The Real Outsourcing and Offshoring Debate

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In the State of the Union, President Obama alluded to outsourced/offshored jobs on numerous occasions. In style, he voiced his mercantilist support of American manufacturing, using the usual rhetoric to make an obvious political point.

In substance, he spoke to increasing export competitiveness and modern trade agreements across both the Pacific and Atlantic Oceans, an idea with little imminent partisan charge.

It is not terribly difficult to see the conflict between these two views with a discerning eye. The contradiction is nowhere near absolute, but a hasty interpretation of the president’s apparent views might be misleading.

The president, no doubt, understands that trade is a two-way street. Export competitiveness in this country is inextricably tied to the ability of partners to import. Offshored jobs increase that propensity by increasing incomes in other nations.

There is legitimate discourse to have on this issue. Unfortunately, the implications of standing against popular opinion make it a sizable gamble, especially for a president desperate to mobilize his base.

In a Gallup poll released on July 19, 2012, the most important thing that could be done to improve the U.S. economy, according to Americans, was to create more jobs. The third most important, bringing outsourced/offshored jobs back to America, falls along the same lines.

To place this goal ahead of others, like controlling the national debt and making college more accessible and affordable, might perplex even the most ardent liberal economists. The U.S. needs to take a serious look at outsourcing, but unfortunately, popular discourse overshadows the necessary debate policymakers must have in order to produce socially optimal legislation.

The majority of rhetoric (ex. “Buy American”) against outsourcing plays primarily on people’s emotions according to Thomsett International, a multinational project management firm. This amounts to a flawed moral argument against outsourcing while missing the many important merits of protecting domestic jobs. Opponents’ main claim against outsourcing is that it hurts those with lower socioeconomic standing.

To this, I ask an obvious question: What populations have the lowest socioeconomic standing?

If the goal is to help the underprivileged, then outsourcing provides jobs to the most underprivileged: workers in LDCs (Less Developed Countries). Say what you want about dismal conditions, but many people in these countries are not accustomed to the luxuries of a Western lifestyle and are glad to take these jobs.

Interestingly, back in the late 90s, Paul Krugman (of all people) actually spoke out in favor of cheap labor, claiming that the primary beneficiaries were third world workers.

With this in mind, the moral argument becomes more clear: Underprivileged Americans (who are fortunate relative to other countries) should take jobs away from the underprivileged everywhere else in the world. Viewed in this light, the issue moves more into the domain of economic stability and growth where both sides raise relevant points.

Assuming the end result of bringing jobs back to America is a reduction in the unemployment rate, proponents of such protectionism assert that aggregate demand increases as more domestic consumers have jobs giving them money to spend. The flip side of the coin, however, is that prices will probably be higher due to cheaper inputs to the factors of production provided in LDCs.

As prices go up, the number of goods consumers can purchase goes down, therefore decreasing demand. Opponents of outsourcing bring up the situation in Detroit, where a massive number of job losses in concentrated areas led to significant social costs in the form of higher crime rates.

Supporters say that many of these low-skill jobs will inevitably be automated and, therefore, a focus on creating a high-skill workforce might be a more desirable long-term policy.

Additionally, a cross-country study by the International Collaborative Initiative on Trade and Employment through the OECD concluded that companies who import from foreign firms tend to export more, showing that not all jobs must be sacrificed to reap the benefits of international trade (something standard economic theory has proclaimed for a long time).

The exact magnitude of these phenomena is debatable, but once the advantages of both sides are acknowledged, both sides move closer to moderation. In today’s polarized political climate, a dose of moderation would do a whole lot of good for the American people.