Offshore outsourcing is good for America

Conventional Wisdom

Good U.S. jobs are being outsourced to other countries, putting America's economic future at risk. 

Background

      In 2004, opponents of the move toward offshore alliances were saying that one of every ten jobs in the U.S. computer, software, and information technology industries would be going overseas in the near future. One in four IT jobs was predicted to go offshore by 2010. A report from Forrester Research concluded that, "at least 3.3 million white-collar jobs and $136 billion in wages will shift from the U.S. to low-cost countries like India, China, and Russia" by 2015.⁹ Other analysts predicted that a large number of the 57 million white-collar and professional jobs in this country would suddenly be lost to overseas suppliers if the outsourcing trend continued.

       Evidence of what could happen, they said, could be seen in the examples of Japan, Germany, and the United Kingdom, which were bleeding white-collar and technical jobs to lower-cost Asian nations. The UK alone was expected to send as many as 25,000 high-tech jobs, and 30,000 banking and finance jobs to India and other developing countries over the next five- to ten-years. By some estimates, Europe would lose more than a million such jobs to India and China by the year 2015.

      Aware that job losses were real, as were concerns about the trade deficit, public discourse about outsourcing and trade became major campaign issues. Business Week reported in 2004 that not everyone was happy with the numbers coming from Washington. "The link between strong growth and job creation appears to be broken," the writer observed, "and we don't know what's wrong with it. Profits are soaring, yet no one is hiring. Angry voices are blaming Benedict Arnold CEOs who send jobs to India and China. If highly educated 'knowledge' workers in Silicon Valley are losing their jobs," he added, "who is really safe?"¹⁰

      It sounded like a rebellion in the making. This fear came at the height of the political season despite the fact that the GDP was growing at a rate above what the Federal Reserve Bank thinks is a sustainable rate of growth; it was advancing at a rate of 3.4%. The unemployment rate was dropping and was already down to 5.5% from a high of over 6% during the recession. The transition from 2004 to today tells much the same story. Politicians campaigning in Ohio, Michigan, and Illinois have blamed job losses on outsourcing and bad trade deals. Outsourcing is feared and heart-rending stories about families devastated by lost jobs remain common in the press. Those who have lost jobs in Michigan or Indiana won't necessarily appreciate the job gains in Louisiana and Arkansas, but markets and marketplace conditions have been changing for as long as there has been industry itself. And while these changes will bring about some job redistribution, in total, the job market in this country is still strong and growing.

Facts:

      The simple fact that from 2000 to the end of 2007 there were 8.3 million new jobs created and unemployment was very low, while many jobs (good estimates are not readily available) were outsourced to India and other countries, should be sufficient evidence to demonstrate that outsourcing is not necessarily bad for the U.S. To understand this seeming paradox, consider the following extreme but analogous situation where the U.S. lost 82% of its jobs ... and it turned out to be a good thing. In 1820, 85% of the U.S. jobs were in farming. As a result of efficiency improvements, today that number is just 3%¹¹, meaning that approximately 82% of American jobs went away. Why was this good? Because the U.S. now gets all the food it needs from the just 3% of its workers, plus it gets all the additional things created by the 82% who would have been farming, but who are now making automobiles, golf clubs, fitness machines, household products, medicines, and countless other goods and services that make our lives better.

      While this is undeniably good in the long run, it must be acknowledged that some people experienced hardships as farming jobs declined during the long shrinkage from 85% to 3%. Those hardships however, were generally short term, as the individuals made the transition from one sector of the economy to another, and those hardships must be weighed against the greater good. Between 1860 and 1920, the number of factory workers went from 1.3 million to nearly 10 million, and output grew from $854 million to $24 billion. By the 1890s the manufacturing sector in this country had surpassed agriculture as the primary source of income for American workers. And by 1920, manufacturing productivity was more than twice that of the farm-based economy.

Assessment

Outsourcing seems bad only if we think of jobs in a narrow sense as work in exchange for money. This leads to a simplistic notion that there is a limited amount of money to go around, so work done by a foreigner must be at the expense of work done by an American. But to understand the big picture, we must think of work as being part of the process of creating something of value, some of which goes to the worker when the product or service is sold. If the work can be done for less by someone in another country, freeing up American time to do other things of greater value, the total amount of value to be enjoyed by Americans is increased.

       Reality Check provides additional evidence that productivity advances enabled by offshore outsourcing have not led to job losses in the aggregate, and explains further why this is true.

Key Terms  

Insourcing: Insourcing is defined as the movement, by a non-U.S. company, of operations that provide goods and services from outside the U.S. into the U.S.