Few issues have received more attention lately than “outsourcing.” It has become a major issue in the presidential race, and could help determine the outcome of the November election. As is often the case with international trade issues, politics may explain why outsourcing is so clouded by wrong thinking and hysteria.
Most of the debate has focused on the direct, visible loss of some U.S. jobs when we buy overseas instead of at home. Unfortunately, outsourcing’s less visible benefit of net job gains receive considerably less attention.
Outsourcing is nothing more than acquiring goods or services from a foreign source. For example, we could grow bananas under glass in artificial environments in North Dakota but we choose instead to outsource them to places like Honduras.
To better understand the controversy, consider how much you benefit directly from “household outsourcing” and the jobs created both directly and indirectly when you engage in it.
Every time you buy groceries or clothes, use the services of a dry cleaner or a car wash, or eat in a restaurant, you are outsourcing. Just like a business, you compare the cost of producing those items or performing those services yourself, to the cost of acquiring them from others.
Outsourcing greatly lowers our cost of consumption, raises our standard of living tremendously and directly supports many jobs. Those are just some of the visible benefits. There are also secondary and indirect benefits. Jobs are created in many industries throughout the economy by the spending made possible because of our initial cost savings from outsourcing. Getting bananas from Honduras for 30 cents a pound instead of “North Dakota-grown” bananas for three dollars a pound frees up $2.70 for you to buy other things, to extend our hypothetical example.
At the state level, we outsource production for most of our food to workers in other states. Farmers elsewhere produce oranges, avocados, and sweet potatoes at lower cost than could Michigan farmers, and we benefit as a state from their greater efficiency. Fortunately for Michigan, consumers around the country in turn outsource the production of motor vehicles to Michigan workers, helping support 700,000 manufacturing jobs here. The outsourcing of some jobs outside of Michigan is fortunately accompanied by the insourcing of just as many, if not more, jobs into Michigan.
As a country, we globally source the production of roses, emeralds, coffee, and hundreds of other goods to workers in South America. Lumber production is outsourced to workers in Canada, tomato production to Mexico farmers, and clothing production to workers in India and Mexico.
To survive, firms have to operate as efficiently as possible, and this requires them to consider all possible locations for producing goods or providing services at the lowest cost. The result is lower prices for consumers and greater overall output. The process indeed displaces some workers (almost always temporarily) but that should not blind us to the overwhelming benefits everyone derives from encouraging trade and the economic prosperity it yields.
A recent study by Global Insight estimates that there will be a net increase of 139,000 jobs throughout the U.S. economy this year alone, due solely to the efficiency gains from the sourcing of information technology (IT) jobs overseas. More than 4,000 of those jobs will be created in Michigan. The study further indicates that for every one job lost overseas due to outsourcing of IT jobs, two new jobs are created in the U.S. economy across many industries.
A Cato Institute study released in March found that the arguments raised against outsourcing today are no different from those that arose during the last two recessions. In national economic downturns, which are not caused by trade, it is easy to shift the blame outside the country. Doing business overseas is always a popular scapegoat.
One sure way to destroy jobs and drive our standard of living lower at the same time is to erect barriers to outsourcing. When sky-high tariffs were passed in 1930 to block outsourcing then, Congress took a mild recession and made it a Great Depression in a matter of months.
By any economic measure — jobs, income or our standard of living — Michigan and the U.S. have a lot more to gain from outsourcing than we could ever expect to gain from restricting international trade.
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Mark J. Perry, Ph.D., is an economist at the University of Michigan-Flint and an adjunct scholar with the Mackinac Center for Public Policy, an educational and research institute headquartered in Midland, Michigan. More information is available at www.mackinac.org. Permission to reprint in whole or in part is hereby granted, provided the author and his affiliation are cited.
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