One of the less edifying features of the presidential campaign season has been the contest between Barack Obama and Mitt Romney to define the other as the true “outsourcer-in-chief.” Party surrogates have also gotten in on the action, with the result that outsourcing has become a political hot potato. That’s unfortunate because obscured by the thicket of bipartisan demagoguery is the fact that outsourcing, while not without its drawbacks, is a net positive for the U.S. economy that deserves to be defended on its merits.
At the most basic level, outsourcing is form of trade. It produces economic gains by maximizing what the economist David Ricardo termed “comparative advantage.” The idea is simple: By outsourcing low-skilled jobs abroad – for instance customer service, data entry, or labor-intensive manufacturing – companies can obtain products and services at a lower cost than if they had tried to create or perform them. That allows companies to increase efficiency and productivity, creating an overall benefit to the economy. Meanwhile, the lower costs of less expensively produced services and goods are passed on to consumers. In short, all parties benefit.
The biggest economic benefit may be efficiency. Outsourcing allows companies to perform functions that that they either can’t do or can’t do in a cost-effective way. Few firms waste precious time and resources doing their own taxes when they can outsource the task to professional accountants. That’s good for the company, which doesn’t have to waste resources on the service, for the accounting firm that gets the business, and for the firms’ clients, who won’t have to pay the added cost of the service.
Domestically, this idea is not controversial. Companies outsource within the country all the time. Politics enters into only when outsourcing is directed overseas. It’s not obviously clear why that should be. By allocating resources more efficiently, outsourcing makes social and economic progress possible.
Consider computers. During the 1990s, computer hardware was outsourced abroad. In the short term, that caused pain for U.S. manufacturers. Between 1985 and 2005, 125,000 jobs were lost in the computer hardware industry. But outsourcing caused prices on computers to drop by 10 to 20 percent, making computers more affordable. As computers became more common, productivity and economic activity surged. Economists estimate that outsourced computer hardware boosted productivity by 2.5-2.8 percent between 1995 and 2002, driving an Internet and technology boom and adding $230 billion to total U.S. output. On balance, outsourcing computer hardware proved a huge boon to the U.S.
That’s not to deny that outsourcing has downsides. As with computer hardware, shipping jobs overseas leads to job losses in some industries. It can be a painful and disruptive process for workers who lose their jobs, and that should not be glossed over. But neither should it be ignored that many of these outsourced jobs or industries would not be sustainable for the long term. Think of the horse shoers, or milk delivery men, or typewriter repair shops that were replaced as new and improved technology came into use. Similarly, outsourcing enables companies to re-invest their profits in new products and services, as well as new and more sustainable jobs. At the same time, outsourcing fuels affluence abroad, opening new markets for American-made goods. In this context, it’s not surprising that economists believe outsourcing strengthens rather than weakens the U.S. economy.
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