Tuesday, October 12, 2010


We're coming into the final stretch on the mid-term elections and it seems that not a day goes by that I don't receive some mailing from the Democratic party denouncing the other candidate for the crime of supporting 'outsourcing' or having had worked for a company which 'ships jobs overseas'. You can see the same narrative coming out of our so-called leaders in Washington as well. Outsourcing is one of those tough topics, like foreign trade, which requires careful thought rather than a knee-jerk reaction. On the surface, opposing outsourcing seems rational, after all some jobs are lost here while others are gained in a foreign country. When our country is going through tough economic times it seems wrong to be 'shipping' these jobs overseas. Of course, those who are opposed to outsourcing are guilty of only looking at what is seen, not what is not seen. What is seen are jobs that have disappeared from this country. What is not seen are the benefits of outsourcing. Companies outsource as a way to manage costs. If a company can save costs by moving some activity off shore they are going to do it. By lowering costs, they increase their profit. This gives the company more resources to grow. When the company can grow, it can afford to hire additional workers in different parts of the business. In the end, outsourcing creates increased and better job opportunities in this country. According to a 2007 study by Matthew Slaughter, an economist at Dartmouth's Tuck School of Business, when U.S. firms hired lower-cost labor overseas through foreign subsidiaries, the parent companies in the U.S. hired even more people in the US to support expanded operations. For example, between 1991 and 2001, foreign employment of U.S. subsidiaries grew by 2.8 million jobs, but during the same time frame, the parent firms in the U.S. increased employment by 5.5 million jobs. Effectively, for every outsourced job, two new jobs were created in the U.S. There is no doubt that if you lose your job because it is outsourced to another country it is bad for you. However, this really isn't any different than if your job was 'outsourced' to another state, or if your job was eliminated due to automation. Companies will always find ways to lower costs and on aggregate this is a good thing for everybody. It lowers the costs of goods and services, freeing resources to be applied to other goods and services, driving their costs down as well. This 'creative destruction', as described by economist Joseph Schumpeter, is the engine behind increased prosperity. If Democrats, and those who mindlessly oppose 'outsourcing' , succeed in impeding outsourcing, we will all be worse off. Rather than opposing a candidate who understands the benefits of outsourcing, they should be supported. We need people in Congress who actually understand business and economics, not a bunch of lawyers who think they can control the world at the stroke of a pen.