The outsourcing bogey

by William Anderson

August 24, 2004

Each U.S. Presidential election campaign seems to have a new economic theme. In 1976, it was “energy independence,” while “supply side economics” dominated 1980s campaign. (I also remember that the 1980 election was the last one in which much of the discussion involved intelligent discourse on the role of government—something that is nonexistent today, as politicians bury us in slogans.)

If there is an economic theme in this present election campaign, it seems to be “outsourcing.” Politicians—and especially the Democrats—for the most part seem to be against it, although in many cases they are the people most responsible for what is taking place. Yet, since political campaigns tend to bring out more heat than light, some explanations are in order to better describe what actually is occurring.

“Outsourcing” is the practice of investing in capital outside the U.S. in order to produce goods that are sold mostly in this country. For example, a U.S. textile firm might invest in a factory in China that makes shirts that are then sold at your local Wal-Mart. This is only the tip of the iceberg, as this practice has grown as countries like China and India, both with large populations, have opened their economic and political systems to the point where foreign firms feel safe to invest—without having their properties confiscated by those governments, which is what often happened in the past.

While it has become popular in recent years, “outsourcing” hardly is a new phenomenon. During the 19th Century, British investors poured money into the U.S., and Japanese firms have done the same in the past 20 years. Unfortunately, politicians and their rhetoric have thrown confusion into the mix by claiming that U.S. companies are “exporting jobs.”

Since a job is not a good, one cannot import or export it. The term is purely rhetorical and not economically meaningful. Politicians decry the fact that U.S. firms and investors are not building factories here to make the same goods that can be made in China in less-costly conditions. They cite the lost income to Americans who might lose their jobs because a good for which they are paid $10 an hour to make can be produced by someone in China or India working for a fifth as much.

When textile workers in South Carolina or computer programmers in Utah lose their jobs to lower-paid labor from overseas, it is hardly surprising that politicians step into the void and demand that U.S. investors be coerced into making investments on our soil. Leftists like Ralph Nader and Jim Wallis (the self-proclaimed “evangelical” who promotes a leftist political culture as the essence of Christianity) have joined in the anti-outsourcing/anti-free trade chorus to demand that the government stop firms and investors from this practice.

(What is curious is that Nader and Wallis, among others, have long been critics of the factory system and have called for its abolition. Yet, now they are demanding that investors build factories here.)

People do not understand that while “outsourcing” from the micro picture looks to be bad, the macro picture is much different, as this practice actually increases the overall standard of living here. It does not benefit only wealthy investors, but all of us.

One fallacy that anti-outsourcing activists present is the notion that higher costs equal more wealth. A shirt that costs $10 to make is no more valuable than the same shirt costing $5; in fact, it is less valuable to the overall economy, since it took $5 of resources that could have been applied elsewhere.

Some reasons for the current wave of outsourcing are natural; the opportunity cost of many U.S. workers means they can find higher-paying jobs than those being outsourced. However, some of it is self-inflicted, as law is used as a weapon, not for the protection from wrongdoing, and the regulatory environment chokes out new investment. The first state of affairs is desirable; the second is not, but that is the situation that U.S. politicians have created.

Lower-cost labor is not the only reason firms engage in outsourcing, as the legal climate in the USA has grown worse for business. Our tort system is literally the worst in the world (giving us the world’s wealthiest lawyers), and the expanded criminal code—and ambitious federal prosecutors—have turned normal business practices into a minefield, resulting in prison sentences for executives and business managers.

Unfortunately, neither presidential candidate is addressing these issues, or at least is proposing real solutions. The Bush Administration may talk a good business line, but regulation grows daily and from the beginning this has been a protectionist administration.

Kerry’s “plan” is even worse. First, he wants to make some of outsourcing illegal, which means that he believes that we can successfully coerce investment here. Second, nothing in his campaign deals with the real reasons that business owners are leaving our shores; in fact, his “solutions” will only speed up the exodus. Furthermore, his Senate voting record reveals deep hostility toward free enterprise and private investment. In other words, he wants to continue the present abusive business climate—and add more burdens on top of that.

If politicians succeed in making outsourcing illegal, that does not mean people will invest here. To the contrary, they will send their money overseas anyway or simply spend it at home. The real losers will be ordinary Americans, not the politicians.

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