I'm depressed to see Obama making the war against outsourcing a main theme of his campaign. Do we really have to do this again? This is from a new column, Bashing Capitalism Is No Substitute for an Agenda, at Bloomberg View:
Outsourcing isn't new, and it isn't capitalism carried to an unacceptable extreme. It's part and parcel of the market economy. Companies strive to control costs, which lowers prices and raises real incomes. Buying goods and services from others, at home or abroad, that would cost more to produce for yourself is a good thing. I outsource all building work and car repairs. I'm glad that Apple Inc. outsources the manufacture of its iPads and MacBooks, because it means I can afford them. This isn't an excess of capitalism. It's just capitalism.
If Bain made money by finding companies where costs could be squeezed and productivity increased, good for Bain. We need more firms like that.
Obama would be right to say that fairness matters as well. He would be right to say that higher productivity is essential, though we also need to take care of the losers from market competition, widen opportunities for the unlucky and guard against extremes of wealth and poverty. That isn't what he says. He attacks outsourcing in its own right, which is economic illiteracy of the highest order. And to fold that attack into a main narrative about rich, evil, profiteering businessmen is worse than economically illiterate: In the U.S., at least, it's a self-defeating strategy.
Maybe somebody in the White House could glance at The Politics and Economics of Offshore Outsourcing, by Phillip Swagel and Greg Mankiw. It's from 2006, but I don't think the economics has changed.
Even with important gaps in the data, the empirical literature is able to conclude that offshore outsourcing is unlikely to have accounted for a meaningful part of the job losses in the recent downturn or contributed much to the slow labor market rebound. The empirical evidence to date, while still tentative, actually suggests that increased employment in the overseas affiliates of U.S. multinationals is associated with more employment in the U.S. parent rather than less.
A new study from Japan, just posted on Vox, reaches a similar conclusion: Effects of offshoring on home employment and skill upgrading.
Economists have already accumulated much empirical evidence on the effects of offshoring. Although the results vary, many of them, including my own for Japanese SMEs, indicate no large negative effect on domestic employment, and positive effects on productivity and demand for skilled labour. One policy implication from these results is that policymakers in developed countries should not worry too much about losses of domestic employment due to offshoring. The evidence suggests that unskilled jobs are offshored and replaced with skilled jobs in the home country, leading to more productive use of the domestic labour force.
However, this is not the end of the story. The evidence also suggests that policies should help to upgrade knowledge and skills of domestic workers. Otherwise, unskilled workers in developed countries would lose their jobs, as offshoring shrinks unskilled jobs and expands skilled jobs.
See also Roger Pielke Jr's nice blogpost--Manufacturing: Lessons from the Olympic Apparel Debate--inspired by Harry Reid's astonishing suggestion that the US Olympic committee should take the US athletes' Chinese-made uniforms and burn them. Pielke looks at the global apparel trade and its effects on the US and concludes:
The globalization of the apparel industry is a good thing. Resources are used more efficiently. Profits are increased. The economy grows. More jobs are ultimately created. There is downside, as well, such as in jobs lost and skills that have become obsolete or uncompetitive. Policy should focus on effectively managing the downside rather than trying to stop change from occurring in the first place.
Exactly. Even on grounds of narrow self-interest, the US should not be opposed to offshoring--and that's that. But I've another question. Let's suppose for the sake of argument that international trade was indeed a zero-sum game. Doesn't the White House want living standards to rise in developing countries? If its bogus economics was correct, shouldn't the effects on far poorer people overseas at least be a consideration? Tell me why concern about inequality stops at this country's borders. How "progressive" is that?