Answers on Outsourcing
A finance professor argues
against placing blind faith in outsourcing. His views follow.
The following is a guest column by Rory L. Terry, an associate professor
of finance at Fort Hays State University.
NEW YORK (CNN) -- A great deal of effort is being expended to convince us
all that the outsourcing of jobs under the rubric of free trade is a good thing. I would like to discuss some of these arguments.
Our labor force is not better trained, harder working, or more innovative
than our foreign competitors. The argument that we will create new
jobs in highly paying fields simply is not true. We have no comparative advantage or superiority in innovation. To assume
that we are inherently more creative than our foreign competitors is both arrogant and naive. We are currently empowering
our competition with the resources to innovate equally as well as we. Consider the number of new non-native Ph.D.s that leave
our universities each year; consider our low rank in the education of mathematics and the sciences; and consider the large
number of international students enrolled in our most difficult technical degree programs at our most prestigious universities.
Most of our best, high-paying jobs can be exported.
- Doctors (even surgeons)
- Financial analysts
- Computer programmers
- Researchers of all types
Our trading problem is an externality
An externality exists in economics any time there is a separation of costs
and benefits, and the decision maker does not have to incur the full cost but receives the full benefits of the decision.
The fact is, there is no economic force, no supply and demand equilibrium, no rational decision process of either business
or consumer, that will make an externality go away. Classic examples of externalities are when a business dumps toxic waste
into a nearby river and the downstream residents incur the costs of cancer. The business is able to lower its costs and pass
those lower costs on to its customers, and never pay for the treatment of the cancer patients. We have laws in this country
against dumping and pollution because they are externalities -- they require a legislative solution.
Cost reductions and other benefits provide a strong incentive to outsource
jobs. A company that decides to move its production overseas cuts
its costs in many ways, including the following:
- Extremely low wage rates
- The circumvention or avoidance of organized labor
- No Social Security or Medicare benefit payments
- No federal or state unemployment tax
- No health benefits for workers
- No child labor laws
- No OSHA or EPA costs or restrictions
- No worker retirement benefits or pension costs
Besides cutting costs, there are other benefits to exporting jobs, including
- Tax incentives provided by our government
- Incentives from foreign governments
- The creation of new international markets for the
company's products (which ultimately empowers the company to turn a deaf ear to this country's problems and influence)
- The continued benefits of our legal system and the
freedoms that we provide
The net effect of all of this is lower costs, higher revenue, higher profits,
higher stock prices, bonuses for management, and the creation of wealth for a subclass that benefits from low taxes at the
expense of the rest of us.
The costs of the decision to outsource are not borne by the decision
maker. As a society and as a country, we experience many costs from
outsourcing, including the loss of jobs, social costs, higher costs of raw materials and loss of national sovereignty. Loss
of jobs reduces the tax base, creates high unemployment benefit costs, and raises the cost of government retraining programs.
Displaced, unemployed workers have higher rates of child and spousal abuse, alcoholism, bankruptcy, divorce, etc. As China
and India and other large populations grow, they demand huge quantities of oil, gas, steel and other basic raw materials.
These costs are born by all of us -- every time we fill our gas tanks, for example. And as a nation, we lose our ability to
make independent decisions that are in our best interest when we are dependent on foreign debt and foreign manufacturing.
This is a classic externality.
Rory L. Terry is an associate professor of Finance at Fort Hays State