Counteracting Outsourcing Hysteria; Households "Outsource" Every Time They Eat at a Restaurant

Another round of outsourcing hysteria is flaring up again, fueled by the China-made Olympic uniform controversy, claims by Obama and Democrats that Mitt Romney outsourced American jobs overseas during his days at Bain Capital, claims by Romney that some Obama stimulus money went to foreign firms and workers, and a recent bill introduced in the Senate that would ban American companies from deducting expenses of moving production overseas from the U.S.  

Back in 2004, another presidential election year, the first large wave of U.S. companies outsourcing operations overseas was underway (e.g. call centers in India), and the outsourcing hysteria was exploding, and it became a huge political issue. In the midst of that hysteria 8 years ago, I tried to bring some sanity to the discussion and I provide a few excerpts of that effort here:

Outsourcing is nothing more than acquiring goods or services from a foreign source. For example, we could grow bananas under glass in artificial environments in North Dakota but we choose instead to outsource them to places like Honduras.

To better understand the controversy, consider how much you benefit directly from “household outsourcing” and the jobs created both directly and indirectly when you engage in it.

Every time you buy groceries or clothes, use the services of a dry cleaner or a car wash, or eat in a restaurant, you are outsourcing. Just like a business, you compare the cost of producing those items or performing those services yourself, to the cost of acquiring them from others.

Outsourcing greatly lowers our cost of consumption, raises our standard of living tremendously and directly supports many jobs. Those are just some of the visible benefits. There are also secondary and indirect benefits. Jobs are created in many industries throughout the economy by the spending made possible because of our initial cost savings from outsourcing. Getting bananas from Honduras for 30 cents a pound instead of “North Dakota-grown” bananas for three dollars a pound frees up $2.70 for you to buy other things, to extend our hypothetical example.

At the state level, we outsource production for most of our food to workers in other states. Farmers elsewhere produce oranges, avocados, and sweet potatoes at lower cost than could Michigan farmers, and we benefit as a state from their greater efficiency. Fortunately for Michigan, consumers around the country in turn outsource the production of motor vehicles to Michigan workers, helping support 700,000 manufacturing jobs here. The outsourcing of some jobs outside of Michigan is fortunately accompanied by the insourcing of just as many, if not more, jobs into Michigan.

As a country, we globally source the production of roses, emeralds, coffee, and hundreds of other goods to workers in South America. Lumber production is outsourced to workers in Canada, tomato production to Mexico farmers, and clothing production to workers in India and Mexico.

To survive, firms have to operate as efficiently as possible, and this requires them to consider all possible locations for producing goods or providing services at the lowest cost. The result is lower prices for consumers and greater overall output. The process indeed displaces some workers (almost always temporarily) but that should not blind us to the overwhelming benefits everyone derives from encouraging trade and the economic prosperity it yields.