“Outsourcing” Makes Us Richer

From ROBERT P. MURPHY of FEE. 

"This short video, put out by the Million Jobs Project, currently has more than 3.7 million views. It claims that US producers have been outsourcing jobs abroad in order to fatten their profits. It urges viewers to increase their purchases of American-made products by 5 percent, since this shift would ultimately create “a minimum” of a million new jobs for Americans. Unfortunately, everything about this video is wrong.

In the first place, the video takes for granted that it is a good thing if an American gets a job at the expense of a foreigner. After all, the whole point of urging viewers to spend more money on American products is that this will cause “insourcing.” Firms will lay off foreign workers and bring those jobs back home to the United States. But other things equal, why should we hold this ethical view? The question is even harder to answer once we consider that the foreign workers who, according to the video producers, will lose their jobs are probably extremely poor compared to the Americans who will get the jobs. Since when is it a noble thing to put a desperately poor person out of work?

This obvious (but unstated) national prejudice of the video provoked the following unintentionally ironic statement in the comments at YouTube: “I am Canadian but I always try to buy north american [sic] made when possible.” I wonder if this Canadian actually means all of North America, including Mexico? Or does he just mean Canada and the United States? If he feels kinship with the members of his continent, what about the entire Western Hemisphere? Should he “buy Western” to keep jobs for his buddies in Brazil, rather than shipping them to those parasites in Thailand? Going the other way, should Americans also try to increase their purchases of items made in state by 5 percent, so that Texans keep jobs in Texas, while Floridians keep jobs in Florida? Of course I'm kidding; I am trying to show the arbitrariness of adjusting one’s spending to “create jobs at home.”

Beyond the fuzziness of the value judgment involved, the fundamental error in the video is the notion that there are a fixed number of jobs in the world. This isn’t so. If an owner closes a factory in the United States and opens a factory in India, he has only “shipped jobs abroad” in the same way that a correspondent can “ship a pen pal abroad” by switching writing partners. Other employers can rush in to offer jobs to the newly laid-off workers, or the workers can start their own businesses and become self-employed.

Indeed, so long as the government (or a union threatening violence with impunity) doesn’t artificially prop up wages and salaries, there is really no problem of unemployment in the market economy. Wages and prices eventually adjust so that everybody who wants a job can get one. Some workers might complain that their income is too low, but that’s a different problem from truly being unable to get hired at all.

To see the relevance of this point, let’s consider exactly how the phenomenon of outsourcing occurs. As the video describes it, US employers realized “about 30 years ago” that they could hire foreign workers to do the same jobs at much lower wages, so they relocated their production facilities abroad. This assertion raises the question: Why didn’t employers just cut US wages down to what the foreigners were asking?

The answer is that US workers won’t take such low-paying jobs because they have better options. For example, suppose Americans are originally employed in a TV factory in Tennessee, making $16 an hour. The owner of the plant realizes he can relocate it to India, where he can hire workers who are half as productive (meaning they only make half as many TVs per hour) but who are willing to work for $4 an hour. He would never bother relocating if the American workers would simply accept a pay cut to $8 an hour. (The American workers make twice as many TVs per hour, remember.) Suppose they won’t do that, because their next-best job option is to work in a warehouse for $10 an hour. In this case, with the numbers I’ve invented, the original factory owner would “ship jobs to India,” not because of some horrible flaw in the labor market, but because American workers had better things to do than make TVs for $8 an hour. It was more efficient for those workers to go into the warehouse sector and for the Indian workers to make the TVs.

Notice also the point about government intervention. If we cut all of the numbers in half from my scenario about TVs, then all of a sudden the outsourcing would seem to cause US unemployment. Specifically, suppose the American workers originally made TVs in Tennessee and were paid $8 an hour. Then the owner of the factory realized the Indian workers were willing to make TVs for $2 an hour. In this case, the Americans (who are still twice as productive) would need to cut their asking wage to $4 an hour to stay competitive, and their other option is to work at a warehouse where they would generate $5 an hour in value for their boss. Alas, in this scenario, the factory owner still “ships jobs to India,” but the laid-off Americans are stuck: It is illegal for them to work at the warehouse for $5 an hour, because that would violate minimum wage laws. Thus, they really have been thrown out of work, but the true culprit was government intervention, not outsourcing per se.

“Outsourcing” is simply a manifestation of the more general phenomenon of trade between countries. As a general rule, giving individuals the freedom to trade with whomever they wish, around the globe, maximizes the “real income” of the groups involved.

Looking at the issue from the other direction, we can say that if the US government imposes a barrier to trade — such as restricting imports from a particular country — then it might make some American workers richer, but only by making the average US consumer poorer. Furthermore, the losses to the consumers outweigh the gains to the “protected” workers, meaning the country as a whole is poorer when the government enacts a trade barrier. There is an entire literature of commentary on the virtues of free trade, demonstrating these truths in various ways. For those who have never read it, I highly recommend Frédéric Bastiat’s famous satirical essay, “Petition of the Candlemakers.” For those readers who can invest more time, I refer them to chapters 8 and 19 of my textbook Lessons for the Young Economist (available online for free here), which explains the standard case for free trade in terms of what economists call “comparative advantage.”

The general logic of the benefits of free trade applies to outsourcing; a particular instance of outsourcing will (obviously) hurt the domestic workers involved, but it will shower on other Americans benefits that more than offset the loss. Immediately, the owners of the outsourcing firm benefit in the form of higher profits (because they’ve cut their wage bill). But the forces of competition will soon cause those cost savings to show up as lower prices for American consumers. Indeed, the video’s producers implicitly admit this when they acknowledge that their recommendation to buy 5 percent more American-made products would be more expensive for consumers.

The logic of free trade is irresistible once a person takes the first step on its path. By effectively paying foreign workers with US dollars when they send us TVs, clothes, and other goods, we give them the purchasing power to buy American exports such as wheat and aircraft components. The opposite holds as well: If American consumers reduce their purchases of foreign-made TVs and other goods, then those foreigners will cut back on their purchases of American wheat and so forth. Ultimately, the video’s suggestion to “buy American” won’t create more American jobs in total, but instead will merely rearrange employment among sectors, making Americans poorer in the process.

To be fair, the video’s narrator does try to defuse the standard economist response to his analysis, starting around the 1:05 point. The narrator says that Americans won’t simply find other, “thinking up” jobs to replace the manufacturing jobs that have been outsourced, because those “thinking up” jobs need to be outsourced as well, in order to stay close to the manufacturing process. Whether or not this is actually true — after all, there are plenty of “thinking up” jobs being created in Silicon Valley and elsewhere in the United States — it misses the more basic point: There is no reason that the United States should manufacture a certain product within its borders for the rest of time.

As foreign governments reduce their own institutional barriers to trade, and as communication and shipping costs fall, it only makes sense that production becomes more globally integrated. To insist that Americans favor products “made in the USA” is as arbitrary and impoverishing as people in Alaska insisting that they only eat oranges grown in Alaska (in greenhouses, presumably). There are serious obstacles to prosperity for the average American worker, but the problem isn’t “outsourcing.” The problem is government mandates and restrictions that hinder the operation of the market economy."