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No one likes the idea of American jobs moving overseas. But in recent years, the U.S. has accepted the outsourcing of tens of thousands of jobs, in everything from technology support to Wall Street research. Many prominent corporate executives, politicians, and academics have argued that we have no choice, that with globalization it’s critical to tap the lower costs and unique skills of labor abroad to remain competitive. Samuel Palmisano, the chief executive of IBM (IBM), made this point last year when he hosted IBM’s investor conference in Bangalore, India, the first ever held outside the U.S. He pointed out that IBM now has 43,000 people working in India who are part of "a new kind of organization," one that’s designed not around a single country, "but on a truly planet-wide model."
Yet a critical point has been lost in the debate: The interests of U.S. corporations are often not the same as those of the country and its citizens. Hiring staff in India may help companies like IBM, Dell (DELL), Microsoft (MSFT), Accenture (ACN), and others lower their costs and boost their profits, but it hurts the workers who lose jobs and those who lose the prospect of jobs.
Economist Paul Samuelson, a Nobel Prize winner, wrote in a 2004 paper that the economic effect of outsourcing is similar to allowing mass immigration of workers willing to compete for service jobs at extremely low wages. They can drive down the income for huge swaths of the middle class, even if they benefit their employers. "Mainstream trade economists have insufficiently noticed the drastic change in mean U.S. incomes and in inequalities among different U.S. classes," he wrote.
There’s no question that the American people would like their government to take a stand against companies that send jobs overseas. A Zogby International poll found that 71% of Americans believe that outsourcing jobs overseas hurts the U.S. economy, and 62% say the U.S. government should tax or legislate to try to stop the job loss.
Yet virtually nothing has been done. "We need some creative solutions here," says Ron Hira, a public policy professor at the Rochester Institute of Technology who is now on leave at the progressive Economic Policy Institute. While some outsourcing opponents advocate taxes on companies that send jobs overseas, that’s controversial because it could end up handicapping U.S. companies and becoming counterproductive.
Still, there are other steps that government officials could take. Hira points out that decoupling health-care plans from the employer and making the plans more portable would be an important step, since U.S. companies now bear the costs of health care while rivals in countries with government-sponsored care don’t. U.S. visa programs could be modified too. He says that some of the most active users of visas for visiting workers are Indian outsourcing firms, which appear to be training workers in the U.S. and then sending them home to be more effective at taking U.S. jobs. The most important point perhaps is to reexamine the costs of letting American jobs go abroad. "The CEOs of international companies have been dominating the debate and the current situation serves their interests," Hira says.
The debate over outsourcing is full of misnomers, miscommunications, and misleading assertions. Government should stay out of the way and let markets determine where companies hire their employees. If politicians preening for the public try to make public policy around outsourcing, they’re likely to make things worse instead of better.
Start with the central idea of the controversy, that U.S. companies are "sending jobs overseas." The phrase itself is almost meaningless. Companies hire abroad and fire in the U.S. for a variety of constantly changing reasons; jobs are almost never moved from one location in the U.S. to India or China or the Czech Republic. Taxing IBM, Microsoft, or Dell because they hire people in India or in other countries is one way to ensure they’ll stumble in foreign markets.
Increasingly, the reason companies are hiring overseas is because of the talent they find there. In a joint study last year from Duke University’s Fuqua School of Business and consulting firm Booz Allen Hamilton, the number of companies that said they were hiring overseas because of "access to qualified personnel" increased 75% over the previous two years. "The business case for offshoring is evolving beyond a pure cost play," the authors wrote. "Companies are leveraging offshoring strategically to create competitive advantage."
Plus, there is no way to reverse the laws of economics. Free trade benefits countries, whether that trade is in goods or services. Almost 200 years ago, David Ricardo established the case for free trade by laying out the idea of comparative advantage. If one country is better at making wine and the other bread, both countries come out ahead if they specialize their skills and then trade with each other. Outsourcing is nothing more than trading services, instead of goods, across international borders.
Countries that embrace global workforces will benefit economically. Those that try to block international trade in services will suffer serious consequences. "If a society attempts…to shut down economic changes, like those from outsourcing, international trade, and new technology, it can avoid some economic disruption in the short run, but at a cost of blocking overall economic gains," wrote Timothy Taylor, managing editor of the Journal of Economic Perspectives, in an article in the Cato Journal, entitled "In Defense of Outsourcing."
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