In this presidential campaign, outsourcing has become an issue. Why should it not be something that we speak about, many people have lost jobs to overseas competition. Yes, Bain Capital has outsourced jobs overseas. But the Federal Government, under the watch of President Barrack Obama has done the same. No major large business has clean hands when it comes to sending jobs overseas, and that includes the Federal Government and many state governments as well.
Outsourcing is really importing. Instead of importing cars, oil or other goods, we are importing white collar labor.
This blog is not against free trade, and believes that the reversal of trade agreements will not resolve the outsourcing problem. Outsourcing is beyond costs and profits. Let's pose a question to all of our readers, why do companies outsource? The one obvious answer to that question is cost. Labor costs are cheaper in overseas markets, and that is why companies outsource. But the answer is not that simple. It goes beyond cost. If outsourcing is the answer to the labor costs question, why don't smaller companies do it? In fact, if outsourcing is the answer, why not move your entire operation overseas?
According to Forbes, the number one reason, and perhaps the only reason for some companies, to outsource jobs is to open up markets for their products. In other words, if I am Company X, and I want to sell my good and services in Renovia...then I am going to move jobs to Renovia so that barriers that the Renovian government normally puts in my way will be removed. The number one reason why companies outsource is to remove trade barriers.
There are other reasons, besides costs, behind outsourcing. They include the lack of labor unions in other countries, the willingness of governments to foot the costs for retraining employees, access to a younger workforce, lower health care costs, access to a specific labor pool and to avoid some of the regulation that the US government and many states have.
But there is a cycle, and eventually there will be little advantage to outsourcing other than to open up markets. Remember Back to the Future Part 3? There is a scene in that movie where the 1985 Marty is speaking to the 1955 Doc. Doc says to Marty, "here is the reason why this car broke down, all of your electronic parts were made in Japan." Marty's response is, "Doc, all of the best stuff comes from Japan." In 2012, many of those same parts are no longer made in Japan, but in Korea, China and India. In 2035, we may be buying electronic parts made in Costa Rica, Brazil, and Chile.
When a nation first enters the world market, it's products are of low quality and low price. Then the quality improves, but the price remains low. When the countries economy improves and inflates, the prices increase. Finally, the quality decreases. Just like we have already seen in Japan and Western Europe. We are getting to the point where India is no longer the hot spot for outsourcing, it is being replaced by The Philippines and by Costa Rica.
Can the trend for overseas jobs be reversed? Not completely, but it can improve for the US. The Federal Government can take two steps in order to reverse the trend. First, set a proper example. Second, strengthen the US dollar.
The US government and many state governments are as guilty as Bain Capital when outsourcing work. Very few US jobs have been directly outsourced, if more were, the AFL-CIO would raise a royal stink about it, even with Obama in the White House. But the contractors that the US and many states hire are some of the biggest outsourcers of work. This could be stopped with one stoke of Barack Obama's left hand. Simply adopt a policy that disallows government contractors from outsourcing. The reason why government contractors outsource is that they are trying to win contracts with foreign governments by showing what they can do with US taxpayer dollars. It is completely uneccisary and it will probably backfire. If I can outsource US government work with how strong US labor unions are, I can outsource the taxpayer dollars from other countries as well. It is not a good practice.
The second policy that could curb outsourcing is to strengthen the US dollar. A stronger dollar takes away some of the financial benefit for sending work overseas. This is where US public debt, especially the debt held by overseas nations, hurts the US economy the most. The more debt the government has, the weaker the dollar. It's a supply and demand issue. Dollars have to be printed when the US goes into debt, that means a higher supply of dollars. A higher supply means a lower price. Getting the government financial house in order will lower the supply of dollars available, and that means a higher price, or a strong dollar. That means less incentive to outsource work and less incentive to import goods.
Taking these steps will not stop outsourcing. There will always be the factor of opening up new markets and reaching new customers. That factor should not be taken out of the question. We should not attempt to stop US companies from expanding overseas. But we can take steps to remove the cost benefit by reducing some of the financial incentives. Our children will thank us if we do.
Step 1--Fix the corporate tax structure.
Step 2--Interest rates and lending
Step 3--Energy
Step 4--Legal Reforms
Step 5--Outsourcing
Posts
