Myth #8: Only greedy corporations benefit from outsourcing.
Fact: Everyone benefits from outsourcing.
Critics err seriously in trying to divorce benefits for corporations from benefits accruing to all Americans. Outsourcing is about keeping costs down in response to competition. As costs decline, every consumer benefits. The vast benefits from lower costs are usually overlooked because the benefits are diffused throughout the economy.
In contrast, the much smaller cost of jobs lost to outsourcing is sharply focused. In other words, the relative few who lose their jobs to outsourcing are far more vocal than the millions of consumers who save a few hundred dollars each year due to lower prices for such things as computers, cell phones, and coffee.
Early studies found that the gains of trade outweighed losses by 50 to 100 times. More recent studies also take the serious matter of job dislocations into account. A 2003 study by Michael W. Klein, Scott Schuh, and Robert K. Triest includes dislocation costs in its calculations, concluding that the benefits of trade outweigh its costs by 100 percent, or 2 to 1. Overall, free trade saves American consumers billions of dollars.
Myth #9: The government can protect American workers from outsourcing.
The underlying myth is that free trade is not fair trade because fair trade can “protect” American companies and workers.
Fact: Protectionism is isolationism and has a history of failure.
Lawmakers have a longstanding record of pandering to specific interest groups on all issues, but the economic damage can become acute when the issue is trade. Misleading protectionist rhetoric fuels policies that are designed to placate these special interests and should be called what it really is: economic isolationism. One example is the recently imposed—and later rescinded—steel tariffs, which raised steel prices for all U.S. manufactures, hindered competitiveness, destroyed jobs domestically, and violated trade agreements.
A recent flurry of anti-outsourcing proposals in Congress and at least 36 states threatens businesses that engage in free trade and investment. Aside from inviting retaliation, clamping down on the ability of U.S. firms to open subsidiaries abroad will simply erode their competitiveness.
Economic isolationism is not new, and it has been an abject failure whenever adopted. A well-known example is the Smoot–Hawley tariff, enacted by Congress in June 1930 to reduce imports and protect American businesses and jobs. Smoot–Hawley did halve imports between 1929 and 1933, but exports also declined by half over that period. Subsequently, the rate of unemployment grew from 3.2 percent in 1929 to 8.7 percent in 1930 and peaked at 24.9 percent in 1933. U.S. efforts to constrict outsourcing can be expected to meet similar barriers among U.S. trade partners, harming Americans and the global economy.
It is not in America’s interest to fall victim to hostile trade rhetoric. Bills before Congress and the states that restrict outsourcing are sending exactly the wrong image: a wealthy America that jealously guards against its prosperity and freedom leaking out to the Third World. This hostility only breeds resentment against America and makes efforts to adopt greater economic freedom around the world more difficult.
Myth #10: Unemployment benefits should be extended beyond 26 weeks.
Fact: Jobless benefits are already working.
The median duration of unemployment is 9.5 weeks, which means that the vast majority of workers who can file for jobless benefits are fully covered by the existing unemployment insurance program of 26 weeks. Calls for extensions are inappropriate, given that new weekly jobless claims are down by more than 100,000 in the past year (10 percent below the long-term average) and continuing claims are down by 700,000.
The goal of unemployment insurance is to help Americans make the transition to a new job, and it is working. Extending the standard 26 weeks of coverage to 39 weeks would cost billions of dollars and do little to help the workforce reorient to new sectors.
What Should Be Done
America’s workers deserve a more informative, less partisan debate on outsourcing. Outsourcing’s negative impact on the economy and American employment has been greatly exaggerated, while its benefits have been almost entirely ignored.
The real problem is not trade, investment, or low wages overseas. The real culprit is not labor-related at all, but the reduced competitiveness of the U.S. business environment. Instead of focusing on the non-issue of outsourcing, Congress and the Administration should cooperate to strengthen the U.S. economy and benefit individual workers and all Americans by:
Ending lawsuit abuse. Frivolous lawsuits cost the U. S. economy between $180 billion and $233 billion in 2003, which is enough to pay 1.8 million to 2.3 million additional six-figure salaries. According to one study, this is up 13.3 percent over 2002, following a 14.4 percent increase over 2001, and strongly suggests continued double-digit growth unless steps are taken to end frivolous and abusive lawsuits.
Congress should take steps to reform class-action lawsuits and restrain the growth of medical malpractice lawsuits. Since one-third of the increase in tort costs is driven by increasingly broad asbestos awards, lawmakers should limit damages for non-sick claimants. Businesses pay these costs in three ways beyond payment of tort claims: through increasing product and general liability insurance, higher employee health-care benefits due to medical liability costs, and legal fees. The burden these costs impose on the economy is more than two times greater than the burden on some major U.S. trading partners (e.g., Japan and Canada), putting American businesses at a competitive disadvantage.
Eliminating overly burdensome regulations. Regulatory compliance costs the U.S. economy nearly $850 billion a year, approaching the amount Americans pay in federal income tax. While some regulation is necessary—such as rules to protect against fraud—much is unneeded and overly burdensome. As the Council of Economic Advisers has observed:
[T]he absence of competition, enforceable property rights, or an ability to form mutually advantageous contracts can result in inefficiency and lower living standards. In some cases government intervention in a market, for example through regulation, can create gains for society by remedying any shortcomings in the market’s operation. Poorly designed or unnecessary regulations, however, can actually create new problems or make society worse off by damaging parts of the market that do work.
Congress should strengthen the review process for all proposed regulations, with stricter guidelines for conducting and evaluating cost-benefit analyses and greater resources for reviewers to critically examine the effects of proposed regulations. Policymakers should target regulatory reforms in areas ranging from burdensome telecommunications rules that slow progress toward next-generation Internet technologies, to unnecessarily costly environmental regulations that make economic growth difficult, to outdated workplace regulations that discourage job creation.
Simplifying and flattening the tax code. America’s tax code is overly complex and incredibly inefficient. Special tax breaks to politically connected businesses, groups, and voting blocs have resulted in a bewilderingly complex mess that forces corporations and individuals to spend at least $194 billion each year to comply with the ever-changing tax code. Adopting a simpler and flatter tax code would eliminate the need for this waste of time and money, free billions of dollars for more efficient uses, and remove incentives against saving that leave many workers with little cushion during hard times.
Moreover, eliminating counterproductive tax policies that undermine U.S. business competitiveness, such as America’s policy of worldwide taxation and reducing the U.S. corporate tax rate (the second highest in the industrialized world), would greatly benefit American businesses, and hence American jobs. President Bush’s tax cuts move the tax code in the right direction and should be made permanent, but substantial gains remain unrealized.
Ensuring affordable and reliable energy supplies. While consumers readily complain about increases at the gas pump and in their utility bills, the high costs of energy also hurt America’s employers. Manufacturers alone consume 30 percent of electricity and 40 percent of natural gas. Thus, national energy policies directly affect the cost of American goods and the ability of companies to create jobs.
Congress should remove mandates that force the utility industry to use power from renewable producers (e.g., wind) and instead allow the market to equate real demand and supply and find the right role for the renewable energy industries. Likewise, policymakers should reform the current command-and-control regulatory scheme of the Clean Air Act and replace it with a market-based approach that sets standards and allows the electric industry the flexibility to meet those standards in the most efficient and cost-effective manner possible while simultaneously enhancing the nation’s air quality.
Congress should also address the needs of the electricity grid by eliminating restrictive regulations that discourage investment—such as the Public Utilities Holding Company Act—and utilize innovative transmission pricing incentives. Finally, Congress should increase domestic supplies of energy by opening up access to reserves that are currently off limits or restricted.
Outsourcing is not a credible threat to the U.S. economy, and objective research is quickly debunking its many underlying myths. At worst, outsourcing is a politically charged trigger word that has the potential to advance seriously flawed economic policy. For example, if state governments begin to bar contracts with firms that subcontract any work overseas, they will hamstring the competitiveness of U.S. firms.
Policymakers cannot stop the process of outsourcing any more than they can stop gravity, but they can scare off profitable U.S. companies. Businesses survive on slim profit margins, and threatening competitiveness will be felt immediately where it hurts the most—in U.S. jobs and salaries.
American companies lead the world in developing sophisticated global supply chains in close coordination with worldwide trading partners. Any disruption to the efficiency of that supply-chain network will have a negative ripple effect. By criticizing and regulating multinational companies that trade, invest, outsource, and insource, Congress is paving the way to major disruptions in efficiency that will lead simultaneously to both inflationary and recessionary pressures.
Instead, policymakers should address the underlying reasons that would induce a company from any country to site a business on foreign soil instead of in the U.S. In a global economy with global competition, the cost environment of taxes and regulation looms larger than ever. Although America has the world’s most productive and skilled workforce, its high tax rates, tax complexity, burdensome regulations, and frivolous lawsuits discourage job creation.
The question is not the outsourcing of jobs, but the forcing out of jobs through inept policy. Congress and states would be wise to continue America’s tradition of free and open markets.
—Timothy Kane, Ph.D., is Research Fellow in Macroeconomics in the Center for Data Analysis, Brett D. Schaefer is Research Fellow in International Regulatory Affairs in the Center for International Trade and Economics, and Alison Fraser is Director of the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
Daniel W. Drezner, “The Outsourcing Bogeyman,” Foreign Affairs, Vol. 83, No. 3 (May/June 2004), at http://www.foreignaffairs.org/200405...-bogeyman.html
Tim Kane, Ph.D., “The Myth of a Jobless Recovery,” Heritage Foundation Executive Memorandum No. 917, March 25, 2004, at www.heritage.org/Research/Labor/em917.cfm
The four-month moving average of the U.S. employment level from the Labor Department’s population-smoothed household survey reached a peak in March 2004, based on the latest data available from the Bureau of Labor Statistics, Employment Situation Report, April 2, 2004.
“Civilian Unemployment Rate, 1959–2003,” Table B-42, in Economic Report of the President, transmitted to Congress February 2002, p. 334.
“Unemployment Rates: Commonly Used Definitions,” Annex Table 14 in Organisation for Economic Co-operation and Development, OECD Economic Outlook: Statistical Annex, Vol. 2003/2, No. 74 (December 2003), p. 196.
“Output, Demand and Jobs,” The Economist, March 27, 2004, at www.economist.com
Tim Kane, Ph.D., “Will the Real Unemployment Rate Please Stand Up?” Heritage Foundation WebMemo No. 456, March 24, 2004, updated April 2, 2004, at www.heritage.org/Research/Labor/wm456.cfm
Bureau of Labor Statistics, population-smoothed household survey.
U.S. Department of Labor, Business Employment Dynamics Data Series, 1992 to 2003.
Clare Ansberry, “Outsourcing Abroad Draws Debate at Home,” The Wall Street Journal, July 14, 2003, p. A2. See also John C. McCarthy, “3.3 Million US Services Jobs to Go Offshore,” Forester Research Brief, November 11, 2002, at http://www.forrester.com/ER/Research...,15900,00.html
Jon E. Hilsenrath, “Behind Outsourcing Debate: Surprisingly Few Hard Numbers,” The Wall Street Journal, April 12, 2004, p. A1.
U.S. Department of Labor, Business Employment Dynamics Data Series, 1992 to 2003.
Global Insight (USA), Inc., “The Comprehensive Impact of Offshore IT Software and Services Outsourcing on the U.S. Economy and the IT Industry,” March 30, 2004, at www.itaa.org/itserv/docs/execsumm.pdf
Marc A. Miles, Edwin J. Feulner, and Mary Anastasia O’Grady, 2004 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2004), p. 21.
Office of the U.S. Trade Representative, “U.S. Proposes Tariff-Free World, WTO Proposal Would Eliminate Tariffs on Industrial and Consumer Goods by 2015,” November 26, 2002, at www.ustr.gov/releases/2002/11/02-112.htm
, and Edward Gresser, “Toughest on the Poor: Tariffs, Taxes, and the Single Mom,” Progressive Policy Institute Policy Report, September 10, 2002, at http://www.ppionline.org/ppi_ci.cfm?...ntentid=250828
Office of the U.S. Trade Representative, “NAFTA at Ten: A Success Story,” December 2003, at http://www.ustr.gov/regions/whemisph...-factsheet.pdf
Kevin Power, “Feds, Get Used to Outsourcing: OMB’s McConnell Says Administration Is Bullish on Contracting Out IT Work,” Government Computer News, June 16, 1997, at www.gcn.com/archives/gcn/1997/june16/govbiz.htm
Organisation for International Investment, “The Facts About Insourcing,” at www.ofii.org/insourcing(April 27, 2004).
Jacob F. Kirkegaard, “Outsourcing—Stains on the White Collar?” Institute for International Economics, February 2004, at http://www.iie.com/publications/pape...egaard0204.pdf
Jon E. Hilsenrath and Rebecca Buckman, “Factory Employment Is Falling World-Wide,” The Wall Street Journal, October 20, 2003, p. A2.
Federal Reserve, “Industrial Production and Capacity Utilization,” Statistical Release G.17, updated December 17, 2002, Table 1 and Table 2, at www.federalreserve.gov/Releases/g17/table1_2.htm
Jeff Madrick, “Economic Scene; As Job Exports Rise, Some Economists Rethink the Mathematics of Free Trade,” The New York Times, March 18, 2004, at www.nytimes.com/2004/03/18/business/18scene.html
, and Michael W. Klein, Scott Schuh, and Robert K. Triest, Job Creation, Job Destruction, and International Competition (Kalamazoo, Mich.: W. E. Upjohn Institute for Employment Research, 2003).
Editorial, “Steeling Our Wealth,” The Wall Street Journal, September 23, 2003, p. A24, and editorial, “Steel Trapped Minds,” The Wall Street Journal, February 19, 2002, p. A26.
Shannon Klinger and M. Lynn Sykes, “A Legal Analysis of State and Federal Outsourcing,” National Foundation for American Policy, April 2004, at http://www.nfap.net/researchactiviti...ngLaw_0404.pdf
The justification for Smoot–Hawley is laid out in the 1928 Republican Party Platform: “[W]e realize that there are certain industries which cannot now successfully compete with foreign producers because of lower foreign wages and a lower cost of living abroad, and we pledge the next Republican Congress to an examination and where necessary a revision of these schedules to the end that American labor in the industries may again command the home market, may maintain its standard of living, and may count upon steady employment in its accustomed field.” “Republican Platform [of 1928]” in Arthur M. Schlesinger, Jr., Fred L. Israel, and William P. Hansen, eds., History of American Presidential Elections, 1789–1968, Vol. 3 (New York: Chelsea House, 1971), from Anthony O’Brien, “Smoot–Hawley Tariff,” EH.Net Encyclopedia, ed. Robert Whaples, August 15, 2001, at http://www.eh.net/encyclopedia/conte...oot.tariff.php
“U 1-14 Value of Exports and Imports: 1790 to 1957,” data series, in U.S. Bureau of the Census, Historical Statistics of the United States: Colonial Times to 1957, p. 537, and Federal Reserve Bank of Minneapolis, “Consumer Price Index 1913—,” at minneapolisfed.org/Research/data/us/calc/hist1913.cfm (April 28, 2004).
Council of Economic Advisers, “Who Pays for Tort Liability Claims? An Economic Analysis of the U.S. Tort Liability System,” April 2002, at http://www.whitehouse.gov/cea/tortli...stem_apr02.pdf
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.71 percent is outsourced? More is insourced. In addition, there were some figures about the "Clinton Years" regarding outsourcing, which shows it isn't some new phenomenon.
I know this material is some heavy lifting, but just try to get thru it.