Evans On The Economy -- Outsourcing Could Hurt, Help The U.S.

Dec. 21, 2004
Consider lost wages, quality and consumer savings.

The debate about the benefits of outsourcing jobs has, as usual, deteriorated into a political football match. Hardly anyone seems to care about the underlying economic issues. There have always been pluses and minuses to foreign trade. On the plus side, consumers can buy goods and services at lower prices, or in some cases they can buy higher-quality products at the same price. On the minus side, some people lose their jobs, and when they find new employment, they may have to settle for less pay. So you would think that a balanced argument about outsourcing would consider both of these aspects. At least so far, that has not been the case. Let's consider some examples. The number of U.S.-based jobs in the textile and apparel industry has shrunk by more than 500,000 during the past decade as manufacturing in that sector moved overseas. But that has been a big plus for the American consumer, because the price of textiles and apparel has dropped by 2% per year because of foreign trade, or nearly 20% over the past decade. Since consumers spend about $330 billion per year on clothing, they saved some $66 billion in 2003 alone. Even if none of the displaced workers found alternative employment, and none of the capital was redeployed, the total loss to those industries has been about $15 billion per year. Since most of those jobs were minimum wage, the net loss of income to economy has been minimal. Next we look at the auto industry, which includes imports of Lexus and Mercedes at the high end and (used to) include Yugos at the low end. Which brings up another point about outsourcing -- the value of quality. You don't see too many Yugos on the roads these days. They were certainly cheap enough, selling for about $5,000. But they were, collectively, of inferior quality. They didn't benefit the American public because the quality-adjusted price wasn't low at all. The market worked in this area, and people stopped buying cars that didn't run. We didn't need legislation to ban Yugos. Now consider the quality of overseas call centers, notably in India. Anyone who has tried to have a meaningful conversation with one of these customer-service representatives knows what I mean. I assume they are highly motivated, intelligent individuals, but so far they aren't giving good service. The India-based call center personnel are the service equivalent of the Yugos, and they won't last either. So stop worrying about them. But what about all the jobs being outsourced in highly paid and highly trained professions, such as engineering, programming, financial services and medical care? The proper way to determine the relative value of outsourcing in these fields is, again, to assess the costs and benefits. Many of these former employees used to be paid $50,000 to $100,000 per year. If they find minimum-wage jobs, the loss of earned income will be an order of magnitude higher than has been the case for textile and apparel workers. And what about the benefits to the economy? Are consumers seeing lower costs for roads and bridges, for software, for stock market "advice" or mutual funds or hospital and doctor bills? Not that I know of. Maybe some firms are making more money. But if they are, the result -- in the words of old Commodore Vanderbilt -- is "the public be damned." Outsourcing helps the economy if the savings to consumers substantially exceeds the lost wages. If the reverse is true -- if prices hardly drop, if service deteriorates, and the loss in wages is substantial -- the economy is worse off. Only when disinterested observers have made these calculations can economists offer valid advice about whether outsourcing is a good idea or not. Michael K. Evans is chief economist for American Economics Group, Washington, D.C., and president of the Evans Group, an economics consulting firm in Boca Raton, Fla.

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