Obama/Biden and Romney/Ryan Issues

Election Economics: Assessing Outsourcing

Jul 16, 2012 • Behavioral Economics, Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic Thinkers, International Trade and Finance, Labor, Macroeconomic Measurement, Regulation, Thinking Economically, Uncategorized • 286 Views    4 Comments

Until November 6, at econlife, Mondays will be about presidential election economics.

In 2004, when President Bush’s Council of Economic Advisers chairman, Harvard professor Greg Mankiw, was lambasted for saying, “… I think outsourcing is a growing phenomenon, but it’s something that we should realize is probably a plus for the economy in the long run, ” politicians, left and right, distanced themselves from his position.

Fast forward to 2012. Still, no one wants to be called an outsourcer. And still we are focusing on the politics of outsourcing rather than its economics.

Here are the economics:

A call center in India or an Apple assembly plant in China are examples of  (offshore) outsourcing when firms send jobs abroad that could be done by domestic manufacturing and service workers. (Please note that here, when we refer to outsourcing, we mean offshore outsourcing.)

The Congressional Research Service tells us that the macroeconomic slowdown, not outsourcing, is primarily responsible for high unemployment.

Most economists believe that the US economy benefits from globalization. As a nation, incomes will rise, goods will be cheaper, and corporate profits will increase whenever outsourcing leads to greater efficiency for producing goods and services.

But others accurately point out that outsourcing not only means job losses but can take place on an “uneven” playing field where other nations’ subsidies unfairly attract US businesses.

The bottom line: After discussing what we do know, most research on outsourcing concludes with, “We need to know more.” No one has gathered sufficient empirical data to be sure of the specific impact of offshore outsourcing.

However, economists like Princeton’s Alan Blinder suggest that we have only seen the tip of the iceberg. In the future, with a sufficiently sizable proportion of the economy potentially being outsourced, we will face a massive shift in how we do business.

Maybe that is what our presidential candidates and the media should be discussing.

Also, I hope they will remember what David Ricardo said about international trade. Explaining the concept of comparative advantage, he told us that we elevate everyone’s well-being when nations produce what they are relatively best at.

For example, what if you can teach a class skillfully or mow your lawn expertly while your neighbor can mow the lawn mediocrely or get paid minimum wage at a fast food restaurant? Then you should teach, she should mow and everyone will be better off. The reason? You sacrifice too much by not teaching when you mow and she would sacrifice too much if she earned less at her fast food job.

Varied, there is a wealth of information about outsourcing. Harvard economist Gregory Mankiw co-wrote a paper on the politics and economics of outsourcing and Princeton economist Alan Blinder, looking at “personal” and “impersonal” services and goods discussed how specific jobs might be affected when outsourcing proliferates, and the St. Louis Fed looked at Germany and outsourcing. In addition, here is a recent Congressional Research Service report and a description of the brouhaha about the Mankiw outsourcing statement when he was the CEA chair.


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