Politics & Policy

Outsourcing Myths — Debunked!

The stats say simply, clearly, that this whole issue is overblown.

The outsourcing of U.S. jobs to foreign countries has been a major theme of the Kerry-Edwards campaign. During his debate with Vice President Cheney, John Edwards repeated the standard Democratic line: “The administration says over and over that the outsourcing of millions of American jobs is good. We’re against it.” A search of John Kerry’s campaign website turned up 176 separate statements on the evils of outsourcing.

What you won’t find on the Kerry website are any references to serious studies of outsourcing. The reason is that they all find the issue to be seriously overblown: Outsourcing is responsible for a trivial amount of job loss at most, and is generally a positive for the U.S. economy. Serious studies of outsourcing include ones by former Democratic administration officials.

In July, economist Martin N. Baily, chairman of the Council of Economic Advisers under President Clinton, looked at who benefits from outsourcing. He found that for every $1 spent by a U.S. corporation on outsourcing to India, only 33 cents stayed in India. The other 67 cents came back to the U.S. in the form of cost savings, new exports, and repatriated profits. However, productivity gains add another 45 to 47 cents of value to the U.S. economy. Thus, on balance, the U.S. economy gains $1.12 to $1.14 for every $1 invested in outsourcing.

In August, economist Charles Schultze, chairman of the CEA under President Carter, looked at the number of jobs lost to outsourcing. He found that between the end of 2000 and the end of 2003, at most 215,000 service-sector jobs were lost. This is a minuscule amount in a working population of close to 150 million. Moreover, Schultze says, the productivity gains produced by outsourcing raised real incomes and living standards in the U.S. He concluded that outsourcing cannot be blamed for the “jobless recovery.”

Also in August, the nonpartisan Public Policy Institute of California looked at the costs and benefits of restricting outsourcing. It found that the cost of restricting outsourcing would greatly exceed any gains. Policies targeted toward those affected by outsourcing are far preferable to a ban on outsourcing. For this reason, California Gov. Arnold Schwarzenegger recently vetoed several bills that would have restricted outsourcing in that state.

In September, International Monetary Fund economists Mary Amiti and Shang-Jin Wei did the most thorough study of outsourcing to date for the prestigious National Bureau of Economic Research. These are their findings:

‐ U.S. imports of computing services — the most controversial area of outsourcing — came to just four-tenths of 1 percent of the gross domestic product in 2003.

‐ In 2002, the U.S. was the world’s largest exporter of computer services, which added almost $60 billion to our exports. By contrast, India’s total exports in this area came to less than $20 billion and China’s were just over $10 billion.

‐ China and India, the two countries most blamed for outsourcing, actually outsource more than we do — six-tenths of 1 percent of GDP for the former and 2.4 percent of GDP for the latter.

‐ Contrary to popular belief, the U.S. is a large recipient of outsourcing from other countries — i.e., insourcing. In 2002, the U.S. ran a healthy trade surplus in this area — receiving $22 billion more in outsourcing from other countries than it paid in outsourcing to other countries.

‐ The number of jobs gained from outsourcing approximately equals the number of jobs lost.

The Federal Reserve Bank of Kansas City did the most recent study of outsourcing. It concluded that outsourcing has no permanent employment effects, although there can be temporary displacements.

Finally, press reports indicate that the outsourcing boom may have already peaked. A Sept. 22 report in the Wall Street Journal said that Chinese workers are now demanding better pay and more time off, which has sharply raised the number of labor disputes. This is quickly eroding the cost advantage of outsourcing to China.

An Oct. 7 report in the Financial Times said that General Electric, which pioneered outsourcing to India, has decided to sell its international outsourcing business. It found that the savings from outsourcing were mostly one-time gains that tended to dissipate over time. One reason is high employee turnover. Call centers operated by GE in India lost 40 to 50 percent of their workers every year.

Perhaps for these reasons, in his debate with President Bush on Oct. 8, John Kerry backed away from some of the more extreme statements he and John Edwards have previously made about outsourcing. Said Kerry, “You can’t stop all outsourcing. … You can’t.” He added that anyone who says he will stop outsourcing “would be pandering.”

Kerry is right. I hope Edwards and other Democrats were listening.

– Bruce Bartlett is senior fellow for the National Center for Policy Analysis. Write to him here.


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