Outsourcing is a Natural Force in Free Markets

By Jeffrey A. Singer
Dr. Singer is a Phoenix-area surgeon and an adjunct scholar with the Reason Foundation who writes and lectures on regional and national public policy.

March 29, 2004 -- The other day, while performing an emergency operation on a patient with a bleeding ulcer, it occurred to me that surgeons don't see many ulcer patients these days. Back in the 1970s and early 80s I would operate for ulcer disease every week or so. But with the advent of new anti-ulcer drugs, most ulcer surgery has been "outsourced" to non-surgical medical specialists. Surgeons have more than made up for this loss of business through the explosion in laparoscopic surgical techniques, whereby people can have gallbladder and other operations as an outpatient through small scopes passed through the navel.

Surgeons are not alone when it comes to outsourcing. In the 19th century more than 80% of American workers were agriculturally based. Technological advancements have increased American farm productivity to the point where only 2-3% of Americans work on the farm. Agricultural jobs were outsourced to developing nations as Americans moved into manufacturing, tech, and service sector jobs.

The last 5 decades have seen a steady outsourcing of manufacturing jobs to countries in the developing world—the US has lost less manufacturing jobs than have the rest of the economically advanced nations. In turn, the advanced nations' economies have evolved into more finance, service-sector, and high-tech oriented industries.

Meanwhile, people in developing countries increase their wealth as they advance from poor agrarian societies to modern industrial ones. They become new consumers of technological, financial, and other services that developed countries have to offer.

This has been the story of mankind since the beginning. Free markets provide what the great economic historian Joseph Schumpeter called a process of "creative destruction." Always dynamic, always progressive, free markets constantly generate new products, new jobs, and new wealth on the foundations of earlier creations. In the end, they replace these earlier creations. Free markets propel society forward.

Where are the blacksmiths and candle makers? Cars and light bulbs have nearly completely eliminated these jobs. But everyone in society is better off today than in the days when blacksmiths and candle makers were indispensable.

To be sure, as societies transition from one stage of economic development to another, real people feel real pain as their jobs are "creatively destroyed." But in the long run, looking at the big picture, as those whose jobs are lost find new positions in newly created fields of work, everyone prospers.

The latest example of "outsourcing" relates to low tech jobs—mostly telephone-based tech support—being outsourced to newly emerging India, with a billion potential new customers for American products. While low tech jobs are going to India, the Indians are performing these jobs on equipment made in the US, and their newfound wealth is being spent on US exports. Ultimately this will increase US jobs in areas where the Indians can't compete. The Americans wind up doing more of what they do best while the Indians do the same. Both societies increase their net wealth in the process. It's ultimately a "win-win."

This creative destruction phenomenon is driven, in the end, by consumers, who are always king in a free market. The consumers demand the lowest price for the best possible product. If not, they will take their business elsewhere—perhaps to foreign imports. In order to compete for the consumers' business, US companies must constantly find ways to keep costs down while keeping quality up.

All of this was originally elucidated by the great classical economist David Ricardo. He called what he discovered the Law of Comparative Advantage, a spin-off of the division of labor principle. In his day, he would have said, "If the French make better wines for less money than the English, and the English make better sweaters for less money than the French, then they both would be better off if they drank French wine and wore English sweaters."

Today, ambitious political demagogues try to take advantage of the public's general lack of understanding of economic principles, as well as everyone's dismay when people are displaced by creative destruction, and they call for the government to intervene against "outsourcing." This is nothing new. They have been doing this since the days of Adam Smith.

In the interest of the health and wealth of society, Americans must resist the temptation to defy the laws of economics. They must try to understand and appreciate the benefits free markets provide to all societies.

Dr. Singer is a Phoenix-area surgeon and an adjunct scholar with the Reason Foundation who writes and lectures on regional and national public policy.

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OFFSHORING & OUTSOURCING

ACKGROUND -- Historically, manufacturing jobs have been the backbone of our state's economy and helped create and sustain our middle class. In the late 1980's and most of the 1990's, our state economy began to diversify. We became leaders in information technology, research and development, and high-tech jobs. With this boom in high-skilled high-wage white collar jobs, we saw a shift in our dependence on manufacturing for our state’s economic vitality.

But these industries and many more such as timber, metal trades, agriculture, pulp and paper and food processing, all of which are important to our state’s economy, are being lost to offshoring and outsourcing.

It is important to distinguish between outsourcing (typically used to describe the contracting-out of government work) and offshoring (companies sending work outside the country).

The phenomena of outsourcing or offshoring is not new. Since the 1980's manufacturers have moved complete production facilities overseas in search of the lowest wage. Leading companies such as Microsoft, AT&T Wireless and Boeing are exporting our white collar high-tech jobs overseas to slash labor costs. In agriculture, whole operations from growing to packing are closing up shop to reopen in Third World nations, where there is an endless supply of workers willing to work for the lowest wages. This trend will have a significant impact on Washington’s economic future because our economy depends heavily on these industries and the jobs they create.

We also know that state agencies supported by our tax dollars are offshoring work in search of the lowest bidder. A 2004 governor’s office report disclosed that dozens of state agencies have outsourced work and sent millions in state revenue overseas.

The offshoring of service sector jobs has been greatly facilitated by the absence of any regulations regarding basic privacy protections, professional qualifications and security safeguards.

LABOR'S POSITION -- In the 2004 session, the Washington State Labor Council and its allies called on policymakers to look at the issue of outsourcing and offshoring and its impact on our trade-dependant state. No new policies or bills were enacted, but constructive study and debate occurred.

But now the time for study is over. There is no question about the problem and no question that Washington's taxpayers would prefer their money spent to create jobs here in Washington rather than in other countries.

The WSLC will support 2005 legislation to prohibit the offshoring of state contracts, to demand accountability from offshoring companies that get state tax breaks. Washington taxpayers should not subsidize companies that export jobs. All tax breaks should have strong provisions for public disclosure and claw backs if the company accepts subsidies, but exports jobs overseas or does not create the intended number of jobs (also see Tax Policy, Subsidies and Economic Development).

Our state must also look at the privacy issues surrounding the personal information beyond name address and phone number. Social Security numbers, medical and financial information, dates of birth, names of relatives and other information is being compiled by overseas contractors outside the jurisdiction of federal or state consumer privacy laws. These security matters have been left solely to the discretion of the private-sector businesses sending the work offshore. As we learn more on this issue we will work for policies that protects workers and our communities.

RECENT LEGISLATIVE HISTORY

2004—EHCR 4419 would have created a joint task force to study offshore outsourcing. The resolution passed the House, but died in the Senate.

— A proviso in the House version of the supplemental operating budget would have required the Office of Financial Management to report on state contracts performed at locations outside the U.S. The proviso was not included in the final version of the budget.

— SHB 3187 would have prohibited work under certain state contracts from being performed at locations outside the U.S. It died in the House

— SHB 3186 would have required call center employees to identify their employer’s identity and location. It died in the House.

— SHB 2352 would have required certain employers to give affected employees 10 days' advance notice of a layoff for workers required to train their replacements. It died in the House.

with thanks to : wslc.org

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