The Case for Outsourcing Overseas.

Business & FinanceObama Campaign Accuses Romney of “Big Bain Lie” on Outsourcing

Is Outsourcing our Jobs Overseas good for the Economy?

If you read the news today, Obama is hammering away at Romney for his role in Outsourcing jobs overseas.

According to President Obama “I want to build manufacturing jobs in this country again. You know, when Governor Romney said we should let Detroit go bankrupt, I said, we’re going to bet on American workers, and the American auto industry, and it’s come surging back”.

Yet at the same time the President is working diligently at opening up free trade with Asian countries. Is all this good or bad for the economy?

Job creation vs. Job loss.

A recent article in the Center for American Progress website by Alex Lach quoted Working America, “Manufacturing employment collapsed from a high of 19.5 million workers in June 1979 to 11.5 workers in December 2009, a drop of 8 million workers over 30 years. Between August 2000 and February 2004, manufacturing jobs were lost for a stunning 43 consecutive months—the longest such stretch since the Great Depression.”

Mr. Lach goes on to claim “Manufacturing plants have also declined sharply in the last decade, shrinking by more than 51,000 plants, or 12.5 percent, between 1998 and 2008. These stable, middle-class jobs have been the driving force of the U.S. economy for decades and theses losses have done considerable damage to communities across the country”

Further, the U.S. Department of Commerce showed that “U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers… cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million.”.

Losing 2.9 million jobs that apparently went overseas could not possibly be good for the country when unemployment rates have been so high, or could it?

Unemployment in the USA

All Americans have heard a lot about persistently high unemployment rates in the USA since the Great Recession. It is interesting to look at a graph of unemployment in the USA since the 1920s until last year. The trend towards higher unemployment is definitely up although nowhere near as high as just before World War II.

Unemployment Rate in the USA

Companies really began outsourcing manufacturing jobs overseas around 1970. Many electronic manufacturing jobs were outsourced to Japan who took advantage of this new ability to manufacture electronics and quickly dominated the field.

Today we outsource those jobs to China who are also quickly becoming adept at copying the technology and have now started several companies that not only compete with American companies but with the electronics giants in Japan as well.

Anytime you send the manufacturing of anything somewhere else, the technology of manufacturing it must, by necessity follow it. Consequently, that technology will become copied and used locally to compete. Competition will result in further potential job losses in that field.

Technology, Job Loss and Unemployment

When America first gained independence, the vast majority of American made their living in the fields. America was a land of farmers and the supporting services that went around farming in the small cities and towns that dotted America’s landscape.

Slowly, as the technology of farming improved with the industrial revolution, there was no need for as many farm hands. A tractor could plow a field far more efficiently than a number of farm hands with an ox could do so.

These displaced workers found their ways into cities looking for employment. America became a manufacturing hub. As manufacturing brought more wealth to America, so farming became less of an industry and America began importing fruits and vegetables from around the world.

But if Americans are anything, they are innovative and entrepreneurial. Large corporations found that they could buy farmlands fairly cheaply and using the latest technology could produce higher yields and lower costs with vast farmlands. Farming came back to some extent, but in a different form. And so Farm production continued to increase.

Average Income in the USA

Much has been said in the press about American incomes not keeping up with inflation. A graph published by Advisor Perspectives based on data from the census bureau shows otherwise. Using inflation adjusted figures, it shows that American incomes have not really risen of fallen to any great degree since 1967. There is a slight uptrend, but nothing to write home about.

Of course the upper middle class and the top 5% incomes have risen quite dramatically, but the average American is earning about the same as he always has.

Yet, does this mean that the average American is suffering as a result?

Manufacturing technology has improved immensely. The cost of luxury goods has fallen however. Back in Henry Ford’s days he boasted that the average man could afford a car with just 2 year’s salary.

Today you can buy a car that is far more technologically advanced for a just a tenth of that price. Having 2 or 3 TVs in the house is normal and our kids all walk around with smart phones. Lives are longer, health care is better. All of these advances, while they have not raised the average salary have improved the average life.

What does it all mean?

When we, as a nation, hang onto work that we could send elsewhere for less, we actually decrease our potential productivity.

If you can go to work and earn $20 an hour and you can find someone to mow your lawn for $10 an hour and you would rather do your work at the office anyway, then why would you mow your lawn?

If you outsourced that job to the neighborhood kid and paid the $10 and worked that hour instead and earned $20, then you are further ahead.

However, if you normally gave that job to your own kid but he charged you $50 an hour and now you decided to give it to the kid across the road because you felt your kid was a bit spoiled, your kid would be upset.

And that is essentially the crux of the matter. That is essentially the critical point. Are you doing your child a favor by paying him more than what his production is really worth? Or would you be better off insisting that your child study harder and learn to produce a product that is worth $50 an hour instead of letting him continue to produce a product that is worth $10 for a $50 price?

When President Obama chastises Romney for outsourcing jobs, he is basically chastising him for not allowing the kid to learn that he has to compete.

Eventually, if we do not compete as a nation, we will fall behind those that are willing to compete. Nowhere is this more obvious than China. Chinese workers have no social services to fall back upon and they have to compete. They typically live frugally, save their money and then start enterprises.

On a recent trip to China I was amazed at the sheer volume of small businesses and small factories. Moms and pops over there had fully embraced competition and entrepreneurship. Most people I spoke to were saving their coins with the goal of starting their own enterprise and today the Chinese that have succeeded are buying up homes and businesses across America.

If America does not go back to that can-do attitude and start competing, we will quickly lose out to the rest of the world.

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