Alexander Hamilton Institute
The Myths of Outsourcing and Free Trade
By Lou Dobbs
Managing Editor of CNN’s Lou Dobbs Tonight
All truth passes through three stages, first, it is ridiculed.
Second, it is violently opposed. Third, it is accepted as being
self-evident. – Arthur Schopenhauer
Gregory Mankiw is a lanky, bespectacled, low-key guy who looks the
part of a former Harvard professor of economics, which he is. Mankiw
has written a number of popular economics textbooks. He's also the
chairman of the President's Council of Economic Advisers, and along
with the president's economics adviser, Stephen Friedman, he has the
greatest access to President Bush on economic polity. Mankiw,
however, chose early this year to publicly support the shipment of
American jobs to cheap overseas labor markets.
He caused a brief outcry in Congress, and even the always loyal
Speaker of the House, Congressman Dennis Hastert, was moved to
separate himself from Mankiw's statement. Mankiw said, "Out-sourcing
is just a new way of doing international trade. We are very used to
goods being produced abroad and being shipped here on ships or
planes. What we're not used to is services being produced abroad and
being sent here over the Internet or telephone wires . . . I think
out-sourcing is a growing phenomenon, but it's something that we
should realize is probably a plus for the economy in the long run."
A number of people on Capitol Hill thought Mankiw should have
resigned, but I disagreed. On my broadcast that night, I called on
the president to fire him. Not merely because I obviously disagree
with him, but because Mankiw's statement raised the administration's
support of overseas outsourcing to a declaration of government
po1icy. Now, maybe I'm being somewhat brittle about the matter, but
I just happen to believe that our government should be on the side
of American working men and women, not aiding and abetting the
destruction of their jobs by supporting a business practice that
even Mankiw said could "probably be a plus for the economy in the
long run." Probably? It could also be a probable negative. It
certainly is if you're one of the hundreds of thousands who've lost
their jobs to outsourcing. When he added a further qualifier to his
support by saying "in the longrun," Mankiw kept his credentials as
an economist in good standing.
How long is the long run? How many jobs do we have to lose to
outsourcing to determine whether it really is a "plus," or a
definite negative? I invited Gregory Mankiw to join me on my show
that night and a number of times since, to ask him those questions
and to debate the issue, but he has consistently declined. The
invitation is permanently open.
Mankiw spoke for the administration in his early sup-port of
outsourcing, and since then the Bush economic team has taken its
advocacy of free trade at any price to new heights. The White House
is not only making statements like "outsourcing is good for the
American worker" but is defending its free trade policies by
insisting that all of us who are concerned about chronic, bulging
trade deficits and the outsourcing of American jobs are "economic
isolationists." Really? I certainly have never called for
protectionist trade policies, only fair trade polices. I've never
called for an isolationist trade policy, only balanced trade. And
frankly, I don't know anyone who has advocated any policy that could
be honestly described as economic isolationism. And neither does the
Bush administration. At a time when we should be having an honest,
open dialogue about the impact of overseas outsourcing and free
trade on American workers, the administration has chosen to indulge
in rhetorical gamesmanship while ignoring the national cost of a
half-trillion-dollar trade deficit, the huge quantities of foreign
capital that we are now dependent on, and the emergence of a
national policy that puts our working men and women in direct
competition for employment with a third world labor force that will
work far cheaper than Americans. There are a lot of misconceptions
to address when we finally do begin that dialogue, and a lot of
myths to dispel.
Myth No. 1: Outsourcing American jobs is good for our economy.
Even the chairman of the President's Council of Economic Advisers
couldn't go beyond saying outsourcing is "probably" a plus for our
economy, "in the long run." The problem is, there's no empirical
evidence to support that position. We do know that workers who have
lost their jobs to overseas outsourcing are finding new jobs that
pay only about 80 percent of their original wages. And we do know
that there are tremendous costs to the government to provide
unemployment benefits and retrain these laid-off workers.
Outsourcing may be good for the profits of U.S. multinationals, but
that isn't really the issue, is it?
Myth No. 2: Outsourcing has improved productivity growth
and the creation of high-value jobs.
Our gains in productivity have resulted from (1) improvements in
business processes and operations as a result of the application of
new technology, (2) employees who are lucky enough to have had jobs
for the past several years and are working longer hours for
basically static compensation, and (3) moving production and
shipping American jobs overseas to provide goods and services to the
As for creation of high-value jobs, the numbers speak for
themselves, and they are not encouraging. When the Bureau of Labor
Statistics released its ten-year projections for American job growth
in February 2004, seven of the ten biggest areas of job growth were
in menial or low-paying service jobs. Here's the BLS projection:
1. Waiters and waitresses
2. Janitors and cleaners
3. Food preparation
4. Nursing aides, orderlies, and attendants
6. Customer service representatives
7. Retail salespersons
8. Registered nurses
9. General and operational managers
10. Postsecondary teachers
Only three of these job categories require a college degree. The
rest rely on on-the-job training. These jobs of the future hardly
qualify as high value.
Myth No. 3: Outsourcing is simply a part of free trade, and
classical economists like Adam Smith and David Ricardo would have
Adam Smith believed that free trade allowed countries to concentrate
their production on goods in which they had a natural advantage, and
to acquire through trade other goods better produced by other
countries. David Ricardo developed the concept of comparative
advantage, which held that nations can benefit from free trade by
concentrating their production on goods they can produce most
efficiently, acquiring through trade other goods that permit them to
concentrate on their comparative advantage and thereby enlarge their
Smith and Ricardo did not envision a trade relation-ship in which
there wasn't mutuality of benefit, that is, balance. Both economists
assumed that national economies would act with a clear understanding
of national self interest. I strongly doubt that either Smith or
Ricardo would be pleased to find their free trade theories being
used to support the transfer of factors of production from developed
nations to third world nations, to take advantage of all but
limitless supplies of cheap foreign labor. They also could not have
imagined that one nation would effectively risk bankrupting itself
by transferring its comparative advantage of knowledge base,
expertise, and capital to its trading partners, and then ship its
jobs overseas as well. Our current trade policies aren't
laissez-faire but rather "c'est la vie."
Myth No. 4: Our economy and consumers are strong enough to run large
chronic deficits, and historically a trade surplus is a sign of a
This bizarre assertion was made by Congressman David Dreier--one of
many he's made in trying to defend free trade agreements on my show
The dapper Republican congressman from California is the
personification of the free-trade-at-any-cost philosophy, and unlike
many in the Republican party, he has the courage of his convictions.
The congressman is partially correct, to the extent that a trade
surplus might occur when an economy weakens or goes into recession,
and the purchase of imports declines. But the reality is that with
our chronic trade deficits we are approaching $4 trillion in
accumulated trade debt and must borrow foreign capital to buy
foreign goods. As a result, our massive chronic trade deficits are
clear evidence that our economy is not producing enough goods for
domestic consumption and not producing enough goods that the world
wants to buy or can afford. If that's not weakness, I don't know
Myth No. 5: The only alternative to free trade is protectionism
or "economic isolationism."
The free traders, within and without the Bush administration, have
taken to casting the outsourcing and free trade arguments in terms
of false choices: insisting that there is only free trade, as
currently practiced, or no trade. But between the polar extremes of
free trade and isolationism are a wide range of polity choices: In
the center of the policy spectrum there is balanced trade. But
Washing-ton and Corporate America are opposed to balanced trade
because it would mean a new direction in policy, a larger and more
active role for our government, and an end to carte blanche for
corporations in international trade. The real alternative to what we
continue to permit Washington and Corporate America to call "free
trade" is balanced trade, in which we negotiate trade agreements
that are reciprocal in benefit—unlike the World Trade Organization
or trade agreements like NAFTA. We have ten years' experience with
the WTO, and we have eleven years' experience with NAFTA. That
experience shows that free trade is not working for the United
States. When one side—namely, the United States—is carrying a
half-trillion-dollar trade deficit, it's clearly not benefiting us.
Many of our biggest trading partners, notably China, are engaging in
obstructed trade, yet our leaders keep insisting that it's free and
fair. They state that this is the only way it can work, or else we
Well, the Chinese are protectionists, the Japanese are, and so is
much of the EU. And they all have trade surpluses. Why should the
United States not be able to achieve a surplus as well, or at least
Myth No. 6: Job retraining is the way to deal with outsourcing.
Whenever industries and jobs have left our shores, we've retrained
the workers for better jobs. That'll happen this time.
I think James Glassman, columnist for the Washington Post and an
American Enterprise Institute fellow, answered this one just fine on
my show When I asked him what we would be retraining workers for,
Glassman said, "One of the things about a dynamic economy is, we
don't know what the jobs are." And that's the point. When you're
ex-porting jobs that are at or near the top of what we consider
professional careers, where is the next step up? How do you tell
radiologists, lawyers, or architects that they can be retrained for
better careers when they've already been to college, apprenticed,
and interned and now are in desirable and well-paying positions?
What are they going to be offered in the way of a better job?
When free traders like Glassman say, "Don't worry, we retrained
blacksmiths after the advent of automobiles," they're talking about
a move from one kind of production to a new one. We didn't just stop
using horses and wait around for a better form of transportation—it
had already arrived. That, however, is what's happening with
outsourcing of American jobs. We're outsourcing high-paying service
and professional jobs, yet there isn't a new job that is attracting
labor, at least not in this country.
Blacksmiths didn't lose their livelihood and then wait years for the
introduction of the automobile. The auto-mobile industry that forced
blacksmiths and carriage makers out of business simultaneously
created new jobs. Americans are not losing their jobs to a dynamic,
rapidly changing economy. Americans are losing jobs because we
permit U.S. multinationals to force American workers to compete with
cheap foreign labor.
Myth No. 7: Outsourcing benefits everyone. Look at what happens when
Honda outsources to the United States and builds cars here. The
United States is insourcing as many jobs as it's exporting.
"Insourcing," as the Bush administration, the multinationals, and
other free traders like to call the building of foreign factories in
this country, is a sham argument. Honda, Toyota, and BMW, for
example, built plants here to win access to the world's richest car
markets. That required them to make an investment in American-based
facilities and American workers. There is no similarity of any kind
between the foreign companies' hiring of Americans to staff these
"transplants" and the exporting of American jobs to India or other
third world countries simply to take advantage of cheap labor,
rather than enter a foreign market. The hiring of American workers
in plants owned by foreign companies is not analogous in any way to
IBM's shipping 10,000 jobs to India solely for the purpose of paying
As I've mentioned, under the direction of the Reagan Administration,
the U.S. Congress and U.S. trade representative forced import quotas
against Japanese auto manufacturers after Japanese vehicle exports
swamped our shores. The administration forced the building of plants
by companies like Honda and Nissan and BMW in return for greater
access to the world's largest consumer market. What the current
administration and free trade proponents like to call "insourcing"
is really just foreign direct investment in the United States.
Those foreign-based companies build here, and they sell here. They
don't build cars here and then send those cars back to Japan or
Germany for sale. They are building here to get access to our
market, and they're doing a good job of it. On the other hand, our
trade agreements rarely open up foreign markets to the degree that
the United States has opened up its markets. We don't sell into
those other markets, because we can't.
Myth No. 8: The goal of outsourcing jobs overseas is to increase
not simply to cut wage costs.
Outsourcing proponents claim that it's all about productivity, not
price. Almost everyone agrees that the American worker is the most
highly productive worker in the world—arid among the costliest. But
for reasons of public relations, U.S. multinationals are loath to
say they're ex-porting American jobs simply to cut their labor
costs. No, instead they or their consultants say they're shipping
jobs to cheap foreign labor markets to achieve "efficienry" or
"higher productivity" or to raise their competitiveness. Nonsense.
It's like the old saying: "When they say it ain't the price, it's
To achieve lower labor costs, the U.S. multinationals are using
their corporate consultants, such as Accenture, McKinsey, and
others, to dress up the language and their rationale. And the
consultants are being paid handsomely to do so. But the simple truth
is that our multinationals and our elected officials who support
them without reservation are callously and shamelessly selling out
the American worker.
Myth No. 9: When Corporate America outsources jobs overseas, it
enlarges its knowledge base and creates not only more jobs here but
John Castellani, president of the Business Roundtable, said earlier
this year, "Shifting routine computer programming, back-office, and
call center jobs overseas does reduce the number of American jobs in
those areas, but the cost savings generates new capital to finance
the remarkable ingenuity of our economic system, to create new,
higher-wage jobs here in the United States." That's the world we all
wish we lived in. The problem is, there is absolutely no empirical
evidence or data to support the statement. In fact, jobs lost are
being replaced by lower-paying jobs.
Tom Donohue, president and CEO of the largest business organization
in the country, the U.S. Chamber of Commerce, says that the United
States also gains technical knowledge by exporting American jobs.
Now, Tom is one of the smartest and most aggressive spokespersons
for any cause or group in Washington, and a likeable fellow But he's
just plain wrong. Knowledge and expertise are moving from the United
States to the cheap foreign labor markets along with our jobs. We're
not only exporting American jobs, we're exporting our technology
Myth No. 10: We want to see countries like India prosper.
helps their economies and their workers.
I really hope that none of the people who use this argument are
suggesting that we create a middle class any-where in the world at
the expense of our own. Because for those who live and work here,
for those who run companies based here, their first and foremost
national concern should be the welfare of their own nation. As far
as I'm concerned, there's no way you can help build your neighbor's
house when your own is on fire.
Certainly we must aid other countries, but that doesn't mean we need
to send our jobs to them at the expense of our own prosperity. The
elitist one-worlders surely won't continue to demand that we consign
our workers to an ongoing labor competition with China, the
Philippines, India, Haiti, and Mexico. Those who claim that we have
a higher responsibility to the world economy than to American
workers might consider a visit to their local unemployment office to
talk with a few of the people in the lines. Our highest
responsibility is to preserve the American Dream for all Americans.
Myth No. 11: U.S. multinationals are outsourcing because Americans
aren't well enough educated to fill the jobs.
First, it's simply untrue. The more jobs Corporate America
outsources, the fewer workers to pay local, state, and federal
taxes, which further punishes our struggling public education
system. As Corporate America is fond of saying, companies don't pay
taxes; people do. And if people don't have jobs, our tax base
diminishes, and we have less to support public education. U.S.
multinationals should be spending money, and setting up training for
public school students, and volunteering to work in our schools,
rather than lamenting the poor quality of education. In fact, we all
should be doing far more to improve our public schools.
But the outsourcing of American jobs is worsening our problems, not
solving them. The law of supply and demand will always determine
economic choices. As Corporate America recruits more labor from
third world countries, it is encouraging our young people to make
educational choices that may be ominous for our ability to produce
and for our future prosperity.
This past year enrollments in computer engineering jobs dropped 23
percent. MIT, arguably one of the most prestigious schools in the
world, announced that enrollment in its engineering programs has
dropped 33 percent in the past two years. Chinese schools now
graduate more than 350,000 engineers every year, far above the
approximately 90,000 who graduate annually from American
I hear some of the world's biggest technology companies bragging
about the amount of money they spend on research and development.
But they don't always make the distinction between R & D that's
going on in this country and R & D that's going on in newly created
facilities in other countries—facilities that house the labor that
is replacing American workers. As we know, Microsoft pledged $400
million last year to create resources in India, on top of some $750
million it had already promised to China. That's more than a billion
dollars that Microsoft has put into other countries while thousands
of software programmers in the United States—still home to
Microsoft—go looking for work.
Myth No. 12: U.S. companies have to compete in a world market. Even
if everyone agreed that outsourcing is terrible, there's no way to
This is the fatalism defense of outsourcing. The multinationals say
there's no practical way to end outsourcing. The reality is that we
could end it tomorrow Bruce Josten, executive vice president of the
U.S. Chamber of Commerce, told me that the issue was complicated and
that his members were still trying to figure out the ramifications,
the laws, and the actual numbers of employees directly affected. I
asked Bruce what he would think of a moratorium on outsourcing by
Corporate America until his colleagues worked out the details with
Congress and academia. Josten said he'd rather see Congress pass
tort reform and rather we had a moratorium on politicians at the
state level introducing bills to stop outsourcing. In other words,
no moratorium on outsourcing—even though that would at least
temporarily halt the practice and give us the time necessary to
determine how many jobs have been shipped out of the country and how
many more are at risk, and time to create a national polity on the
subject. But of course, that's the real point: Corporate America
doesn't want the public to know the real numbers, or the real
impact, and the last thing it wants is—God forbid—a national policy
on the issue.
All these myths and the facts that dispel them have been part of the
early stages of a public dialogue, from the factory floor to the set
of my show, from the floor of the U.S. Senate to the water cooler.
Despite the extraordinary efforts of the multinationals, their
lobbyists, and the politicians they support to distort the debate on
the critical issue of outsourcing, I believe that nearly all working
Americans understand that not only truth is being assaulted but also
our economic future and our way of life.
The Myths of Outsourcing and Free Trade is Chapter 7 in
America: Why Corporate Greed is Shipping American Jobs Overseas.
New York: Time Warner Books, 2004. ISBN No. 0-445-57744-8.
Principles of Genuine Free and Fair Trade