Alexander Hamilton Institute
International Trade

Outsourcing Jobs

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 U.S. market.

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
5. Cashiers
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 loved it.

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 economy.

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 weakening economy.

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 what is.

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 become protectionist.

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 balanced trade?

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 lower wages.

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 productivity,
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 the price."

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 high-value jobs.

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 advantage.

Myth No. 10: We want to see countries like India prosper. Outsourcing
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 institutions.

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 stop it.

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 Exporting America: Why Corporate Greed is Shipping American Jobs Overseas. New York: Time Warner Books, 2004. ISBN No. 0-445-57744-8.


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