While not without its drawbacks, outsourcing is a net positive for the U.S. economy. At the most basic level, it is form of trade. It produces economic gains by maximizing what the economist David Ricardo termed “comparative advantage.” The idea is simple: By outsourcing low-skilled jobs abroad – for instance customer service, data entry, or labor-intensive manufacturing – companies can obtain products and services at a lower cost than if they had tried to create or perform them. That allows companies to increase efficiency and productivity, creating an overall benefit to the economy. Meanwhile, the lower costs of less expensively produced services and goods are passed on to consumers. In short, all parties benefit.
The biggest economic benefit may be efficiency. Outsourcing allows companies to perform functions that that they either cannot do at all, or cannot do in a cost-effective way. For example, few companies waste precious time and resources doing their own taxes when they can outsource the task to professional accountants who can do it much more efficiently, and thus less expensively. Such outsourcing is good for the company, which does not have to waste resources on the task; it is good for the company's clients, who do not have to pay a portion of what otherwise would have been the higher cost of completing the task; and it is good for the accounting firm that gets the business.
Domestically, this idea is not controversial. Companies outsource within the United States all the time. Politics enters into the conversation only when outsourcing is directed overseas. It is not obviously clear why that should be. By allocating resources more efficiently, outsourcing makes social and economic progress possible.
Consider computers. During the 1990s, computer hardware was outsourced abroad. In the short term, that caused pain for U.S. manufacturers. Between 1985 and 2005, some 125,000 jobs were lost in the computer hardware industry. But outsourcing caused prices on computers to drop by 10 to 20 percent, making computers more affordable. As computers became more common, productivity and economic activity surged. Economists estimate that outsourced computer hardware boosted productivity by 2.5-2.8 percent between 1995 and 2002, driving an Internet and technology boom and adding $230 billion to total U.S. output. On balance, outsourcing computer hardware proved a huge boon to the U.S.
Outsourcing does, of course, have its downsides. As with computer hardware, shipping jobs overseas leads to domestic job losses in some industries. This can be a painful and disruptive process for workers who lose their jobs. But it must be noted that many of these outsourced jobs or industries would not be sustainable for the long term. Think of the horse shoers, or milk delivery men, or typewriter repair shops that were replaced when new and improved technology came into use. Similarly, outsourcing enables companies to re-invest their profits in new products and services, as well as in new and more sustainable jobs.
At the same time, outsourcing fuels affluence abroad, thereby opening new markets for American-made goods. In this context, it is not surprising that economists believe outsourcing strengthens rather than weakens the U.S. economy.
If this view is not politically palatable, it is because politicians view outsourcing without context. They consider the jobs lost, but not the jobs created. Just as important, they fail to factor in the jobs that are outsourced to the U.S. from foreign countries. Japanese auto manufacturers like Honda, Nissan, and Toyota have been building manufacturing plants in the U.S. since the 1990s. Today, Toyota operations in the U.S. sustain 365,000 jobs nationally and pay more than $20 billion in compensation to American workers. The German firm BMW is another major outsourcer to the U.S., announcing in January 2012 that it would invest $900 million in a Spartanburg, South Carolina factory. Even India, traditionally a destination for U.S. outsourcing, is now outsourcing call-center jobs to the United States, bringing the process full circle.
Cost-benefit analyses of outsourcing will never convince everyone, of course. Unions, for instance, have long blamed outsourcing for destroying the manufacturing sector in the United States. That is mostly false. In reality, the decline in manufacturing jobs has less to do with jobs going overseas than with improvements in technology that have made many manual laborers dispensable. As a percentage of GDP, manufacturing has remained relatively constant in recent decades. What has changed is that the work is now more often done by machines than by men. Outsourcing is not the culprit.
Considered on a broad scale, outsourcing creates more good than harm, more wealth than economic loss.
Adapted from "In Defense of Outsourcing," by Jacob Laksin (July 20, 2012).