Keeping outsourcing in perspective

Posted: Mar 26, 2004 12:00 AM

On Friday (April 2), the Bureau of Labor Statistics will release the employment report for March.  Most economists are expecting a solid increase in jobs.  But they have expected significant increases for months, only to be proven wrong when the official data were released.  Another weak jobs number undoubtedly will raise pressure on Congress and the Bush Administration to take action on the issue of outsourcing, which many unemployed workers, especially in information technology (IT), blame for their misfortune.

 One reason why the outsourcing issue has gotten so much attention is that it plays to deeply held fears about foreigners that have been part of the American political landscape since the Know-Nothing movement of the 1840s.  As Holman Jenkins of the Wall Street Journal recently put it, "The current griping over 'outsourcing' seems almost a species of psychological dysfunction, one that blames foreigners over any explanation that doesn't."

 The Bush Administration has been very slow to recognize the political threat from the outsourcing issue.  Indeed, it played right into it with an ill-timed proposal to allow illegal Mexican workers in the U.S. to have "guest worker" status allowing them to remain here legally.  While I think this is a defensible policy, it suffers from appearing to be motivated more by politics than a serious concern for illegal immigration.  It looks as if its sole purpose is to win Hispanic votes.

 President Bush also shot himself in the foot when he promised to create a high level post to promote manufacturing, where the greatest job loss has occurred.  Then it turned out that this "manufacturing czar" position involved nothing more than renaming an existing assistant secretary position at the Commerce Department.  Finally, its vetting process blundered by naming to the post a businessman, Tony Raimondo, who has outsourced jobs to China from his own business.  The appointment was quickly rescinded when John Kerry's campaign brought this fact to the media's attention.

 The Bush Administration has done little to address the outsourcing issue other than muzzle Council of Economic Advisers Chairman Greg Mankiw for daring to suggest that it is an inevitable process. But others are starting pick up the slack.  A new study by the American Electronics Association offers a balanced perspective.

 While acknowledging that outsourcing has hurt some Americans, the AEA study places most of the blame for job loss on slow growth and rising productivity.  It also notes that other countries have caught up with the U.S. in terms of education and technology, making them stronger competitors for IT business.  They are competing not just on the basis of wages, but quality as well.

 The AEA study says that today's concern for outsourcing echoes warnings in the 1980s that Japan was going to take over the world.  A recent Forbes Magazine article points to parallels with the automation scare of the 1960s.  As a presidential candidate in 1960, John F. Kennedy warned that automation "carries the dark menace of industrial dislocation, increased unemployment and deepens poverty."

 Robots, Japan, NAFTA and other threats to our prosperity have never sustained themselves and the doom-and-gloom crowd always slunk away without ever explaining why they were so wrong.  Ross Perot, for example, has never told us why NAFTA didn't cause the "giant sucking sound of jobs being pulled out of this country" that he predicted in 1992.

 Writing in the May/June issue of Foreign Affairs, political scientist Daniel Drezner explains that fears of permanent job loss from trade and technology always arise when unemployment is high for cyclical reasons.  But eventually the slowdowns end and employment strengthens again.  "Once the economy improves, the political hysteria over outsourcing will also disappear," Drezner writes.

 This is exactly what President Kennedy's Council of Economic Advisers told him would happen when fears that automation would cause all jobs to disappear were at a peak 40 years ago.  CEA Chairman Walter Heller explained that the best thing he could do was cut taxes to stimulate investment and consumption, which would raise economic growth and employment regardless of how much automation was going on.  When this proved to be correct, the automation hysteria faded away.

 Thus most economists believe that policies aimed specifically at outsourcing are misdirected and potentially counterproductive.  For example, a new study by the National Foundation for American Policy argues that anti-outsourcing legislation recently passed by the Senate will likely destroy more jobs than it saves, by inviting foreign retaliation, reducing competition and raising costs to governments.  The amendment, sponsored by Senator Chris Dodd (D-CT), would prohibit federal contractors or states from contracting-out with foreign businesses.

 Outsourcing is an issue only because employment growth is slow.  But it is not the cause.  Hence, policies directed at restricting outsourcing are unlikely to create any jobs and run the risk of actually making the situation worse.

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