Outsourcing

A lot of bloggers and political types are predicting that outsourcing will be a big campaign issue. Bruce Bartlett over at NRO has a fine articulation of the issue and what it means to the bottom line. To be frank, protectionists brought this on themselves.

[M]uch of the move toward offshoring is the result of ill-considered efforts to keep software jobs in the U.S. Previously, companies had brought Indian programmers to this country to do their work under a program established in 1990. It provided these foreign workers with H-1B visas that allowed them to work here temporarily. But under pressure to save such jobs for the native-born, the number of visas allowed under this program was reduced from 195,000 to 65,000 in October.

So now, instead of having Indian workers come here, where they spent much of their earnings, companies are contracting with them to work in India, which is where they now spend their earnings. Rather than admit that they were wrong in the first place, the same people who demanded restrictions on foreign workers are trying to get new limits placed on outsourcing as well. A new report from the National Foundation for American Policy details this effort and the likely costs. These include higher taxes when laws are passed preventing state and local governments from utilizing cheaper foreign sources for information technology (IT) services.

Bartlett shows that outsourcing actually can add value to companies without catastrophic job loss. He says:

he truth is that outsourcing is far less of a threat to American workers than they imagine, and there are significant benefits for the U.S. economy. For starters, there is not a one-for-one relationship between jobs lost here and those gained elsewhere from outsourcing. Boston University researcher Nitin Joglekar has found that outsourcing of IT services typically leads to domestic job losses of less than 20 percent. In other words, for every 100 jobs outsourced to India only 20 are lost here.

A study by the McKinsey Global Institute found that workers freed up from routine tasks that have been outsourced are often redeployed within the company in projects generating greater value-added and jobs paying higher wages. It also found that companies engaging in outsourcing often established foreign subsidiaries that generate sales and profits for the home company. Adding it all up, McKinsey concluded that every $1 outsourced led to a gain for the U.S. as a whole of $1.12 to $1.14. The country where the outsourcing takes place captures just 33 cents of the total gain from outsourcing.

I haven’t heard of the McKinsey Global Institute, but I trust Brce Bartlett’s work. If it’s good enough for him, it’s good enough for me.