Outsourcing: An Easy Target for American Politicians

Shipping Jobs Overseas Becomes Bête Noire of Politicians in the US

“Outsourcing is just a new way of doing international trade, which is a good thing,” said Greg Mankiw (chairman of President Bush’s Council of Economic Advisers). Greg Mankiw simply made a statement that shipping jobs is a form of free trade, and free trade is good for America. The next day an elaborate political machinery goes into action explaining how his comments on shipping jobs is not what he meant. Furthermore, the comments sparked a furor on both sides of the political aisle.

That offshoring is a bad thing is untrue and simply political propaganda, “Offshore outsourcing is bad, it causes job losses and thus negatively impacts the economy…but do not fear we will place restrictions on trade, we will remove any tax benefits for any companies outsourcing, provide tax credits for companies that don’t outsource and hence we will save your jobs…in summary vote for us if you want to keep your jobs.”

To make job shipping a scapegoat for domestic business cycles is smart politics. Protecting domestic markets gives leaders the appearance of taking direct, decisive action on the economy. “Is your job next to fall to offshore outsourcing” has a massive psychological impact; it is, however, simply a means to get votes and favorable public opinion. Protectionism would not solve the US economy’s employment problems, although it would succeed in providing massive subsidies to well-organized interest groups.

If the US government truly believed that offshoring has a negative impact on the US economy then why not revert to protectionist policy? The US government doesn’t do that because offshoring keeps the US competitive against other nations and free trade has always been the recipe behind America’s success. The effect of offshoring on the US economy has been exaggerated and its effect on the US employment situation has been grossly exaggerated by the media and politicians.

During the 2008 Presidential elections, offshoring once more received much notoriety, in particular from Barack Obama. Now elected to office Obama continues to raise the job shipping debate. In May 2009, when discussing the tax code he seeks to reform Obama explained it as one “that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York.” Obama undoubtedly gives the impression of appearing tough on offshoring; lambasting job shipping never lost a President public opinion. Indian and US tax experts are, however, bemused, for from their interpretation, the proposed tax reform will have a negligible impact on corporate tax. Companies make vast savings in cost reduction when offshoring, the marginal amount of extra tax paid is not enough to deter companies from offshoring. IBM employs some 75,000 employees in India; this move was not taken because of corporate tax but because employee salaries in India are a 1/5th or 1/6th of those in the US.

If the US government or President Barack Obama is of the view that shipping jobs overseas negatively impacts the US economy then credible and potent protectionist policies would have been implemented. This is not done because offshoring enables US companies to be the most competitive in the world. In turn this benefits the US economy more than it hurts it. President Obama is fully aware of this and the reason for his continued attack on job shipping is because he is simply playing cheap politics. Free trade, globalization and offshoring are all American conceptions and predominant reasons behind the US economies success. Offshoring should not thus be feared, prohibited or even lambasted.