Outsourcing and Economic Gains

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    Groups opposed to offshoring and outsourcing often riddle their rhetoric with economic untruths and propaganda designed to capitalize on the limited economic literacy of many Americans. Lee Conrad, national coordinator of [email protected], an affliliate of the Communications Workers of America union has suggested that offshoring efforts by IBM will result in inferior service to customers and harm U.S. workers.

    "IBM has admitted that thousands of jobs are being sent offshore to India, China, Brazil and other countries, with plans to increase this outsourcing," Conrad said in a statement during a 2004 protest against IBM.

    "This raises serious concerns about the long-term job prospects for workers in the US, and also about the need to ensure that customers have the quality service they expect to receive from IBM."

    While it is important to consider the motivation of the union’s attitude, the fundamental facts are much different. The "serious concerns" cited by Conrad suggest that the long-term job prospects for US workers will be reduced as a result of offshoring. This limited view fails to consider the economic gains that result from corporate cost reductions.

    In a simplified, hypothetical example, if IBM can reduce costs by 40% that should reduce the costs of IBM products by a similar percentage. If an IBM ThinkPad computer cost $2000 before the savings, then the price will necessarily fall to roughly $1200 for the same product. If a consumer’s budget for a new computer was $1500, then two benefits will arise from the savings. First, the consumer can now afford the computer, secondly, the remaining $300 allowed in the consumer’s budget can then be used to purchase software or accesories for the new machine. So while previously, the consumer could not have purchased the computer, now the consumer will buy the computer and spend the savings on other products. This additional purchasing power will drive the economy, creating new demand for products and with it, new jobs. If a small business were purchasing fifty of these computers, the money saved could allow for capital expansion of the business which would include more jobs. Conversely, the money saved in the hypothetical computer purchase could be returned to shareholders who could then use the return to invest in new industries.

    Conrad’s argument about the long-term job prospects of US workers is innacurate. The long-term prospects of US workers will improve due to increased demand resulting from cost savings. In the short-term, it is likely that there might be a loss of US jobs, however the long-term will result in a net gain.

    The other aspect that pundits neglect is the increase of worldwide purchasing power when industries outsource and offshore. The IT workers in India for example driving worldwide economic growth because they now have higher wages with which they can purchase products that they would not have been able to afford previously. This has created an increase of product demand in India and has resulted in an expansion of the Indian economy and resultingly, the economies of India’s trading partners. The same situation has resulted in China. With the increase of foreign manufacturing in China, comes an increase of product demand within China. Outsourcing and Offshoring is creating a new middle-class where none had existed before.

    The Nobel Prize-winning economist Simon Smith Kuznets’ research has established that increases in real gross domestic product are almost always good for the poor. Kuznets’ law states that increases in income inequality that occur in the early stages of industrialization are followed by increases in income equality. This law effectively explains the benefits of globalization. There will be inequalities, however as world economies approach equilibrium, income disparities will diminish.

    The US and the Western world have gone through several stages of industrial and economic evolution. Globalization, and with it outsourcing and offshoring, represents a new frontier of economics. As with all revolutions, there will be some growing pains and no system will ever be perfect, however the reality of globalization is that the economies of all participating countries will improve in the long-run.

    It is important to remember that economic policy should not be shortsighted. Don’t let propaganda from specific groups influence policies in ways that will untimately harm the economy and the pocketbooks of everyone.

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