Trade: Insourcing, Outsourcing and the American Worker

July 17, 2005

R.L.H. Trade is defined as a mutually beneficial practice in which both parties exchange something of equal value for mutual benefit of each. One nation, as the theory goes, may provide something better and cheaper, and thereby exchanges that "something" for "something else" which another nation has specialized in to produce better and more cheaply. This determination is done by local labor markets, capital costs, resource inputs as well as other considerations. And that theory has worked well for a long time and is today still an effective and beneficial operating principle and practice.

M.A.B. It has become a common and unfounded misconception that the United State is losing jobs due to trade. This is blatantly and unequivocally false. The basic point which is missed by those who claim job losses is one principle which underlies all modern economics. The economy is dynamic. This means that there is no set amount of wealth, no set amount of wages available, and even more specifically, no set amount of jobs. The misconception continues, the US economy is suffering at the hands of third-world nations, nations which have lower wages, regulations and costs. The evidence proves otherwise. Cost is nothing more than a reflection of value. An individual working in poor conditions produces less all day than an American produces in an hour.

R.L.H. Clearly, this should be axiomatic. The United States would not engage in trade unless it was in its long-term interest. To think that trade is a zero sum game, with only charity on the part of US, is often a misconception held by those who hold such a view. Conclusively, the evidence refutes this notion. There is convincing documentation that gains from trade raises American living standards, wealth, education, median income and job availability. True, these gains are not exclusively from trade alone, but there is clear evidence that supports the notion that there are substantial benefits to the American public which results in the creation of specialization, competition and innovation.

M.A.B. Peter Drucker, renowned world recognized economist and father of modern management stated "Nobody seems to realize that we in the US import twice or three times as many jobs as we export. I'm talking about jobs created by foreign companies coming into the US." For example, to demonstrate Drucker's point, Japanese automobile plants make Toyotas and Hondas on American soil with American workers and thus creating jobs for Americans. Siemens, a high tech communications corporation, alone has 60,000 employees, thus creating American jobs for American workers. Drucker in 2005 points out: "We are exporting low-skill, low-paying jobs but are importing high skill, high-paying jobs." It is a truism and it never fails, low wages correlate with lower level skills; higher wages correlates with higher level skills. This is true within our economy and it is true in the total world economy; to wit, and it is a fact of life, employers pay based on an individual's skill set.

R.L.H. Douglas Irwin, well known economist from Dartmouth, stated in 2004 just one example among many of this concept, when he said "low waged countries require US made computers, telecommunications equipment and hard and soft ware. In addition, they also procure legal, financial and marketing services from the US." Point of fact, services alone amount to nearly 30 percent of the value of all US exports. And thus, high level goods and sophisticated services are produced in America and are sought and purchased by others around the world. And as Andy claimed before, these are DYNAMIC effects. These are jobs which are exported overseas, and have high-level, high-skill support jobs created, here in the US to support the outsourced ones. Trade is not a static game, and the facts support this view.

M.A.B. The Chairman of the Council of Economic Advisors, N. Gregory Mankiw, recently stated "Outsourcing is a growing phenomenon, but its something that we should realize is a plus for the economy in the long run." Mankiw was stoned in the popular press for these remarks, but He was absolutely right. When firms outsource they become more efficient with higher margins of profit and more healthy accounts. These more healthy conditions lead to more dynamic gains in jobs, specialization and higher wages. The Wall Street Journal has repeatedly pointed out that "By reducing costs, outsourcing gives companies more money to invest. More investment means more jobs, especially with higher values added." As outsourcing takes place, along with its competitive advantages, it is clear that firms will increase productivity, and productivity is the key determinant to income and wage growth. As the worker spends his or her time on tasks more related to their immediate specialty, it would make sense they would produce more, and as a result, gain greater income from their greater production.

R.L.H. Documented studies clearly demonstrate that for every job that is "outsourced" to a foreign affiliate, two jobs are created in parent firms within the United States. Professor Matthew Slaughter in his published refereed report contents affirmatively that the dynamic gains from trade greatly outweigh the static losses. From statistical sources obtained from the US Bureau of Economic Analysis, Slaughter was able to substantiate his claim conclusively. He goes on to present data that shows that the firms engaged in insourcing and international trade are more likely to pay higher wages which of course enhances and enriches a high-performance US economy. Let that point be repeated, companies which engage in trade pay higher wages, and create more jobs as a piece of the economy than anything else. If nothing else, this should prove the value of trade.

M.A.B. One would think that with such a high-performance economy, producing above-average growth and below-average inflation, that this would be heralded by those in public leadership roles regardless of political affiliations. But this is not always the case. After all, during the 10 recovery quarters since the end of the 2001 recession, real GDP-the most comprehensive measure of the economy-has averaged 3.4 percent growth. Since the supply-side tax cuts were passed in spring 2003, real economic growth has jumped to 4.8 percent, putting it at the head of the class of the past 20 years. We are living presently in one of the strongest economic periods in history. And its no wonder, its also one with the freest trade, When FDR rose to power, it was on a platform of free trade and lower tariffs. And for the record let it be noted that the last protectionist President was Herbert Hoover. This isn't a subject to take lightly and to believe the intentional yellowish of the modern media on trade.

BOTH IN CONCLUSION: We hear little about the fact that inflation-adjusted consumer spending is up nearly 4 percent and residential housing investment is up 13.2 percent. Exports and imports are up 11 percent and at an all-time high. Further, industrial production is up 5.2 percent and high-tech production is up 23.7 percent, while productivity has reached an astonishing 4.6 percent, among the highest in history. Household wealth is up to 11.1 percent hitting an all time record of $45.9 trillion. For the United States to have the sustained recovery it has achieved is short of heroic. Unemployment remains well below historical levels at 5%. Median Income, the measure of the economic well-being of those in or near the median of income is also near all time highs in absolute and inflation adjusted terms. How can any rational person see such facts and claim that the US is having a net loss of jobs and wealth? We can't. And that is how we see it FROM OUR PERSPECTIVE.