Outsourcing is a Good Thing

Recently the topic of outsourcing has again become popular in the news. The scandal is currently over whether Mitt Romney was working at Bain Capital when they closed down some companies and moved jobs overseas. I would like to point out that if these companies had not either already gotten themselves into trouble or been out-competed elsewhere, a company like Bain wouldn't be buying them. It’s not Bain’s fault the most profitable thing they could do was declare bankruptcy. Second, it doesn’t matter if Romney was at Bain when they outsourced jobs. Outsourcing is in fact good for the world economy, and good for the poor. As economist Paul Krugman put it back when he was still cool:

“The lofty moral tone of the opponents of globalization is possible only because they have chosen not to think their position through. While fat-cat capitalists might benefit from globalization, the biggest beneficiaries are, yes, Third World workers.”

The jobs that have left the United States in search of cheap labor left because wages here are too high relative to destination countries to economically justify keeping them in the United States. This is a good thing; it means we are a developed country. The flip side of this is that the wages outsourced jobs offer to developing country workers are as good or better than the alternatives for those workers, otherwise they would not take the jobs. The increased availability of outsourced jobs increases competition for workers, and increases wages of the world’s poorest. And there is overwhelming evidence of this in the 1 billion people who have been raised out of poverty in the past couple decades.

It gets even better, because outsourcing is good in net for the countries that jobs leave. First, outsourcing, if rational, reduces the cost of production, which inevitably gets passed on to consumers. The effect is upward pressure on the real wages of consumers who can now buy more for the same money. And many of our imports are inputs for final production in the United States, meaning more profitable production, and thus more jobs here.

In spite of all this it could very well be possible that the effect on jobs and wages is negative for developed country workers, but only in the short run. Increasing wages in developing countries eventually reduce the incentive to outsource jobs in the first place. Already thousands of jobs that were outsourced to China are returning to the United States as wages rise in China. And there is much higher domestic demand for products all around the world in developing countries. The United States’ trade deficit has closed considerably in recent years. And despite decades of outsourcing the export sector in the remains one of the bright spots in our economy.

Mitt Romney should stand up for himself. He need not have been motivated by anything more than profits to have brought benefits to the poor in developing countries, and to consumers in developed countries. And the opponents of outsourcing and globalization should realize that their opposition keeps people poor for the benefit of the few, hardly a sound strategy to reduce inequality.