Outsourcing isn't the problem

In his February 24 address to Congress, our bright, forward-looking, globally-admired president said at least one thing that was dim, backward, and globally lamented. “We will restore a sense of fairness and balance to our tax code,” Barack Obama told lawmakers, “by finally ending the tax breaks for corporations that ship our jobs overseas.”

Politically, attacking outsourcing is a winner. Americans are frightened for their jobs, some of which they have seen going to lower paid workers in other countries; they want it to stop. Understood.

But in every other respect, Obama's assault on outsourcing is a sure loser.

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First, as a practical matter, American jobs are hard to super-glue to American soil. Moreover, if every U.S. company quit outsourcing tomorrow, there would be nothing to stop foreign competitors from continuing to farm out their jobs to workers in lower cost countries, thereby cutting costs, slashing prices, and weakening their U.S. counterparts, all of which could well lead to.... layoffs. That is not a victory for the U.S. economy.

Second, as free-trade advocates correctly point out, outsourcing American jobs creates jobs in other countries, which builds markets, which creates other American jobs. According to a 2007 report by McKinsey & Company, the Indian consumer market—already fueled by an “economic miracle” that has halved the poverty rate and seeded a middle class—should quadruple over the next two decades. Smart American policy would work to keep that market open—not stunt its growth.

Third, not every ripple effect of outsourcing is instantly clear at the surface of the pool. It is frustrating to see a leader of Obama's sophistication participating in the simplistic depiction of outsourcing strictly as a matter of transferring jobs from A to B, which hurts A and helps B. As he surely knows, there can be all kinds of implications for C, D, and E, which can turn around and affect A.

For instance: Indian wages in outsourced areas have risen to the point where India has begun outsourcing jobs to places like Vietnam and Mexico. Unless America's long-boiling debate over illegal Mexican immigration has suddenly been settled, we should be thrilled at any prospect of job creation in Mexico, because it helps at least some would-be immigrants build better lives at home.

Outsourcing has also helped to transform some of the societies that most need transforming. For one, it has helped to reverse “brain drain” from developing nations, by which their leading citizens spend their lives and talents in the West.

Take any country on the border between viability and chaos. (Feel free to imagine Pakistan back when it looked as if it might have a government.) Typically, this country has an unimaginably large base of unimaginably poor people. But it also has a small, educated elite that has enough money to buy things and enough time to focus on pursuits other than feeding their families today.

Elites can't transform an entire society on their own, but they can get the ball rolling. They can peaceably counter a government they oppose, or use their skills in the service of a government they support. They can pay taxes, invest capital, patronize vendors. Slowly but surely, they can help boost the living standards of everyone. On the other hand, if their country's economy is shot back to hell, they may very well leave.

Who would stay? Those who have absolutely no choice, and those who would terrorize them—and, very possibly, us.

Granted, it may be late in the day to trumpet the glories of outsourcing jobs that support industries, such as financial services, that are on their knees. But in a much larger sense, the global downturn is a test, and outsourcing poses one of its first questions. Are we going to treat developing economies as essential partners in a global recovery, or as flypaper for misguided rhetoric designed to induce false comfort in American audiences?

President Obama, you still have time to change your answer.