Tuesday, July 10, 2012

Outsourcing Common Sense and US Jobs

President Obama quoted others in calling Romney and his past colleagues at Bain Capital “Pioneers at Outsourcing.” The President smiled and puffed out his chest as he proclaimed that in contrast he was the one who saved the auto industry.  Romney denied that either he or Bain Capital were responsible for outsourcing. But given the chance he did not take the opportunity to stand up for free trade. Thus they both want us to think that outsourcing is something evil that hurts US employment. As an aside, I think they used the wrong word – outsourcing instead offshoring. Their rhetoric works better for locating businesses abroad. But I suspect they like neither offshoring nor outsourcing.Both appear to hurt US employment. But keep reading please...

One quick thing to ask the President… he proudly bailed out the auto industry.  Is there any other industry that has done more offshoring of jobs? Does GM not have a plant in virtually every country of the world? Why is he so proud of saving the auto industry when he is so against offshoring? Has he vilified GM for all those jobs created abroad rather than at home? Why is it okay for GM to offshore but not okay for Bain to help other companies who want to offshore?

Those of you who are very worried about employment in the USA want your politicians to stand up for jobs in America. The disappointing labor department report last Friday underscored our concern for jobs.  But please, both these guys are agreeing on the wrong thing. Yammering against globalization is just wrong. It is very wrong.  Obama continues to take his eye off the ball. Employment suffers in the US because we have no fix for finance, housing, and a fiscal cliff. Yet he finds something new to talk about each week – he will talk about anything that diverts our national attention from what matters.  Romney does not do much better. I don’t care if he worked for Bain Capital or Micky D’s – I want a clear exposition of what he is going to do as President. Neither of these guys lived normal lives with paper routes and lemon-aid stands. I doubt either one would know the right end of a lawn mower.  Get over it. Both are running. What are they going to do once they get into office? This offshoring thing is a red herring.

Both these guys think they can score points with workers by pointing out that outsourcing/offshoring (o/o) hurts national employment. But stopping o/o is not going to save US jobs. It is important to see that o/o is not much different than importing goods and services from abroad. If we o/o or if we import we are buying things that are produced abroad rather than at home. On the surface it sounds pretty bad to import or to outsource. But luckily that is not the whole story.

We cheer for our good guys when export sales increase. When a firm on US soil sells more peanut butter to China, we acknowledge the extra jobs that are created in the US. Imports do just the opposite. Imports are goods that we buy and consume here that are produced abroad by workers in Brazil or Spain or Botswana. Clearly if those goods were produced at home this would create more job opportunities for Americans. But what has the president done about imports? During his watch US imports from the world increased from $2.54 trillion in 2008 to $2.66 trillion in 2011.  In 2011 US exports to the world were $2.1 trillion so we had a net deficit in goods and services of more than half a trillion dollars. That half a trillion dollars represents the difference between jobs gained through exports and jobs lost through imports. That’s a lot of jobs.  Why isn’t Mr. Obama traveling around in his fine bus ranting about all those imports? Clearly neither he nor previous presidents wanted to stop this trade deficit. It has gone on for decades. A Buy America program has done almost nothing to reverse all this.

Why is it okay to let imports replace US jobs but not to let o/o do the same? The answer is that it isn’t okay. Globalization is a two-way street. We all realize that you can’t have exports without imports. You can’t have in-sourcing without out-sourcing. A policy to reduce imports or o/o would surely hurt our exports and the desire of foreigners to invest here. Worse yet, it would be very inefficient and costly. Many imports reveal our own decisions to specialize. Importing things where we have no real business edge makes no sense. It would simply mean less choice and higher prices.  That is not what we are after.

Along similar lines, it makes sense to produce abroad rather than at home.  China and other parts of Asia are growing rapidly. They need a lot of goods to support the growth. Given the distance and cost of traversing it – it often makes sense to produce for those markets in Asia. Producing in the US would be more costly and we might lose in the competition with Asian, German, and other firms who also want to serve those markets. The reason the President doesn’t rail again GM plants abroad is that he knows that a global foot print makes GM a stronger company and more able to sustain its jobs at home as it spreads employment and production around the globe.

Why has Obama been so silent about the recent decision of Airbus to locate a production facility in Alabama? Obama does know that Alabama is one of the 57 US states, doesn’t he? I realize Alabama is a right-to-work state but even non-union workers count in the national employment statistics, don’t they?  Why did Airbus decide to locate in the US? Did they do it to irritate French workers? The Wall Street Journal says the location decision was made because Airbus wants to be able to produce for the US government. To be competitive in government procurement a company must have factories in the US. Is it not possible that many US companies locate abroad for similar reasons – whether they serve government or private purchasers? Isn’t Airbus made stronger by locating a plant for US buyers in the US? Are not jobs in France and other places in Europe made that much more secure because Airbus is stronger? So it makes sense for France and other countries to o/o.

Let’s take a look at offshoring in a comparative sense. You will see below that the US is just doing what everyone else is doing. We are clearly not alone.   In 1990, the US owned $732 billion in foreign capital (Foreign Direct Investment, FDI*. A more complete definition of FDI is given below.) That is, US cumulative purchases over many decades of foreign productive capital across the globe amounted to $732 billion. That amounted to 13% of our GDP in 1990. We have since experienced more than 20 years of rapid globalization and now own $4.8 trillion capital abroad. That amounts to an almost 7-fold increase. FDI was 32% of GDP in 2010. Offshoring is very evident for the US.

The below table compares the US to 10 other countries and the EU: (this data comes from the United Nations Web Table 8. FDI outward stock as a percentage of GDP, 1990 to 2011. Stock values are in trillions of dollars). http://archive.unctad.org/Templates/WebFlyer.asp?intItemID=6018&lang=1

The stock of FDI owned by the EU was almost twice as large as that for the US in 2010.  The listed countries own from $340 billion (Switzerland) to $1.7 trillion (UK) of FDI in other countries. What matters more, however, is how large the ownership compares to the size of the country.

For the Netherlands, FDI was 123% of the economy in 2010.  The US position was 32% which ranks it about 9th in this list – at par with Australia. Only Japan and Italy have FDI lower as a percent of the economy than the US.

Consider the increases in dollar value since 1990. The US FDI increased 7 times. That sounds like a lot but over these 20 years only Japan had slower growth in FDI at 4 times. Spain’s FDI increased 41 times! The median country’s FDI increased 8 times. Spain, France, Switzerland and the EU all found FDI increasing in double digits.

Globalization means investing at home and abroad. Countries that don’t do it will lose out on opportunities and will not compete well. Between 1990 and 2011 US non-farm employment increased by 23 million jobs. Private sector jobs increased by 19 million. The New Age of Globalization saw American jobs at home increase by more than 20%.

                   Stock      FDI        Fold increase
                    FDI         %GDP       Since 1990
                    2010      2010

EU            $8.93tr      57%               11times
US              4.84        32                    7
UK             1.69        72                    7
France        1.52         62                  14
Germany     1.42         44                    9
Netherl         .89        123                   8
Japan           .82         15                    4
Spain            .66        46                  41
Canada        .62         41                    7
Italy              .48        24                    8
Austral         .40         32                  11
Switzerl        .34         80                   8
*FDI is meant to capture the value of purchases of companies abroad for the intent of management control. It does not include purchases of foreign stock that are made for the purposes of only financial investment. That is, most international bodies distinguish between FDI and portfolio investment. FDI involves the purchase of companies through merger, acquisition, or simply enough shares to lead to some managerial control. It also includes greenfield sites which would include building a new plant or business firm in a foreign country.


  1. Dear LSD. Again, good stuff . . . and explains why o/o (cute abbr.) is good for growth (and, oh, BTW, creating wealth, too . . . ). While we (your ardent follows) struggle to keep up with your steel mesh logic and data, but eventually get what you’re saying . . . and generally agree, others are not able to keep up with your horse power (er, horse _ _ _ _ ?). Unfortunately, those “others” are the general electorate to whom (who?) Obummer is addressing and he is correct in assuming they will not “get it” and will swallow all the horse _ _ _ _ he serves. It’s obvious to your ardent followers he cannot campaign on his record and must smear Romney at whatever cost over things that really don’t matter in the long run . . . like putting his dawg on the car of the roof roof, being wealthy, and disclosing his income taxes only to the extent required and no further.

    Data such that you present make for solid argument but we (your ardent followers) will never see that type of logic/data presented in the lame-stream media over the course of the campaign, except possibly by Fox. Maybe you should lobby Bill O’Reilly to get on his show.

    Hopefully, the 8.2% unemployment rate, slow economic growth and anemic job creation will continue until Nov. 6th and those “others” will ferget ‘bout o/o and vote their paychecks or lack thereof.

    Much ado about nothing?

  2. As the token manufacturer of this distinguished group, I would have and may still produce may produce my products in Asia for consumption there only...not to make something cheaper and import it back to the US with favored tariffs. (See Congressional Rules-Clinton Years) It makes sense. At the same time I import the base material for my product from the EU because DOW has a monopoly on it in the US and China makes an inferior grade. Right now I am exporting finished product to 8 countries ( including the BRIC) of which 4 are in Asia. I give a 35% price break to overcome tariffs and bribes at the port. If sales can justify I plan to manufacture in India within 2 years. I had the opportunity in China but could not keep the formulation secret.
    Dr. D is correct about the benefits of globalization and there also are numerous negatives but the EU has been globalized every since Alexander the Great via camel routes and later via the Portuguese and Spanish sailors plus Marco Polo. The computer has enhanced ( accelerated) this in the last three decades)
    Yes we are losing jobs for the imports we bring in and yes we do a lot of off-shoring and outsourcing. Yes we are in a terrible transition period. No there is not the 9 to 5 work your whole life and retire type of job anymore. The system is very dynamic and changing constantly. Jobs occur as small business people invent product and services to offer. Yes the failure rate is high but that is the cost of not having a controlled economy. The success rate is very rewarding. It blows me away to Google IT companies in the US and get more than I can ever investigate...or the guy down the block that starts a Doctor’s interface company with the various sources of insurance and grows the company to 300 people in 5 years with an average salary of $60,000 per year. A local couple bottled lemonade and Vodka and calls the stuff Pucker-Up ( like 7 UP but different) 3 years ago and now has distribution in 24 states. It happens all of the time but these types of enterprises are new to the old fashioned 9-5 jobs we had in the
    Government investment is and should be in providing an environment for more of these companies. It needs to understand them and do things that help make the success rate higher because this is where our future will come from.

    1. Thanks James. It is always nice to read the views of people who run companies. I never wanted to be in business because I didn't have the stomach for all that risk. People forget about the risk in a dynamic world. Nothing is sacred. No business can sit still. Most of us humans wish it weren't so and we hate it when we are on the wrong end of the results. So it is natural for people to want more security. Global or not, government simply cannot guarantee security and sometimes when they try they end up making things worse. Therein lies the rub. People want more government and government is often happy to supply it. But sometimes they make things worse. It seems pretty simple.

  3. Charles,

    Thanks for suggesting that I have ardent followers. That makes my day. I agree that o/o is pretty complicated but it saddens this old man that it seems so reasonable to conclude that average people don't know much about the benefits of international trade. I can't do much to change that but I do enjoy trying to discuss these things with my friends. It also keeps me off the streets and out of Betty's way. And that's a good thing.

  4. Larry,
    It is so refreshing to see political fallacies exposed with such enlightening facts! Thanks for a great article!

  5. You are very welcome Brandan!

  6. Airbus will have a bitch of a time in Alabama, After all, have you ever tried to teach French to a good ol' 'Bama boy? Mercy bucket, madam weasel!

  7. And vice versa -- ya'll come on down, hear? I guarandamntyit.

  8. I have been to he site in Alabama. My customer there is planning on big things. The original site is an abandoned military base and the Chamber of Commerce as well as the City was planning on Boeing. Now they have the EURU version...same jobs and income can be expected. The culture may even change a little.

    1. But will the lunch room sell Freedom Fries?

  9. I guarandamntee they won't serve goose live pate.