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Answers on Outsourcing
A finance professor argues against placing blind faith in outsourcing. His views follow.
March 12, 2004: 8:18 AM EST
By Rory L. Terry

The following is a guest column by Rory L. Terry, an associate professor of finance at Fort Hays State University.

NEW YORK (CNN) -- A great deal of effort is being expended to convince us all that the outsourcing of jobs under the rubric of free trade is a good thing. I would like to discuss some of these arguments.

Our labor force is not better trained, harder working, or more innovative than our foreign competitors. The argument that we will create new jobs in highly paying fields simply is not true. We have no comparative advantage or superiority in innovation. To assume that we are inherently more creative than our foreign competitors is both arrogant and naive. We are currently empowering our competition with the resources to innovate equally as well as we. Consider the number of new non-native Ph.D.s that leave our universities each year; consider our low rank in the education of mathematics and the sciences; and consider the large number of international students enrolled in our most difficult technical degree programs at our most prestigious universities.

Most of our best, high-paying jobs can be exported.

  1. doctors (even surgeons)
  2. mathematicians
  3. accountants
  4. financial analysts
  5. engineers
  6. computer programmers
  7. architects
  8. physicists
  9. chemists
  10. biologists
  11. researchers of all types

Our trading problem is an externality

An externality exists in economics any time there is a separation of costs and benefits, and the decision maker does not have to incur the full cost but receives the full benefits of the decision. The fact is, there is no economic force, no supply and demand equilibrium, no rational decision process of either business or consumer, that will make an externality go away. Classic examples of externalities are when a business dumps toxic waste into a nearby river and the downstream residents incur the costs of cancer. The business is able to lower its costs and pass those lower costs on to its customers, and never pay for the treatment of the cancer patients. We have laws in this country against dumping and pollution because they are externalities -- they require a legislative solution.

Cost reductions and other benefits provide a strong incentive to outsource jobs. A company that decides to move its production overseas cuts its costs in many ways, including the following:

  1. Extremely low wage rates
  2. The circumvention or avoidance of organized labor
  3. No Social Security or Medicare benefit payments
  4. No federal or state unemployment tax
  5. No health benefits for workers
  6. No child labor laws
  7. No OSHA or EPA costs or restrictions
  8. No worker retirement benefits or pension costs

Besides cutting costs, there are other benefits to exporting jobs, including the following:

  1. Tax incentives provided by our government
  2. Incentives from foreign governments
  3. The creation of new international markets for the company's products (which ultimately empowers the company to turn a deaf ear to this country's problems and influence)
  4. The continued benefits of our legal system and the freedoms that we provide

The net effect of all of this is lower costs, higher revenue, higher profits, higher stock prices, bonuses for management, and the creation of wealth for a subclass that benefits from low taxes at the expense of the rest of us.

The costs of the decision to outsource are not borne by the decision maker. As a society and as a country, we experience many costs from outsourcing, including the loss of jobs, social costs, higher costs of raw materials and loss of national sovereignty. Loss of jobs reduces the tax base, creates high unemployment benefit costs, and raises the cost of government retraining programs. Displaced, unemployed workers have higher rates of child and spousal abuse, alcoholism, bankruptcy, divorce, etc. As China and India and other large populations grow, they demand huge quantities of oil, gas, steel and other basic raw materials. These costs are born by all of us -- every time we fill our gas tanks, for example. And as a nation, we lose our ability to make independent decisions that are in our best interest when we are dependent on foreign debt and foreign manufacturing. This is a classic externality.  Top of page


Rory L. Terry is an associate professor of Finance at Fort Hays State University




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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.