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Dr Peter Morici: Outsourcing, oh what demagoguery!
By Professor Peter Morici
Jul 16, 2012 - 6:22 AM
|President Obama campaigning in Virginia, Saturday, July 14, 2012 |
Dr Peter Morici:
No issue is more misunderstood, or been more purposefully confused by the Romney
and Obama campaigns, than outsourcing.
Outsourcing is merely the importing side of international trade—purchasing
abroad goods and services, and components to assemble final products in the
Just about everyone who has had a choice between buying an American-made product
or an import—a car, a wedge of cheese or a movie on-line—must admit that two-way
trade based on legitimate comparative advantages is a good thing.
If Americans expect folks abroad to purchase Boeing aircraft and Intel
processors, then they had better be prepared to outsource some of what they
purchase directly, or through the firms that assemble products domestically and
The problem is not outsourcing but rather it is inappropriate outsourcing—purchasing
abroad products that could be made as or more cost-effectively at home. That
happens when: US policy throws up unnecessary barriers to domestic production;
foreign governments unfairly subsidize businesses or simply keep out competitive
American products; or US firms have an inappropriate bias toward foreign
Those swell the trade deficit, which imposes great costs, and both President
Obama and Governor Romney own some of that problem.
President Obama’s bans and tough restrictions on oil and gas development in the
Gulf, off the Atlantic and Pacific Coasts and in Alaska do not benefit the
global environment if those do not reduce US petroleum use but merely shift
US sourcing abroad, where environmental risks may be less effectively managed. EPA imposed limits on CO2 emissions that shift manufacturing to China where
similar regulations do not apply are a similar problem. Both kill US jobs
without an environmental benefit.
China keeps its products artificially cheap, and forces the relocation of US
manufacturing to the Middle Kingdom by maintaining an artificially undervalued
currency, imposing high tariffs and outright exclusions on competitive US
Billions of dollars of US stimulus money were spent in China, instead of the
United States, and President Obama could have excluded those products—either
through the initial legislation or by executive order—without violating WTO
rules but chose not to do so. Moreover, he has failed to take action regarding
US procurement generally, or by broadly forcing China’s hand on its
mercantilist practices, as he promised to do when campaigning for the presidency
Private equity has an inherent bias toward outsourcing that is neither helpful
to the firms it reorganizes nor healthy for the US economy.
Essentially, private equity purchases distressed businesses, and looks for quick
profits by slashing wasteful employment—unnecessary jobs that would be lost
anyway if the firms failed—and replacing ossified management. However, by
seeking large returns in a brief period, private equity emphasizes selling
brands and intellectual property (patents) in repackaged firms that are
generally loaded up with debt. To boost cash flow and service debt, these firms
are more likely to sell off valuable brands and patents, and to strip away and
offshore manufacturing that supports domestic R&D and could contribute greatly
to the future value of the firm and US competitiveness and employment.
Unnecessary outsourcing is responsible for at least half the $600bn US
trade deficit. Eliminating half of that deficit would boost domestic demand and
GDP by about $500bn and add 5 million jobs.
Export and import-competing industries spend at least four times as much on R&D
as the private business sector as a whole. Reducing outsourcing, by increasing
R&D, could boost US GDP by one or two%age points. A US economy
growing at 3 or 4% a year, instead of its current 2%, would have
far fewer budget problems at the federal and state levels, and far more
resources to address issues like health care, the solvency of social security
and finance an adequate national defense and space exploration.
Professor, Robert H. Smith School of Business, University of Maryland,
College Park, MD 20742-1815,
703 549 4338 Phone
703 618 4338 Cell Phone
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