Shipping Away Jobs and Common Sense

In demonizing outsourcing, both Obama and Romney are playing a stupid political game with the U.S. economy.


Who’s the bigger outsourcer, Mitt Romney or Barack Obama? To judge by their spooky television ads, being an outsourcer is right up there with letting Willie Horton out on furlough. Romney says Obama’s stimulus package spent billions helping foreign companies, and Obama says Romney practically invented the notion of shifting jobs overseas. Lately, it seems like this question is being asked by a lot of people who don’t really care what the term "outsourcing" actually means. Outsourcing isn’t all bad, as both candidates surely know — but dare not say. In their lines of work, outsourcing is also pretty hard to avoid.

Outsourcing is a straightforward principle: Paying someone else to do something you could do yourself. For a company, outsourcing could mean contracting a janitorial service instead of hiring its own janitor. For you and me, outsourcing is as simple as going out to dinner; it’s just paying someone else to do the night’s cooking and serving.

As the decision-maker in your business or household, you might outsource a job because you don’t have the time to do it, or because having someone else do it turns out to be cheaper. You might even outsource a job when doing it in-house would actually be less expensive, if someone else can do it much better.

This kind of outsourcing is often beneficial for both companies and consumers. In theory, it should lower prices, improve quality, take advantage of market efficiencies, and free up resources for other investments. Of course, outsourcing can also have more sinister ends. Sometimes companies are accused of outsourcing because they don’t want to pay for staff benefits, or because they want to avoid unionized workers. In other cases, quality may suffer. In the past several years, some companies that used manufacturers in China later had reason to regret their decision.

Yet the biggest economic effect of outsourcing may be to encourage specialization. Why should you do your taxes when an employee of a professional accounting firm can? Who better to take care of your lawn than a professional gardener? One consequence of this specialization, however, is that the world may need fewer accountants and gardeners. In the accounting industry, for instance, a smaller number of highly efficient accountants would do all the work that is currently spread across in-house staff of varying abilities in all the world’s companies.

Does that mean outsourcing destroys jobs? If you’re a lousy, expensive, or under-utilized accountant, then yes, your job might disappear. But this is just the economy’s way of telling you that your labor might be used more efficiently in another occupation. Unfortunately, it takes time to retrain and start over in a new job, and that’s where the political problems begin. In the United States, there is no broadly effective mechanism for helping people make this transition. Not surprisingly, then, the kind of outsourcing that draws the harshest criticism is when companies lay off staff in their home countries and transfer their functions to foreign workers. But even this is somewhat misleading. Transferring jobs overseas is a form of "off-shoring," but it isn’t necessarily outsourcing; the new foreign workers may still be part of the same company’s overseas operations.

When Mitt Romney worked at Bain Capital, outsourcing was undoubtedly an important part of his business, and this should not come as a surprise to anyone. Bain Capital is a private equity firm that buys and sells companies. After a private equity firm purchases a company, it usually tries to improve the management in order to raise the company’s value. Here, outsourcing may be a useful tool, especially for trimming payrolls and cutting costs. Often, this means eliminating some jobs or sending them overseas. But Bain Capital typically sold its investments after five to seven years, so the charge that Romney was after a fast and easy buck at the expense of employees isn’t necessarily a fair one.

Back then, Romney didn’t have to worry about political consequences. These days, however, he’s taken to defending his actions by painting Barack Obama as the bigger outsourcer. Obama, he claims, is guilty of channeling federal dollars into energy companies that manufacture products outside the United States, as well as subsidizing American companies’ overseas factories. A new website funded by the Republican National Committee claims that "billions of dollars did go to create jobs that were outsourced or spent overseas."

Putting aside the grammatical problem in the above sentence, is there really any evidence that Obama’s policies help to create jobs outside the United States? In fact, it would be shocking if Obama’s policies weren’t creating foreign jobs. America’s biggest companies are multinationals, and anything that helps them will help their overseas operations as well.

Also, imagine what would have happened if Obama required that any federal aid or subsidies to American companies come with the caveat: "Don’t hire any more workers in your foreign operations, or we’ll take this money away." Many of Romney’s own backers — step forward, U.S. Chamber of Commerce — would have cried foul. After all, is there anything more un-American than to constrain the operations of America’s corporate heavyweights? Isn’t the role of government to unleash their animal spirits to help them to create jobs anywhere?

Yes, Romney outsourced aplenty while he was at Bain Capital. And yes, some of the stimulus money and loan guarantees allotted during Obama’s first term may have ended up creating jobs abroad. But even if you believe every one of the Romney campaign’s claims, just $4 billion in cash — less than 3 percent of the funds directed to businesses in the first stimulus package — went towards "outsourcing."

And as several media outlets have already pointed out, many of the claims are bogus. It’s not hard to see why. Take, for example, the $25 million stimulus award for Danish company Haldor Topsoe that the Romney website claims Obama funded — it went to build a biorefinery in Illinois, not Denmark, and was expected to create 25 permanent jobs there. Or consider the $118 million that Ener1, which is based in New York with a factory in Indiana, received to make vehicle batteries. Was its subsequent purchase by a Russian investor really outsourcing, or was it just an inflow of foreign capital?

Yet even the claims that do qualify as outsourcing are disingenuous at best. In some cases, outsourcing actually may have been the right thing to do. Many components for electronics and energy products aren’t manufactured in the United States anymore, if they ever were. So if the Gulf Wind Project did indeed use stimulus money to buy parts from South Korea, was it really passing up good options in the United States? Before you slam the outsourcing, you have to consider the alternatives — as anyone with as much business experience as Romney ought to know.

Perhaps it’s naïve to expect clarity on points of economic policy from presidential candidates. But by clouding the debate about outsourcing with misplaced definitions and misleading claims, they’re doing the American public a disservice. Our economy will make the best use of outsourcing when we understand it clearly — and these guys aren’t helping.

Daniel Altman is the owner of North Yard Analytics LLC, a sports data consulting firm, and an adjunct associate professor of economics at New York University’s Stern School of Business. Twitter: @altmandaniel