Importing Affluence

The economics of offshoring.

Democrats and Republicans are now engaged in a partisan Three Stooges slap fight over who is more outraged by offshore outsourcing. Wasn't it just a few months ago that both parties were trying to outdo each other in their support for free trade?

"Offshore outsourcing" (or offshoring) is the fashionable term for the recent uptick in service jobs contracted to firms in India, China, and other developing nations. Consultants who help companies arrange offshore outsourcing agreements predict it could affect up to 3.3 million jobs by 2015. Take away the marketing hype, and it could still easily be 2 million.

Lost in the concern about offshoring is the fact that the money companies save by sending rote work overseas is invested in more creative jobs here in the U.S., a point made by a recent Institute for International Economics study (downloadable at www.iie.com/publications/papers/kirkegaard0204.pdf). Analyzing Bureau of Labor Statistics data and outsourcing studies, the report finds that while more than 70,000 computer programmers have lost their jobs since 1999, more than 115,000 higher-paid computer software engineers have been hired. In fact, most of the jobs that will go offshore pay less than the U.S. average wage and are likely to be eliminated through technology whether sent overseas or not.

Meanwhile, in a paper for Deloitte Research called "The Macro Economic Case for Outsourcing," economist Carl Steidtman shows that the U.S. exports many more services than it imports and that "the benefit of importing services is the same benefit that comes from importing goods." Improved productivity lowers prices and pushes up wages and profitability, which in turn creates new jobs.