Obama's Flawed Case for Insourcing

American workers are losing jobs to machines, not to Chinese workers.


President Barack Obama declared in his State of the Union address that the U.S. has a major opportunity to bring manufacturing back and fight unemployment. "Tonight, my message to business leaders is simple: Ask yourselves what you can do to bring jobs back to your country, and your country will do everything we can to help you succeed," he thundered.

But all one can say to that is, "Good luck." If that works, maybe he can spin gold from hay and pay off the national debt, too.

The president's call wasn't new. He has even invented a name for it: "insourcing." And he's been hectoring CEOs to make "Made In America" their prime goal, "not just because it's increasingly the right thing to do for their bottom line, but also because it's the right thing to do for their workers and for our communities and our country."

But neither the president's appeal to patriotism nor his economic case adds up.

The patriotic approach is not "the right thing to do," because universalizing it would eviscerate its benefit. If American CEOs should make business decisions based on their nationality, then shouldn't foreign CEOs as well?

If they did, it wouldn't work out too well for America. Foreign-owned companies employ close to 5.5 million Americans and generate about $3.1 trillion in economic value. Does Obama want their CEOs to fold their businesses up and return home to do their patriotic duty?

Moreover, forcing American companies to produce goods more expensively at home rather than wherever it is most cost-effective will mean higher prices for American consumers. Where is the patriotism in sacrificing the interests of 300 million American consumers to protect the jobs of a few American workers?

But suppose that America's great manufacturing rival, China, were to disappear tomorrow. Would that mean American workers would regain lost factory jobs? Not really.

The fact of the matter is that even though manufacturing employment has declined—America has lost roughly 6 million manufacturing jobs since the sector's peak in the 1970s—manufacturing output has been going up. Indeed, total output today is 2.5 times its 1972 level in adjusted dollars. In 2010, America produced $1.8 trillion in goods (in 2005 dollars) — about $100 billion more than China, but with only about a tenth as many workers, thanks to automation and technological advances that have vastly increased American productivity. Goods that took 1,000 American workers to produce in 1950 now take 177.

The choice for American companies, then, is not between American workers and Chinese workers, but between American machines and Chinese workers. Given how much more American workers cost in wages and benefits, U.S. companies that relocate to America would have to develop even more labor-saving technologies or watch the market for their products simply disappear.

Consider the iPad you are holding in your hand. Back-of-the-envelope calculations suggest that a wholly American-made iPad 2 with 3G capability would cost about $1,400 instead of the current $700, putting it out of the reach of so many consumers that it might not offer the economies of scale that make it worth producing.

That's why last February, when Obama asked Steve Jobs what it would take to bring Apple's jobs back home, Jobs bluntly retorted, "Those jobs aren't coming back." Presumably he knew what he was talking about.

The president's touching faith that the golden age of manufacturing jobs can return to America with a little government help is based largely on studies by the Boston Consulting Group. In one of them, the organization makes the claim—as far as I can tell, uncorroborated elsewhere—that about 2 million to 3 million manufacturing jobs might return to the U.S. over five years as the productivity-adjusted wage differential between China and America closes.

But even if one accepts this estimate, the Boston Consulting Group itself predicts that these jobs won't go to the hollowed-out Rust Belt in the North but to Southern right-to-work states such as South Carolina, Tennessee, and Alabama, where labor is reasonably priced and flexible.

All of this suggests that the way to re-attract manufacturers is not by throwing government subsidies at them. The Boston Consulting Group notes that subsidies might help on the margins, but "won't make a major difference in determining whether a plant is built in the U.S. or Asia." Rather, we should be tempering union power to create a more competitive workforce.

But that is the exact opposite of what Obama has been pushing. Indeed, if he could have his way, card check would already be the law of the land. This would allow union bosses to unionize companies without holding a secret-ballot vote—not exactly a recipe for creating an attractive workforce.

The president pledged in his State of the Union to give tax breaks to multinationals that keep "American jobs" in America and to raise taxes on those that move them overseas—as if every job comes endowed by its creator with a domicile. But, far from protecting U.S. jobs, such protectionism will actually kill them by encouraging companies to outsource completely and move their headquarters overseas, especially since the U.S. already has the second-highest corporate tax rate in the world after Japan, which is set to lower its rate in April.

In short, "insourcing" is a fool's errand, and Obama is going about it foolishly.

Reason Foundation Senior Analyst is a columnist at The Daily, where this article originally appeared.