A Brief Defense of Outsourcing

Recently, libertarian champion and award-winning journalist John Stossel posted a job listing with a writing test. I found the prompt to be incredibly interesting, so I typed up how I would respond. The prompt:

“(in 2 pages or less): John is going to go on the O’Reilly Factor to discuss the decline in American manufacturing jobs. O’Reilly’s premise is that American companies are using cheaper foreign labor (largely in China) to make products, which is destroying and bad for America overall. How should John respond?”

My response:

Key Points:
-Economics is the study of how to allocate scarce resources to meet unlimited wants. There is always more work to be done.
-The principle of comparative advantage tells us we should focus on the kinds of goods produced by U.S. manufacturing, not the quantity.
-The U.S. manufacturing sector is still strong, producing $5.6 trillion in 2012.
-The American economy is transitioning from manufacturing to service and knowledge-based jobs, just as it transitioned from agrarian to manufacturing over a century ago.
-Low-cost foreign goods and emerging markets for American firms have increased average U.S. household wealth by nearly $14,000 per year.

Definition of Economics: Economics is the study of how to allocate scarce resources to meet unlimited wants. Thus, there is always more work to be done that will be of value to someone. Thomas Sowell summed up this point in his book Basic Economics: “In short, middle-class Americans’ desires exceed what they can comfortably afford … it is not something as man-made as a budget which constrains them: Reality constrains them. There has never been enough to satisfy everyone completely. That is what scarcity means.”[1] This refutes the mercantilist idea that there is only so much work in the world to be done. Therefore, the assumption that allowing work to be done more affordably overseas diminishes opportunities for Americans to do something of value is simply illogical.

Comparative Advantage: The reality of infinite work naturally leads to a discussion of comparative advantage. Comparative advantage stresses allocation of work to produce the greatest net wealth across a population. This raises the question of what American labor is best suited to produce. Is our economy truly thriving if all of our factories and workers are dedicated to producing the trinkets and other cheap goods mass-manufactured in China? Or is the world better-off when American manufacturing is dedicated to producing higher-order goods, such as airplanes and semiconductors, which other nations may not have the institutions, resources, and knowledge to provide to the global market? According to the International Trade Centre, the top export categories of the U.S. are 1. machinery 2. electronics 3. aerospace 4. vehicles and 5. fossil fuels.[2] By contrast, two of China’s top five export categories are related to clothing, and the remaining three are furniture, electronics, and machinery.[3] America leads the world in some of these categories, including aerospace and fossil fuels.[4] [5] This is our manufacturing comparative advantage. If we become preoccupied with trying to lead the world in making anything and everything, we rob humanity of the complicated and important things our country can produce more efficiently than anyone else. In short, we shouldn’t judge the health of American manufacturing by raw output. China will always be able to turn out more cheap goods. Instead, we should take pride in what our workers are capable of producing: complex vehicles and the fuel to power them, among other wonders.

Manufacturing Output: America’s manufacturing sector remains robust. According to the Department of Commerce, American manufacturing provided $5.6 trillion in goods to the market in 2012 with a direct value-add of nearly $1.9 trillion.[6] In context, If American manufacturing were its own country, it would have the third largest G.D.P. in the world, behind only the U.S. and China. The value created by American manufacturing alone would be the eighth largest G.D.P., ahead of countries like Brazil, Canada, South Korea, and Russia.[7] However, it is true that employment in manufacturing in the United States has fallen in real and relative terms since World War II.[8]  Yet, we should not lament this drop in manufacturing employment as some sort of broad indicator of poor economic health.

Economic Transition: Prior to the industrial revolution, most jobs were in agriculture. In 1790, 90 percent of the total jobs in the U.S. were in farming.[9] Today, that figure is less than 2 percent.[10] Following the same logic of those who decry outsourcing manufacturing jobs, the unemployment rate should be north of 90 percent. Of course, it’s not. Today, unemployment in the U.S. is less than 10 percent, even when accounting for part-time workers and the shrinking labor force participation rate.[11] Automation and innovation allowed for fewer farmers to produce more food. The remaining laborers weren’t so much displaced as they were liberated to work elsewhere, such as factories. The exact same forces are at work in the manufacturing sector today. Combined with automation, cheaper labor overseas helps relieve highly-productive American labor from menial tasks and production of lower-order goods, like clothing. The American economy is now dominated by service sector and, increasingly, knowledge-based jobs. Combined with high-technology goods, Americans increasingly export ideas. The iPhone may be manufactured in China, but it is designed and programmed in California. We did not barricade factories to keep workers toiling in the fields so we should not seek to impede this new economic transition by erecting barriers to trade.

Middle Class Enrichment: Outsourcing has unequivocally enriched the American middle class. Stated succinctly in a 2015 report from Congress’s Joint Economic Committee, “International trade benefits consumers by lowering prices, improving quality, and widening selection.”[12] Particularly beneficial for jobs is lower prices. Cheaper goods allow Americans to spend more money and invest in areas that create domestic jobs. This impact is far from minute. The JEC reports that foreign trade has raised average household income by nearly $14,000 per year![13] As wonderful as this is for Americans, trade is not a zero-sum game. The jobs “shipped” to places like China enrich people in those countries as well, creating new markets for the goods, services, and ideas produced by Americans. Last year, Boeing landed a $38 billion order from a group of Chinese airlines[14] and the company forecasts that China’s airline sector will spend more than $1 trillion on new planes over the next 20 years.[15] Economic evolution through foreign trade benefits the entire planet, but it is particularly good for Americans as our advanced economy allows us to lead the way into the new economic ventures… so long as we don’t get in our own way.

[1] Thomas Sowell, Basic Economics – Fourth Edition, Basic Books, New York, N.Y., 2011.

[2] International Trade Centre, “Trade Map,” Accessed on 12/8/16 at: http://www.trademap.org/tradestat/Product_SelCountry_TS.aspx?nvpm=1|842||||TOTAL|||2|1|1|2|2|1|1|1|

[3] Ibid. At: http://www.trademap.org/tradestat/Product_SelCountry_TS.aspx?nvpm=1|156||||TOTAL|||2|1|1|2|2|1|1|1|

[4]Top Aircraft, Space Craft, and Aeronautics Parts Export Countries,” World Atlas, March 16, 2016.

[5]United States remains largest producer of petroleum and natural gas hydrocarbons,” EIA, May 23, 2016.

[6] Jessica R. Nicholson and Ryan Noonan, “What is Made In America?” Department of Commerce, October 3, 2014.

[7] World Bank: Gross domestic product 2015.

[8] Jessica R. Nicholson and Ryan Noonan, “Manufacturing Since the Great Recession,” Department of Commerce, June 10, 2014.

[9] Mark J. Perry, “A Lesson About Manufacturing Jobs from Farming,” AEI, April 7, 2010.

[10] World Bank: Employment in agriculture.

[11] Bureau of Labor Statistics, Table A-15. Alternative measures of labor underutilization. December 2, 2016.

[12]Consumer Benefits from International Trade,” Joint Economic Committee, Republican Staff Analysis, May 14, 2015.

[13] Ibid.

[14] Julie Johnsson, “Boeing Lands $38 Billion Jet Order From Chinese Airlines,” Bloomberg, September 23, 2015.

[15] Charles Riley, “China to spend $1 trillion on 6,810 new aircraft,” CNN Money, September 13, 2016.

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