With unemployment in some states nearing record highs, it's not hard to see why the trend of companies sending jobs overseas has become a hot issue on both sides of the aisle. The lingering high unemployment rate is arguably the biggest problem facing the Obama administration, and political pundits have argued it will be the single largest factor in the upcoming midterm elections and a threat to Democrat seats in the Senate and the House of Representatives.
As the country struggles with its huge jobless rate, overseas outsourcing is growing. Business consultants such as Everest Research Institute predict a huge increase in offshoring as companies recover from the recession. In one survey last year, more than 40% of companies said they had increased outsourcing in the previous two years.
Making it Easy to Outsource
Why are companies outsourcing work to other countries? Simply put, the current economic structure strongly encourages companies to move their jobs overseas. Using cheap overseas labor to make products and deep American pockets to buy them, companies can increase their profits on both sides of the production equation.
Add in the fact that several countries, like Ireland and the Netherlands, offer attractive tax rates, and in many cases, it doesn't even make sense for companies to bring their profits back to American banks. The U.S. corporate tax rate is among the world's highest, with a federal rate of 35% and state rates that can tack on up to 12% more. By comparison, China charges 25% and Korea's starts at 13%.
The problem is compounded by America's tax policy, which allows companies to hold off on paying American taxes until they bring those funds into the U.S. Not surprisingly, many companies park their profits in foreign banks: General Electric, for example, has $62 billion in profits sitting in offshore bank accounts.
The Carrot or the Stick?
But even though offshoring has been decried by Democrats and Republicans alike, Congress hasn't managed to discourage the practice. A bill aimed at reducing offshoring failed to garner enough support to end a Republican filibuster last month.
Senate Republicans, aided by four Democrats and Connecticut's Joe Lieberman, torpedoed the proposed law, which sought to stimulate U.S. jobs with a tempting two-year tax break for businesses that brought overseas jobs back to the country and a new tax on products imported back to the U.S. from companies that ship production out of the country. The bill also would also have made it illegal for off-shoring companies to deduct expenses that they incur when shipping jobs overseas.
Part of the reason the parties can't agree on legislation might have to do with different philosophies about how to attack the problem. While Republicans, including John McCain, have pushed for a lower corporate tax rate, they are strangely silent on the issue of taxing overseas earnings. Conversely, the Democratic party has attacked offshore banking, but has not seemed interested in offering a carrot to go with the stick of a sudden, potentially devastating, tax levy.
Dropping Wages, Dropping Workers
With continued incentives to move jobs to China and India and an apparent inability to pass legislation that would encourage investment in America, it seems likely that the situation will only get worse. That's bad news for the country's many jobless workers. While the unemployment rate is officially holding steady at 9.6%, that doesn't count underemployed workers -- those working part time while searching for full-time jobs -- and long-term discouraged workers who have given up on the job search. Adding those two groups would bring the number to around 22%.
Even the huge 22% rate doesn't tell the whole story because it doesn't include workers under the age of 25 and students in college and graduate school. The unemployment rate during the height of the Great Depression, which peaked at 25% in 1933, did include that large body of labor that's excluded from the figures today. In other words, today's official rate of 9.6% unemployment might reflect a much larger actual rate of unemployment than 1933's 25%.
And it isn't only the unemployed who may be suffering from offshoring. The trend also has had a devastating effect on the middle class. A combination of outsourcing, layoffs and freelancing has sent wages plummeting, according to Tax Analysts columnist David Cay Johnston, who reported this week that total U.S. income dropped 5%, or $313 billion, between 2007 and 2009. More than 3% of those who worked in 2008 didn't earn a penny in 2009, he reported.
A Difficult Decision
But the problem is a complicated one. After all, offshoring may also be helping to keep some U.S. companies competitive, as the U.S. Chamber of Commerce, which opposed the anti-outsourcing bill, pointed out: "Replacing a job that is based in another country with a domestic job does not stimulate economic growth or enhance the competitiveness of American worldwide companies."
For legislators and the voters they must sway, the conflict may come down to a choice of either increasing the economic growth of Americas companies or increasing the economic security of its citizens.