Is Outsourcing Good For The Economy -- And Workers?

Obama Romney outsourcing workers

If there's one position that both presidential candidates can agree on, and it may be the only one, it's that outsourcing jobs overseas, or "offshoring," is absolutely terrible for American workers. Earlier this year, President Barack Obama proposed a 20 percent tax credit for companies that return offshored jobs back to this country.

His opponent, former Massachusetts Gov. Mitt Romney, claims to be on the same page, speaking about offshoring in strictly negative terms. And according to his "Believe in America" economic plan, he plans to adopt to a "territorial tax system" in which "income is only taxed in the country it is earned." Such a policy, the Romney plan says, will "encourage the creation of jobs in the United States" thereby eliminating the need for companies to outsource jobs abroad.

Both candidates have called the other the "outsourcer-in-chief," with the president's reelection campaign releasing ads calling Romney's business firms "pioneers" of the "problem" of outsourcing jobs to China.

'Stay Competitive To Stay Open'

But in spite of such heated rhetoric, a broad range of experts maintain that offshoring is beneficial for the economy and even results in the creation of jobs. They acknowledge that it can be brutal for laid-off workers but say that overall there is a net gain of jobs for the U.S. economy. "It lets companies do their grunt work abroad, and focus resources domestically on research, development and product. We know more innovation grows the economy and as a result creates more jobs," says Vivek Wadhwa, a fellow at Stanford Law School and an economist who is a recognized authority on outsourcing."Such allocation also helps businesses stay competitive to stay open, which of course is the No. 1 issue for keeping jobs."

Such a rationale is not the only reason why economists defend outsourcing as a practice that has economic benefits for workers. As CNNMoney points out, increased efficiency leads to a driving down of prices of consumer goods, and indeed, the cost of of items like clothing, toys and electronics are getting cheaper, even without adjusting for inflation.

It's difficult to gauge the exact number of American jobs that have been sent overseas, given that privately held companies are not required to disclose such data. But an analysis compiled by The Wall Street Journal of U.S. multinational companies found that the sector added 2.4 million jobs overseas from 2000 to 2010.

There is, however, a study that shows outsourcing expands the American economic pie, creating more opportunities for workers. In 2003, Matthew Slaughter, an economist at Dartmouth College, took a look at companies that engaged in offshoring in the 1990s, and found that for every job that U.S. multinationals created abroad (2.8 million by his count), two jobs were created for the parent company (5.5 million jobs) back home in the U.S.

More:Jobs That Won't Be Outsourced Anymore

But what about those who have been laid off? Another study that sings the praises of outsourcing, this one by the International Monetary Fund, maintains that the practice "does not appear to be leading to net job losses." But it goes on to concede that jobs lost in one industry are only "offset by jobs created in other growing industries." In other words, if you lose your job to offshoring that doesn't mean that you yourself will benefit from new jobs in your field.

The Human Impact

To be sure, the job loss can be devastating for the individual. Just last month, the Philadelphia Inquirer wrote a story about Kevin Flanagan, a Bank of America computer programmer who killed himself after he was laid off and his job was outsourced to India. And making the ultimate choice because of a job loss seems to be a response that's on the rise amid the financial crisis. As was reported by AOL Jobs, the rate of suicides is on the rise across the world, with the highest upticks apparent in economically struggling countries like Ireland, Portugal and Greece. The three European countries saw a 15 percent rise in suicides between 2007 to 2011.

But the offshoring advocates emphasize that reacting to such tragedies by erecting barriers for trade and labor flow isn't the solution. "Protect the people and not the jobs," says Nariman Behraves, the chief economist for Global Insight, the international economics consultancy. "You don't solve this problem by blocking trade."

Indeed, one bill, the Creating American Jobs and Ending Offshoring Act, contains many of the anti-offshoring plans that anti-outsourcing activists still hope for during this election season. The legislation proposed in 2010 would offer employers a two-year break on payroll taxes for every new American that a company hires to do the work of an overseas worker. Designed to discourage companies from sending operations overseas, the bill also would clamp down on tax deferrals for income earned at plants or factories abroad.

Experts, like Behraves, argue that such solutions -- while they may be politically popular -- are short-sighted. Behraves points to the automobile industry: After automation arrived, the industry needed fewer auto workers. "That was terrible for [workers who lost jobs], but what should we have done? Should we have forced companies to keep paying high salaries for jobs that were no longer needed?" That, he says, would have caused problems in the industry to come even faster than the ones seen in the last generation -- when foreign competitors benefited from cheaper labor overseas.

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Workers need to be retrained for new jobs that are still needed in the economy -- as opposed to having their jobs protected, Behraves and others argue.

Indeed, all of the political posturing on outsourcing drives these experts crazy, especially since both Obama and Romney appear to have signed off on the practice at times. According to, "there is no question" that Bain Capital, Romney's firm, invested in and helped companies like Modus Media and SMTC Corp. send jobs overseas.

And in spite of all his grandstanding, in his first term, Obama has taken little action on his plans to rewrite the rules that allow for outsourcing. For instance, he has shied away from reworking a visa system that allows high-tech jobs to be sent abroad, according to TheWashington Post. And while the stimulus hasn't come close to being a source for outsourcing as the Republicans claim, the practice did lead to some instances in which the manufacturing of wind turbines took place abroad. (But domestic industry was not able to meet all the demands, the Post adds.) Finally, the president's jobs council is filled with corporate leaders who have pursued outsourcing policies in their companies, such as General Electric CEO Jeffrey Immelt.

"Because [the practice makes sense] Romney and Obama should be open about outsourcing," says Stanford's Wadhwa. "But when it comes to election time, they change their tune. It's easier to go with what sells politically than it is to educate people."

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