IS outsourcing good for the economy? Should it be stopped?

[Vincardog]

I just saw a clown on the tube saying sending US jobs to India or China or Argentina was GOOD for the economy because the company made more money and could hire more people. :wtf: How does giving more Indians jobs help the US economy?

[wurzel]

1. How can outsourcing jobs be good for the economy?

If we outsource all the jobs would we even have an economy? Jobs are the economy.

[aquart]

7. No, no. Corporations are the economy. Jobs are irrelevant.

At least, on the economic model they use now.

"The business of America is business." Maybe so. But what is the PURPOSE of America? If it is not to protect and foster the welfare of the citizens of America, what the hell are we doing?

Any corporation that declares a profit which debits the nation, as occurs in outsourcing, is a parasitical element, and it will destroy us.

The special privileges of corporations were based on the belief that healthy corporations would benefit the nation. If they do not do so, why should they have privileges granted by the nation?

I favor a with us or against us policy in dealing with corporations. And outsourcing is against us.

[bekki31]

36. Outsourcing State Jobs

I watched a show I think it was Dateline. In Atlanta Georgia when you call the welfare line, you are redirected to India. So all of these people losing their jobs and are now collecting welfare trying to survive are calling too check benefits are calling India. I just don't understand how we go through background and credit checks, drug testing and everything else under the moon and stars for a government job with the state and yet they are outsourcing those too.
I guess my brain doesn't work like theirs

[craiga86]

2. Creating jobs!?

These are the same companies that are diverting jobs over to India and China, THEN cutting people in America. Who does that benefit? Not only that but the US includes these expenses for the cost of employing people overseas as a tax deduction, basically a cycle that doesn't do anything but hurt the US economy. These policies only benefit the companies themselves. I can't understand why people aren't complaining about this more.

[da_chimperor]

3. Well . . .

if you look at it from a purely economic perspective: it has to do with saving costs and comparative advantage. Countries with cheaper labor than the US that can make a product of comparable quality have a comparative advantage over the US. Products will be cheaper as a result of being produced there compared to within the US, and so as a result American consumers will have more money to spend on more goods and services.

The comparative advantage has to do with different countries specializing in the production of different goods. The whole theory states that everyone is better off when everyone can produce what they're best at producing. This is a pretty old theory, actually, but to my knowledge it's never really been tried out in full. The view of Ricardo (the guy who came up with the theory) suggests that international trade and the world's economy would be best with no trade restrictions at all. Basically, his whole model depends on completely free trade. There's a lot of stuff that's been written about this topic. If you're curious, and don't mind reading stuff on economics, check it out: http://internationalecon.com/v1.0/ch40/40c000.html

I think I got everything right, feel free to correct me anyone. It's been a while since I finished off all my econ requirements.

[Vincardog]

5. Doesn't that plan assume a perfectly fair or even playing field?

No American other than a prisoner can compete with 37 cent pre hour labor. The prisoner has housing food and medical taken care of by the state. Is that what he free marketers want? The state to take care of everything and the people work for chump change?

[da_chimperor]

6. Well, Ricardo didn't actually think about that

This was back in the early 1800's after all. The theory assumes that some countries will be better and producing lots of things, but others will not have any clear advantage in producing anything. He assumes an even playing field in terms of NO restrictions in the import/export of goods at all. Without this, the model doesn't work at all. The problem with this, along with a lot of other economic models, is that they seem contrary to logic. I believe that he does have a very good point, but I seriously doubt that a true free-market system could be implemented worldwide without decades of economic disaster. Economics is the dismal science, after all. :evilgrin:

[bonddad]

37. I agree

One of the problems that I have when I studied economics is their reliance on models that made illogical assumptions. I debated a professor who posed a model where the "rational" consumer wakes up every morning and inquires what the rate of inflation is and makes decisions based on that assumption.

[aquart]

8. They produce cheaper because they pay less.

They pay badly, give no benefits, use their workers up and let them die.

How does this benefit anyone on the planet? Except corporate execs and shareholders in the short term. VERY short term. In the long term, starving one nation by preferring cheap labor in another dries up the first market causing cutbacks and unemployment in the cheap labor market which has NO safety net. What does that lead to? Death, bloody riots, revolution, destruction of corporate property....stop me when you find a plus to starving people in order to produce cheaply.

Ricardo's model is an airy fairy dream world in the same plane of unrealistic existence as pure communism. It's a joke.

An old theory is not necessarily a theory worth spit.

[da_chimperor]

9. You're taking his theory out of context

Ricardo does not address those ideas because they didn't exist in the early 1800's. I strongly disagree to calling one of the fathers of modern economics a joke. Why not call Adam Smith's work a joke as well? Ricardo's work was a development of most of the principals laid down by Smith. His theory on comparative advantage simply deals with how to make production and trade efficient: it is no substitute to a full economic system. I think that saying his theory isn't worth spit is also incorrect. How can you say that a theory that was a key development in our continual refinement of economic theory is worthless? Additionally, I disagree putting it in the same realm as pure communism. Communism fails because it's creators didn't understand human nature. Ricardo's theory fails because it was meant for a world that was very different from how ours is now. Does that mean it's worthless? Not at all.

[aquart]

10. When, please, did the world fit that idiotic theory?

What, btw, is the definition of economics, and what is the purpose of economics.

Get back to me.

[Vincardog]

12. Economics as I understand it is the 'science' to explain what happened

it has no predictive value

[da_chimperor]

20. Some economists like to think it does have a predictive value

but it's far from a perfect science. That's why GDP numbers are significantly revised months after they come out.

[da_chimperor]

18. Well, I never said it did

I said that his theory was "meant for a world that was very different from how ours is now". I never said that world actually existed. It's completely acceptable in economics to work with a theory under assumed circumstances. The elasticity of demand for an example. In regards to the definition of economics, which one do you want? There's no universal definition. Here's one: "The social science that deals with the production, distribution, and consumption of goods and services and with the theory and management of economies or economic systems." As to the purpose: well, what do you want it to be?

What is your point anyway? You seem to have an Axe to grind with Ricardo. This isn't exactly a controversial subject, seeing as he's been dead for near 200 years now.

[Wright Patman]

28. Dismal, you say? Economists are party animals!

Just look at John Maynard Keynes. His most famous saying, recently paraphrased by *, is that "in the long run, we are all dead."

I think one of his final statements was that he wished he had drunk more champagne.

[idlisambar]

16. The theory was never really a source of guidance

I am not saying that it is not elegant, but it was never really applicable.

One, it is a static model, ignoring the effects of time and effects of the period of "transition" (which could be decades).

Two, it assumes that capital can losslessly be converted from one economic endeavor to another. The reality is that much of the capital devoted to production of a good is worthless unless used to produce the good. In closing a steel mill for example, a substantial capital investment is simply lost.

Three, it similarly assumes that labor can losslessly be converted from one economic endeavor to another. The costs of the worker's period of unemployment, his education for the next hot job, the drop in the value of his home when the factory leaves, etc. are not accounted for.

Four, it ignores the effects of the distribution of wealth within the state. Usually it is the investors that reap the greatest benefits, while consumers benefit slightly, and workers are hurt most. The effect of this redistribution on the wider economy is not an easy thing to gauge and Ricardo's theory has nothing to say about it.

Fifth, and perhaps most important in the American context, it does not account for gains that can be made with strategic trade. Using practices such as dumping, subsidies and other measures that constitute industrial policy, a strategic trader can easily take advantage of a nation that subscribes to Ricardo's theory.

[da_chimperor]

17. All very good points

You've made a little light-bulb go off in my head. It's been a while since I finished all my economics. Would you say his theory is worthless, though? I wouldn't. That seems to be a bone of contention between me and aquart.

[idlisambar]

24. Worthless? That depends.

Ricardo originally crafted his theory to help argue for repeal of protectionist measures in his time. It was extremely useful to this end and has been ever since.

That's probably not what you mean though. In my personal opinion, the main takeaway from the theory is something that is already pretty obvious -- mainly that gains can be made through specialization. The problem is that (many) economists argue for much too strong a conclusion given the scope of the theory. While trade in a given situation may or may not be good, only under very restrictive conditions does Ricardo's theory and its variants conclusively settle the question.

[da_chimperor]

27. Ok, just wanted to get another opinion on it, thanks n/t

[Robert Oak]

11. this is part of the free trade mantra

But...unfortunately it doesn't work, as now pointed out by
Paul Samuelson, Economic MIT "godfather" and many others, my fav
being Ralph Gomory.

Comparative advantage (which is the idol by which these free traitors bow and pray) started with wool and wine from England and France respectively..
The overall net gain was greater when England made wool and France
made wine and traded because each could do this cheaper and better
than the other country... In other words, if the English didn't try to grow grapes and make wine and the French didn't try to make wool because they sucked at it and instead traded the English for the wool with wine...everybody in fact was better off economically. (or if they weren't no one noticed because they were now warm and drunk).

so the new line of the free traitors (free trade) is that
we should all follow this model because Indians can program better
(questionable) and cheaper (without a doubt due to their PPI (
PPI means they can live the same as we can on a hell of a lot less money)) and if we let the Indians program and the Chinese build because they have a comparative advantage and we focus in on what we do best...(which since all is being outsourced now if harder and harder to find what we do best specifically...maybe propaganda)...Anyway,
we'll all hold hands, be happy and all be better off economically...

BIG BIG PROBLEM HERE FOLKS! the old comparative advantage model
only worked when the goods of production (that's people if you realize
as well as the grapes and the sheep) weren't mobile...

it completely falls apart when goods of production are mobile.

it also falls apart when a 3rd world country starts reaching a 1st world industrial capability (Gomory)...

For more articles, books, discussion, visit my URLS..

and if you don't want to rake through this gunk, just take my word
on it that these free traitors have come up with a lot lot of hooey
to bring down the US and put power and money in the hands of a few multinational corporations.

[aquart]

15. What is the purpose of a nation?

THAT is what we have to be clear on.

If corporate structure and behavior does not serve the purpose of the nation, WHY SHOULD A NATION SUBSIDIZE IT?

WHAT do these corporations offer US?

[da_chimperor]

19. OK, I get what you're saying

I'm not exactly an advocate of free trade, but I'm not for unbridled protectionism either. I'm kind of in the middle, actually. My original post was not to advocate Ricardo's theory, it was simply informative in nature.

[German-Lefty]

21. Comparative Advantage

This is an interesting concept. People agree that if two countries each have a good they produce better than each other(absolute advantage), they should trade. For example:
China:
1 <unit manufacturing> = 1$
1 <unit IT> = 100$
USA:
1 <unit manufacturing> = 100$
1 <unit IT> = 20$

What he's arguing is even if one country is worse than the other in all goods they should trade. Like in this situation:
China:
1 <unit manufacturing> = 1$
1 <unit IT> = 10$
USA:
1 <unit manufacturing> = 10$
1 <unit IT> = 20$

Think about what trade-off there is between IT and manufacturing production in each country. It still makes sense for the US in this model to specialize in IT since it is "least worse" in this industry. It can then buy manufactured goods from China, by trading 1 unit IT for 2 to 10 units of manufacturing. Trading would produce a surplus.

Basically, his whole model depends on completely free trade.
No, this isn't true. His model is based on just two countries. The question is should they trade.

If you want to nit pick the model go down to "The Ricardian Model - Assumptions and Results". Here are the major sticking points:
* Labor can be reallocated costlessly between industries
* Labor is always fully employed.
* The labor and goods markets are assumed to be perfectly competitive in both countries.

By the way the model could work in helping to communist dictators decide if they wanted to trade. I think the model makes the most sense if one assumes economies in steady state.

This is an interesting thread.

[da_chimperor]

22. Yeah, well

OK. As i said, it's been a while since I finished off all my econ. :)

[Robert Oak]

23. Ricardo assumed goods of production not mobile, includes labor

Just a note he's saying labor can be reallocated costlessly between industries, i.e. a sheep herder with zero training and effort magically
turns into a wine maker...

this is different from employees, the goods to manufacture, raw materials being able to move about from country to country which Ricardo assumed they could not.

I think the best modeling of comparative advantage is:

GLOBAL TRADE AND CONFLICTING NATIONAL INTERESTS Ralph E. Gomory, President of the Alfred P. Sloan Foundation and William J. Baumol is Director, C.V. Starr Center for Applied Economics, show the difference between classical economics and today's complex and modern economies. This text also highlights scenarios where global trade isn't necessarily a "non zero sum game". An excellent primer on global trade theory.

They prove, with mathematical models, that "free trade" isn't always a win for the stronger country and is exactly what is happening now
with India and China and we know have 40% foreign owned debt and a record trade deficit reaching the percentage of GNP that Italy had
before it collapsed in the 1920's.

I have a list of some other great reads on my website under the trade link.

[Wright Patman]

29. Italy didn't have nukes

I really believe that the fact that an unstable megalomaniac like * has been able to usurp and hold onto high office (or Crashcart, if you believe he is running things and he probably is) is giving us clear evidence that there will not be a normal macroeconomic adjustment to the collapse of the U.S. economy.

Two billion earthlings will be incinerated instead. Just make sure you're in the other group of four+ billion. Einstein had it right. World War IV will be fought with sticks and stones.

[German-Lefty]

31. Yeah that was my original objection too

Just a note he's saying labor can be reallocated costlessly between industries.
This is was my first major object. You could save him however if you talk about a final state, and ignore the cost of switching. In other words two countries can see if there are many comparative advantages between their industries, and then decide if they want to trade or not. Sure it'll hurt in the short term, but in the long term if there was a comparative advantage trade would be profitable.

GLOBAL TRADE AND CONFLICTING NATIONAL INTERESTS Ralph E. Gomory
Arg, a book. I have to buy it and have it sent to Germany, and then I can't read it at work. :-(

"free trade" isn't always a win for the stronger country
Trade generally doesn't have to benefit both sides equally. I'm guessing game theory might have answers as to how benefit is divided up. Generally I think the big guy that can say :take it or leave it: gets more power, like a big company (monopoly) vs. a customer, or company vs. single worker, union vs. small company, large investor vs. small company, or the big USA vs. a small island nation.

...India and China and we know have 40% foreign owned debt and a record trade deficit reaching the percentage of GNP...
There's a whole bunch of stuff I don't understand the total effects of like:
1) buying foreign currency, to effect exchange rates
2) owning large debts of other countries
3) running up huge debts
4) jerking the prices around to effect others
5) subsidizing exports
6) trade deficits
These things wrap my brain into a pretzel.

Sure I'll check out your site. Is it the reason why so few people seem to be posting here on the econ forum?

[smirkymonkey]

26. But the thing is, the good AREN'T cheaper

instead of lowering prices, greedy execs are using the savings to woo shareholders and line their own pockets. Not only will we not see the savings on good, but who the hell will be able to afford anything that's not absolutely necessary if their jobs have been sent overseas.

That's the trouble with supply side economics, they are so short sighted that they never bother to figure the demand side of the equation. Even if goods are cheaper, when disposable income dries up so does demand for a large portion of consumer goods. Most economists also forget to factor human greed into their models, which if left unchecked, will ultimately destroy companies, workers and even entire economies. It may take a few years, but it will happen.

[punpirate]

4. The question is one of the definition of...

... "economy." If one looks only at the bottom line of corporations, then, yes, moving jobs to places where the labor market is cheaper improves the bottom lines of corporations and is good for the "economy."

However, if one defines the "economy" as all aspects of the country's economic health, no, it's horrible for the economy. Fully two-thirds of the GDP is dependent upon consumer spending, houses, cars, consumer goods, etc. Offshoring has not substantially brought down the cost of consumer goods (an example might be Nike shoes--the labor costs to produce a pair produced in Vietnam might be 20 cents, as opposed to six or seven dollars in the U.S., but this isn't reflected in the retail cost), but drastically reducing the buying power of the American public will eventually erode consumer sales.

Reducing the buying power of consumers eventually affects the government's generation of revenues, since the very largest part of taxes are paid by individuals.

And, finally, consumer debt accumulated as households attempt to maintain quality of life without full income, combined with government debt and the increasing current accounts deficit may eventually severely restrict money available for investment in new technology, new industries and advanced worker education.

Depends upon which "economy" you're speaking of--Wall Street, or the rest of the country.

Cheers.

[Vincardog]

13. I am talking about MAIN STREET Bu$hCO is taking care of WALL street

[punpirate]

14. Then you understand the difference...

:)

[mhr]

25. Free Trade, Fair Trade, Not Slave Trade!

We should actively engage in fair trade for goods and services not people.

Just because corporations can engage in global labor arbitrage does not make it right, fair, or just.

Trade in people is not the same as trade in goods and services.

[fedsron2us]

30. Do we really have free trade ?

Free trade operates best when there is a degree of reciprocity in the process. Otherwise massive imbalances develop that result in wealth being channelled from one party to another. Floating currencies were meant to be a means by which this threat was mitigated. When freely traded they would automatically adjust to reflect the fluctuating strengths and weaknesses of different economies. Unfortunately, many Asian governments are trying to fix the game by either pegging their currencies at artificially low values (e.g China) or by massive intervention in the money markets to hold the value of their currency down (e.g Japan). It is this process which is helping to drive the outsourcing market. For example, if the Chinese currency was freely traded it is estimated that it would immediately appreciate by between 20-40 % in value. This would not remove the competitive cost advantage of Chinese workers but it would start to limit their attraction. It would also put up the cost of imports into the USA thus discouraging American consumers from buying from overseas. This adjustment has got to take place sooner or later. The longer it is left the more painful the process is likely to be. I think that both Western and Asian governments are being desperately short sighted in not tackling the problem now. The economies of both areas are likely to be taken down when the world's financial systems crash. It will certainly mean the end of the globalist dream.

[Skittles]

32. no it is not good

we Americans are not able to compete for those jobs because we cannot live on the wages they make.

[jwirr]

33. I don't know about the total

economy but any job that is outsourced immediately stops paying into Social Security, sales taxes and other program taxes. This lose to these programs is some of the reason we are going to have problems in the future. So we loose say a 1000 jobs those jobs quit paying into programs and in many cases the laid off workers start collecting. We are hurt both ways. We are also hurt by the drop in income tax revenue collected each year. I read that there is less revenue this year even though the are higher corporate profits.

[Pump Man]

34. The only job needed to be outsource is Bush 's job

Any country need a dictator. He be ready for work Jan.05.
Salary all he can steal plus long vacations.

[Lydia Leftcoast]

35. Ooh, good point!

I hadn't thought about it in those terms, but you're right.

[bonddad]

38. Complex Issue

From what I have seen, the net result is actually zero. On the global scale, for most jobs that are lost another one is created. Now, there is no mention of the quality of the job replacing the outsourced job. For example, a computer programmer is outsourced -- which is a fairly common occurrence. Are there any programmer jobs available with comparable pay and benefits? That is the central question.

[Robert Oak]

39. complex true, conclusion, not good with a *

Hi,

the * being a scenario where the goods of production are never mobile..in that scenario is is much more clear that certain types
of outsourcing would make sense, but as it is currently practises,
absolutely not, it is a "race to the bottom" and reduces the social
stratosphere to the elite and the proliteriate.

Personally I am a researcher, a logical person who looks at the bottom line, in a macro-economic view.
In my URLS I put up a series of books which show outsourcing is not good for America.

More importantly, "free trade" which as currently practised
is not even free trade, is not good for America.

Recently the "godfather" of economists, Paul Samuelson, has
come out to say outsourcing is not good for America.

The most dense study, with mathematical modeling, is the Ralph
Gomory book, listed on the site...which shows the complexity
of the theory, the multi-dimensional factors involved
in a global economy, many of which are not fully understood to date.
This book really proves that one must be very shrewd in dealing
with a global economic strategy and in fact, if poorly executed, a bad trade policy could potentially pull down a 1st world economy to a 3rd world one.

The thing I find most interesting in all of my study, is I find
that the US economy was strongest when labor in the United States
was the strongest. While some of this is spurious (contributable potentially to other factors) I find the overall correlation to date
not refutable.

I find current economic models lacking in terms of what the middle
class, in terms of disposible income as well as the interaction
of the gross revenues of the US treasury in terms of taxes, is really contributing overall to the economic health of the nation. I also find lacking any accounting, in terms of revenues, investment in people and loyalty to people. For example, the GI bill pulled millions into upward mobility, cutting edge scientific
and other areas of the industrial period, skill as experts, etc...
yet no real accounting of this contribution in terms of an overall
economic analysis.

Currently I find as well, terrible models of productivity from economists. They seem to not want to deal with outsourcing and how
that affects overall productivity as well as GDP. I hope they
make a breakthrough soon in this cutting edge economic research area.

Anyway, please read some of these books...they really take the spin
out of the argument and show very strongly that it is in the interest
of all America to support the middle class, protect critical skills
and make sure the middle class always has a strong revenue generating
economic position.

[Sinnerman]

40. Dollars & Sense.

Classic Scenario That I Used to Work For.
1988 Trico Corporation (Windshield Wiper Factory) Had 2400 Employees Buffalo NY, Closed Plant and moved to Mexico. Why.

Why Pay 2400 Workers an average of $16.50 Per Hour (Union Contract) when Company can move to Mexico and Pay out $2.50 Per Hour

Remember this... Public Traded Companies are responsible for only 1 group of people (The Shareholders) it's all about bottom line Profit

also in the age of technology there's obsolescence A company that had 4 people doing a job gets eliminated by a Machine or robotic computer.

Kerry Edwards 2004