Outsourcing Is Generally Conducted for the Benefit

Outsourcing is generally conducted for the benefit of the individual firm, but often creates negative outcomes for the economy at large. The best way to understand the economic issues surrounding outsourcing is to understand the economic tradeoffs at play. Two case studies will help in fostering this understanding. Fishman discusses the experiences of Wal-Mart suppliers, struggling to compete in a global marketplace. Friedman discusses some of the non-economic factors involved in outsourcing, looking at the issue from the other side of the ocean.

Wal-Mart is often criticized for outsourcing American jobs, Fishman notes, and he presents evidence that it does facilitate this practice. Wal-Mart's mission is to offer low prices to customers as a matter of competitive policy, and do to this is must find goods from the lowest-cost producers. Given the factor input costs in the United States, this usually means outsourcing production to low-cost countries, where the prices of land, labor and doing business in general are lower. China is the usual location, but there are other countries as well. The story of Carolina Mills is a good example, where the company simply could not meet Wal-Mart's price and was forced to either lay off American workers for those overseas or to lose their contract to another supplier who could meet Wal-Mart's price. Fishman presents several similar anecdotes as well. The idea is that Wal-Mart's quest for efficiency and low prices is emblematic of American business in general. There are, after all, many retailers just like Wal-Mart and even companies that do not operate on a cost leadership strategy -- like Apple -- outsource their production.

There are economic benefits to outsourcing in this way, of course. Americans benefit from having access to lower-priced goods. It facilitates more consumption and higher quality of life, on average, because it allows even those who earn little to live better. High income earners do not likely see much benefit from the Wal-Mart strategy, however. By keeping prices low through outsourcing, American firms do one of two things, both of which are generally considered beneficial. Either they offer low prices like Wal-Mart, which contributes to lower inflation, or the companies pocket the difference like Apple and earn higher profits for their shareholders. Whether the wealth is distributed broadly (Wal-Mart) or concentrated (Apple), more wealth is created through outsourcing strategies that emphasis cost control and efficiency.

The tradeoff, as Fishman notes, is that America loses jobs, often well-paying jobs. Lower levels of inflation are offset by stagnant real wages, meaning that there might not be as much improvement to buying power as Wal-Mart pretends there is. Moreover, even if buying power improves on some consumer goods, suppressed real wages reduce buying power for real estate, which if it increases in value will mean that Americans are on average poorer. In particular, the labor class that loses its manufacturing jobs and those who are not wealthy enough to enjoy the benefits to shareholders of higher profits are gaining nothing from such outsourcing strategies. Friedman points to the hopelessness of a society with no prospect for job or a future. This is becoming the reality for a class of Americans, forced to forage for deals at Wal-Mart because it cannot afford anything better.

If there are Americans who are losing economically as the result of outsourcing, that wealth must be transferred somewhere. The current account deficit with China is a good example of how this wealth transfer works on a broad scale. Outsourcing offshore facilitates wealth transfer, and knowledge transfer. Friedman outlines this situation well with his example of workers in India. The gains of Indian call center workers, or factory workers in China, might come at the expense of American wealth creation, but there are non-economic tradeoffs as well. When other countries around the world are able to increase their standard of living -- with good, honest jobs -- they are in a better position to become strong actors on the world stage. Their people have hope, and such countries are more likely to become engaged in the global trading system. As nations like China and Russia become more economically integrated with the world and their people enjoy increased standards of living, they become more stable and better able to contribute to an overall global society.