Outsourcing - good or bad?

Who benefits from outsourcing? Why, everyone - according to economic theory.

In the cone head world of economics, there is something called a "competitive advantage". What this says is that nations should produce things they are good at producing. Under this theory, if nation A can make widgets of equal quality for less than nation B can produce them, nation B should get out of the widget business.

The third world has one huge competitive advantage - cheap labor.

Add to this the fact that business is there to turn a profit, not to provide an income to employees. A good manager will always seek to produce stuff at the lowest cost possible.

In the USA, employees want things like a decent wage, benefits, insurance, 401K programs, paid vacations, and unions. Because of all these added costs, the final price of the product goes up. Costs went up to the point where it became cheaper to produce the stuff in Bangladesh and ship it here on a barge. So that is exactly what business did.

Made in the USA used to mean quality. People were willing to pay a little extra for that quality. But gone are the days when made in the USA meant excellent quality. Made in the USA tags are now just a marketing tool used by companies in an effort to pass off goods for a higher price than other comparable goods. Made in the USA no longer means "excellent quality" like it did 50 years ago. Now it means "buy the extended warranty". I drive a Toyota (assembled in the USA, but most of the parts were made in Japan).

Made in the USA used to mean the entire process was done here. For cars, the steel was made in the USA, the leather was made in the USA, the plastic was made in the USA, the engine was made in the USA, the glass was made in the USA, and everything was bolted together in the USA.

Today, most things made in the USA are really imported as parts, and simply put together here. Car makers do this on a regular basis. Look at the sticker in your door jam, you will see that even if you drive a Ford at least 1/2 of the parts were made somewhere else. So was that car really made in the USA? Not really - it was made in 4 or 5 nations.

So who benefits from outsourcing? Well, in a way all consumers do. If quality is the same, consumers will choose the cheapest option. Say you are shopping for clothes. You find two very similar garments. One is made in Honduars and costs $15. The other was made in the USA and costs $25. Most people will buy the $15 garment, assuming similar quality and materials.

By offering consumers the goods they demand, at the lowest possible retail price, outsourcing benefits consumers and investors.

Of course, all this just makes you mad if you have lost your job due to outsourcing. This is the dark ugly side that nobody wants to talk about. Workers sell their labor on an open market. American labor is unwilling to work for less than $1 per hour, but labor in the third world will gladly do so! Therefore, labor in America is at a major competitive disadvantage compared to say Mexico.

And it is not just labor, it is society that make the cost of doing business in the USA high. OSHA regulations require a somewhat safe worlplace. The third world has no such requlations. The USA has strict pollution controls, in the third world you can still dump toxic waste down the drain. And so on. All this amounts to more competitive disadvantage.

So how can America save its manufacturing jobs? Several things have to happen.

1. Consumers have to DEMAND American made goods, and be willing to pay 2x or even 3x more than they are paying for the same products now.

2. The third world has to have a labor revolution, like America had in the late 1800s/early 1900s. The third world needs to form labor unions, demand a living wage, demand benefits, demand weekends, and all the other things American workers are used to.

3. I hate to say this, but American workers need to be less lazy. The Japanese kicked our asses because of their very strong work ethic and company loyality. While American auto workers were just putting in hours, Japanese workers were striving for excellence.

Sadly, I do not see any of the above happening anytime soon. I do not think that the third world will have a labor revolution soon enough to make a difference to the people alive now. By the time they do organize, all the manufacture jobs in the industrial world will be outsourced.

Capitalism is based on exploiting resources. Right now, labor is one of the last things that can be exploited cheaply. Once the cheap labor in th third world is gone, I do not see the economic system alive today being able to survive. But this is OK, the USA will survive the final death blow to capitalism as we know it today. I will explore that tomorrow.