The Pitfall of Outsoursing's Economics (as submitted to Highestwire)

Submitted by Jon Book on Sunday, August 14, 2005 at 01:56:45 AM EST.

In reflecting on the state of the economy today I can't help but question the underpinnings of certain economic suppositions raised about outsourcing.

With manufacturing jobs having more or less departed this country for good, and the earnings of new jobs created in the economy to replace the lost ones, I cannot help but speculate about the fundamental economic underpinnings of outsourcing and globalization.

The typical argument raised by proponants of outsourcing is that it benefits the economy by reducing prices and creating new opportunities through new consumer spending dynamics. But this statement presumes certain things:

1. It presumes that the companies that outsource pass the savings along to consumers rather than increase their profit margin.

2. It presumes that after outsourcing, the money remains circulating in the economy.

3. It presumes that corporate bottom lines are synonymous with national economies.

I believe these presumptions are wrong.

1. If pure theoretical capitalism functioned in the manner it was supposed to, we would probably have seen the prices of the products we purchase decrease due to outsourcing. But, much like theoretical communism, theoretical capitalism breaks down when applied to a practical world. The prices simply haven't gone down. They've remained the same, or even increased a smidge. This is because the corporations largely shoot for profit margins rather than marketshare. Were the companies concerned with marketshare, they would undoubtedly drop prices as far as they could in reflection of their new labor costs and out-compete the others in the market. But why make less money selling more products when you can maintain the balance of marketshare and drive your profits through the roof? A price-war between the companies, something theoretical capitalism anticipates, is not in the best interests of the investors. They can all maintain their higher prices, and drop costs by outsourcing, and both of them go laughing all the way to the boardroom and then the bank.

Some people believe higher profit margins are good. After all, when companies make money they reinvest it into their businesses, spurring economic growth, right? If you confined the corporations to a western economic model then this might work. A company that outsources to America might save on labor because they don't have to pay higher German wages (they don't, but that's another story for another thread), and by investing more in and employing more Americans they can actually help the German export economy because the Americans now have jobs and can afford to buy more German products. The problem is this doesn't work when you outsource to the third world. The companies might pay enough so that the relative buying power is quite high in those countries, but we still market our products in western prices, and those wages are far too low to create viable consumers of western consumer exports. In short, we build car parts in the Domincan Republic for cars the Dominicans can't afford, and when we expand the operations in those countries, we just make more Dominicans who can buy oodles of domestically produced agricultural produce, but couldn't afford a Happy Meal without taking out a loan.

2. Arguments by outsourcing proponants presume that Americans will spend on new, cheaper products. But this presumes that Americans will still have as much money. By removing the manufacturing basis of the American working class, and relegating them to the only available sector that will accept undereducated inexperianced workers, the service sector, you're taking a significant chunk of the American consumers and reducing them from $15 per hour wages to around $7 per hour wages. So the consumer isn't spending $10 on an item instead of $15 and saving $5 to spend elsewhere; now, the consumer cannot afford the $10 sweater because he only has $8.

The money leaves the system, a very small portion of it going to 3rd world workers, and the lion's share of it entering corporate cauffers. There's no manufacturing jobs opening up to replace what we are outsourcing, no higher-paying jobs opening up as we were promised. Instead we have only retail and other minimum wage jobs that pay less, have fewer benefits (forcing the workers to tie up more money in the programs previously taken care of at the corporate level), and much less employment security. The money isn't being freed up, it's leaving the system and being tied down.

3. The corporate bottom line is no longer synonymous with the health of the national economy. This is the biggest issue surrounding outsourcing. Indeed, the corporations are doing great, profits are high and the big wigs are getting showered in money.

The nation, on the other hand, has experianced higher rates of unemployment, a five year recession, a contraction of the DOW, and nothing resembling the growth we were supposed to get from all the outsourcing and globalization. The only group to benefit from the practice has been the corporations and workers a world away. This has been terrible for the national economy.

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