President Obama has become increasingly critical of candidate Romney’s position in venture capital firm Bain Capital. There is evidence that Bain Capital purchased companies then closed the domestic factories that these firms utilized to manufacture their products. Bain then opened factories overseas or contracted with foreign manufacturers to produce the goods or provide the services. This, Obama argues, created unemployment in the US at the closed factories.
This issue was raised during the 2004 presidential election. Candidate Kerry noted that the increased use of outsourcing was damaging our economy and said that the Bush administration wants to “export more of our jobs overseas.” Greg Mankiw, the head of President Bush’s Council of Economic Advisors noted that “outsourcing is just a new way of doing international trade” and that outsourcing is actually a “good thing.”
Senate Minority leader Tom Daschle responded by saying, “If this is the administration’s position, I think they owe an apology to every worker in America.” Speaker of the House Dennis Hastert then warned “outsourcing can be a problem for American workers and the American economy.”
But is outsourcing a bad thing for the economy?
Numerous studies have been done that indicate outsourcing has had a minimal effect on job losses and, in the aggregate, has actually added jobs. How can that be?
The reason a company chooses to manufacture a product outside of the US, is very clear. The company finds it is less costly, even considering the logistical cost of shipping raw materials and the finished goods. Usually the cost savings are very significant. This allows the company to sell the products at much lower prices so more Americans can consume them and also to increase profit.
The cost reduction and profit improvement often results in an increase in employment. Consider for instance Delta Airlines in 2003. They moved 1,000 jobs to India. By doing so Delta was able to reduce cost by $25 million. They used the money to fund 1,200 new reservation and sales positions in the United States, thus resulting in a net gain in jobs.
Similarly consider a consumer who needs to purchase a new computer. The consumer finds she can purchase a state of the art laptop for about $600. If the computer was made in the US the cost would be over $1,000. By saving $400 because the computer is manufactured outside of the US where labor’s wage rate is much much lower, consumers have more money to spend on other goods and services. This increased demand results in growth for the economy.