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August 4, 2012

Outsourcing and Jobs

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It is tragic that our mainstream media has failed to explain the cause-effect relationship of two important election issues: outsourcing and jobs. 

In a free and competitive society, the well-being of millions of shareholders (including millions of retirees) depends on the profitability of business firms in which they invest their savings. If profit opportunities in Chile were greater than in USA then outsourcing resources to Chile is a survival requirement. It surely is not a choice made by greedy CEOs. By implication, the critical issue is not the fact of outsourcing but: why are profit opportunities greater abroad? It is theoretically arguable and empirically testable that corporate taxes, business regulation and strong unions have raised the costs of doing business in the USA relative to many other countries. And if so, government policies rather than business leaders (such as Romney) should be held accountable for outsourcing. 

The "jobs" game is equally misleading. It is not true that government cannot create jobs. There was no unemployment in the former USSR. All inmates in our prisons are fully employed doing something. I am also sure that there is no unemployed private in the US Army. The issue is not the jobs per se but the relationship between the opportunity costs of workers in government created jobs and the value of their output. The efficiency requirement is that the market value of output that is produced by workers is at least equal their opportunity costs. It is arguable that relative to policy makers in government, private for-profit firms have greater incentives to create such jobs. If so, lower taxes (e.g., JFK and Reagan tax cuts) are more efficient job-creators than government spending (e.g., Carter and Obama years).

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