Time To Talk About Outsourcing

Smith (WA09) - Press Release - Congressman Adam Smith Announces Release of Groundbreaking GAO Report on Offshore Outsourcing
Here's a quote from the released portion of the GAO report (click on the pdf link yourself):

Federal statistics provide limited information about the effects of offshoring IT and other services on the U.S. labor force and the economy overall. The Department of Labor’s Mass Layoff Survey (MLS) shows that layoffs attributable to overseas relocation have increased since 1999, but these layoffs represent a small fraction of workers laid off—of 1.5 million layoffs reported in the 2003 MLS, 13,000 (0.9 percent) were reportedly due to overseas relocation. The data also show that most of these layoffs were in the manufacturing sector.

Thanks to Daniel Drezner for going through the report on his blog, so I don't really have to.

So, outsourcing costs the US about 13,000 jobs per year. There is, however, a very similar term called "insourcing". Insourcing is when companies in other nations outsource jobs to the US. Or, more simply, when US workers are employed in a foreign company. It's the opposite of outsourcing
Drezner has a nice bit on that data:

Brier Dudley and Marilyn Geewax have dueling stories at the Seattle Times and Seattle Post-Intelligencer respectively. One data point that captures attention is the fact that "the number of business, technical and professional services, flowing into the United States, however is rising, from $21.2 billion in 1997 to $37.5 billion in 2002," as reported by Geewax (this is CNN's lead as well).

That's an increase of 76.9%, which sounds really bad. But it's only half of the picture. What about exports of business, technical and professional services?

Those precise figures weren't in the GAO report, so I e-mailed their staff to see if they knew -- and they promptly replied. As it turns out, during the same period, exports of these services rose from $44 billion in 1997 to $64.5 billion in 2002 (This is from the Bureau of Economic Analysis's Survey of Current Business, October 2003, p.65, Table E).

from the same article that I linked to before

Now, back to Smith's report:

“This study shows us that we have the opportunity to address the growing trend of offshore outsourcing with positive and aggressive solutions,” said Smith. “We should increase investment in research and development, improve math and science education in K-12, enhance training and professional development for workers, open markets for American goods and renew the government’s focus on promoting innovation. By doing so, we can make sure that our economy remains the most vibrant and competitive one in the world.”

Smith continued, “We are at a relatively early state in the offshore outsourcing trend. We must get the facts straight and have a serious and educated policy dialogue on outsourcing. It’s my hope that this study will help “kick off” that process and move the discussion in a positive way that is focused on real issues and solutions. I am committed to continuing my work on identifying real solutions to this potentially growing problem for the American people.”

Well, Smith has hit on a good solution. Instead of whining about a nonexistent outsourcing crisis, he pretty much says that the US should do what it does best: innovation.

Let me explain. Every company that makes those little paper drink umbrellas for the US, to the best of my knowledge, has its factories (and probably management) somewhere other than the US. This is not really a problem, because little paper drink umbrellas are not a profitable industry in the US, because expenses like labor and real estate are much larger than the tiny profit margin on little paper drink umbrellas. So, unless the US doesn't want those LPDUs (little paper drink umbrellas, which I'm getting tired of writing), which are more of a luxury than a necessity, the entire industry must be outsourced. However, the LPDU factory needs machines to make the LPDUs. Due to the profitability of machine manufacturing, American companies make the machines that the LPDU factory needs.
So, US Machine Factory co. sells machines to LPDU co. Then, LPDU co. makes and sells LPDUs to every nation that wants them, including the US. Because Europe buys a lot of the LPDUs, LPDU co. may not need to sell enough to the US to cover machine expenses.
Thus, the US profits, because US Machine Factory co. sold more to LPDU co. than LPDU co. sold to the US. And, without the outsourcing of LPDU factories, the entire LPDU industry would be forced into bankruptcy. In this case, US Machine Factory co. would not be able to profit by selling machines to LPDU co.
Of course, LPDU co. will have to fire the American employees when moving away, but those employees would have lost their jobs anyway when the company went bankrupt.
What America needs to do is keep US Machine Factory co. modern and on the cutting edge, so no foreign companies can replace it. Development and innovation is the US’s specialty, while cheap labor is abundant in the rest of the world (and is certainly not in the US).