October 29, 2004 | by | Topic: The Path to Freedom, Vision & Values Concise E-publicationsPrint Print

In a speech during the primaries, John Kerry called companies that outsource “Benedict Arnold” companies. If Benedict Arnold would have had his way, he would have denied Americans what they, and all of mankind throughout history, have sought—freedom—the unalienable rights to life, liberty and the pursuit of happiness. Senator Kerry’s proposal to tax companies that seek to use capital in the most productive way, thereby raising the American standard of living, would deny freedoms to all Americans, including American laborers.

Before considering the feasibility of Kerry’s proposal let’s consider a more fundamental question. Is outsourcing bad for U.S. workers and what, if anything, should be done about it?

Outsourcing occurs when a company chooses to employ workers in a foreign country to perform work that was previously done in the United States. Outsourcing is possible because modern transportation and communication technology make low cost labor in countries like China and India available to U.S. firms. When firms build factories to employ this low cost labor the result is lower cost products available for consumers.

The starting point for understanding the impact of outsourcing is to consider why wages are higher in some countries and regions than others. In a free market economy, high wages reflect high productivity. U.S. workers’ wages are high because their productivity is high.

In jobs where the difference between the productivity of U.S. and foreign workers is smaller than the difference in wages, it is more profitable to substitute foreign workers for U.S. workers.  Competition with workers in other countries need not result in unemployment for Americans if they are willing to accept lower wages or find other jobs where their productivity advantage justifies maintaining their wages at the same level.

Rather than being bad for U.S. workers and the U.S. economy, outsourcing is a reflection of the dynamism of the U.S. economy. While some U.S. firms find it profitable to cut costs by replacing workers with foreign workers, other U.S. firms can expand their production using the labor that is no longer needed by the firms that outsource. The result is better use of U.S. workers’ skills, a more productive and more competitive U.S. workforce and access to a greater variety of low cost products which means rising average standards of living for Americans.

While outsourcing may result in declining wages of some workers, it is not to blame for current high rates of unemployment. Keeping the rate of unemployment low in a market economy does not require that jobs be preserved doing things that others can do more efficiently.   A growing, prosperous economy, like that of the late 1990s, results from entrepreneurs creating more new jobs than were lost. The long run prosperity of American workers depends not on their being protected from foreign competition but in gaining the skills, and having access to technology, that makes it possible for them to produce goods and services that consumers demand at a low cost.

Success in a market economy depends on producing good quality products and services at a low enough cost to be able to compete with other producers. Those unable to compete must find ways to either reduce their costs or produce something different. For government to prevent or penalize outsourcing is to deny firms the freedom to produce goods and services using the least costly resources for the benefit of consumers.

Kerry’s proposed tax on outsourcing, like many of his other economic proposals, involves using government tax policy to favor one group of Americans at the expense of others. It is an unworkable proposal. Business firms have a variety of different types of relationships with suppliers both in this country and around the world, so that it would be very difficult to determine which firms are outsourcing and which firms are importing products and services. As political scientist Paul Kengor notes, Kerry would “need to hire an army of bureaucrats to keep track of this stuff. And Labor isn’t going to hold him to this anyway. Both Kerry and Labor know it’s insanity and pure political posturing.”

Rather than favoring one group at the expense of others, a better way to help workers in the U.S. is to eliminate or reduce the regulations and taxes which discourage business investment and make it harder for U.S. workers to compete on the world market on the same terms as workers in other countries. Unfortunately, Kerry’s economic plan involves raising tax rates on some of the most productive workers and investors, denying American workers the ability to compete effectively and stagnating the American standard of living. Kerry’s plan would deny freedom to Americans to seek their unalienable rights.

Senator Kerry should reconsider the use of the term “Benedict Arnold” companies.

Tracy Miller

Tracy Miller

Dr. Tracy C. Miller is an associate professor of economics at Grove City College and fellow for economic theory and policy with The Center for Vision & Values. He holds a Ph.D. from University of Chicago.

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