“Anti-Outsourcing” – A policy of unreality

The public is still collectively shitting its pants about the economy and swine flu, two issues that do not have a long-term negative outcome for the US. One way the Obama administration is responding to this is to resurrect a common Democratic Party campaign theme: Anti-Outsourcing. There are several fundamental reasons why anti-outsourcing will never work over the long term, here I will examine a few of them.

The concept of “outsourcing” is an interesting one. It has always been true that any economic activity that is labor intensive carries a high cost, because the cost of paying all the hands that do the work generally greatly outweighs the other costs of business. This is part of why slavery has, until very recently, been the worldwide norm for dangerous, menial or massive labor efforts. Even slavery is not without its costs, however. Humans are highly intelligent and difficult to control unless they choose to be controlled. If given untenable survival conditions or even continual emotional distress slaves tend to revolt, and this is expensive and socially dangerous. This means that slave owners have always had to invest in long-term plans, plans at least as long-term as the bondage is to last, which puts them in a very difficult situation if their dependent markets take a dive or the environment within which they operate comes under threat (see the American Civil War, various Roman slave revolts, the history of Carthage, etc.). Suffice to say, slavery is not a safe or socially responsible option given a fluid economic environment — and this is even totally ignoring the humanitarian side of things.

So what is a better option? The hiring and firing of workers. Workers take care of their own survival, their own families, their own living conditions, buy or find their own food, etc. Their only connection to their employer is either entirely defined by a time-for-pay relationship or an effort-for-pay relationship. The employer is entirely freed from any domestic responsibilities over the employee, and the employee is freed from the social control that domestic responsibility entails. (An interesting hybrid to this is modern military and para-military systems.)

Problems arise, however, when human nature and collective reasoning get involved. It is always to the short-term benefit of the employee to try to get as much as he can for as little effort or time as possible, thereby increasing the received (but not actual) value of his work. It is always in the interest of a company over the long-term to try to give as little as possible for as much effort or time from each employee. There are various ways of looking at this situation, and whether a company aiming to retain highly skilled, experienced or ideologically tuned employees by paying more than the industry standard or takes the view that manpower can always be replaced and is satisfied with high employee turnover is irrelevant. In the end both styles of thought are essentially financial and profit-oriented decisions.

As a nation improves its situation the salaries and cost of living in that country tends to rise relative to other countries. At some key point it becomes cheaper to train new, otherwise unskilled and inexperienced employees in another country for a specific job than to hire domestically educated and relatively skilled labor to do the same job. When the labor in question produces a service then it will almost always be much easier to maintain domestic employment because the market and the labor must be in the same place. When the labor produces a product which can be easily shipped (cars, bags, cocaine) or a service that can be communicated (software, remote IT services, call-center services, audio-visual pornography) then the location of the labor in relation to the market is of little importance. In such situations companies will quickly move the locations of their labor centers away from their domestic markets where people have money to spend — and therefore demand more money for each unit of work — to foreign places where people have no money to spend — and therefore demand very little money for each unit of work. Over time this creates a phenomenon where 1st world nations tend to be service-oriented economies, 2nd world nations tend to be manufacturing and export oriented economies, and 3rd world nations remain nasty and chaotic enough that the cost of business outweighs the benefits of cheap labor.

[An interesting point of note: By the above reasoning there are slightly fewer 3rd world nations slightly more 2nd and 1st world nations in 2009 than in, say, 1969. This is the foundation of the idea that internationalization of trade is a good thing helps drive the advancement of humanity. “Advancement to what?” is an entirely different question.]

As stated above, companies make these labor moves to remain competitive, because other companies will do the same thing if they have a chance. The key idea behind the campaign pledge to enact “Anti-Outsourcing” legislation is that if Congress were to somehow restrict or outlaw such labor moves then no companies could do it and in isolated theory all companies would remain on the same footing to compete equally from the domestic labor pool.

The flaw in this reasoning is, of course, that Congressional laws only apply to US companies and individuals. Neither are Americans. It can become quickly profitable for a currently operating American company to cease operations in America, relocate entirely overseas to offices in, say, Singapore — a place which knows it will never domestically manufacture much due to mere geography and will therefore be eternally prone to support such overseas relocations — and continue to conduct precisely the same business as before, but this time as an exporting foreign entity with an American market and the exact same cheap overseas labor pool. In this scenario business not only moves overseas, but so do taxes, entirely. The American system would suffer a 100% loss to manufacturing in this case as opposed to maintaining a hand in directly administering the foreign labor market.

If Congress were to clamp down on this sort of practice by making it illegal for American citizens to either start foreign companies, become employed by foreign companies or otherwise be involved in overseas management then the American government would effectively be cutting itself off from its current main source of international business revenues (despite the current claims of massive tax evasion). If Congress were to alternately suddenly raise trade barriers and resurrect the old protective trade tariff structure that the entire global system has been working against for the last 60 years then the Americans will be guilty of firing some huge opening shots in the next global systemic struggle. None of these courses of action have good outcomes for the American system when taken to their logical conclusions.

It is also very important to consider that there are legitimate foreign companies out there who would love to buy away American expertise or develop their own expertise to compete directly with American manufacturers if Washington suddenly found it a good idea to slap a huge number of unsufferably expensive labor market restrictions on American business activity. Most, of not all, of these foreign companies could predictably be expected to locate themselves either in countries with a cheap domestic labor market or headquarter in a country which has very liberal business, tax and labor laws. Once again, the only available American reaction to this would be to enact trade barriers or tariffs against such companies to protect the American domestic market. This would, of course, come at the expense of a massive international political backlash and a cascade of increasingly high anti-American trade barriers and grind the American international trade machine to a complete halt. Trade barriers or no, however, American companies will come under swiftly growing pressure from increasingly sophisticated foreign competitors to streamline and evolve or suffer ultimate defeat and demise.

These are the basic mechanics of why it is unreasonable to expect the American government to ever seriously consider enacting real restrictions on the outsourcing of menial labor. There will always be a place in the domestic American labor market for skilled workers, location-specific service workers, and management personnel as well as a an increasingly large place for what amounts to professional thinkers such as engineers, scientists, etc. But the place of the lowly factory worker who presses a button for a living, runs a simple drill press or sews backpacks is no longer in America. America will increasingly either need to become a nation of management, education and technology centers which manage the broad overseas labor efforts of other, less expensive hands or suffer a competition gap crisis at some point.

Obama’s popularity is going to face some pretty stiff challenges as time moves on. He needs to push every populist button possible right now to try to keep his numbers up if he hopes to have another term in office. In a certain sense in this he is a prisoner of his own campaign success. It is difficult to promise a world of change when the only world we have to work with is the one we’ve already been living on and are familiar with. They key on this particular issue, however, is not that Obama has to somehow actually succeed at making an anti-outsourcing policy change. He knows that is entirely unrealistic and so does the rest of Congress. The idea is popular with the media and the largely uncontemplative public, however, so no politician is going to stand in front of a camera and explain everything I have just explained above because elective politics is about popularity and the difficult situation I have illustrated above is in no way a popular message. Obama must be perceived by the public as trying to get an anti-ousourcing initiative started, whether it fails or not. If it fails he can say “Congress blocked it, its not my fault” and if it succeeds then it will have to be written in such a way as to provide sufficient loopholes to permit business to effectively continue operating as it does now.

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