Despite the criticism, the president’s chief economic advisor was right. Outsourcing itself is nothing new. U.S. companies and governments have been outsourcing domestically for decades by contracting out such services as payroll, database management, and janitorial services. The new twist has been the recent increase in foreign outsourcing, or offshoring, in which companies buy services from foreign-based providers. Foreign outsourcing has been made increasingly cost-effective because of the personal computer, which has digitized much of our work, and high-speed and deregulated transmission of that information through broadband and the Internet. Informational technology (IT) companies are increasingly outsourcing routine programming, data entry, and system monitoring. Call centers are shifting more of those thankless jobs abroad.
If anything, Mankiw was guilty of understating the benefits of outsourcing. Foreign outsourcing almost certainly benefits the U.S. economy in the short run as well as the long run. Like more conventional forms of trade, foreign outsourcing allows U.S. companies to dramatically cut the cost of certain information technology services. As a result, U.S. companies become more competitive in what they do best, their “core competencies.” Better and more affordable services become available for consumers and taxpayers. Outsourcing allows companies to operate on an around-the-clock, “24/7” production cycle, further adding to productivity. Outsourcing is even making possible work that simply wouldn’t exist otherwise, such as chasing down delinquent accounts receivable that were thought to be beyond collection.
According to a 2003 study by the McKinsey Global Institute, outsourcing delivers large and measurable benefits to the U.S. economy. It reduces costs for IT and other services by as much as 60 percent, keeping U.S. companies competitive in global markets, benefiting workers and shareholders alike. It stokes demand abroad for the export of U.S.-supplied computers, telecommunications hardware, software, and legal, financial, and marketing services. It returns profits to the United States from U.S.-owned affiliates abroad, and it allows U.S. companies to re-deploy workers in more productive jobs here at home. In fact, McKinsey calculates that every $1.00 spent on foreign outsourcing creates $1.12 to $1.14 of additional economic activity in the U.S. economy. Another study by Global Insights estimated the U.S. economy will be $124 billion larger in 2008 if outsourcing continues compared to no outsourcing.
Foreign outsourcing could eventually deliver the same scale of productivity gains to the IT services industry that it has to the hardware industry. Many of the components in a typical computer sold in the United States today are sourced from around the world, especially East Asia. According to a study by Catherine Mann at the Institute for International Economics in Washington, global sourcing for IT hardware cut the final costs to businesses and consumers by 10 to 30 percent, accelerating the diffusion of computer technology through the U.S. economy. That diffusion added three-tenths of a point to GDP growth and a cumulative $230 billion to U.S. gross domestic product. Foreign outsourcing, by spreading lower IT costs to service sectors that make up 80 percent of the U.S. economy, could have an even bigger impact on growth than the outsourcing of IT hardware. Outsourcing could help control spiraling costs in such sectors as health care and education.