Does government exist to provide for certain essential services, or does it exist to employ people, even at higher-than-necessary costs?
That’s the essence of the debate going on in 36 states, including Michigan. Government managers who seek to make efficient use of tax dollars by seeking the best goods and services — including, on occasion, foreign workers and companies — can face heavy criticism.
But there is more than idle talk at work. Governor Granholm issued two executive orders, and has said that prohibitions on using foreign companies are important to "supporting American jobs."
Legislative proposals in Lansing would make those orders permanent. House Bill 4940, for example, would "prohibit awarding state contracts for the purchase of services unless the work is done by U.S. citizens, legal resident aliens, or individuals with a valid visa. Contractors would be prohibited from "outsourcing" the work to workers in another country." A related measure, House Bill 5080, would "prohibit the state of Michigan from investing in any company that is considered an 'expatriated business.’"
A PROBLEM, OR AN OPPORTUNITY?
If you listen to the critics, you might fear that everyone’s job is going to India (if not Mexico or China). This concern about job loss, often called offshoring, is an updated version of the battle over outsourcing, whereby companies contract with other companies rather than hire workers directly to perform certain tasks.
There’s one fundamental flaw with the dire predictions. They are wrong. As Mackinac Center scholar and University of Michigan economist Mark J. Perry wrote, job outsourcing is "beneficial trade by another name." Trade, according to Perry, "greatly lowers our cost of consumption, raises our standard of living tremendously and directly supports many jobs."
This is true whether the trade involves agriculture, automobiles, or service work. A recent study by the McKinsey Global Institute, for example, found that each $1 of labor sent overseas created another $1.12 in value in the U.S. Class warriors would assert that the value goes only to wealthy shareholders (never mind that nearly half of all households are shareholders).
Trade creates not only wealth, but jobs as well, even in services. The offshoring of some information technology jobs, the latest line of work allegedly requiring protection, has created more than 4,000 jobs in Michigan, according to a report cited by Dr. Perry.
Like any measure designed to protect a class of companies or employees, a prohibition on offshoring would have negative consequences.
The most obvious cost would be higher costs to government; such a prohibition could add $1 million to $10 million to the cost of many state contracts. That’s money that could otherwise be spent to increase the number of services offered by the state, or returned to taxpayers, who could use the money to generate even more jobs.
U.S.-only requirements also restrict innovation and quality improvement. GM cars are much better today because of the tough competition they faced in the 1970s. In the same way, service companies — and state government agencies — will improve to the extent that they face competition and are not sheltered by legal mandate.
A prohibition on outsourcing will add to Michigan’s reputation as a place that is unfriendly to business. Restricting whom job providers can and cannot hire results in forgone income, jobs and tax revenue. Existing companies will be reluctant to expand here and those elsewhere will bypass Michigan for more friendly states.
WHAT IS THE STATE TO DO?
When headlines announce job losses and factory closings, it’s hard to resist the urge to "do something." But there is plenty government can do without adding new restrictions on anyone. Enhanced school choice, for example, can improve human capital, and thus enable people to adjust more effectively to a changing economy. Tax and regulatory reforms can make Michigan a more attractive place to do business. And subjecting government functions to the rigorous test of competition whenever possible — including the use of outsourcing and offshoring — will invigorate the private sector and civil society of our state.
John R. LaPlante is an adjunct scholar with the Mackinac Center for Public Policy. He has written about questionable government spending for the Oklahoma Council of Public Affairs and serves as an adjunct scholar with the Taxpayers League of Minnesota. He has contributed to the Mackinac Center’s study on Balancing Michigan’s State Budget. House Bill 4940, 5080, and other legislation relating to government contracting can be tracked at MichiganVotes.org.