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The Wall Street Journal

OCTOBER 12, 2010

Obama and the Politics of Outsourcing
For every job outsourced to Bangalore, nearly two jobs are created in Buffalo or other American cities.

By William S. Cohen

In the opening scene of the new NBC comedy "Outsourced," lead character Todd Dempsey arrives at work to find the call center he is supposed to manage has been moved to India. Suddenly a brick flies through the window with an angry anti-outsourcing message attached. Todd's boss laughs and adds it to a pile of bricks beside his desk.

In recent weeks, Congress and the AFL-CIO have thrown some bricks of their own through the windows of American businesses. Last Thursday the union unveiled a new searchable database of more than 400,000 U.S. companies and subsidiaries it says have shipped jobs overseas. The database is part of organized labor's campaign to harness anti-outsourcing sentiment to energize union voters for the midterm elections. Meanwhile, the Senate voted 53-45 last month to raise taxes on companies that move operations abroad and lower payroll taxes for jobs created in the U.S.

The Senate vote was seven shy of the 60 needed to get the "Creating American Jobs and Ending Offshoring Act" past a filibuster, but the angry message was received loud and clear: Protectionist sentiment is taking hold in America and in Congress. If this sentiment is allowed to grow unchecked, the damage to our economy and relations with key allies could be severe.

A Wall Street Journal/NBC News poll released Sept. 28 found that outsourcing was the top reason cited by Americans as the cause of the country's economic problems—and that for the first time in years a majority (53%) of Americans say free-trade agreements have hurt the U.S.

Politicians are responding to this antitrade sentiment by enacting protectionist measures. In August, Congress voted to raise fees for H1-B and L1 visas to discourage skilled workers from India and other countries from coming to the U.S. That same month, the state of Ohio banned the use of public funds for offshore services—including IT services from India.

Most people treat outsourcing as a zero-sum game—one foreign worker replaces one American worker. But this is not how the dynamic global economy works. In 2007, Matthew Slaughter, an economist at Dartmouth's Tuck School of Business, published a comprehensive study of the hiring practices of 2,500 U.S.-based multinational companies.

He found that when U.S. firms hired lower-cost labor at foreign subsidiaries overseas, their parent companies hired even more people in the U.S. to support expanded operations. Between 1991 and 2001, employment at foreign subsidiaries of U.S. multinationals rose by 2.8 million jobs; during that same period, employment at their parent firms in the U.S. rose by 5.5 million jobs. For every job "outsourced" to India and other foreign countries, nearly two new jobs were generated here in the U.S.

Those new U.S. jobs were higher-skilled and better-paying—filled by scientists, engineers, marketing professionals and others hired to meet the new demand created by their foreign subsidiaries. Todd, the American call center manager transferred to India in "Outsourced," keeps a framed picture of an executive suite back home on his desk—a reminder of the more prestigious job he is working towards. That job is more likely to be created because of the call center in India.

Putting up protectionist barriers against outsourcing also risks retaliation by foreign trading partners, whose businesses also hire workers abroad—including here in the U.S. A 2004 study by Prof. Slaughter titled "Insourcing: The Often Overlooked Aspect of Globalization" found that the number of American jobs created by the subsidiaries of foreign-based multinationals has more than doubled over the past generation.

In 2002 those subsidiaries employed over 5.4 million American workers, nearly 5% of total private-sector employment. They also paid American workers 31% more than their American nonsubsidiary competitors—an average of $56,667 per year. If Congress enacts legislation to stop American companies from outsourcing, foreign governments could do the same—and that could put at risk millions of high-paying jobs in the U.S.

During difficult economic periods, people are tempted to seek refuge in the false promise of protectionism. This is true of both America and India. Today, India maintains protectionist limits on foreign direct investment in such areas of its economy as infrastructure, insurance, retail and defense. And Indian politicians continue to put up obstacles to foreign investment in nuclear power. If India wants the U.S. Congress to resist protectionism, New Delhi has a responsibility to remove barriers against American investment.

Politicians are not above exploiting an issue by appealing to popular sentiment even when that sentiment is belied by economic reality. President Obama has succumbed to this temptation, warning that we should not tell U.S. companies that they will be treated the same "if you create a job in Bangalore, than if you create one in Buffalo."

That may play well in Buffalo. But the fact is that for every job outsourced to Bangalore, nearly two jobs are created in Buffalo and other American cities. That's a good deal for America—and something our president, and even Todd from "Outsourced," should understand.

 

Mr. Cohen, a former U.S. secretary of defense, is CEO of The Cohen Group, a business consulting firm.