Clueless About Offshoring

All for freedom and for pleasure
Nothing ever lasts forever
Everybody wants to rule the world
--Tears for Fears

In previous posts we distinguished between outsourcing and offshoring, and we observed that offshoring in particular is subject to political meddling. Perversely, while politicians jawbone against the practice of offshoring, many of their policies exacerbate, rather than brake, offshoring tendency.

Consider the following three general policy categories:

Tax rates. Econ 101 tells us that when you tax a behavior, you get less of that behavior. Couple that with US corporate tax rates that approach 40% - among the highest in the world - and, voila, policymakers have created compelling incentives for companies to operate outside the US.

Minimum wage laws. Minimum wage laws are a form of price control which imposes a price of hourly labor above the free market rate. Minimum wage laws also can be viewed as a monopolistic grant that protects a subset of workers from would-be workers willing to do the same job for lower pay. Econ 101 tells us that minimum price controls drive buyer (in this case employer) demand from the market. Thus, not only do minimum wage laws result in compulsory unemployment for some workers in domestic markets, but these laws encourage companies to look at foreign markets where labor can be obtained at a cheaper rate.

Regulation. Regulation in its general form involves any government interference in voluntary exchange between individuals. Tax and minimum wage laws discussed above can be viewed as regulation. Here, however, let's limit the notion of regulation to government interference in processes of production. In this context, regulatory burden might include product requirements (e.g., safety, quality), production process requirements (e.g., environmental, mandatory practice, testing, record keeping), and/or licensing requirements (process qualification, individual qualification), among others. Plainly, regulation raises cost of production. It also reduces flexibility to quickly move in directions that better satisfy market needs. Incumbents as well as aspiring entrepreneurs will be prone to look abroad for less regulated markets that reduce cost and increase freedom.

We might include other policies as well. For example, monetary policies that force interest rates lower discourage saving, thereby starving markets of real capital for investment. High levels of government spending and debt reduce forecasting clarity, thereby making it more difficult to plan for the future.

Clearly, policymakers have enacted rules that tilt the playing field away from domestic employment and toward offshoring.

The escalating presidential campaign provides a nice example of the politics of offshoring. Recently President Obama has been chastising challenger Mitt Romney for offshoring jobs during Romney's time at Bain Capital. Because Obama presides over an offshoring friendly political system, this is a classic 'pot calling the kettle black' accusation.

And Romney should have said so. He should have said that he, like hundreds of thousands of managers, was making decisions inside a system distorted by rules that encourage offshoring. This system is currently being overseen by the Obama administration. Romney should have said that before lashing out at others, President Obama should perhaps get his own house in order by dedicating effort toward lower corporate tax rates, abolishing minimum wage laws, and less regulation.

Unfortunately, Romney did not say so. He either a) does not possess capacity for recognizing lay up opportunities when presented with them, or b) he would like to preside over similar offshoring-friendly policies himself. Given Romney's history as a Big Government type, b) seems more likely.

Regarding offshoring, these two candidates may be more alike than different. Both seem either clueless about the president's role as offshorer-in-chief, or they think that voters are clueless.