Hey Mitt: Just say you’re a free trader

Published 11:00 pm Wednesday, June 27, 2012

The US presidential campaign is heating up. At the moment, President Obama and Mitt Romney are sparring over the role Mitt Romney’s private equity firm, Bain Capital played in sending good American jobs overseas: outsourcing.

Even Vice President Joe Biden has chimed in with his two cents: “Give Mitt Romney credit: He is a job creator. In Singapore.

And China. And India.” Mitt Romney, meanwhile, has been backpedaling and downplaying the role outsourcing played in Bain Capital’s success.

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Outsourcing, which is the practice of contracting an existing business process to an outside company, has been a controversial political topic for quite some time. Back in 2004, George W. Bush’s Council of Economic Advisers chairman, Greg Mankiw, was criticized for saying outsourcing would “prove a plus for the economy in the long run.” Nearly all economists agree with Mr. Mankiw on the benefits of outsourcing, but his comments didn’t sit well in Washington, where emotions run high.

Putting emotion aside, here are the basics of outsourcing: The wages American workers lose when production goes abroad to a country like Singapore, China, or India is more than made up for by benefits to consumers. The consumer benefits come about when prices are lower and greater product variety comes about. In addition, an entire set of activities that economists call “rent seeking”—lobbying the government for a special protection—are reduced when we leave trade alone and let firms employ workers where they want to employ them.

Rather than embrace free trade, politicians work to block outsourcing, discourage trade, and protect American jobs. (The $500 billion Farm Bill passed by the House last week is a case in point.) Blocking trade, however, increases costs for consumers and creates special interests committed to blocking change in an industry. One need look no further than the American automobile industry to see the costs of protecting American jobs: every job saved costs Americans more than $100,000 per year.

The costs of blocking trade are real, and they are obvious once you pause to think about how miserable life would be if we were to take arguments against trade to their logical push the conclusion.

A lot of my clothes come from China; many of the fruits I eat come from other states in the US; and I normally get my car serviced in Montgomery. Think of all the people adversely affected by my choices. Clothes producers in Alabama and many other states around the country could benefit if we blocked clothing imports from China. Fruit farmers in Alabama could gain if we blocked imports from other states. And, imagine the economic boom local mechanics would enjoy if we restricted people from servicing their cars in Montgomery!

The gains to Alabama’s economy, of course, would be offset by higher prices, inferior quality, and tremendous inconvenience. The example is meant to be absurd. But, the example helps make an important point: Restricting trade is bad news, whether it’s a “buy local” initiative or an international set of policies blocking employment of foreign workers. Opponents of outsourcing—Joe Biden, union members, many anti-globalization students on college campuses—want a world more like the one I described in the previous paragraph. They are against people engaging in free, consensual exchange, but what they don’t understand is the following: Whether it’s a restriction on the purchase of fruits or a restriction on the purchase of labor, the world is worse off when barriers of any kind are introduced.

Mitt Romney, no doubt, gets the basics of free trade, but political calculations have muddled his thinking. Rather than dodge the issue of outsourcing, he should celebrate his record as someone who believes in running companies efficiently and promoting consumer well-being.

Mr. Romney should be defending himself because there is nothing wrong with outsourcing jobs, and America needs more people—especially people running for president—willing to speak truth about trade.


Scott Beaulier is Executive Director of the Manuel H. Johnson Center for Political Economy at Troy University.