Deinonychus antirrhopus

Outsourcing, Part IV

I thought I'd follow up on my outsourcing post below. Many people believe this is a serious problem, but as of yet I have not seen any serious proposals on what to do about it. I suspect that one reason nobody says anything about how to stop it is that they know that policies to stop will be roundly trounced as bad policy.

I am going to engage in a fun game that many often engage in, putting forward policies to address outsourcing and then shoot them down. I am to some degree engaging in a strawman argument since nobody that I know of has actually suggested much be done about this problem. So with that warning out of the way....

The most simplistic is to pass a law prohibiting the outsourcing of jobs. I don't think anybody would suggest this policy as the negative outcomes should be obvious. First, many firms that at are looking at outsourcing would see such a law as another reason to outsource. Get out of the United States; not only are the wages for software programmers high, but its government can be intrusive. So you'll have companies leaving the U.S. and quite possibly not only accelerating the rate of outsourcing, but the magnitude as well. Another law could be put into place that punishes financially firms that do leave the U.S. economy. The only problem with this is that firms tend to try and pass on such punishment to their customers via higher prices. So such a policy could in the end result in more outsourcing, faster outsourcing, and higher prices. Say, is this some sort of idiots trifecta?

Another possibility which some Democratic candidates have endorsed is offering tax incentives to firms to stay keep jobs in the U.S. There is a problem with this. On the whole it is not clear that this is welfare enhancing. That is, it might actually reduce people's overall welfare. Tax incentives would increase the governments revenue obligations, which in turn would need to be met with increased taxes (lets assume for a moment that the Democrats who are in favor of this idea are actually fiscally conservative...now stop laughing). These taxes will reduce people's welfare. The fact that fewer jobs will be leaving the U.S. is welfare in enhancing. The overall effect is ambiguous here. It could be that the loss of welfare due to increased taxes means people, in general, are worse off by a larger margin than they are better off. Now on top of this lets throw in the inefficiencies of taxes. This will make it even more unlikely that the such a policy is welfare enhancing (and obviously more likely to worsen overall welfare). This criticism applies to just about any policy that requires the government to spend money that is raised via taxes. So if there is a policy that is geared to increase access/availability of college educations, subsidize infant industries that might employing the people whose jobs have been outsourced, etc.

Given all this I see absolutely no reason to do anything right now. We have a situation that may or may not actually come to pass (i.e., large scale outsourcing that seriously damages the U.S. economy), and the policies that could be used to try and prevent this could themselves accelerate or even worsen the problem. Further, it strikes me as reckless basing policy on something that may not even come to pass.