Wednesday, January 05, 2005

Why Lou Dobbs Is Wrong, Part I

Lately I’ve noticed CNN running a lot of ads for their network, some of them touting Lou Dobbs, their premiere economic analyst. Lou Dobbs is probably most famous for his “Exporting America” segment on his show, where he ridicules American businesses that employ people in other countries. As one of the most well recognized names in the media he’s no doubt strengthened the surge of concern over outsourcing that took up so much valuable time this past election.

Every time I hear one of his commercials I get sick, because he is so wrong. Outsourcing is good for America, not bad. Greater specialization allows greater economic growth. Trade creates wealth. That’s the pattern of human history. Saying that sending jobs overseas is bad for the American economy is the same as saying sending jobs across the country is bad for the Californian economy. But you never hear Californians complain about the financial jobs that go to Manhattan; it’s always the tech support jobs that go to India. People understand that specialization (in the financial case) is good. But paradoxically, even the smartest people think there’s no overarching reason why specialization is good.

Count Lou Dobbs among them, because he’s a smart guy. He graduated from Harvard, majoring in economics. He’s on the board of four organizations (the Society of Professional Journalists Foundation, the Horatio Alger Association, the National Space Foundation and SPACE Holdings, Inc.). He writes syndicated columns, writes and edits his own newsletter and has won countless journalism awards.

Upon looking for this information, I came upon this review of his Lou Dobb’s new book—can you guess the title?—Exporting America. In the opening paragraphs of the article, the reviewer asks, “If Lou Dobbs is so wrong, why isn’t ANYONE stating HOW he is wrong and back that up with facts, instead of just saying he is wrong, or tearing him down personally. If Lou Dobbs is so wrong, why does he have the facts to back him up?” [Original emphasis] Well Paym Bergson, I’m about to tell you why. And he doesn’t, by the way, but that's for a later post.

One of the core lessons of economics is constant existence of opportunity costs—doing one thing bars you from doing something else. Spending a dollar here means you can’t spend that dollar there. Watching TV at nine means you can’t play tennis at nine. Dating one person means you can’t date someone else (unless you’re a sleaze ball). Opportunity costs don’t go away when we talk about jobs. They’re existence is, in fact, abundantly clear because jobs take up so much of our free time. Anyone that ever wanted to see a movie instead of being at work readily understands this concept (especially people that deliberate if they should skip work to see a movie). A second job takes up more time than a two-hour flick which is why people have two full-time jobs only if it’s absolutely necessary.

This is why specialization and trade are so great. Specialization says we don’t have to do both jobs to live a good life. In fact it’s better if we don’t. Doing just one lets us do that one thing really well. Because we’re so efficient, we get extra of that one. Trade lets us exchange that extra bit for some of the other. We get both while working for just one. Specialization and trade lower the opportunity cost of a job. We sacrifice less by specializing.

Just as a single person should focus on a few things (family, career, hobbies) to get the most out of life, a nation should, too. Imagine for a moment if America did everything and no jobs were outsourced. That’s a lot of additional stuff to do—manufacturing, customer service, farming, mining, research, record-keeping…yak raising. The International Herald Tribune reported that a bipartisan congressional commission puts the number of outsourced jobs at over 400,000 and rising. And they’re all important for maintaining our standard of living (except for maybe yak raising).

That’s a lot of jobs and if they were all kept inside of the economy, two things would happen. First, lots of people would get these new jobs, baring them from something else. Sure that something else would include Wal-Mart, but it also includes night classes and trade schools. It includes entrepreneurs who prefer the safety of a steady job rather than the riskier (but more profitable) self-employment. It includes those who just entered the bottom rung of a company with high prospects later down the road. With solid wages it rewards people now rather than working for more later. Their gain is our loss because we lose their talent, energy and novelty and replaced with a job anyone could do for less. These are opportunity costs.

Second, when we prevent outsourcing we make things more expensive. While these costs are felt first by companies, they affect us, too. A firm that has to pay more for domestic labor must spend less on other things. (Contrary to conventional wisdom, corporations that save money through outsourcing don’t burn the extra in their backyard.) They can’t pay contractors to remodel, banks to expand, advertisers to advertise. These are opportunity costs.

When economically feasible, outsourcing is good. Without it, the public gets AT&T customer service. With it, the public gets AT&T customer service and something else. It’s not just the economics that back me up, it’s the evidence. For every dollar the US outsources, we get back $1.14 (again, assuming the outsourcing is economically sound—it doesn’t work so well when those with little education are hired to write software).

Want some more facts? Go here. In the meantime I’m waiting for Lou’s retraction.


Chris said...

And outsourcing can work for both the business *and* the employee. I can't remember where I read this (I think on Liberty & Power blog, or maybe Mises blog), but anyways there was a story about a guy who outsourced his own job where he made $65,000 a year to a techie in India and payed him $12,000; which for an Indian is a hefty sum of money. This essentially left the American tech worker (whose boss by the way just assumed he was telecomuting) with $53,000 a year to spend only 30 minutes a day checking the Indian's work for errors and forwarding the programming code to the boss. And even more, the guy says that he is going to get another job and just do the same! Now if that isn't a great example of having outsourcing work for you, then I don't know what is, and Lou Dobbs be damned!

Anonymous said...

Lou Dobbs
Lou dobbs is a man of great insight and has an economics degree from Harvard.He understands the economic theories of smith and ricardo and puts in perspective of the primative period in history in which these theories were drafted.Anyone who thinks outsourcing is good for our country is wrong it will force us to exist as most third world countries do that is no human or environmental rights can exist becouse they might upset comparitive advantage.Unbridled free trade will have only one outcome,a handful of people will control 99 percent of the wealth leaving a tremendous population of workers who earn an extremely small wage.The U.S. through strong past union activity and protectionist economics has raised its standard of living for its middle class.thus creating the worlds largest consumer base.This large pool of purchasers fuels the multinationals profits.Destroy this pool and you have destroyed the world economy.Lou dobbs is right on the mark he is one person who is smart enough not tp beleive the corporate propaganda called free trade.Free trade should be renamed as slavery reinvented.

Jim said...

Lou Dobbs is correct in regard to outsourcing, which has devastated the middle class. The increase in the number of jobs now highly touted by the Whitehouse are very low paying jobs. Decent wages are disappearing rapidly in this country, and will get worse unless something is done.

Lou Dobbs is incorrect in his views on immigrants (legal or otherwise) from Mexico. Most of these folks coming across our southern borders are very desperate people looking for a way to raise their children without starving. We need to be more understanding of their plight - and show a more kindly attitude. And although Lou won't admit it, agriculture cannot function without them.

Anonymous said...

my mommy told me not to talk to strangers.

Anonymous said...

we should outsource our government to india too. why should anything be off limits? no need to be hippocrites now.

i'm outsourcing my children to china. it's really worked out well. i no longer have to clothe them or feed them. the chinese are doing a marvelous job raising my children so that i can focus on my specialization: urinal sanitation.

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