The Washington Post and Outsourcing: Two Wrongs Don't Make a Right

Outsourcing is a big problem. That’s about the only thing The Washington Post got right in its front page story this morning, “Obama struggles to make headway on outsourcing,” that sadly does much to misinform about one of the most important issues confronting the U.S. economy.

Perhaps the president deserved this. His campaign had jumped on an equally misleading Post story last month that accused Mitt Romney’s former private equity firm of investing heavily in U.S. companies that were moving work to lower-wage countries. That story immediately became fodder for a series of Obama campaign ads accusing the GOP presidential challenger of shipping jobs overseas. I presume today’s story was an attempt by the Post to show “balance,” but the result is to leave Post readers more befuddled than ever.

Where to start? The Post stories are absolutely right that outsourcing by multinational corporations poses a huge challenge to the United States. In the Council’s recent Task Force report on U.S. Trade and Investment Policy, on which I served as project co-director along with the Dartmouth economist Matthew Slaughter, we showed the dramatic turn for the worse over the past decade. In the 1990s, U.S.-based multinational companies created 4.4 million jobs in the United States, and 2.7 million jobs in their overseas affiliates – a classic “win-win.” In the 2000s, however, those same companies went on adding another 2.6 million jobs abroad, but eliminated 2.9 million jobs in the United States. The world’s gain became our loss.

That’s a big problem. Not only are these generally better, higher-paying positions, but these are the companies that do more than 70 percent of the private sector R&D in the United States. As jobs in these firms migrate overseas, there are growing worries that research and innovation will follow.

In its Romney story, the Post highlighted Bain Capital’s investments in various companies that expanded call center operations abroad, helped tech companies outsource packaging and hardware assembly, and moved or expanded manufacturing outside the United States. The story was not so much wrong as meaningless – any private equity firm or other large investor in the United States over the past two decades has unavoidably held a stake in firms that were outsourcing. In fact, one could probably say confidently that virtually every American who has owned stock or a mutual fund over that period has, to quote the Post headline, “invested in companies that moved jobs overseas.”

This morning’s story, however, was even worse in quoting a series of “critics” slamming the Obama administration for not enacting remedies that would likely have done nothing to reverse the trend, and could in fact have accelerated it. It focuses heavily on Obama’s repeated call to raise corporate taxes on income earned overseas; some Democrats have been advocating various forms of this proposal for a decade or more. The proposals are complex, but in simple form would make it harder for U.S.-based multinationals to lower taxes by retaining overseas income outside the United States, or shifting profits to lower-tax jurisdictions overseas. CFR.org has an excellent backgrounder on the issue here. The difficulties in enforcing compliance would probably be overwhelming. And if the regime were truly effective, the primary result would likely be to encourage U.S.-based multinationals to reorganize in ways to escape the additional tax burden, probably by moving additional parts of the company offshore.

The other suggestions are even less likely to help. The article quotes various critics saying that Obama should have labeled China “a currency manipulator” which, according to the Post, “could ultimately allow the U.S. government to erect tariffs to protect American industries.” No it couldn’t. In fact, all the statute says is that, by identifying a country as a currency manipulator, the Treasury Secretary is required to "initiate negotiations with such foreign countries on an expedited basis.” Slapping punitive tariffs against China over currency manipulation would almost certainly be a violation of World Trade Organization rules, and would be struck down as such.

The article similarly accuses Obama of embracing “unfettered trade despite its costs to American workers,” citing the administration’s belated support of trade agreements with Colombia, Panama, and South Korea. The first two countries already exported virtually everything to the United States duty-free, so the primary effect of the deals was to open those markets to U.S. exports. And with South Korea, the administration only supported the deal after forcing Seoul to re-write the provisions related to auto trade to meet the concerns of the United Auto Workers, who then backed the agreement.

Perhaps the most egregious distortion in the article is the suggestion that allowing skilled foreign workers into the United States on H-1B visas means that “these foreigners get trained in the United States and then set up competing enterprises when they go home.” Really? Some surely do, but by that logic the United States should kick every foreign student out of U.S. universities because they might acquire skills that allow them to go home and compete with Americans.

While there are legitimate debates over the H-1B program, the notion that it encourages outsourcing is ridiculous. By allowing the best foreign workers into the United States, it means U.S. companies do not need to go abroad to hire top talent. It is far better for the United States to have skilled foreigners working here alongside skilled Americans than to see those operations leave the United States. And if some smart Indians or Chinese go back home and set up businesses, they are likely to build on the contacts they made in the United States, opening up new opportunities for American business even as they may provide new competition.

Finally, it's not even clear that the premise of the article remains correct. The subhead in the print edition notes: "President's record is criticized as jobs keep flowing from U.S." That was certainly the case through 2010, the latest hard data available. But there is growing evidence of at least a slight uptick in manufacturing jobs returning from overseas, in part due to rising wage costs abroad. And as indicated by the recent Airbus announcement of its plans to begin assembling planes in Alabama, the United States is becoming more attractive to foreign investment as well.

The debate over outsourcing deserves better than this, though judging by the thousands of comments on the two Post stories, it is clearly a topic of great interest. It should be. The United States desperately needs to figure out how to do more to expand investment and jobs in a world where other countries are competing aggressively to do the same. Serious newspapers like the Washington Post should be raising the quality of that discussion, not lowering it.