Who's the bigger outsourcer, Mitt Romney or Barack Obama? To judge by their spooky television ads, being an outsourcer is right up there with letting Willie Horton out on furlough. Romney says Obama's stimulus package spent billions helping foreign companies, and Obama says Romney practically invented the notion of shifting jobs overseas. Lately, it seems like this question is being asked by a lot of people who don't really care what the term "outsourcing" actually means. Outsourcing isn't all bad, as both candidates surely know -- but dare not say. In their lines of work, outsourcing is also pretty hard to avoid.
Outsourcing is a straightforward principle: Paying someone else to do something you could do yourself. For a company, outsourcing could mean contracting a janitorial service instead of hiring its own janitor. For you and me, outsourcing is as simple as going out to dinner; it's just paying someone else to do the night's cooking and serving.
As the decision-maker in your business or household, you might outsource a job because you don't have the time to do it, or because having someone else do it turns out to be cheaper. You might even outsource a job when doing it in-house would actually be less expensive, if someone else can do it much better.
This kind of outsourcing is often beneficial for both companies and consumers. In theory, it should lower prices, improve quality, take advantage of market efficiencies, and free up resources for other investments. Of course, outsourcing can also have more sinister ends. Sometimes companies are accused of outsourcing because they don't want to pay for staff benefits, or because they want to avoid unionized workers. In other cases, quality may suffer. In the past several years, some companies that used manufacturers in China later had reason to regret their decision.
Yet the biggest economic effect of outsourcing may be to encourage specialization. Why should you do your taxes when an employee of a professional accounting firm can? Who better to take care of your lawn than a professional gardener? One consequence of this specialization, however, is that the world may need fewer accountants and gardeners. In the accounting industry, for instance, a smaller number of highly efficient accountants would do all the work that is currently spread across in-house staff of varying abilities in all the world's companies.
Does that mean outsourcing destroys jobs? If you're a lousy, expensive, or under-utilized accountant, then yes, your job might disappear. But this is just the economy's way of telling you that your labor might be used more efficiently in another occupation. Unfortunately, it takes time to retrain and start over in a new job, and that's where the political problems begin. In the United States, there is no broadly effective mechanism for helping people make this transition. Not surprisingly, then, the kind of outsourcing that draws the harshest criticism is when companies lay off staff in their home countries and transfer their functions to foreign workers. But even this is somewhat misleading. Transferring jobs overseas is a form of "off-shoring," but it isn't necessarily outsourcing; the new foreign workers may still be part of the same company's overseas operations.
When Mitt Romney worked at Bain Capital, outsourcing was undoubtedly an important part of his business, and this should not come as a surprise to anyone. Bain Capital is a private equity firm that buys and sells companies. After a private equity firm purchases a company, it usually tries to improve the management in order to raise the company's value. Here, outsourcing may be a useful tool, especially for trimming payrolls and cutting costs. Often, this means eliminating some jobs or sending them overseas. But Bain Capital typically sold its investments after five to seven years, so the charge that Romney was after a fast and easy buck at the expense of employees isn't necessarily a fair one.