JUNE 30, 2003

By Christopher Kenton

Outsourcing: The Word on the Hill

I received an education -- and I hope lawmakers did, too -- when I explained the reasons for hiring an offshore programmer

I've just returned from Washington after testifying before the House Committee on Small Business on the topic of offshore outsourcing and the potential loss of white-collar jobs overseas. I accepted the invitation as a valuable civics lesson on the shaping of trade policy in Congress, but also as a challenge to crystallize my own position on the increasingly controversial topic.

When I wrote the first column detailing my own experience outsourcing a project overseas, I was simply sharing a business anecdote (see BW Online, 4/11/03, "The Woman Behind the Code"). I was (naively) unaware of the backlash that would follow from American workers whose jobs are threatened by the trend toward outsourcing by large corporations (see BW Online, 4/11/03, "Grasping, Greedy, Unpatriotic? Not Me"). In the following weeks, I spent a lot of time thinking and writing about the issue from my perspective as a small-business owner, and I received a lot of feedback from readers offering their own experiences and impressions (see BW Small Business Mailbox, "Kenton in the Crosshairs"). But when the invitation came to go to Washington, it forced me to face the bottom-line question: "So, what do you propose we do about it?"

PHOENIX OF INNOVATION. In preparing my testimony I had to make the shift from striving for objectivity while considering the issues to making concrete -- and concise -- suggestions for addressing the problems. You can read my five-minute testimony and judge the results for yourself, but the main points follow (see BW Online, 6/30/03, "What I Told the Committee").

The factors that have led to the current trend toward overseas outsourcing -- the pressure to cut costs, the advancement of a global communications infrastructure -- will not be eliminated through trade policy. Even as we consider new measures to address the loss of American jobs, thousands of engineers are working on new technologies that will enable a whole new wave of streamlining, cost-cutting, and automation. This is the proverbial "creative destruction" -- to use the term coined by Austrian economist Joseph Schumpeter -- innovation's habit of continually overturning markets. It's a fundamental property of capitalism. Simply put, we would never enjoy such a high standard of living without enduring the hardship that comes with change and innovation.

We need to be very careful about enacting regulations to prevent the fallout of creative destruction. Too often, when we try, we cause more harm than good through expensive and ineffective policies that prompt waves of unintended consequences. In order to avoid those unintended consequences, we need to clearly identify and debate the principles that would inform any new trade regulation.

A FAIRER WORLD. I suggest that the primary principle is that trade policy be used to increase parity in the living standards of competing nations, rather than to shield our own standard of living from encroachment. There are a number of ways foreign governments artificially reduce the cost of labor -- manipulation of currency rates, suppression of worker rights, and elimination of environmental regulation -- that also reduce foreign workers' living standards. I think it's far preferable to use U.S. influence to reduce and eliminate those differences overseas rather than to penalize American companies for using offshore labor.

The first reason is because penalizing American businesses does nothing to solve the underlying problem. The second, because foreign businesses will simply gain a competitive advantage through access to cheap labor that we can't tap. And the third, because it's simply the right attitude for a world leader like the U.S. to take.

The second principle that should inform any new regulation is a distinction between the use of outsourcing among large and small businesses. While large companies may outsource overseas to improve operational efficiency, small businesses do so to create new products that would otherwise require expensive capital investment. Small businesses provide much of the energy and growth in our economy. It would be self-defeating to stifle their opportunities to innovate and create jobs.

While these were the ideas I covered in my testimony, I also learned a few things from the other speakers. Bruce Mehlman, the Assistant Commerce Secretary for Technology Policy, pointed out that the creative ability to invent technology is what makes America so unique, not the production of technology. From a policy standpoint, then, we should focus on safeguarding the ability and opportunity to innovate -- not only from perceived foreign threats, but from the domestic threat of regulatory policies designed to protect against the necessary fallout of innovation.

EASE THE PAIN? John Challenger, of the outplacement firm Challenger, Gray, & Christmas, spoke about workers' between-jobs transitions in an environment of increasing change, and also about the need for effective education and training. This suggests what may be the most polarizing principle of all. Is it better for the government to establish regulatory policy to protect jobs and the status quo? Or is it better for the government to let creative destruction run its course, and to establish policies that provide support to workers in transition? I'm curious to hear what you think is the more appropriate role of government in a capitalist economy. And don't forget, regulations come with a substantial cost of administration. How should that money really be spent?

Now that I'm leaving Washington behind, I'm glad to have had the experience of testifying. Witnessing, if only for a moment, the endless, grinding process that shapes has changed the way I think about my responsibility to my business and my industry. I'm often cynical about the productivity of government, but it's somehow heartening to know there's a place where an army of people battle every day over the most fundamental question of them all when things are changing: What are we going to do about it?