Archives: July, 2012

Bonfire of the Inanities

Don’t get angry because Congress refuses to cut spending.  Don’t be upset that our beloved legislators have abandoned efforts to rein in runaway debt.  Pay no mind to the fact that Congress has left us in the dark about the tax rates we and our employers will face in just six months.  In fact, forget all of the reasons that explain why a whopping 86 percent of the public disapproves of the job Congress is doing.

We’ve got bigger fish to fry. And we can fry them on Harry Reid’s bonfire.

Words can’t express the indignation felt by the Senate majority leader over the U.S. Olympic team’s uniforms being manufactured in China. He wants the uniforms put on a pile and burned.

Look, politicians are as likely to pass up an opportunity to exploit patriotism in an election year as a dog is to remain parched upon the ringing of a nearby bell. But really, what exactly is un-American about Chinese-made Olympic uniforms? It’s quintessentially American. Probably 80 percent of the clothing in 99 percent of American closets is made in China. And the rest is made in other foreign countries. We don’t make clothing in the United States anymore (with a few small exceptions). But we design clothing here. We brand clothing here. We market and retail clothing here.

The apparel industry employs plenty of Americans, just not in the cutting and sewing operations that our parents and grandparents endured, working long hours for low wages. Congressman Steve Israel, citing 600,000 vacant manufacturing jobs (though I’m not sure what that number means), calls the Olympic Committee’s decision to outsource manufacturing uniforms to China “not just outrageous,” but “plain dumb.” Does Mr. Israel realize that the U.S. Olympic team is privately funded, and that the funders—unlike Congress—feel obligated to stay within budget?

Does Mr. Israel actually believe that producing those couple of hundred uniforms in the United States would spark an employment renaissance? How about if Congress decides what the 2013 tax rates will be today, as opposed to tomorrow? That one extra day of certainty would create far more jobs for a longer period than the one- or two-day production run necessary to make those couple hundred uniforms.

If you are still not convinced that our policymakers’ objections are inane, consider this: As our U.S. athletes march around the track at London’s Olympic stadium wearing their Chinese-made uniforms and waving their Chinese-made American flags, the Chinese athletes will have arrived in London by U.S.-made aircraft, been trained on U.S.-designed and -engineered equipment, wearing U.S.-designed and -engineered footwear, having perfected their skills using U.S.-created technology.

Our economic relationship with China, characterized by transnational supply chains and disaggregated production sharing, is more collaborative than competitive. The real competition will be happening in the gyms, pools, and on the fields. Let the games begin.

Roberts Was Against Treating the Mandate as a Tax Before He Was For It

On March 27, during the part of the Obamacare oral argument devoted to the individual mandate, Solicitor General Verrilli said that the Court has an “obligation to construe it as an exercise of the tax power, if it can be upheld on that  basis.”  To that, Chief Justice Roberts responded quite critically, interrupting the solicitor general and asking why then didn’t Congress call it a tax.  The Chief does not seem particularly convinced on this issue, with the SG having a nonsensical answer of “there is nothing I know of that illuminates that.”

Yet, that is the exact issue he later accepted.

Here is the full exchange (from pages 49–50 of the transcript), including the preceding relevant exchange between Justice Kagan and the SG:

JUSTICE KAGAN: I suppose, though, General, one question is whether the determined efforts of Congress not to refer to this as a tax make a difference. I mean, you’re suggesting we should just look to the practical operation. We shouldn’t look at labels. And that seems right, except that here we have a case in which Congress determinedly said this is not a tax, and the question is why should that be irrelevant?

GENERAL VERRILLI: I don’t think that that’s a fair characterization of the actions of Congress here, Justice Kagan. On the—December 23rd, a point of constitutional order was called to, in fact, with respect to this law. The floor sponsor, Senator Baucus, defended it as an exercise of the taxing power. In his response to the point of order, the Senate voted 60 to 39 on that proposition.  The legislative history is replete with members of Congress explaining that this law is constitutional as an exercise of the taxing power. It was attacked as a tax by its opponents. So I don’t think this is a situation where you can say that Congress was avoiding any mention of the tax power.  It would be one thing if Congress explicitly disavowed an exercise of the tax power. But given that it hasn’t done so, it seems to me that it’s—not only is it fair to read this as an exercise of the tax power, but this Court has got an obligation to construe it as an exercise of the tax power, if it can be upheld on that basis.

CHIEF JUSTICE ROBERTS: Why didn’t Congress call it a tax, then?

GENERAL VERRILLI: Well—

CHIEF JUSTICE ROBERTS: You’re telling me they thought of it as a tax, they defended it on the tax power. Why didn’t they say it was a tax?

GENERAL VERRILLI: They might have thought, Your Honor, that calling it a penalty as they did would make it more effective in accomplishing its objective. But it is—in the Internal Revenue Code it is collected by the IRS on April 15th. I don’t think this is a situation in which you can say—

CHIEF JUSTICE ROBERTS: Well, that’s the reason. They thought it might be more effective if they called it a penalty.

GENERAL VERRILLI: Well, I—you know, I don’t—there is nothing that I know of that illuminates that, but certainly…

What a difference a few weeks make.

H/t to a frequent co-author who must remain nameless due to his current occupation.

GOP Freshmen Vote to Move Farm Bill Out of Committee

In the latest example of the so-called “Tea Party Class” of House Republicans not living up to the hype, GOP freshmen on the House Agriculture Committee voted overwhelmingly to approve a bloated $957 billion farm subsidy/welfare bill.

The overall vote was 35-11. Only 4 Republicans voted against it – the rest appear to be Democrats who weren’t happy that the bill doesn’t spend more money on food stamps. Republican freshmen occupy 16 of the 25 GOP seats on the committee. Only 3 out of the 16 voted against the bill.

  • Bob Gibbs (Ohio)
  • Tim Huelskamp (Kansas)
  • Marlin Stutzman (Indiana)

Here are the names of the 13 GOP freshmen who supported it:

  • Austin Scott (Georgia)
  • Scott Tipton (Colorado)
  • Steve Southerland (Florida)
  • Rick Crawford (Arkansas)
  • Martha Roby (Alabama)
  • Scott DeJarlais (Tennessee)
  • Renee Ellmers (North Carolina)
  • Chris Gibson (New York)
  • Randy Hultgren (Illinois)
  • Vicky Hartzler (MO)
  • Robert Schilling (Illinois)
  • Reid Ribble (Wisconsin)
  • Kristi Noem (South Dakota)

The question now is whether the House Republican leadership will allow the bill to come to the floor. According to the Washington Post, Speaker Boehner hasn’t decided:

Agriculture Chairman Frank Lucas, R-Okla., feels the committee did “an awful lot of good work,” Boehner said at a weekly news conference. But “no decisions about it coming to the floor at this point,” Boehner said…“There are some good reforms in this bill. There are other parts of the farm bill that I have concerns with,” Boehner said. He referred to what he said was “a Soviet-style dairy program in America today and one of the proposals in this farm bill would actually make it worse.”

Boehner has voted against farm bills in the past so he’s probably not eager to get this one to the floor, especially since advocates for free markets and limited government rightly consider the bill to be a disaster. But Boehner helped create this dilemma for himself when his Steering Committee gave Frank Lucas the chairman’s gavel after the 2010 elections. As Chris Edwards and I noted in a recent op-ed, Lucas is a big supporter of farm subsidies and takes pride in having been named a “Wheat Champion” by the National Association of Wheat Growers.

Back in December 2010, I wrote that “An indicator of the incoming House Republican majority’s seriousness about cutting spending will be which members the party selects to head the various committees.” Lucas’s chairmanship indicated that when it comes to bloated farm bills, the House leadership wasn’t serious. If this bill is allowed to reach the floor, any doubts will have been erased.

H/T Justice Clarence Thomas

It’s now been two weeks since the landmark decision upholding Obamacare.  Most of the attention has, understandably, been on Chief Justice John Roberts since he turned out to be the pivotal vote in the 5-4 split on the Supreme Court.  Still, for anyone who takes seriously the fact that the Constitution established a federal government of limited and enumerated powers, there is one Supreme Court Justice that consistently stands head and shoulders above the rest–and that’s Clarence Thomas.

Thomas’s opinion in the Obamacare case was quite short–just a few paragraphs–and that’s because he previously filed a lengthy opinion in the landmark Lopez ruling in 1995, the first ruling in some 60 years where the Supreme Court finally applied the brakes to federal laws that were based upon a boundless reading of the commerce clause.  Thomas explained how the federal government had assumed vast powers under the commerce clause that were inconsistent with the original understanding of the Constitution.  After having explained his view at length, Thomas now files only terse opinions that refer readers back to what he said in the Lopez case.

In 2010, for example, when the Supremes upheld a federal criminal law against a constitutional challenge, Thomas said the Court’s majority  ”genuflects” to the doctrine of enumerated powers but then “endorses the precise abuse of power that Article I is designed to prevent–the use of a limited grant of authority as a ‘pretext … for the accomplishment of objects not intrusted to the government.’”   The other justices tend to ignore Thomas’s reasoning.  They satisfy themselves with a bland … “Our precedents about the commerce clause say it is a very broad power, etc etc”

Thomas rarely asks questions during the Court’s oral arguments.  He prefers to stay out of the spotlight and let his written opinions speak for themselves.  And because his views are clearly articulated, everyone (academics, reporters, Supreme Court advocates) knows where he stands, so they focus on the “swing vote” and speculate about which direction some justice will ”swing.”

Be that as it may, let’s not take Justice Thomas for granted.  He regularly calls out the Emperor for not having any clothes. Since one can safely assume that George H.W. Bush did not plan that out (his other selection to the Supreme Court was David Souter, after all), luck was in play.

For more on the Obamacare ruling, go here.  For a good book about Clarence Thomas’s views, go here.  If you’re not ready for a book, do check out Thomas’s opinions in these cases:  Lopez (1995), Morrison (2000), Sabri (2004) Raich (2005), and Comstock (2010).  David Bernstein has some related thoughts here.

Class Size, Dropouts, & the Windy Atlantic

In Monday’s Wall Street Journal, I argued that America has too many public school employees, and has wasted those employees’ talents on a mass scale. Jordan Weissmann, an associate editor with The Atlantic, disagrees, accusing me of running “roughshod over a lot of important nuance.” As it happens, no nuances were injured in the composition of my piece.

Let’s consider Mr. Weissmann’s cruelty-to-nuance claims in turn. First, he feels that I ignored “significant evidence that smaller classrooms do indeed improve student performance,” citing two sources. The first source is an unsigned web-page by the “Center for Public Education” that is so biased in its selective coverage as to not be worth serious consideration. The second is a scholarly paper by Alan Krueger, author of one of the two best-known literature reviews of the subject.

What Weissmann doesn’t mention is the work of Eric Hanushek, author of the other best known literature review on class size. Krueger contends that class size reduction is usually educationally beneficial and cost effective, Hanushek argues the contrary on both points. It’s easy to compare their evidence and arguments because both contributed at length to the book: The Class Size Debate, published by the left-of-center Economic Policy Institute. It is a testament to how comfortable Hanushek is with the strength of his case vis-à-vis Krueger’s that he links to a full .pdf of that book from his own web pages at Stanford University. I understand why. When Hanushek looked at the most methodologically sound estimates—those that measure changes in student performance over time instead of at just a single point in time—he found that 89% show either no statistically significant advantage or a significant negative effect to smaller classes. To arrive at his opposing conclusion, Krueger had to, among other things, overweight the lower quality studies.

Hanushek’s conclusion is also more consistent than Krueger’s with the national U.S. data. The average American classroom has gotten substantially smaller over the past 40 years (by about 7 students) but achievement at the end of high-school is essentially flat. The only way to counter this evidence is to claim—usually without systematic basis—that children must be so much more difficult to teach today that the gains we would have seen from smaller classes have been eclipsed by this reduced “teachability.” The only systematic study of “teachability” trends of which I am aware does not support that claim—finding net “teachability” to have been mostly flat over time, with some improvement in the past decade.

Hanushek’s conclusion has also been supported by new, large-scale research, published after his and Krueger’s reviews. Harvard researchers Antonio Wendland and Matthew Chingos reported in 2010 that Florida’s state-wide class size reduction had “no discernible impact upon student achievement,” but has so far cost the state roughly $28 billion.

Some journalists are aware of the evidence that smaller classes generally do not improve outcomes. Consider, for example, this bit of reporting from last December:

Think of the ingredients that make for a good school. Small classes. Well-educated teachers. Plenty of funding. Combine, mix well, then bake. Turns out, your recipe would be horribly wrong, at least according to a new working paper out of Harvard…. The study comes courtesy of economist Roland Fryer, an academic heavyweight who was handed a MacArthur Foundation “genius award” earlier this year…. Fryer found that class size, per-pupil spending, and the number of teachers with certifications or advanced degrees had nothing to do with student test scores in language and math.

In fact, schools that poured in more resources actually got worse results.

Who is the astute journalist who wrote these words and from whom Jordan Weissmann could learn a few lessons? You guessed it… it was Jordan Weissmann, writing just seven months ago. How soon we forget.

Next, Weissmann claims that “dropout rates, for instance, have fallen by almost half since the 1970s.” Presumably he is unaware that this statement and the table he cites in support of it do not reflect reality. The “dropout rates” published in that NCES table are statistical fabrications of the nation’s education bureaucrats, looking to placate the public with the help of the remarkably credulous education media. You needn’t take my word for it. That is the finding of the left-leaning, Nobel-prize-winning, cited-by-President-Obama-with-approbation economist James Heckman. Heckman’s 2007 study, with Paul LaFontaine, is still the definitive work on the subject (though it was not the first to report the truth). Here is what Heckman and LaFontaine established through a painstaking analysis of the nation’s graduation data:

(a) the true high school graduation rate is substantially lower than the official rate issued by the National Center for Educational Statistics [the one cited by Weissmann]; (b) it has been declining over the past 40 years; (c) majority/minority graduation rate differentials are substantial and have not converged over the past 35 years; (d) the decline in high school graduation rates occurs among native populations and is not solely a consequence of increasing proportions of immigrants and minorities in American society;

They also note that the post-NCLB uptick in graduation rates probably does not imply a genuine improvement in educational outcomes:

NCLB gives schools strong incentives to raise graduation rates by any means possible. When monitoring was implemented in 2002, minority retention [a.k.a. “flunking”] dropped sharply and graduation rates turned upward, especially for minority groups. A similar pattern is observed following the publication of A Nation at Risk. Whether these represent real gains or are an indication of schools cheating the system in the face of political pressure remains an open question for future research, although the timing suggests strategic behavior [i.e., “cheating”].

The italics and the text in square brackets in the above quotations are mine.

The fact that public school systems report falsely rosy “dropout rates” is not a secret. Anyone who spends 60 seconds on Google will discover it. It’s even been reported in such popular media outlets as… Mr. Weissmann’s employer, The Atlantic. That page on the Atlantic’s website actually links to the very same Heckman and LaFontaine study I link to above. Heck, it’s even been mentioned in The New York Times (though they’ve managed to protect their most die-hard readers from cognitive dissonance by restricting coverage of these findings to David Brooks’ column).

Weissmann wraps up his blog post with a foray into the art of mind-reading:

I doubt Coulson truly believes we really have too many teachers in this country. He hints at so much in his last paragraph, writing, “While America may have too many teachers, the greater problem is that our state schools have squandered their talents on a mass scale.” Why the hedge? My guess is….

Kudos to any readers who correctly predicted that both Mr. Weissmann’s belief and his guess were wrong. The reason that I can make no certain statement about the ideal size of the U.S. education labor force is that no one can predict the allocation of human and capital resources that will occur in future in a free market. That said, there is reason to expect fewer teachers will be required under market conditions since our public school monopolies have been on a hiring spree 11 times faster than enrollment growth for forty years. Moreover, on-line learning and educational software options are only getting better and more numerous, and this should lessen demand for classroom teachers. Against those forces we have to consider that families may choose to invest some of the resulting savings from employing fewer classroom teachers in one-on-one tutoring, which is generally accepted as highly effective if, at present, too expensive to be much used.

One thing I can say with some certainty, based on the world-wide research literature comparing different sorts of school systems within countries, is that whatever particular allocation of teachers and capital resources the market arrives at will be more efficient than the gross, unproductive staffing bloat that has been perpetrated by state schooling. And, as I explained in that linked study, the existing small niche of non-profit private schools in the United States does not constitute a free education marketplace. A further explanation of the difference, should anyone find it necessary, can be found in this piece by economist John Merrifield.

To quickly correct some of Weissmann’s remaining errors: I am on record as not faulting teachers’ unions as the cause of our nation’s education woes. Their predations (e.g., contributing to the system’s demonstrably unproductive employment bloat) are a symptom, not the disease. And while some public school teachers are obviously overpaid, others have been equally obviously underpaid. The problem with public school teachers’ salaries at present is that they are allocated based on time-served and credentials (neither of which is consistently related to student achievement) rather than performance. Markets tend to compensate employees based on performance and so this problem, too, will likely be solved by liberalizing America’s education sector through programs like K-12 education tax credits.

This is probably all the time I will have to debunk the various flawed criticisms that were offered in response to my WSJ piece, so I thank Mr. Weissmann for conveniently collecting most of them in one place.

Dematerialization (update)

On June 29, I posted a blog about dematerialization. I used the iPhone as an example of a technological improvement that enables increased output and resource conservation at the same time. I asked the readers of Cato@Liberty to tell me about additional gadgets and physical things (as opposed to services) that they no longer need thanks to their iPhones. Many have written and we have adapted our graphic accordingly. Please share it widely.

Outsourcing for Dummies (Including the Willfully Ignorant)

In an era of misinformation overload, it is disheartening to see the Washington Post perpetuating the ignorance surrounding the issue of outsourcing. To be sure, in addressing the topic in Tuesday’s paper, writers Tom Hamburger, Carol D. Leonnig, and Zachary A. Goldfarb were merely presenting the case of Obama’s critics “primarily on the political left,” who claim the president has failed to make good on his promises to curtail the “shipping of jobs overseas.” That conclusion may be accurate. But the article’s regurgitation of myths about outsourcing and trade, peddled by those who benefit from restricting it, gives readers a parochial perspective that leaves them confused and uninformed about the manifestations, causes, consequences, benefits, and costs of outsourcing.

Outsourcing is a politically-charged term for U.S. direct investment abroad. Although the large majority of that investment goes to rich countries, the Post article claims that “American jobs have been shifting to low-wage countries for years, and the trend has continued during Obama’s presidency.” While that may be factually true, the numbers are likely fairly small. Many more jobs have been lost to the adoption of more productive manufacturing techniques and new technologies that require less labor. And we, overall, are much wealthier for it.

The article attributes 450,000 U.S. job losses to imports from China between 2008 and 2010 – a figure plucked from an “economic model” at the Economic Policy Institute that has been criticized by everyone in Washington but Chuck Schumer and Sherrod Brown. That estimate is the product of simplistic, inaccurate assumptions equating the value of exports and imports to set numbers of jobs created and destroyed, respectively, as if there were a linear relationship between the variables and as if imports didn’t create any U.S. jobs in, say, port operations, logistics, warehousing, retailing, designing, engineering, manufacturing, lawyering, accounting, etc. But imports do support jobs up and down the supply chain. Yet, so blindly committed are EPI’s stalwarts to the proposition that imports kill U.S. jobs that they even suggest that the number of job losses would have been greater than 450,000 had the U.S. economic slowdown not reduced demand for imports. In that tortured logic, the economic slowdown saved or created U.S. jobs. But I digress.

Contrary to the misconceptions so often reinforced in the media, outsourcing is not the product of U.S. businesses chasing low wages or weak environmental and labor standards abroad. Businesses are concerned about the entire cost of production, from product conception to consumption. Foreign wages and standards are but a few of the numerous considerations that factor into the ultimate investment and production decision. Those critical considerations include: the quality and skills of the work force; access to ports, rail, and other infrastructure; proximity of production location to the next phase in the supply chain or to the final market; time-to-market; the size of nearby markets; the overall economic environment in the host country or region; the political climate; the risk of asset expropriation; the regulatory environment; taxes; and the dependability of the rule of law, to name some.

The imperative of business is not to maximize national employment, but to maximize profits.  Business is thus concerned with minimizing total costs, not wages, and that is why those several factors are all among the crucial determinants of investment and production decisions. Locales with low wages and lax standards tend to be expensive places to produce all but the most rudimentary goods because, typically, those environments are associated with low labor productivity and other economic, political, and structural impediments to operating smooth, cost-effective supply chains. Most of those crucial considerations favor investment in rich countries over poor.

Indeed, if low wages and lax standards were the real draw, then U.S. investment outflows wouldn’t be so heavily concentrated in rich countries. According to statistics published by the Bureau of Economic Analysis, 75 percent of the $4.1 trillion stock of U.S. direct investment abroad at the end of 2011 was in Europe, Canada, Japan, Singapore, Australia, New Zealand, Taiwan, Korea, and Hong Kong (i.e., rich countries). In contrast, only 1.3 percent of total U.S. foreign direct investment stock is in China.

Likewise, if wages and lax standards were magnets for investment, we wouldn’t see the vast sums of foreign direct investment in the United States that we do, and the United States wouldn’t be the world’s most prolific manufacturing nation. At the end of 2010, foreign direct investment in the United States totaled over $2.3 trillion, one third of which was invested in U.S. manufacturing facilities. As the president and his critics (including candidate Romney) drone on about the ravages of “shipping jobs overseas,” they should take a moment to note that 5.3 million Americans work for U.S. subsidiaries of foreign companies (jobs “outsourced” from other countries). And they should note that Europe’s Airbus announced last week that it is making a $600 million investment in a 1000-worker aircraft assembly plant in Mobile, Alabama, just down the road from the $5 billion, 1800-worker steel production facility belonging to Germany’s Thyssen-Krupp, which is located within a few hours’ drive of a dozen mostly foreign nameplate auto producers, who employ tens of thousands more U.S. workers and generate economic activity supporting thousands more. These investments, jobs, and related activity are the products of foreign companies outsourcing.

Why do these foreign companies come to American shores to produce instead of producing at home and exporting? Because each company has determined that it makes sense from an aggregate comparative cost perspective. They’re not here because of low wages or lax enforcement of labor and environmental standards, but because all of the factors affecting cost that each company uniquely considers, weigh – in the aggregate – in favor of investing here. One very important factor for a growing number of companies is proximity to market. Shipping products long distances can be costly, particularly for time-sensitive products and parts. And having a productive presence in your largest or fastest growing market is a factor that carries significant weight.  Exporting is not always the best way to serve foreign demand.

But outsourcing has been stigmatized as a process whereby U.S. factories are disassembled rafter-by-rafter, machine-by-machine, bolt-by-bolt and then reassembled in some foreign location for the purpose of producing goods for sale back in the United States. There may be a few instances where that accurately depicts what took place, but it is simply inaccurate to generalize from those cases. According to the BEA research described in these two papers (Griswold and Slaughter), between 90 and 93 percent of U.S. outsourcing – investment abroad – is for the purpose of serving foreign demand. Only between 7 and 10 percent of that investment is for the purpose of making sales back to the United States.

In 2009, U.S. multinationals sold over $6 trillion worth of goods and services in the foreign countries in which they operate, which was nearly quadruple the value of all U.S. exports that year. Outsourcing helps make U.S. multinational corporations more competitive, and the profits they earn abroad (even if they’re not repatriated) underwrite investment and hiring by the parent companies in the United States. Typically, the U.S. companies that are investing abroad are the same companies that are investing in the United States for reasons that include the fact that U.S. MNC investment abroad tends to spur complementary investment and hiring in the U.S. parent operations.

The capacity to outsource also serves another crucial, underappreciated function: to safeguard against bad U.S. policy. Like tax competition, outsourcing provides alternatives for businesses, which help discipline sub-optimal or punitive government policy. Because of globalization and outsourcing, businesses can choose to produce and operate in other countries, where the economic and political environments may be more favorable. As more and more companies undertake these comparative aggregate cost-of-doing-business assessments, governments will have to think long and hard about their policies.

Governments are now competing with each other to attract the financial, physical, and human capital necessary to nourish high value-added, innovation-driven, 21st century economies.  Restricting or taxing outsourcing as a means of trapping that investment wouldn’t be prudent.  It would render U.S.businesses less competitive, and ultimately reduce employment, compensation, and economic activity. In this globalized economy, policymakers cannot compel investment, production, and hiring through threat or mandate without killing the golden goose.  But they can incentive U.S.companies to return some operations stateside and foreign firms to invest more here by adopting and maintaining favorable policies.

According to the results of a survey of over 13,000 business executives worldwide published in the World Economic Forum’s Global Competitiveness Report 2011/12, there are 57 countries with less burdensome regulations than the United States. That same survey found that business executives are increasingly concerned about crony capitalism in the United States, ranking the U.S. 50th out of 142 economies in terms of the government’s ability to keep an arms-length relationship with the private sector.  Then consider the fact that the United States has the highest corporate tax rate among all OECD countries. Add to that the prevalence of frivolous lawsuits, political uncertainty, out-of-control government spending, the dearth of skilled workers, uncertainty about the tax burden come 2013, and it starts to become clear why U.S. companies might consider investing and producing abroad.  But policymakers can improve policy – in theory, at least.

It boils down to this. About 95 percent of the world’s consumers and workers live outside the United States. We live in a world where U.S. companies have much more competition on the supply side, much greater opportunity on the demand side, and far greater potential for tapping into a global division of labor (i.e., collaborating across borders in production) than 50, 20, even 5 years ago. After a very long slumber, the rest of the world has come on-line.  We should embrace, not curse, that development.

In a globalized economy, outsourcing is a natural consequence of competition.  And policy competition is the natural consequence of outsourcing.  Let’s encourage this process.