Voters in Massachusetts, Georgia, Illinois, and elsewhere are being treated to a little 2012 redux, as desperate candidates try to paint their opponents with last election's popular pejorative: "Outsourcer!" You may recall the accusations exchanged between President Obama and Mitt Romney two years ago, as each sought to portray the other as more guilty of perpetuating the "scourge" of outsourcing. At the time, I faulted Romney for running away from what I thought was his responsibility (as the businessman in the race) to explain why companies outsource in the first place, and how doing so benefits the economy and leads to better public policies. Had he done so, his explanation might have sounded something like this.
For many people, the term outsourcing evokes factories shuttering in the industrial midwest only to be ressurrected in Mexico or China to produce the exact same output for export back to the United States. While a popular image of outsourcing, that particular rationale -- to produce for export back to the United States -- accounts for less than 10 percent of the value of U.S. direct investment abroad (as this paper describes in some detail). Over 90 percent of outward FDI is for the purpose of serving foreign goods and services markets and for performing value-added activities in conjunction with transnational production and supply chains. In most industries, it is difficult to succeed in foreign markets without some presence in those markets. And without success in foreign markets (where 95% of the world's consumer's reside), it is more difficult to succeed at home.
So, does "outsourcing" really deserve its bad reputation? Does it really hurt the U.S. economy? Well, the U.S. Bureau of Economic Analysis collects and compiles the kinds of data that can help us begin to answer these questions, including data about inward and outward foreign direct investment, and the activities of U.S. multinational corporations -- both U.S. parents companies and their foreign subsidiaries. The scatterplots presented below reflect the relationships between annual changes in various performance metrics (value added, capital expenditures, R&D expenditures, sales revenues, employment, and compensation per employee) experienced by U.S. parent companies and their foreign affiliates. Each point on each plot represents a combination of the annual percent change for the affiliate (horizontal axis) and the parent (vertical axis) in a given year.
If a foreign hire comes at the expense of a U.S. job, if ramping up production abroad means curtailing output at home, if a $100 million investment in a new production line or research center abroad means that plans for a new line or center in the United States get scrapped, if foreign outsourcing is as bad as its critics suggest, then we should expect to see an inverse relationship (at least not a direct or positive relationship) between the economic activities at U.S. parents and their foreign affiliates. We should expect to see most of the points in the upper-left or lower-right quadrants of the plots below.
The first plot shows annual changes in value added. The prevalance of observations in the upper-right quadrant indicates that in most years, value-added increased at foreign affiliates and their U.S. parents simultaneously, suggesting that U.S. and foreign activities of U.S. multinational are complements, not substitutes. That might be counterintuitive for some, but those more familiar with how multinational corporations operate can probably appreciate that production and sales activity on the foreign affiliates end often requires support from the parent company with respect to the provision of goods, supply chain logistics, finance, accounting, public relations, and various administrative functions. Increased activity abroad necessitates increased activity at home. Granted, the slope of the line running through those points is less than 45 degrees, which suggests slightly less than a one percent increase in value added at U.S. parents for every one percent increase of value added at their foreign affiliates. But this picture clearly refutes the notion of a zero-sum game, as value added increased for one group and decreased for the other in only 4 or 15 years.
The concern that U.S. MNC investment in factories or research centers abroad diverts investment from their U.S. operations should be put to rest by the data in the capital expenditures chart below. The positive relationship between capital expenditures abroad and at home is very strong, moving in the same direction for 12 of 15 years at approximately the same rate (the slope of the line is about 45%).
Claims that outsourcing drains research and development dollars and activities from the United States get a little bit of support from the data below (6 years showing an inverse relationship and a slope suggesting a ratio of about a 5 percent increase at foreign affiliates for every one percent increase at parents). However, in 9 of 15 years, R&D expenditures increased at both affiliates and parents, suggesting that research and development spending is also complementary.
In 13 of 15 years, annual changes in sales revenue moved in the same direction -- and positively for both affiliates and parents in 12 of those 13 years. These data suggest that sales by affiliates do not come at the expense of parents' sales.
The idea that outsourcing amounts to "shipping jobs overseas" is not well supported by the employment figures, which indicate that in 9 of 15 years, employment changes moved in the same direction at parents and affiliates.
Finally, the compensation data also fail to support the negative characterizations associated with outsourcing. In 10 of 15 years, changes in the amount of compensation per worker moved in the same direction and, in fact, never once showed a decrease at U.S. parents.
Certainly, there are more data to consider and more layers of analysis to perform, but the metrics considered here suggest a lack of merit to to the adverse connections politicians, in particular, make between outsourcing and domestic economic conditions.
With the newspapers full of crises, it can be hard to maintain a proper perspective on the progress humanity has made, and to remember that there are individuals striving every day to make the world a better place. In a recent interview, businessman and philanthropist Bill Gates discussed the improving state of humanity, and the work that he is doing through private charity to help those in need. He said,
I think the idea that people are worried about problems, like climate change or terrorism or these challenges of the future, that’s okay. But boy, they really lose perspective of what’s happened over the last few hundred years. And how science and innovation have been a central factor of that. And I think that’s too bad, because people are lucky to live now. And they should see that progress is actually taking place faster during their lives than at any time in history.
One of the major initiatives of the Gates Foundation, for example, aims to eliminate polio. The data bear out how much progress has already been made towards that end:
In 1980, about half of all children received the polio vaccine. Today, around 90% of children receive the vaccine, and eradication of the condition is in sight – just as people eradicated smallpox in 1979.
Gates is also among the many caring individuals working to eliminate malaria and malnutrition, areas where humanity has already made great strides. Insecticide-treated mosquito nets, for example, protect more children from malaria in Sub-Saharan Africa:
Malnutrition among children is also declining. In populous developing regions, such as East Asia and the Pacific, malnutrition affected about 20% of children in 1990. More must be done, but today malnutrition affects fewer than 6% of children in those areas.
Even one child afflicted by polio, malaria, or malnutrition is too many, but the dramatic improvements the world has made on these fronts should be celebrated. Like Gates, while working to make the world better we must not lose a proper perspective on the progress humankind has already made.
Social Security Disability Insurance (SSDI) provides benefits to 11 million individuals, costing $140 billion annually. Its trust fund will become insolvent by 2016, so policymakers have little time to reform the system.
Funding is not the only issue facing the program. A new report from the Washington Post highlights the long list of disability cases waiting to be adjudicated.
Individuals apply to the Social Security Administration (SSA) to claim disability benefits. The file is reviewed by an administrator who makes an initial ruling, with 32 percent of applicants qualifying. Individuals who are denied can appeal the ruling. Eleven percent of appeals are approved for benefits. More than 633,000 individuals are waiting on initial claims with 170,000 waiting on appeal.
An individual’s second appeal goes to one of SSA’s 1,445 judges, whom are tasked with more than 990,000 individuals waiting on appeals. The average wait for a hearing is longer than a year.
The backlog for a hearing before an appeals judge is not new. It started during the Gerald Ford administration and SSA has never caught up. The agency tried various tactics to solve the problem, but nothing seemed to work.
Several years ago, the SSA tried a different approach. The SSA pressured judges to decide 500 cases annually, but that led to a different problem.
The Washington Post explained:
The problem was rooted in a flaw in the system. Judges complain that saying “yes” is a lot easier — and faster — than saying “no.” A negative decision often requires a lengthier write-up, which goes through all the different ailments that might have rendered this person disabled. That means 10 pages of text to prepare for a future appeal. A “yes” decision is rarely appealed. So, they say, it takes less writing.
“So, what happens when you’re pressed for time? You end up paying [approving] cases,” said Thomas Snook, a judge who has worked in the Miami office for 17 years and has been active in the judges union.
Snook is not the only judge that felt the pressure. The Washington Post notes “across the system, judges approved more than half of the cases they saw — up to 62 percent, according to Social Security’s figures. Congressional investigators found 92 judges were even more generous: They had been saying yes to 90 percent of their appeals.”
SSA acknowledged the incentives faced by judges and tweaked their requirements. The Washington Post said:
Today, Social Security officials seem to have backed off their push for faster decisions. They’ve now limited all judges to 720 cases a year and imposed new checks to make sure the “yes” decisions are as well thought-out as the “noes.”
Today, judges approve just 44 percent of cases, a marked decline. At the same time — even as the agency has hired dozens more judges — the backlog has reached its highest level in history. It increased by 13,000 people in the first half of this month alone.
SSDI blames the backlog on less funding over the last few years, last year’s government shutdown, and a large increase in applicants due to the weak economy.
But with a backlog since 1975, there are much larger issues: SSDI is suffering from decades of missteps.
SSDI is ripe for reform and spending cuts. Good intentions from federal policymakers led to bureaucratic headaches and years of waiting. Slashing requirements and reorganizing the program will allow funds to be dedicated to the truly needy.
The recent story of a Liberian man in Dallas who had Ebola sparked a political conflagration around travel restrictions for countries where there are Ebola cases. The virus does not appear to have spread from him to anyone that did not come into direct contact with him in the Dallas hospital.
Many are arguing that his arrival in the United States means that all travel from the affected West African countries should be shut immediately. Others are arguing that travel should remain as open as it currently is – which is still heavily restricted.
What happened to policy responses on the margin?
Fortunately, the federal government took a marginal action yesterday. Fliers from Guinea, Liberia, and Sierra Leone will have to enter through one of five ports of entry and undergo an interview as well as a temperature check once they arrive in the United States. These restrictions are far less than the total ban sought by some folks and still more restricted than the current system These checks do not interrupt the flow of aid to these West African countries either and will affect roughly 150 travelers per day.
Immigration or movement restrictions for legitimate health concerns are proper and already written into law. Travel restrictions to contain viruses different than Ebola have not been successful in the past. Ebola is far less communicable than the flu so the comparison to previous travel bans might not be appropriate.
Americans have a very low chance of contracting Ebola while in the United States, let alone dying from it. The only person to die from Ebola in the United States contracted it in Liberia. I took a bigger risk of dying from a traffic accident this morning commuting to the office than I will ever face from Ebola.
More Americans are killed every year from their furniture than all Americans who have died from that dreaded hemorrhagic fever.
Those Americans who worry about Ebola focus on the freakishly high death rates for those who contract the virus – 50 percent for most strains of the virus (only 20 percent of Americans who have contracted Ebola have died.) But the death rate is not the most important figure; the chance of contracting the virus in the first place is the most important factor.
So far, two American nurses who treated the Liberian man contracted Ebola from him. Both nurses are recovering. For the rest of us, that means the chances of contracting Ebola is about zero. No matter the death rate, a zero chance of contracting the disease means we will not die from it.
Still, a few marginal precautions, like those put in place by the federal government, will impose a very small temporary cost and likely stop any future Ebola patients from coming to the United States on a commercial flight.
America accounts for nearly 40 percent of globe’s military outlays, but Washington hawks believe that the federal government never spends enough on the Pentagon. The United States should scale back its international responsibilities and cut Pentagon outlays accordingly.
Military expenditures are the price of Washington’s foreign policy. And the cost is high—about $627 billion budgeted this year, before counting extra expenditures for the latest Mideast war.
The war lobby minimizes the magnitude of America’s military spending through statistical legerdemain: real outlays have been falling and account for a lower percentage of GDP.
But the United States leads the world in military spending and is allied with every major industrialized state save China and Russia. America and its allies collectively account for two-thirds of the globe’s military expenditures.
While Washington’s inflation-adjusted outlays have recently dropped, they previously rose significantly—almost 165 percent between 1998 and 2011. It is only natural for expenditures to fall as Washington wound down two wars.
Moreover, the percentage of GDP is irrelevant. America’s GDP this year is almost seven times that in 1952, at the height of the Korean War. Today’s GDP is roughly 3.5 times that in 1968, at the height of the Vietnam War and almost twice that in 1989, the peak of Ronald Reagan’s Cold War military build-up. Washington today spends more in real resources on the military than in any of those years.
Early in the Cold War, Washington had good reason to bear much of the burden of defending the “free world.” But no longer. The fact that the world is dangerous does not mean it is particularly dangerous for Americans.
Terrorism remains the most pressing security threat, but does not pose an existential danger. Washington must spend better, not more, in response.
The People’s Republic of China is becoming more powerful, but is no replacement for the Soviet Union. The PRC remains a relatively poor nation beset with economic and political challenges. It has but one ally, North Korea, while America is friends with most of Beijing’s neighbors. The United States remains well ahead of the PRC militarily.
Russia has reverted to a pre-1914 Great Power which is most concerned about border security and national respect. Moscow’s potential military ambitions are limited to its former republics. Europe alone has eight times the GDP and three times the population of Russia.
Beyond these two large powers, there is no there there, as Gertrude Stein said of Oakland. North Korea should be contained by the Republic of Korea, which has roughly 40 times the North’s GDP. No one wants Iran to have nuclear weapons, but there is no evidence that it is suicidal and would strike America.
Syria’s implosion is of only minor relevance to U.S. security. The Islamic State has little ability to harm Washington other than killing Americans who fall into its hands.
Challenges in these and other nations may warrant some form of U.S. involvement, but not primarily military action.
Mitt Romney declared that “our military is tasked with many more missions than those of other nations.” Actually, no one “tasks” America with such jobs. Rather, Washington takes on these roles voluntarily—indeed, it shoves aside other nations.
Reducing Washington’s security objectives and armed forces does not mean becoming a pushover. The United States should maintain the world’s most powerful and innovative military on earth, and doing so won’t be cheap. But Washington could protect America while spending far less.
As I noted in my new column on Forbes online: “Washington’s policy of promiscuous foreign intervention would be foolish even if it was not costly. But it is both.”
The United States should scale back its international objectives and adjust its force structure accordingly. Returning to a foreign policy of a republic would be both safer and cheaper.
It's important to push back against the tendency of modern anti-discrimination law to trample the rights of private business and property owners to follow the dictates of their own religious scruples or other personal conscience. It's also important to get the facts right in each of these controversies as they arise, lest we be stampeded into mistaken assumptions and alarmist misreadings. At Overlawyered, I've got some thoughts on the Hitching Post wedding chapel case from Coeur d'Alene, Idaho, which may pose dangers in both of these directions.
The office of Senator Tom Coburn released its fifth annual “Wastebook.” The report highlights “100 silly, unnecessary, and low priority projects” funded by federal tax dollars or government debt. The 100 projects in this year’s report cost taxpayers $25 billion and represent the enormous scale of the federal government.
Among the waste in the report:
- The National Institutes of Health’s grant-making is roundly criticized. NIH provided $533,000 to study the “effects of meditation…from reading Buddhist texts,” $1.5 million to develop a smartphone game to help parents of children with picky-eating habits, $387,000 to provide Swedish massages to rabbits, and $371,000 to study whether moms love dogs or their own children more.
- The National Science Foundation awarded an $856,000 grant to train three mountain lions to use treadmills to study mountain lions’ use of energy while hunting. This follows NSF’s earlier grant to study shrimps’ ability to walk on treadmills.
- A small bridge in Morrison, Colorado may be removed and rebuilt for violating the federal government’s “Buy American” provision. The original bridge, built with $52,000 in federal highway dollars, contains $3,300 in American steel that was rolled into sheets in Canada. Reconstruction costs are estimated at $20,000.
- The Department of Housing and Urban Development provided a $1.4 million grant to build a luxury hotel in Cary, North Carolina. The hotel features afternoon tea, facials, and an “upscale cocktail bar.” There are 50 hotels within 15 minutes of driving distance.
The report also includes several other boondoggles that I’ve highlighted recently:
- Customs and Border Protection built 21 homes in Ajo, Arizona for its agents. CBP overpaid for land, added unnecessary amenities, and wasted $4.6 million on these extravagant homes.
- The Department of Homeland Security’s vehicle fleet is underutilized. Fifty-nine percent of the agency’s vehicles are driven less than 12,000 miles a year, wasting up to $48.6 million.
These projects represent a fraction of the federal government’s almost $4 trillion in annual spending, but illustrate a larger trend. Agencies spend wildly and Congress refuses to provide the necessary oversight.
Entrenched interests encourage policymakers to allow wasteful spending to continue. For instance, the Department of Agriculture tried to close a $2 million sheep research station in Idaho, but “politicians in the region stepped in to keep it open.” There are many similar examples.
Policymakers applaud themselves for the recent drop in the budget deficit, but Senator Coburn’s “Wastebook” shows that a lot of work is left to complete.