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Is Outsourcing the Cause of the Recession?

By: Steve Johnson

8/19/2008 - 59 Comments

Outsourcing America jobs was the direct result of free trade agreements like NAFTA.

The globalization process of ‘free trade’ agreements like NAFTA changed the economy of America from a once-proud exporting nation, to the world’s biggest importer – as much of the manufacturing sector of the economy was moved to other nations with lower paying workers in China and India.  In only 15 years, from 1992 to 2007, the US balance of trade deficit surged from $84 billion to $700 billion.  Today, most of the jobs in America are in the service sector – as we server one another.  But, this is about to change.

Globalization Has Run Its Course

The globalization process can be traced all the way back to the end of World War II, when nations began creating economic treaties to reduce the risk of another dictator from creating an extreme form of nationalism. The idea was to create trade agreements to couple together the economies of independent nations – which increased GDP in exchange for lowering the risk of war, because a nation is much less likely to go to war with another nation whom their economy depends upon.

Each agreement brought financial benefits in exchange for economic independence. After 50 years, the globalization process had run most of its course along with the economic benefits. The nations that benefited the most were of course the nations with high unemployment and low wages, as they became the producers of the world (like China and India).

The Benefits Have Been Consumed

Some say that America should not have taken part in the globalization process. Some say we should have not have traded financial benefits for economic dependence. But to truth is that America has enjoyed economic growth for decade by leveraging the dollar as the Reserve Currency of the world which allowed America to continue to increase its currency as globalization brought more and more demand for dollars throughout the world. Very few complained about the economic expansion that each new trade agreement brought or the lower prices produced by other nations. Low prices leader Wal-Mart became the largest retail chain in the world.

Globalization has been the biggest factor in the last decade of increase in productivity and growth around the world.  But now that globalization has run its course, the financial benefits have also run their course. The free ride is over.  In the global economy, America needs to compete with the low wages of the rest of the world. Capitalism has been embraced by the world, and America now has to work for a living just like everyone else. It's easy to look back and blame outsourcing because we have declining job growth, but our declining job growth is purely a result of spending more money than the goods that we are producing. America needs to rebuild our manufacturing sector and once again become a nation with high exports. To do that, we will have to settle for lower paying jobs and will need to once again turn our attention to education.  Education is the key to higher wage jobs, as education was the foundation of America’s productivity 40 years ago.

The global recession that is upon us was not caused by outsourcing. It is a direct result of America taking advantage of the fact that the dollar is the world reverse currency by borrowing and spending much more money than we are producing goods for.  We were able to do this by increasing the supply of dollars and trading them for goods to the rest of the world - otherwise known as OIU's.

There is No Going Back

The complexity and history of policy changes and trade agreements which have coupled the economies of the world over the last several decades cannot be quickly decoupled.

To reverse globalization, tariffs would have to be put into place to block free trade between nations – which would result in a large recession as each nation could no longer export products they build or import the many products they consume at very low prices.  Each nation would have to stop the flow of free information available on the Internet which is shared by the world. Prices and energy costs would skyrocket, resulting in the largest economic crisis in history.

The best thing nations can do is move forward with;
• A strong educational system
• A strong small business tax policy
• Produce competitive products (resulting in high exports) and
• Create a strong currency policy (limiting the money supply with higher interest rates)

It can be done. America can return to its economic strength, but it’s going to take leadership and a willingness to tear down some of the strongholds within our nation. We need to rebuild the educational system and stop congressional spending on social programs based on the false idea that prosperity and good health are basic rights.

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