Governor Schwarzenegger has three bills awaiting his signature that seek to limit off-shoring by companies doing business in California. Off-shoring, sometimes known as outsourcing, occurs when U.S. firms move some of their service support jobs, such as data processing or tech support call-in centers, that service U.S. clients to overseas locations. But a recently released study by the Bay Area Economic Forum on the local impact of off-shoring indicates that such reactionary bills will not improve our economy or save jobs.
Two of the proposed bills would limit the client information that companies are allowed to handle offshore. The third bill would ban state agencies from contracting out their services to companies that use overseas labor. Limiting off-shoring obviously increases costs for the companies that are directly affected. In the case of the third bill it will also strain an already tight state budget by increasing the cost of state subcontractors. More important than the direct costs are the negative impacts that limiting off-shoring will have on the rest of the Bay Area economy.
One of the first lessons in any international economics course is that exports are the price you pay for imports. When we export some jobs overseas through off-shoring, other jobs are created back in the U.S because foreign workers use their earnings to buy U.S. made products and services or to make investments in the U.S. economy. When off-shoring is limited, U.S. based exporters are hurt because foreign demand for our goods decreases. Similarly, fewer U.S. jobs are created by foreign direct investment in the U.S.
The Bay Area would be disproportionately harmed by measures that restrict off-shoring and international trade because it is such a highly globalized region. Bay Area manufacturers derive almost 60 percent of their revenue from foreign sales. In fact, the Bay Area leads the nation in in-sourced jobs. Over 700,000 Bay Area employees work for subsidiaries of foreign corporations located here. According to the recently released study by the Bay Area Economic Forum, our region has more foreign-owned research and development facilities than any other region, or even state, in the U.S. All of these benefits to the Bay Area economy are only possible because we export products and jobs to other countries.
Instead of trying to limit job outsourcing, the government should concentrate on creating an environment that will encourage new businesses and job growth. The recent off-shoring study found that the Bay Areas competitiveness was limited because of the high cost of living caused by inadequate housing supply, a corporate tax rate more than 40 percent higher than the national average, and high costs of both workers compensation insurance and electricity.
In a recent ranking of economic freedom in the 50 states, California placed second to last. This is particularly important since most outsourced jobs go to other areas of the U.S., not overseas. Nevada and Arizona have been particularly successful at attracting California firms. Both of these states scored high in the economic freedom rankings. Lowering the tax burden and removing other government-imposed regulations that raise the cost of doing business would improve Californias competitiveness and ability to attract jobs. Creating a better business environment in California will not end off-shoring but it will raise living standards by improving efficiency and the mix of jobs.
The bills awaiting the governors signature will not save any California jobs on net. They will only protect some jobs at the expense of others. In the end, the bills would contribute to making the state less competitive in attracting new businesses. The governor would be well advised to veto the proposed bills.
Benjamin Powell is a Senior Fellow at The Independent Institute, Director of the Free Market Institute at Texas Tech University, and former President of the Association of Private Enterprise Education. Dr. Powell received his Ph.D. in economics from George Mason University. He has been assistant professor of economics at San Jose State University, a fellow with the Mercatus Center's Global Prosperity Initiative, and a visiting research fellow with the American Institute for Economic Research. Benjamin is also the editor of Housing America: Building out of Crisis.
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