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By Caroline G. Cooper, Willkie Farr & Gallagher, LLP**

These days it seems that almost every political analyst in Washington is writing about the “growing phenomenon” of outsourcing U.S. manufacturing and service sector jobs overseas. Although outsourcing is not new and has been going on for decades, the issue has garnered much political attention in the past year in large part because manufacturing job losses were so great.

In recent months, the negative political rhetoric on outsourcing has focused more on job losses in the services sector, especially in the information technology (IT) industry--a driving force behind America’s renewed economic growth. The reasons are two-fold. First, politicians claim that IT jobs are being shipped overseas in droves, and subsequently, America is losing her technological edge; and second, American consumers are not happy with the customer service they receive from foreign call centers. GalleryWatch.com reports that in the next ten years, researchers predict that nearly 5 million service sector jobs will be shipped overseas.

That many Americans are concerned about the increase in outsourced U.S. jobs is understandable; they want to ensure that skilled employment opportunities are not taken away from future generations of Americans. But an analysis of the current political debate on outsourcing and some proposed policy solutions reveals that politicians are more concerned about the politics of outsourcing than they are with the economics of the issue. Politicians should avoid prescribing short-term political fixes to what could become a longer-term economic problem.

Deconstructing the Political Debate on Outsourcing

As political interest in outsourcing has grown, so has the debate. Essentially, three schools of thought on outsourcing have emerged representing the interests of the far right, the far left, and centrists.

The Bush Administration and conservatives in general represent the far right school of thought on outsourcing. They argue that outsourcing jobs is not an economic problem; rather, it is a boon for the economy, as shipping low-skilled jobs overseas enables U.S. companies to reinvest in the economy and create higher-skilled jobs at home.

The Administration’s position on outsourcing was outlined in the Economic Report of the President released last February. In the report, U.S. officials downplayed the contribution of outsourcing to job losses by finding that the decline in manufacturing jobs last year resulted in small part from the transfer of low-skilled manufacturing jobs abroad and more to rising demand for workers in the services sector. Shortly after the report was released, Gregory Mankiw, Chairman of the Council of Economic Advisors, received harsh criticism for his widely reported characterization of outsourcing as beneficial for the U.S. economy.

U.S. business groups have defended the Administration’s position on outsourcing, claiming that too few facts and too much rhetoric have played into the political debate on the issue. In the April edition of Asia Insider, Thomas Donohue, President and CEO of the U.S. Chamber of Commerce, outlined a number “Facts About Outsourcing.” Donohue argued that U.S. job losses were associated more with increases in productivity and slow growth in the economy than outsourcing. He opined that the biggest threat to future employment is a shortage of workers--not jobs, and that future jobs will not be created by protectionist policies. Donohue disavowed the notion that outsourcing IT jobs is causing America to lose her technological edge, and he pointed to expert’s opinion that jobs sourced overseas “amount to a small fraction of (the United States) workforce.”

On the last point, Donohue was proven correct. A report published in June by the Department of Labor, Bureau of Labor Statistics (BLS) on extended mass layoffs associated with domestic and overseas relocations determined that in the first quarter of 2004, only 4,633 jobs of the 239,361 jobs lost from lay offs were due to the movement of work overseas.

Donohue’s arguments point to the fact that while outsourcing may not be an immediate economic problem, preventing it from becoming one in the future requires that politicians reduce their political rhetoric and enact the right policies. According to Donohue, the right policy mix would encourage the government to “open markets and enforce trade agreements; improve the skills of our workforce and expand the labor pool; modernize our transportation, energy, and technology infrastructure; and reduce the legal, regulatory, tax, and health care costs.”

Analysts from the Progressive Policy Institute (PPI) correctly argue that the second school of thought on outsourcing, as advocated by far left Democrats, emerged in response to the Bush Administration’s inattention to the issue and suggestion that cutting taxes will keep businesses at home. In reaction, left-leaning Democrats have introduced legislation, both at the state and federal level, that “inspires a retreat from globalization,” according PPI head Will Marshall.

A survey of legislation on outsourcing compiled by GalleryWatch.com and MultiState Associates, Inc. shows that members of the second school of thought want to restrict companies from sourcing work overseas in two ways: by protecting labor interests and by protecting consumer interests. One notable example of legislation proposed to protect labor interests is an amendment offered by Senator Christopher Dodd (D-CT) to S. 1637, the American Jobs Act. Dodd’s amendment would preclude the federal government or any state government from receiving federal funds for a specific project to outsource federal contracts overseas. One example of a bill introduced under the guise of protecting consumer interests is H.R. 4366, the Personal Data Offshoring Protection Act of 2004, sponsored by Representative Edward Markey (D-MA). H.R. 4366 would preclude companies from sourcing work overseas that involves a consumer’s private information without prior notification to and consent from that consumer. This is required for countries that do not have adequate privacy protection laws. Although a number of state governments have proposed, and in some cases, passed outright bans on the outsourcing of U.S. jobs, no such legislation has been approved by either chamber of the U.S. Congress.

On July 20, PPI introduced a new policy paper on “Meeting the Offshoring Challenge,” hoping to shift the debate on outsourcing to the center and create a third school of thought on the issue. Although PPI is affiliated with the New Democrat faction of the Democratic Party, many of the policy proposals advocated by the organization are endorsed by centrist members of the Republican Party and many businesses. PPI’s Robert Atkinson promotes the following three-pronged strategy to confront the outsourcing challenge: