What I learned at Bain Capital working with Mitt Romney: outsourcing is good and America’s future isn’t manufacturing, it’s ideas.
Foreign Policy Magazine
By Edward Conard | June 7, 2012
The United States must integrate its economy more fully with China and India to maximize their dependence on the United States for employment, innovation, and growth in order to cement its leadership role. This dependence not only increases the chances of a mutually beneficial alliance on terms more favorable to the United States, but it allows the United States to maximize growth by shifting an increasing share of its output to innovation, rather than slower growing goods and services. In effect, the United States must become the head to the world’s body.
For fourteen years, I served as a partner at Bain Capital, working closely with Mitt Romney on making businesses stronger, in order to grow them faster and increase their value. We searched the landscape for unrealized investment opportunities and saw first-hand where the U.S. economy succeeds and fails. The United States will not succeed by manufacturing commodity-like products that can be used to transport low-cost labor around the world. Innovation is the source of its competitive advantage where other economies have achieved only limited success.
Remarkably many people have yet to realize that today’s economy is very different than that of the 1950s. Then, the United States capitalized on the value of mass marketed manufactured goods, like automobiles. Growth was driven by large-scale companies that funded low-risk investments, which added capacity to meet growing demand. Individuals mattered less. But that economy slowed to a crawl long ago. Supporters of the Obama administration and its economic policies have found some refuge amid the tide of dismal economic news in the fact that the U.S. manufacturing sector has grown slightly in the past year. But the truth remains that America’s future does not lie in making things — it lies in conceiving of things, much of which others will make for us.
Today, with the advent of the Internet, 13 people can create Instagram and $1 billion of value in two years. Information and innovation from successful high tech startups, like Google and Facebook, drive growth. The talents of individuals, their willingness to take risks that produce innovation, payoffs for successful risk-taking, and the accumulation of equity needed to underwrite those risks, matter much more today than they did in the past. To maintain its faster growth, the United States must outsource production to low-wage economies, continue to transition to a local service economy to protect its wages from competition with low cost offshore labor, and pump up its growth rate by continuing to produce a disproportionate share of the world’s innovation.
Concerns that the United States may not find alternative uses for its lesser skilled labor at comparable pay are overstated. If offshore labor were free, how much of it should the United States buy? All of it. At $1 an hour, it’s effectively free. Cheap offshore labor is no different than any other productivity improvement that lowers cost. It makes the United States richer and stronger by increasing the relative value of its alternative endeavors — both existing alternatives and new investments. When it competes with China for manufactured goods, the United States is attempting to make for $20 an hour what it can buy for $1 an hour. It should use the $19 of savings to employ additional nurses, school teachers, and waitresses — positions that cannot be outsourced. Median incomes have grown 37 percent from 1979 to 2007, even more if we account for demographic shifts in the U.S. workforce, despite nearly a 40 percent increase in the U.S. workforce from increased immigration and record levels of workforce participation — hardly an indication that the marginal product of labor declines as we employ more labor.
The problem is that China, which exports more than it imports, buys U.S. assets — principally low-risk government-guaranteed debt — instead of goods from the sale of their exports. When the U.S. economy is expanding, it uses those resources to grow services and investment that produce innovation. But in a recession, consumers and investors retreat from risk-taking and savings sit idle, slowing growth and increasing unemployment. The trade deficit the United States runs with countries like China exacerbates this effect, causing unemployment to rise and U.S. workers and their families to suffer. In effect, surplus exporters pulled employment from the United States at a time when more jobs are needed.
In the long run, both the United States and surplus exporters like China benefit from a more open U.S. economy. But currently, U.S. workers alone suffer higher and more volatile unemployment as a result of our largely unrestricted trade policies — policies that allow large trade deficits during times of high unemployment. Successful integration of the U.S. economy with the rest of the world demands offshore economies sharing the burden of unemployment by buying goods, which employs U.S. workers, rather than assets during these times. The United States must insist on these actions by its trade partners in the short run, when economic conditions warrant it, as a quid pro quo for granting them access to U.S. markets over the long run. The alternative — the government intervening to borrow this money from its trade partners, likely spending it less productively than the private sector to temporarily increase employment in the interim — harms the United States’ long term potential.
In the long run, open trade is valuable to the United States and its trading partners. Increased dependence will forge a mutually beneficial and enduring alliance with negotiating leverage benefitting the employer — the United States — relative to its offshore employees in China and India.