Let’s try and reason together on what offshoring is fundamentally doing to the economy. Economic situations are complex only because of the large number of factors that need to be taken into consideration for a given situation. However, the factors themselves are usually simple.
By taking a single factor and removing the rest, we can follow up on the effect and thus be able to understand the direction in which it takes us. Let us do this with offshoring. We will be touching on issues like the meaning of wealth to the printing of money. Keep in mind, that we aren’t professional economists. Just following up on some ideas that are interesting.
So what is offshoring? Offshoring, or outsourcing, means the taking of a job and giving it to someone else who is in another country. Obviously this person needs to be paid, albeit at a lower cost. Now an economy works by everyone contributing something. This means that the customer who is at a supermarket is actually serving someone else somewhere. So a customer in a grocery store can become the salesman in a shoe shop, and a teller in the grocery store will become the customer in a shoe shop.
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So all employees are customers for someone else. If there was just one big corporation in the whole country, then all the employees of that corporation would also have to be it’s customers. This is necessary for the circulation of money. The employees of this big corporation will buy goods from it with the same money that they receive in salaries from that very corporation. So it goes round and round.
In real life, there is more than one corporation, but the basic principle does not change. Money that is handed out as salaries is flushed back into companies that give out the salaries after passing through many hands. For example, a man gets paid to work in a grocery store. He uses the money to buy shoes and pays the owner of the shoe shop who then uses that money to buy groceries and pays the grocery store owner. What goes around comes around.
Now what happens in offshoring? I can see two interesting things happening. First of all, when you pay a person in another country, the person is not going to use that money to buy goods in your country. That money is gone forever from the economic system. Second, that person is going to spend money in her country that has not come from any business generated in that country.
Let us look at the first point. Since money has gone out of the system never to return, the total amount of money in the country has gone down. And since the total amount of money is finite, logically, this cannot continue forever unless new money comes in. Most of the time, offshoring is one way. That is, if one country offshores to another country for a cost advantage, then the offshoring country will not provide services back for the destination country because it is by definition more expensive. So the offshoring country only outsources and does not return the favor.
This means that the new money can only come from printing extra money. If this doesn’t happen, then the cost of goods in the offshoring country will fall because there is now less money chasing more goods. If this happens, then the cost advantage in offshoring will slowly be nullified! It makes your head spin.
Conversely, the cost of goods in the providing country will increase because there is more money chasing fewer goods since the goods or services are being exported out. This means that, due to inflation, the cost advantage of the providing country will be gradually reduced, and offshoring will become even less viable.
Where does this end? The only way to prevent this is for the offshoring country to print more money and thus keep the amount of money in circulation constant. But then this means money is being printed for the sole purpose of buying goods and services from outside. This will lead to disastrous consequences for the value of the currency.
Of course, this is just one extremely simplistic view. If we factor in the fact that the economies of both countries are growing, then it becomes a race to see which is more: the rate of offshoring or the growth of the economy? In other words, are you paying others more than you are earning yourself?
I hope you’ve enjoyed this discussion and will post your comments in order to give a better insight into the dynamics of this complex and exceedingly interesting issue.
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The issue is not the price of toilets. It is PAYCHECKS IN CHINA.
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Home Depot has many stores with few customers and no selling.
Home Depot announced that it is cutting prices to try to induce a return of customers who buy.
Home Depot fills its stores with stuff made in Communist China. Nothing is labeled “Made in USA”. All of the paychecks for those products got cashed in China.
All of the now unemployed Americans have no paychecks and are unlikely to reach for their empty wallets when they are inside a Home Depot.
But, Home Depot management thinks that cutting the price on toilets is going to solve the problem.
That is like blaming the Wall Street meltdown on mortgage foreclosures. Again, the real problem with mortgages is homeowners whose jobs are in China, thanks to the wholesale merchandise BUYERS at Home Depot.
Lower prices for goods helps reduce Americans cost of living.
Lower costs frees up more of Americans income to save and invest.
Money used to purchase foreign goods ultimately has to return to the country of origin. What are the foreigners going to do? Cherish it for its intrinsic value? No, they’re going to eventually use it to buy something. Otherwise they’re trading real goods for worthless paper.
Walter responds …
Raymond, on Sept 25 said:
Lower costs frees up more of AMERICAN’S INCOME to save and invest.
That statement ignores the situation of Americans having no jobs and NO INCOME. The Home Depot story talked of American JOBS in China, and paychecks or INCOME from those jobs also in China.
How did Raymond get back to “AMERICAN INCOME”?
Employment is not at 94% as the U S Labor Department falsely announces. That number would be a lie, a gross overstatement, even if that number were transposed.
I personally, with multiple college degrees and multiple decades of high technology experience, have been seeking employment since 9/11 happened. That is typical today.
J.D. Seagraves, on Sept 25 said:
Money used to purchase foreign goods ultimately has to RETURN to the country of origin. … they’re going to eventually use it to buy something.
Seagraves assumes money returns to my town from India and China.
However, Americans can not find employment to produce INCOME, and here is one reason why….
SBA MDB Rule 8A (Small Business Administration of the Federal Government, MINORITY Disadvantaged Businesses, Rule 8A.).
Moves a MINORITY individual or organization to the HEAD of the QUEUE to obtain work.
For instance, moves Adil ( www Adil com ) and
Fourth Technologies of INDIA ( www Fortek com ) and
( www uciny com ) to the head of the line to obtain work.
The WORK goes to their local branch office in the USA (manned by Asian Indians who are a minority population in the USA). From that local branch office – the acquired work then goes to thousands of Cubicles in India, where it is worked on.
Rule 8A is a huge advantage in keeping America’s work in India’s Cubicles.
Check out the named websites. These companies and others brag about their “8A” certificates, and their Asia addresses. They are laughing at us on their websites.
Don’t talk about “American’s INCOME” while foreclosures are a national problem roiling the Congress and Wall Street. It is caused by unemployed Americans. That in turn is caused by “8A” and also the wholesale BUYERS of Home Depot.
The money in paychecks which reach India and China never returns to my state to make mortgage payments to our banks.
Walter A Nodelman
Rule 8A is another form of intervention in the economy by the government along with monetary policies that caused the housing bubble. There’s your goat.
If you are still eating then you’re still grocery shopping,
do you only buy made in America products?
I admit I do have a self serving response on the subject of outsourcing—–
(1) Lower prices for goods save me money.
(2) Lower costs frees up more of my income to save a little more for my kids education, and perhaps buy a little more
Coca Cola stock. I believe the Indians and Chinese will drink more of the stuff.
Walter – The money hasn’t returned yet. But it will. It has no intrinsic value. There’s no need to hold it for its own sake. Eventually, it will return — and that won’t be a good thing, by the way. Keeping the money out of circulation “strengthens” the dollar. Putting it back into the domestic market will weaken it, cause prices to rise, etc. It’s an inevitability. The culprit is not India or China but the Federal Reserve System that makes these trades (real goods and services for worthless paper) possible.