Effects Of Outsourcing On The Economy

Outsourcing and the U.S. Economy
Outsourcing jobs has been a topic of great debate for the past several years here in the United States. Those who are against outsourcing stated that it would have a negative effect on the U.S. economy because we would lose our competitive advantage to other countries and hundreds of Americans would lose their jobs, which include not only low-skilled workers but also semi-skilled and skilled workers, and in the end this does not leave enough jobs for the American people. American economists and policymakers that have favored outsourcing seem to have been misled because they believed the United States would be successful if we specialized in research and innovation, and let developing countries do the manufacturing.
However, these views have been sadly mistaken because the manufacture of high-tech products in an age of ever changing technology is very valuable and if the U.S. is not producing these products we are importing them from some other country and that in turn has caused our 30 billion trade surplus that we enjoyed ten years ago to our 56 billion trade deficit that we face today.
The loss of manufacturing jobs those that require low skills are jobs that are lost and they will be lost forever. These low-skilled workers have had a very difficult time finding a new job which in turn created a negative effect on the U.S. economy because of the expense and time it takes to re-train this workforce. A study held by the University of California-Santa Cruz discovered that in a period of 20 years about one-third displaced workers in the manufacturing industry could not find reemployment within a three-year period, and those people who did find a new job, suffered a considerable cut in their pay by at least 15 percent. In addition, the United States also faces a reduction in consumer spending and tax revenues, a loss of industrial infrastructure because factories have been forced to close down and capital once invested in the U.S. is now exported to foreign countries, which in turn leaves us with less money for economic expansion.
The offshore relocation of the manufacturing industry has greatly debilitated the United States capability to create new jobs, the capability to get out of this Great Recession, and it has also destroyed the prosperity of middle-class Americans.
According to Harvard Professors Willy Shih and Gary Pisano, “for the first time in our history, the U.S. economy has been unable to provide a rising standard of living for the majority of its people". Furthermore, outsourcing manufacturing has devastated the United States’ ability to invent the products and medical advances of the future. Nonetheless, the biggest threat to our future that we face now is the fact that the social wealth created by innovation will go to the outsourced country. In 1980, the United States produced 42 percent of the world’s supply of semiconductors as of today we only produce 14 percent. Moreover, the 8 percent that the U.S. semiconductor firms spent on research and development moved to the outsourced countries. The United States once held the first place as a research and development intensive economy and now we have moved down the ranks to number eight. The National Science Foundation reported that in 2008, $58 billion, one-fifth, of total research and development spending by U.S. firms took place
overseas.
The United States if the only country in the world that does not provide tax cuts and other incentives to venture capitalist who wish to invest in a manufacturing company within the United States’ territory. Other countries around the world such as China and Germany do so because the manufacturing industry is the best job generator in the world. According to Conrad Burke, President and Chief Executive Officer of Innovalight, "Every nation is lowering tax rates to attract business, every nation except the United States. In Germany, they have very attractive incentives where, in the case of solar, you can actually get up to 50 cents on the euro back in your capital costs." For every job created in the actual manufacturing plant an additional of up to fifteen jobs are generated to support it. Manufacturing is also what allows the wealth created by technological innovation to be diffused in society and produces income gains for society as a whole. In other words, the creator of the strongest middle class of the world is manufacturing.
Another sector that has been hurt by outsourcing is the service sector. These types of jobs do not require much training and capital investment is very low. However, U.S. companies obtain higher savings in wages and most importantly in health benefits, but there is a loss of wealth because these companies are sending money overseas to pay wages and salaries. However, a recent study has found that a company may save approximately forty percent in wages and salary costs by outsourcing service jobs to low-wage countries but the company on average also faces a sixty percent decrease in productivity. According to Martina Musteen, a San Diego State University Professor, “On the industry level it can be extremely destructive, but on the firm level it can have at least short-term or medium-term benefits”. Companies that outsource their jobs have little to no regard to the harm they cause to the economy, but in the end every little thing counts and the bottom line is that using cheap labor is only weakening our economy even more.
A study held by the University of California found that fourteen million white-collar jobs are susceptible to being outsourced. These jobs do not only include call-center operators, customer service representatives and back office jobs, but also information technology and accounting personnel, architecture, advanced engineering design, news reporters, stock analysts, and medical and legal services. These are the jobs that help achieve the “American Dream” and are also the occupations that create the majority of tax revenues that fund our education, health, infrastructure and social security systems. Corporate America’s short-term approach to save money in bonuses, wages and salaries, is causing U.S. companies to lose not only their human capital but also their consumers. Employees that have been laid off due to outsourcing or having had to accept a lower paying job have a decreased presence in the consumer market and also provide less retirement savings for new investment.
In conclusion, with unemployment levels lingering around 9.6 percent while economic inequality is at levels not seen since the 1930’s Great Depression, many Americans feel as if the economy is leaving them behind and that the economy is getting worse, rather than staying the same or getting better. What makes matters worse is that Corporate America is certainly not doing its part to help bring America out of this Great Recession, because they continue to believe that outsourcing is the solution that will give them a comparative advantage in this globalized world. Nonetheless, organizations may be able to save some money by sending our jobs overseas, but they seem oblivious to the fact that if the American people do not have a job, they do not have any income and hence they are not able to participate in the consumer market where Corporate America sells its products.
Works Cited BIBLIOGRAPHY Ensinger, Dustin. "More Service Sector Jobs Outsourced." 19 February 2011. Economy in Crisis. 25 November 2011 <http://economyincrisis.org/content/more-service-sector-jobs-outsourced>.
Mandel, Michael. "The Real Cost of Offshoring." 18 June 2007. Bloomberg BusinessWeek. 25 November 2011 <http://www.businessweek.com/magazine/content/07_25/b4039001.htm>.
Nothhaft, Henry R. "Outsourcing Manufacturing Hurts U.S." 22 May 2011. SFGate. 25 November 2011 <http://articles.sfgate.com/2011-05-22/opinion/29580189_1_r-d-spending-manufacturers-move-innovation>.
Saleem, Hasan. "Business Journal." 16 September 2008. Directory Journal. 25 November 2011 <http://www.dirjournal.com/business-journal/how-outsourcing-affects-the-us-economy/>.

Effects of an Undervalued Yuan
The Chinese currency, Yuan, has been pegged to the U.S. Dollar for a very long time. In the 1980’s the currency was devalued when China moved gradually from a centrally planned economy to a free market economy in order to become competitive in the global market. The devaluation of the Chinese currency went from a 1.50 Yuan/U.S. Dollar in 1980 to an all-time low in 1994 of 8.62 Yuan/U.S. Dollar. Nevertheless China has kept its currency unrealistically undervalued since this time. In 2005, China lifted the peg the Yuan had on the U.S. Dollar and allowed the currency to float around a fixed base rate determined with reference to the world currency basket, during this time the Yuan appreciated 21 percent. However, in 2008 when the United States found itself in a financial crisis the Chinese government lifted the float on its currency and once again pegged the Yuan to the U.S. Dollar giving them an unfair advantage in the global markets since it is considered to be 40 percent below its actual value.
China has several advantageous reasons for keeping the Yuan undervalued. One of the advantages is that their exports are more attractive to global markets which increase the demand for their products. Another advantage for China is related to their economic growth because exports make up a large portion of their Gross Domestic Product so keeping the Yuan undervalued plays a key role in boosting their growth. Last but not least, China is keeping the Yuan at its current level since it is a country that needs high growth as compared to global standards. Ever since they switched from a centrally planned economy to a free market economy they face a problem of unemployment because of the loss of jobs in the agricultural sector and other state owned enterprises and with a strong export sector they are able to generate jobs in the manufacturing industry. China has a weak welfare support system for the unemployed, so the government is concerned about social unrest should unemployment rise in the overcrowded cities.
Other than the above mentioned advantages, China also faces several disadvantages for keeping the Yuan undervalued. One disadvantage is that a weak currency creates inflation which in turn makes commodity prices more expensive. China imports most of its commodities and an undervalued Yuan increases the cost of living and also the cost of raw materials. Another disadvantage is for them to keep the exchange rate at low levels they need to keep buying U.S. Dollar assets but many Chinese officials are worried about these purchases given the weakened state of our economy so China is trying to diversify away from the U.S. Dollar but this means that their currency will appreciate. Last but not least, are the pressures China is facing from the United States to appreciate their currency so to level out the global market playing field. China cannot afford to ignore the largest purchaser of their products and it is their best interest to have a strong U.S. economy.
The biggest advantage for the United States is that we can buy cheaper imports and hence increase consumer spending but this has also proved to have a very negative effect on our economy. Because many of the products we can purchase from the Chinese are much more inexpensive than to manufacture them at home many companies have either gone out of business or moved their operations overseas. This unfair advantage that China possesses has created a trade deficit here in the United States because we are importing many more products than we are exporting. According to Stephen S. Roach, Morgan Stanley Asia Chairman, “Without addressing the root of the problem, America 's chronic saving shortfall, it is ludicrous to believe that there can be a bilateral solution for a multilateral problem”
President Obama recently addressed the situation with China stating that China is now a grown-up economy and should act more responsibly with their currency situation because it is damaging American companies and jobs, "Our exports to China are that much more expensive and their imports into the United States are that much cheaper". In order to level the playing field the United States has threatened to impose import duties on Chinese products. China responded by stating that this bill will cause a trade war and hence hurt the U.S. / China economic trade relations. The bill has been approved by the U.S. Senate and now rests in the House of Representatives but the final approval lies in the hands of President Obama. As stated by the Secretary of State Hillary Clinton, "I don 't know whether this bill in the form that it 's passing the Senate will ever end up as a piece of legislation coming from the Congress, but it does reflect a great deal of frustration on the part of the American people."
In addition to the above mentioned bill, policymakers have also proposed to appeal to international bodies such as the International Monetary Fund and the World Trade Organization in order to take action against China and name them a “currency manipulator”. Nevertheless, in order for this to occur the Treasury Department must determine if China is manipulating its currency so to prevent effective balance of payments or to gain an unfair competitive advantage in international trade and this must be done under the 1988 Omnibus Trade and Competitiveness Act, which is an annual report on the exchange rate policies of countries with large trade surpluses with the United States. Furthermore, according to a formal International Monetary Fund official, "The IMF has never labeled a country a currency manipulator, but it 's something they need to think about, because if there 's no pressure, there 's no change, China returned to a largely fixed exchange rate in 2008 in part because the issue dropped off the agenda globally”.
Many economists state that China’s exchange rate policies and trade surpluses are a huge threat to the United States’ economy’s growth and stability. Fred Bergsten from the Peterson Institute’s C stated, “China 's policy of keeping the Yuan undervalued leads to a sizeable dollar overvaluation and rising trade deficits. These deficits in turn provoke industry leaders to ramp up pressure for protectionist U.S. trade policies”. Nevertheless, a very big concern is as the United States trade deficit increases can we continue to rely on China to buy our debt, if this is not so it would be very costly to our economy because China offers very favorable interest rates in order to finance our debt. After the Standard and Poor’s Agency downgraded the U.S. debt from a triple A to a double A in August of this year, China sold $36.5 billion in U.S. treasuries bringing them to a total of $1.137 trillion, which was also the lowest amount of debt they owned in a year. However, the United States does have one good thing going for them the fact that there are very few choices besides the U.S. in which China can safely invest into. According to Uri Dadush, director of the international economics program at the Carnegie Endowment for International Peace, "The alternatives are European government bonds and Japanese government bonds, neither of which are very appetizing”.
In conclusion, as long as China does not let the market determine the value of the Yuan and dismisses the pressures put on them from around the world, the Yuan will continue to be undervalued. Chinese exports will continue to flood the world because they possess an unfair advantage in global markets.
Works Cited BIBLIOGRAPHY
Pettinger, Tejvan. "Why is Chinese Currency Undervalued?" 18 June 2009. Economicshelp.org. 5 December 2011 <http://www.economicshelp.org/blog/1675/economics/why-is-chinese-currency-undervalued/>.
Unknown. "Obama Says Undervalued Yuan Hurts U.S. Economy." 14 November 2011. RIA Novosti. 5 December 2011 <http://en.rian.ru/business/20111114/168683565.html>.
Wayne M Morrison, Marc Labonte. "Congressional Research Service." 3 August 2011. China 's Currency: An Analysis of the Economic Issues. 5 December 2011 <http://www.fas.org/sgp/crs/row/RS21625.pdf>.
Wolverson, Roya. "Council on Foreign Relation." 2 November 2011. Confronting U.S.-China Economic Imbalances. 5 December 2011 <http://www.cfr.org/china/confronting-us-china-economic-imbalances/p20758>.

The Eurozone Crisis
The Eurozone is an Economic and Monetary Union that consists of 17 European Union countries that have adopted the Euro as their common currency.
The countries that currently compose the Eurozone are Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain. In order to join the Eurozone, European Union countries had to qualify by meeting the terms of the 1991 Maastricht Treaty in terms of budget deficits, inflation, interest rates and other monetary requirements. The European Union countries that declined to join the Eurozone are: the United Kingdom, Sweden and Denmark. Monetary policy of the Eurozone is the responsibility of the European Central Bank which is governed by a president and a board of the heads of national central banks. The Eurozone is largest trading area in the world and one point in time challenged the U.S. Dollar for global supremacy, but large deficits and sovereign debt by many of the countries exposed the Eurozone’s vulnerability. Furthermore, the Eurozone’s sovereign debt crisis demonstrated the interdependence of the European Union and also the lack of leadership in order to respond to the problem with a strong fiscal and monetary policy. Germany and France considered the most stable economies called on the weaker countries to embrace strict austerity measures which caused much popular unrest bringing down both the government in Italy and
Greece. Even though many rescue packages have been put in place by the European Central Bank there is still doubt about the future of the Euro.
In 2009, it was announced that Greece had manipulated its balance sheet and it had reached a debt of 300 billion Euros. This was caused by their excessive spending because upon entering the Eurozone the Greek government was offered loans with very low interest rates something that had never occurred in the past so the Greeks went on a crazed spending spree. According to a report by George Mason University 's School of Public Policy, "The roots of Greece 's fiscal calamity lie in prolonged deficit spending, economic mismanagement, government misreporting, and tax evasion". In 2010, the European Financial Stability Facility was created as a temporary bailout fund in order to address the Greek crisis and provided them with a $163 billion loan in exchange for guarantees from the Greek government that they would implement strict spending cuts and increase taxes. Nevertheless, by 2011 three credit agencies categorized Greeks government bonds as “junk” and it was also clear that Greece was having problems implementing the conditions of the loan, so Germany and France came to their rescue with a second bailout conditioned-package in order to avoid a Greek default. However, the conditions in the second package cased even more social unrest among the Grecians and led the Greek Prime Minister George Papandreou to resign and the creation of a technocratic government of national unity commissioned with ratifying the new European Union’s agreement and implementing extremely unpopular austerity measures.
In addition to the problems the Eurozone was facing with Greece they were also having difficulties with Portugal, Ireland, Italy and Spain. These countries came to be known to the world as the PIIGS of Europe. Portugal was very dependent on foreign debt which made it very susceptible to the European crisis and even though its prime minister tried to put rigorous packages in place they were all rejected by parliament. By mid-2011 the European Financial Stability Facility granted Portugal a $116 billion bailout package with the condition that they would implement the austerity measures that parliament had tried to avoid which included a cut to pensions that would total 3.4 percent of Gross Domestic Product. Ireland’s crisis was similar to the one the United States faced in 2008, the housing bubble, banks were lending money they did not have which caused Portugal to enter the worst recession the Eurozone has seen. In 2009, after warnings that there deficit was increasing at dangerous levels the country’s finance minister announced a budget-reduction plan, however, the plan did not work and by the end of 2010 Ireland was on the verge of default. The European Financial Stability Facility once again came to the rescue and granted them a $112 billion bailout package with the condition that Ireland would put in place a new budget that included a decrease in spending and an increase in taxes. Spain had experienced a strong growth for fifteen years because of a real estate boom but was severely hurt by the global financial crisis. They soon faced a dramatic decrease in investment, exports and private consumption. Spain’s unemployment levels reached an impressive 20 percent and their government deficit went from a 2 percent Gross Domestic Product surplus in 2007 to a deficit of 11.2 percent in 2009, which according the International Monetary Fund, “due to the large stimulus and evaporating cyclical and one-off revenues”. Spain also has similar weaknesses as Greece, Portugal and Ireland which is the loss of the competitive advantage and large current account deficits. Nevertheless, even though there has been chatter about a bail out it has not occurred as of yet.
Toward the end of October of this year the debt crisis set it claws on Italy, which is the third largest economy in Europe following Germany and France. Both people and markets had lost their confidence in Italy’s Prime Minister Silvio Berlusconi because of his lack of authority to implement austerity measures that would help to improve the Italian problem, a public debt of $2.6 trillion, which caused yields on government bonds to surpass the 7 percent sustainable level and unfortunately for Italy a bail out as the ones requested by the other European countries is out of the question. Berlusconi faced with this crisis was forced to resign and Mario Monti took his place and is commissioned to carry out budget reforms which not only include a decrease in spending but also a raise of the retirement age.
In conclusion, the future of the European Union is dependent on their leaders to comprise a solution as how-to handle their debt crisis and take the necessary steps to become a more politically and economically stable integrated bloc of nations. As they face both a global financial crisis and their own sovereign debt crisis they have started to implement procedures so to centralize governance systems and coordinate stronger economic and fiscal policies. As part of their solutions the European Union has agreed to replace the temporary European Financial Stability Facility with the European Stability Mechanism which will be a permanent rescue fund by 2013. In addition, they also established the European Systemic Risk Board, which will be in charge of overseeing the financial and banking sectors. Germany’s Chancellor Angela Merkel requested for changes to be enacted in the European Union’s treaty so to improve fiscal coordination and tighten budget controls for all member countries of the Eurozone but she declined proposals by the European Commission to issue “Eurobonds”, which would tackle increasing borrowing costs throughout the Eurozone. Even though Europe’s leaders are taking some action to address their problems they need present a strong front and set aside their own personal interest for their country and view the Eurozone as a whole.
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Lazaro Sandoval, Erika Beltran, Sodgerel Ulziikhutag,Temuun Zorigt. "George Mason University." 2011. The European Sovereign Debt Crisis:Responses to the Financial Crisis. 5 December 2011 <http://journals.gmu.edu/index.php/newvoices/article/viewFile/261/152>.
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Worstall, Tim. "Forbes." 14 November 2011. Eurozone: The Italian Problem in One Picture. 5 December 2011 <http://www.forbes.com/sites/timworstall/2011/11/14/eurozone-the-italian-problem-in-one-picture/>.