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Outsourcing Kansas jobs

In the campaign for United States Congress from the fourth district of Kansas, Democrat Raj Goyle uses the issue of outsourcing of Kansas jobs as his main issue against Republican Mike Pompeo.

Goyle’s criticism of Pompeo is based on a claim that Pompeo could have created jobs in Kansas, but instead chose to create them in Mexico and China. The latest allegations are regarding Sentry International, a company servicing the oilfield industry. Pompeo is currently president of that company.

A lengthy page on Goyle’s campaign website details the allegations. Some of the criticism Goyle levels against Pompeo is for things that many Kansans would applaud.

For example, one piece of Goyle’s evidence or criticism is this: “In February 2008, the Wichita Eagle reported that Sentry International sold mostly in Kansas, Oklahoma and Texas until Pompeo came on board as President. After that, the company began selling in other states and international markets.”

Normally, we would applaud a company growing its markets and sales. But evidently to Goyle, a Kansas company expanding is not good news.

Goyle’s argument then proceeds to criticize Sentry International for manufacturing some of the equipment it sells overseas, when it could — according to Goyle — be made in Kansas. He further claims that trade with China has cost Kansas jobs.

So far the only plan Goyle has advanced for stopping outsourcing is to eliminate the deferral of taxation of income that U.S. companies earn overseas. Currently, companies pay the host country’s tax, and then pay the difference between that tax and the U.S. tax when those profits are transferred to the U.S. Goyle — following President Obama’s lead — would do away with this referral.

The problem is that this action will probably drive more jobs overseas. The Wall Street Journal reported that when this tax deferral was eliminated to the U.S. shipping industry, the results was “a real disaster for U.S. shipping,” with U.S. shipping capacity falling by 50 percent over a period of years following this reform.

A case study on the effects of eliminating the deferral on the U.S. shipping industry concluded:

  • In a competitive industry, taxing U.S.-owned operations at non-competitive international tax rates simply diminishes U.S. activity and advantages our foreign competitors.
  • Reduced U.S. operations result in reduced employment and lower wages for American workers.
  • Non-competitive international taxation of U.S. businesses leads to a lower standard of living for American workers.

In addition, the case study finds: “Recent analyses indicate that the 2004 legislation restoring deferral for foreign shipping income is reversing the decline in the U.S. shipping industry.”

Part of the problem is that U.S. corporate tax rates are highest in the developed world, next to Japan. Lowering U.S. tax rates — instead of increasing them, as Goyle advocates — would spur investment, including investment by foreign companies in the U.S.

Does outsourcing cost U.S. jobs?

Matthew J. Slaughter of Dartmouth University has researched and written extensively on outsourcing and its effects. Writing in the Wall Street Journal earlier this year about outsourcing and President Obama’s proposal to do away with the tax deferral — that’s the only solution Goyle is proposing — Slaughter wrote:

The fundamental assumption behind these proposals is that U.S. multinationals expand abroad only to “export” jobs out of the country. Thus, taxing their foreign operations more would boost tax revenues here and create desperately needed U.S. jobs.

This is simply wrong. These tax increases would not create American jobs, they would destroy them.

Academic research, including most recently by Harvard’s Mihir Desai and Fritz Foley and University of Michigan’s James Hines, has consistently found that expansion abroad by U.S. multinationals tends to support jobs based in the U.S. More investment and employment abroad is strongly associated with more investment and employment in American parent companies.

When parent firms based in the U.S. hire workers in their foreign affiliates, the skills and occupations of these workers are often complementary; they aren’t substitutes. More hiring abroad stimulates more U.S. hiring. … To climb out of the recession, we need to create millions of the kinds of jobs that U.S. multinationals tend to create. Economic policy on all fronts should be encouraging job growth by these firms. The proposed international-tax reforms do precisely the opposite.

So while many people assume that when a U.S. company creates a job overseas it means one lost American job, that is simply not the case.

Protectionism — the next step?

Any plan to protect U.S. jobs from being sent overseas will have to resort to protectionist measures such as tariffs on imported goods. Goyle hasn’t advocated this. Instead, he has simply criticized his major opponent for running a global business, and has not advanced a plan to protect U.S. jobs except for eliminating the tax deferral. As we’ve seen above, that would harm U.S. job growth instead of helping.

What advocates of protectionism fail to realize is that trade is a two way street. It benefits both parties, or the transactions would not take place. And when governments try to intervene and restrict trade, everyone is hurt.

When President George W. Bush placed tariffs on imported steel in 2002, it was seen as a political move to protect steel-making jobs in Pennsylvania and West Virginia, two states he needed for his reelection, according to Washington Post analysis.

As a result of the tariff, steel-making jobs were saved. But jobs in steel-using industries were lost, and U.S. consumers paid more for products that contained steel.

When President Obama imposed tariffs on Chinese tires last year, he increased the cost of those tires for U.S. consumers. While this undoubtedly saved U.S. tire-making jobs, U.S. consumers of Chinese tires pay more. As these tires are primarily at the lower range of prices, it is mostly low income consumers who have to pay more to prop up U.S. tire worker jobs.

Then even more harm arises. China — perhaps in retaliation — has imposed tariffs on imported chicken. According to the New York Times, “The commerce ministry started the investigation less than two days after President Obama imposed steep tariffs on Chinese tires a year ago. Chinese officials have denied that the inquiry was in retaliation, but poultry is one of the few categories in which the United States runs a trade surplus with China, making it an ideal target for Chinese trade actions.”

While protectionist rhetoric sounds good to workers who are facing pressure from overseas competitors, we again have to remember that trade is a two way street. We also need to be aware that locally, Wichita exports a lot airplanes. If foreign nations were to restrict imports of U.S. aircraft, that would seriously harm the prospects of Wichita’s aviation industry. Kansas farmers, too, are exporters.

This is what the harsh reality of economics tell us — and there’s a reason why it’s called “the dismal science.”

The politics, however, are on Goyle’s side. As recently reported: “A Wall Street Journal/NBC News poll released Sept. 28 found that outsourcing was the top reason cited by Americans as the cause of the country’s economic problems — and that for the first time in years a majority (53%) of Americans say free-trade agreements have hurt the U.S.”

The residents of the fourth district of Kansas need to ask Goyle what specifically will he do to retain jobs in Kansas, and what will be the economic impact of these policies. All evidence tells us that the result will be harmful to Kansas and America.

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11 Comments

  1. LifeNLiberty October 18, 2010

    Very well researched & written. Pompeo’s companies, and others that are “international” and have offices in other countries and states create more opportunity for everyone. We are living in a global economy, and the protectionist attitude is only going to create a situation where the U.S. will lose everything.

  2. RussM October 18, 2010

    Goyle appears to be confused when making his arguments in favor of his candidacy. Even his commercials are confusing. He claims that the only thing important to him in legislation are the “good ideas” and then he proceeds to tell us that he votes with the Republicans over 80% of the time. So, are we to assume that the Democrats in Topeka only have good ideas less than 20% of the time and since he is a Democrat why should we elect him?

  3. Wendy October 18, 2010

    This protectionist sentiment always rises up when we have a severe recession, & was really bad during the great depression.

    The solution to the huge long-term job losses is not protectionism (more government intervention), but rather a decrease in the size of government & less government interference.

  4. Chuck October 18, 2010

    These kind of arguments are going to become increasingly irrelevant. More and more jobs will simply be eliminated as advancement in robotics and otomation become more and more prevelant. Thousands, and then millions of jobs are going to disappear, never to return. Commerical drivers – not needed when cars can drive themselves. Construction workers – not required, when 3-D printers can build a home without any human assistance. Fast food restaurants – fully automated except for one or two managers. It won’t be next month, but it is in our future, and sooner than people realize. This is prefectly in line with the goals of most corporations, which are to eliminate expense and waste. The main liability of any company is its own work force. They have every natural economic incentive to eliminate their single biggest liability, their worker, and become ever more efficiant. What will happen when unemployment starts going past 10%, to 15%, then 30% and 50%?

  5. Wendy October 18, 2010

    We’ll all be watching “Terminator” movies???

  6. liberty4all October 18, 2010

    Well researched and informative article, Bob. I wish all journalists were as thorough as you are.

    I am starting to call Goyle: “Raj Outsource” since he can hardly say one sentence without this word in it. He obviously does not have a grasp on the business and job creation. But what do we expect from someone who has never held a private sector job.

    Pompeo’s company is called Sentry “International” for a reason. Hopefully the voters of KS-04 will see that Raj is trying to “play” them with his one-track monotonous ads.

  7. Jerry Durant October 18, 2010

    A more simplistic question… would the business have failed (or been unjustifiable) without considering a sourcing solution? One must remember that we should be guided by facts and not by political fervor used purely to gain votes. You may want change but consider the consequences.

  8. sheila October 20, 2010

    Wichita had a smoking situation that worked for everyone. Plenty of places were non smoking, a few, who paid a City license of $250, permitted it. There wasn’t smoking around children, and NO ONE was forced to work at any job! Good ol’ Rajbo voted for the ban that has now destroyed many small, locally owned businesses, lost jobs, and put small, longterm business people near to bankruptcy. Not only has Raj not CREATED any jobs, he is destroying them as fast as he can.
    NO WAY GOYLE!

  9. LifeNLiberty October 20, 2010

    Jerry – your question is great, if I am reading it right “- would the business have failed (or been unjustifiable) without considering a sourcing solution?” So, would the company have been able to survive without allowing jobs elsewhere?

    My husband is employed at Nex-Tech (Thayer). I asked him if he though Nex-Tech would have been as successful as they are right now without that contract that gave the 13 jobs to Mexicali. His answer was “absolutely not.” He believes very strongly that Thayer/Nex-Tech would have gone under, or at least come very close, without that particular contract simply due to the timing – in 2003, things were not good for many plants, and several small shops closed their doors. Unfortunately most people just look at the 13 jobs that went to Mexico, and not the 50+ that were created here at the same time, and the fact that Nex-Tech is highly successful still right now, not laying off, and actually hiring. I for one am grateful for that concession that allowed that company to thrive.

  10. SP October 25, 2010

    I am getting sick and tired of complaints about outsourcing jobs to China and other countries.
    I am one of these evil small companies forced to outsource jobs to China!
    Why? Do you care to hear? Do you want of these jobs? I will give you job if you show up to work every day on time and concentrate on work, and accept less than so called “aircraft worker pay”!
    I am trying very hard to bring these jobs back to Kansas for years but… when the unemployment check coming and coming to you, you have no incentive or appreciation for any job.
    Stop crying and bitching: get a job. There is plenty of jobs around here but you are too lazy and too spoiled.
    Keep it in mind that these “aircraft” jobs are not coming back here and Cessna and others will follow soon out of Kansas!
    I know the decision makers in these “big” companies – they are getting ready.
    Look, Cessna is making one airplane in China already.
    At the end you deserve this!!!

  11. Russell Smith October 31, 2010

    How refreshing it is, in this political silly season, to see a well-balance discussion on outsourcing! I have nothing to do with Mike Pompeo. I’m a former union organizer, and I even after I became a lawyer, I took three months off from work to campaign against Bush in 2004. And I still support the Democrats and the unions. But I’ve got a different take from them on outsourcing. The statistics suggest it is likely that off-shore outsourcing leads to more jobs in the West, not fewer. http://bit.ly/c42NES On the legal process outsourcing front, I’ve seen with my own eyes how off-shore legal outsourcing, especially high-end, legal services KPO (knowledge process outsourcing), creates more legal work in the West, as deals previously undone, and litigations previously settled (or never filed), due to excessive legal costs, are suddenly affordable.

    Russell Smith
    http://www.sddglobal.com
    high-end legal outsourcing

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