The Obama "Insourcing" Follies

The Obama Administration introduced its latest job creation plan with great fanfare. The president gathered business leaders and offered examples of how many of them had brought jobs sent overseas back into the U.S. And the White House website has a tutorial on “insourcing.” The administration’s pitch is that when American companies bring jobs back to the U.S., they both fulfill a patriotic duty and save money. Neither of those assumptions is true.

The president said that the cost of doing business in America has fallen, particularly in the manufacturing sector. That is true. The recession and union busting have brought down wages. Yet, those actions have not undercut the very large costs of rebuilding factories or building new ones so that insourced workers have places to work. This means the economy of scale is off when capital expense is taken into account. And, in many sectors, the cost of overseas labor remains low, despite the president’s selective examples of where labor costs have fallen in the U.S.

The next stage of the drive for insourcing will be to offer tax credits to those companies that adopt the practice. One hurdle to that may be Republican objections. Another is that businesses still wary about the recovery may not care about tax incentives. They will not take on the risk of adding jobs, even if that risk is mitigated by special credits from the government.

The anecdotal case for the low cost of U.S. labor suggests that some Chinese manufacturing wages have increased. That is true, but they are still, in almost every case, below those in the U.S. China also continues to manipulate its currency, which keeps the real costs of its exports more than competitive. Factory workers in the U.S. would have to work for wages that are unsustainable for people who want to maintain even a modest standard of living.

The president pressed hard on the patriotism card. By way of support he offered comments from one of America’s great business leaders, Andy Grove, former CEO of Intel (NASDAQ: INTC). Grove once said: “There’s another obligation that I feel personally, given that everything I’ve achieved in my career and a lot of what Intel has achieved in its career were made possible by a climate of democracy, an economic climate and investment climate provided by our domicile –- the United States.” That is easy for the head of one of America’s largest and most profitable companies to say. Intel has been colossally profitable. Many other U.S. businesses have struggled due to the cost of American labor.

Tax credits will not encourage worried business owners to bring jobs back to the U.S. Neither will the appeal to what it means to be a “real American.” The economy is still too bad to support either case.

Douglas A. McIntyre