TCS Daily

The States and Outsourcing

By Radley Balko - February 9, 2004 12:00 AM

The emergence of John Kerry as frontrunner for the Democratic nomination suggests that free trade might be off the table in 2004, at least as a national issue. It's certain to come up, however, in a number of congressional, senatorial, and gubernatorial campaigns. And of course, as long as Lou Dobbs is still kicking at CNN, we'll continue to hear nightly nativist tirades against the loss of manufacturing jobs, the offshoring of tech jobs, immigration, and general alarmism about the "outsourcing of America."

The truth of course is quite a bit more complicated than the simplistic picture painted by protectionists. The United States is still far and away the world's leading exporter of services. Direct corporate investment in India -- generally the target of protectionist rants on tech jobs -- actually declined from 2001 to 2003. As for manufacturing jobs, sure, it's likely that free trade agreements played a part in the loss of jobs in the last five years, but so too did a host of other factors, include exchange rates, changing consumer preferences, upgrades in technology and equipment, the recession, and new federal regulations. Michigan's Mackinac Center for Public Policy, to cite just one example, estimated in 2002 that a federal appeals court ruling favoring procedural matters over hard science in federal environmental regulatory policy could cost the state as much as $2.6 billion, or about 10,000 jobs.

Which brings me to state policy. I'm not an economist, so the analysis that follows is largely anecdotal. But they're some awfully persuasive anecdotes. Time and again, when we look at the states attracting and retaining jobs, and we compare them to states losing jobs, we find that the states doing well are those with tax and regulatory schemes most friendly to doing business in the state. It's only when the cost of staying local becomes too burdensome that companies pick up and relocate elsewhere. Perhaps that doesn't surprise you. But just how strongly the data shake out just might. And the correlation isn't reported much in the press.

For example, according to the Economic Policy Institute, the five states losing the most jobs between 1993 and 2000 were, in order, California, New York, Michigan, Texas and Ohio. According to figures from the Bureau of Labor Statistics, the states of New Jersey, Pennsylvania, Illinois and Massachusetts also rank near the bottom, particularly when you take jobs as a percentage of population. The left-leaning EPI blames these losses chiefly on NAFTA, and perhaps that's partially the case.

But I'd suggest that aggressive tax and regulatory climates might play a pretty big role, too.

Every year, CFO magazine asks financial executives to assess the business-friendliness tax policy of their respective states, which the magazine then compiles and ranks. Ranking in the bottom ten? California, New York, Michigan, Texas, Ohio, New Jersey, Pennsylvania, Illinois and Massachusetts -- the very states that seem to be bleeding jobs. The most recent unemployment figures from the Labor Department put California, Texas, Ohio, Illinois and Michigan all in the bottom ten there, too, all with unemployment rates at 7.0% or higher.

The Small Business Survival Committee also puts out a report ranking the states on business-friendly public policy. In the SBSC report, Ohio ranks 39th, New York 45th and California 46th. Oregon, also with one of the country's highest unemployment rates, ranks 41st.

A 2003 ranking by the Tax Foundation focusing mainly on tax policy and business tells the same story. It puts California 49th, Ohio 47th, and New York 44th.

Only Texas and Michigan score relatively well on the Tax Foundation and SBSC reports, suggesting that at least in these two states, free trade may have played a more significant role in job loss than poor public policy (and when you think about what Michigan manufactures, and where Texas is located, that makes some sense).

The Cato Institute's Alan Reynolds wrote recently about San Jose, California, a city which recently lost about 120,000 jobs over two years. Reynolds points out that despite the debacle in San Jose, the nearby communities of San Diego, Riverside and Orange County actually added almost as many jobs over the same span of time.

San Jose was one of the first jurisdictions in the area to implement a so-called "living wage" ordinance, mandating that business contracting with the city pay their lowest-paid workers around $11 per hour, more than double the federal minimum wage. Of course, a living wage law in and of itself won't wipe out 120,000 tech jobs, but it's certainly indicative of the sort of "progressive" anti-corporate sentiment that might cause local businesses to pick up and spill out into friendlier communities.

Protectionists often bring up Ohio as the prototype of a hard-working, breadbasket state whose manufacturing sector has fallen victim to free trade. But Ohio's also a case study in how a state government hostile to business pushes jobs to more hospitable locales. You've read the numbers above. But additionally, in the last few years, Ohio legislators have begun to feel the hangover caused by big spending habits fomented back in the freewheeling 1990s. As of 2003, the state faced a $720 million deficit. Ohio governor Bob Taft has promised to shrink the deficit not with cuts in state spending, but with new taxes, tax hikes, and new fees, as well as rollbacks of promised tax breaks. Taft's tax happy policy earned the Republican condemnation from the Club for Growth's Steve Moore, who called him one of the "worst governors in America." The Buckeye Institute, an Ohio free market think tank, reports that Ohio's aggressive pro-labor policies cost the state jobs even during the relatively strong economic period from 1982-1998. Zeroing in on the effect of mandatory union memberships on state economies, the Institute emphasizes that during that sixteen year period, states that mandated union membership in the manufacturing sector lost a net 996,000 jobs, while "right to work states" gained 493,000.

Let's look at the flip side. How well are states with business-friendly public policy doing at attracting and retaining jobs?

The anecdotal evidence suggests they're doing pretty well.

According to the Bureau of Labor statistics, the only state that actually gained net manufacturing jobs from 2000 to 2003 was Nevada. Nevada ranks 2nd on the SBSC's business-friendly list. It ranks 3rd on the Tax Foundation list. It ranks in the top four of CFO's list. Alaska lost only 900 manufacturing jobs over those same four years, which of course is likely due in large part to its population. Still, Alaska too ranked in the top four on the CFO list. Virginia made a big push in the late 1990s to attract tech firms to its D.C. suburbs and the Dulles corridor. Despite the tech bust, Virginia still has one of the lowest state unemployment rates in the country, and perhaps not coincidentally, ranks 14th on the SBSC list (and would likely rank higher were it not for Gov. Mark Warner's recent promise to raise taxes). South Dakota, which ranks number one on the SBSC list, also has one of the four lowest unemployment rates in the country, as of December 2003.

Again, this isn't a statistical analysis. But on its face, this cursory look at the data makes a lot of sense. For all the talk of offshoring, the cost of packing up a domestic plant and moving it overseas is pretty significant. Even outsourcing tech support and programming doesn't always make economic sense. American workers are still far more productive than, for example, Indian workers -- even when you factor in the lower wages. It's only when the onus of complying with federal, state and local tax laws and regulations becomes overly burdensome that it makes economic sense for a corporation to shop jurisdictions for a better deal.

So the next time a local politician blasts NAFTA or greedy corporatism for the loss of local jobs, it might not hurt to take a look at just how friendly that politician's state's or city's tax, regulatory and labor policies are toward business. Check where his state ranks on the Tax Foundation, SBSC or CFO lists. If he's a governor, see how he did on the Cato Institute's Governor's Report Card. If relocation really is the cause of the job hemorrhage he's complaining about (and often it isn't), it's likely that same politician's policies are a big reason those jobs left.


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