February 15, 2004

The States and Outsourcing

Radley Balko on jobs, outsourcing and state's economic and regulatory policies:

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.