Outsourcing Social Cost or the “Socialization” of Cost!

Farid A. Khavari, (Ph.D.) Economist

In 1993, the Miami Herald asked me to express my opinion about the NAFTA (North American Free Trade Agreement), which was just getting off the ground. I was against it back then, and I am even more against it now. I wrote:

“… Mexico is going to provide no more of an increased market to the United States than East Germany did to West Germany after the unification. As the economy moves towards full employment, projects like NAFTA can be implemented and implemented successfully for all nations involved. NAFTA, in its current form, could well result in innocent and dedicated workers moving from the upper middle class to the welfare rolls. What is accomplished if Wal-Mart or Chrysler hits the jackpots only at the expense of the working people of both nations?”

(The Miami Herald, November 17, 1993, Page 27A)

Of course, we know what NAFTA has done to our country ever since. What we did as a nation was increasingly outsourced our “social profits” and our “social benefits” to the other countries, depriving American citizens from enjoying a prosperous standard of living! We had instead imported the “social cost” of the low-cost labor nations, which is now reflected in increased unemployment numbers with the economic downturn within the United States. On the other hand, those countries started to prosper to the point that we as a nation are now in the process of switching our leading position with these low-cost labor nations. Even though Wal-Mart is reaping tremendous profits in this chess game, which has been witnessed, it has not assisted companies such as Chrysler nor GM; Chrysler and GM ended up being bailed out or they were headed towards oblivion.

Since NAFTA’s inception, many other American companies did not see benefits from the agreement either. The United States is now starting to make the same grave mistake by outsourcing work to India as we did in the Nineties with China. The simple fact is that each time we engage in these types of outsourcing matches with the low-cost labor nations, we give away our social profits and our social benefits! What we must do is outsource our “social costs” instead of our “social profits” and our “social benefits.”

Politicians, economists and CEOs must take serious consideration outsourcing our manufacturing jobs to over 2 billion people with a tremendously lower standard of living worldwide versus our roughly 320 millions people with higher standard of living. This could lead only to one result—lowering the standard of living of our people by having no way out in a “losing match” with these low-cost labor nations when outsourcing happens. The American people will continue to lose economically until they reach a much lower standard of living, most likely worse off than those individuals in these low-cost labor nations. One scenario is obviously clear, that in the long-run both sides will lose. However, by outsourcing “social cost” as we will see, both sides will gain from it, and increase the standard of living of both parties without disadvantaging one group against another.

What is social cost and how we can outsource it, creating a win-win situation for both nations or for all nations involved?

“Social cost, in economics, is defined as the total of all costs associated with an economic activity. It includes both costs borne by the economic agent and also all costs borne by society at large.”

Of course, we do not intend to get into a time-consuming discussion about the social cost. However, according to the above definition, every activity has some kind of social cost associated with it. An appropriate and more precise definition with regard to the jobs related to outsourcing of social cost would be as follows:

“Social-cost-inducing jobs includes all those jobs that by outsourcing them to a designated nation an equal service, performance or standard of living can be received at a tremendously lower cost than it could have been possible in that nation,  which outsources those jobs. Social-cost-inducing jobs are predominant in the service sector, whereas it could be found to a much lesser extend or seldom in the manufacturing sector.”

In other words, we should outsource all those social-cost-inducing jobs, or at least, as much as possible those types of jobs that reflect social costs, which do not contribute to economic gains and/or social benefits. To be even more precise, there are jobs that simply must be done, which create cost without contributing to any kind of social benefits or economic gains; all they do is taking a chunk of the social benefits and profits away from the economy. These jobs are a kind of economic “parasites.”

In order to distinguish between outsourcing these types of “social-cost-inducing” jobs as opposed to other types of outsourced jobs which fall under the term, “globalization”, we dub it with “socialization”.

The question, which begs for an answer in this connection, is: What jobs are the primary sources of social cost? There are a series of sectors that could be included in this category; the most critical ones are the healthcare, law, accounting, prison system and our military forces. It must be emphasized that this is the first attempt to quantify social cost-inducing jobs. Expecting to find possible solutions in this piece would be simply impossible; the main purpose of this article is to start a fruitful discussion.

The reason for discussion with the above-mentioned sectors of the economy to be considered as social cost is on hand. With regard to healthcare, we must consider any healthcare cost as a social cost, because it does not bring in gains other than restoring ones health to its original condition. Healthcare must be made as inexpensive as possible. Legal services are no better than healthcare. One suffers healthcare cost because one has to get rid of a physical headache; with regard to the legal services, one need to pay his/her legal dues to keep the future financial headaches away or deal with them as one may face it in the future. With healthcare and legal services, we have to be on a permanent guard—either dealing with “curative” or “preventive” measures! And, that causes plenty of unnecessary cost!

Accounting definitely does not cost as much as the healthcare and legal services. Accounting is the easiest one to outsource at a drastically lower cost, achieving the same services than it is possible in the United States, especially considering the growing speed and ease of electronic communication system worldwide. For example, as an average, the accounting cost for a small business runs around $2,000 annually, which could be drastically reduced for a routine accounting work. This area may not be as critical as the other, but it is an area to be taken into consideration.

The prison system in the U.S. could function at much lower cost, especially by having prisoners with relatively higher incarceration times incarcerated in nations that can provide same level of services and security as within the United States at a tremendously lower cost. The savings could be staggering, considering some of the statistics! According to John Dewar Gleissner, Esq.:

“At the beginning of 2008, 2,319,258 Americans were in prison or jail, more than in any other country in the world, and a greater percentage of our population is in prison and jail than in any other country in the world. At the start of 2009, the total incarcerated population in the United States was 2,424,279. That is just the number behind bars, four times more than are in the U.S. Army, more than Utah in the last census. The United States incarcerates more people than the Russian Federation, South Africa, Mexico, Iran, India, Australia, Brazil, and Canada combined. With 5% of the world’s population, the United States has 25% of world’s prisoners.”

(Source: How Bad is the Crisis in America’s Prisons? http://www.corrections.com/news/article/26861-how-bad-is-the-crisis-in-america-s-prisons- )

With regard to cost involved, “prisons cost taxpayers more than $32 billion a year. Every year that an inmate spends in prison costs $22,000. The cost of a life term averages $1.5 million.” (Source: Prison Facts, http://www.heartsandminds.org/prisons/facts.htm )

Until the common sense could prevail in our legal system, finding more effective and less costly ways for punishment, and for instance, not sentence an individual to five years for a $300 theft, which costs the public more than $100,000, we must seriously think about ways to cut the cost of incarceration in the United States; outsourcing would be a welcomed possibility.

Assuming the U.S. military presence or involvement is required around the globe in the future for whatever reasons. The least expensive way would be to hire and train foreign soldiers fighting instead of United States Forces. If the foreign soldiers get killed, the compensation is less expensive. If a soldier is maimed or critically injured and disabled, it is less expensive for the U.S. army to treat them medically in his/her own country of origin, and take care of them otherwise such as financial compensation. To get an idea as to what all is involved, here are some figures:

• US Military personnel killed in Iraq war: 4,754 as of January 28, 2011.
• Cost of War in Iraq and Afghanistan: $1,144,166,056,129 ($1.144 trillion) as of January 28, 2011.

The U.S healthcare system can be reformed indefinitely with no end to it! Since powerful interest groups are involved, it would be very difficult to achieve any major improvement, and any effort to reach this goal is time-consuming and costly. However, there could be many opportunity to outsource the medical “cost” without receiving a lower quality service from a low-labor cost nation. There are already arrangements available for practically all types of medical services in this regard. Certainly, there would be no limitation for the business people to exploit this opportunity, especially, when we consider that in 2009, the United States federal, state and local government, corporations and individuals, together spent $2.5 trillion, $8,047 per person on healthcare. This amount represented 17.3% of the GDP; up from 16.2% in 2008.What really demands an increase in outsourcing of healthcare is that the health insurance costs are rising faster than wages or inflation, and in turn, medical causes were cited by about half bankruptcy filers in the United States.

Since most of legal jobs are routine, such as preparing lease agreement, contracts, legal advice, etc. these “social-cost-inducing” jobs could be outsourced to low-labor cost nations. With the growing speed and ease of communication around the world, this should reduce the legal cost of doing business in the United States tremendously. Not only a great deal of the annual U.S. legal cost of over $180 billion will drop drastically, will it also make the services more efficient.

Bottom line is that we must only outsource those service sectors that are just social cost oriented, anything other than that, especially those sectors which are our social benefits and social profits should be kept here and protected rigorously. Until now, we were doing just the opposite. It’s high time to change our direction, and change it for better.

Farid A. Khavari is the author of nine books, dealing with oil, energy, Middle-East, healthcare, medical mal-practice, environment and cost. For details, please visit www.zerocosteconomy.com