Another Look At Outsourcing

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? )

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, )

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

FairTax Presented To Ways & Means Committee

Testimony of Karen Walby, Ph.D. Chief Economist Americans For Fair Taxation Before the House Committee on Ways and Means Hearing on Fundamental Tax Reform January 20, 2011.

It’s the first baby step towards real tax reform. There’s still a long long way to go for the grass-roots to gain some momentum. Pulling H.R. 25 out for a fair hearing is still a long way off. The politicos in Washington still seem hell-bent on bending the current tax code some more. Even to the extent of having a V.A.T. on top of the current income tax system, which would be doing a Kevorkian on the U.S. economy.


Egypt’s Unrest And The News Media

The political climate in Egypt doesn’t look good. But is that because of what we see on the news or because it really doesn’t look good?

I guess it depends on what the definition of ‘good’ is, and which side of the fence you are on. The side of democracy or the side of the Muslim Brotherhood. The latter of which want nothing to do with democracy. Well, unless you call Iran’s government a democracy.

Considering that the population in Cairo, the largest city in Egypt, is 6.8 million, is a riotous group of tens of thousands of people really representative of the other millions of Egyptians?

Not satisfied living in a country with a majority of Muslims where other religions are tolerated, it is apparent that the Muslim Brotherhood is trying to hijack the unrest over the economic disaster that Egyptians find themselves living in, and turn it into some sort of Islamic state like Iran; hostile to the West, Israel, and the rest of the non-Muslim world.

Calling for Mubarak to step down before the scheduled September elections, like President Obama has done, plays into the hands of the radical Islamists. And his calling for all opposition parties to have some representation in the ‘new’ government, including the Muslim Brotherhood, only exacerbates the problem. That irresponsible action just reinforces what we are shown in the media. Pretty presumptuous of our President to tell Egyptians how their government should be assembled. No doubt President Obama is overflowing with audacity.

The only reason for optimism in Egypt now is that the other 6.7 million Egyptians will keep a secular and more democratic government in place. Given the choice in a free and legitimate election, it is hard to imagine that they would choose a government that is anything like Iran.

What Liberals Don’t Know About Guns

Fresh off of blaming Jared Loughner’s killing spree in the Tucson mall on Sarah Palin, liberals are now blaming it on high-capacity magazines. They might as well imprison everyone named “Jared” to prevent a crime like this from ever happening again.

During the presidential campaign, Obama said: “I don’t know of any self-respecting hunter that needs 19 rounds of anything. You don’t shoot 19 rounds at a deer, and if you do, you shouldn’t be hunting.” It would have been more accurate for him to end that sentence after the word “hunter.”

It’s so adorable when people who wouldn’t know a high-capacity magazine from Vanity Fair start telling gun owners what they should want and need.

Continue reading What Liberals Don’t Know About Guns

Obamacare Is Void, Lawless Administration Doesn’t Care

That’s the bottom line where Judge Roger Vinson’s opinion on the State of Florida v. U.S. Dept. of HHS is concerned. Judge Vinson of the United States District Court for the Northern District of Florida yesterday became the second federal judge to strike down Obamacare’s individual mandate.

Drawing on the precedent of the original Boston Tea Party was not only valid, but whether intentional or not, was a nice kick in the pants balls to the political Left that non-stop demonized the ‘tea party’ of today. Attaching a vulgar sexual act to them.  ? Maybe projecting what really turns them on.

Judge Vinson writes . . .

“It is difficult to imagine that a nation which began, at least in part, as the result of opposition to a British mandate giving the East India Company a monopoly and imposing a nominal tax on all tea sold in America would have set out to create a government with the power to force people to buy tea in the first place. If Congress can penalize a passive individual for failing to engage in commerce, the enumeration of powers in the Constitution would have been in vain for it would be ‘difficult to perceive any limitation on federal power’ and we would have a Constitution in name only.”

Like Judge Henry Hudson of the United States District Court for the Eastern District of Virginia, Judge Vinson also found that Section 1501 of the act, which forces all Americans to buy government-approved health insurance policies, “falls outside the boundary of Congress’ Commerce Clause authority and cannot be reconciled with a limited government of enumerated powers.”

But then Judge Vinson went even further, concluding that “the individual mandate and the remaining provisions are all inextricably bound together in purpose and must stand or fall as a single unit.” Accordingly, Vinson concluded: “Because the individual mandate is unconstitutional and not severable, the entire Act must be declared void.” {emphasis added}

Judge Vinson further explained the problem with the mandate part of the bill.

For the reasons stated, I must reluctantly conclude that Congress exceeded the bounds of its authority in passing the Act with the individual mandate. That is not to say, of course, that Congress is without power to address the problems and inequities in our health care system. The health care market is more than one sixth of the national economy, and without doubt Congress has the power to reform and regulate this market. That has not been disputed in this case. The principal dispute has been about how Congress chose to exercise that power here.30

And to that point, Judge Vinson expounded on what is faulty with a federal mandate by using then Senator Barack Obama’s own words. Oh ya gotta love it. {Free cheesesteak for Judge Vinson.} Judge Vinson continues . . .

30 On this point, it should be emphasized that while the individual mandate was clearly “necessary and essential” to the Act as drafted, it is not “necessary and essential” to health care reform in general. It is undisputed that there are various other (Constitutional) ways to accomplish what Congress wanted to do. Indeed, I note that in 2008, then-Senator Obama supported a health care reform proposal that did not include an individual mandate because he was at that time strongly opposed to the idea, stating that “if a mandate was the solution, we can try that to solve homelessness by mandating everybody to buy a house.” See Interview on CNN’s American Morning, Feb. 5, 2008, transcript available at:

{great research Judge}

Here is Obama’s quote in context. He was responding to Sen. Hillary Clinton’s idea of mandating health insurance . . .

OBAMA: Let’s break down what she really means by a mandate. What’s meant by a mandate is that the government is forcing people to buy health insurance and so she’s suggesting a parent is not going to buy health insurance for themselves if they can afford it. Now, my belief is that most parents will choose to get health care for themselves and we make it affordable.

Here’s the concern. If you haven’t made it affordable, how are you going to enforce a mandate. I mean, if a mandate was the solution, we can try that to solve homelessness by mandating everybody to buy a house. The reason they don’t buy a house is they don’t have the money. And so, our focus has been on reducing costs, making it available. I am confident if people have a chance to buy high-quality health care that is affordable, they will do so. That’s what our plan does and nobody disputes that.

Oh what a difference a couple years make.

Refusing to take NO for an answer the administration intends to ignore the Judges ruling that the legislation is VOID. Because the judge did “not order the government to stop implementing the law, a senior administration source said ‘implementation will proceed at pace.'” Legally speaking, when the legislation is considered VOID by the judiciary, the other branches have nothing to go on to proceed. They have to either appeal it or ask for a stay. Tomorrow, President Obama ought to request the senate to repeal the bill and start over. Don’t hold your breath for that to happen. Ignoring the ruling just highlights how lawless this administration is. It is the Chicago way. It’s what community organizers do.

Fed Policy, Govt. Policy, Egypt Burns

Here’s a little ditty that the mainstream media won’t touch with a ten foot pole. That’s because the Obama administration, environmentists, and the Federal Reserve are not insignificant players in the rioting and unrest we are seeing in the Middle East, and in the rise in prices of foodstuffs around the world. WHAT you say?

For years now, the United Nations has been complaining that they can’t continue to feed all they need to for a lack of money caused by the rising food cost. This is a direct consequence of bio-fuel nonsense where the United States is using food (corn) to put in our gas tank. This causes all kinds of food to be more expensive. Not just for foodstuffs made from corn, but meat and poultry products because it is also food for the livestock.

Compounding that is the enormous spending of the Federal Reserve. The effect of that has contributed to the increase in food prices not only here but everywhere else in the world.

Chriss W. Street at Big Government writes . . .

QE2 money quickly drove up commodity food prices around the world. This price rise is barely noticeable to Americans who only spend 10% of their personal income on food for three meals a day; but the impact of food inflation is devastating the over half the world that spends approximately 50% of personal income on food for two meals a day. The 15% QE2 induced commodity food price increase has reduced the amount of food poor people can purchase by almost 1/3.

The riots and revolutionary activity burning down Tunisia, Yemen, and Egypt are about gut-level economics. Do you think Americans would riot and throwing out our government if we were forced to cut back to eating 1 1/3 meals a day? Once riots start people in cities hoard food to survive and becomes dangerous for farmers to transport food. This is exacerbates food shortages and drives prices even higher.

When you consider how lucky we are to live in the United States, where 10% of our income goes for food for three meals a day,  a rise in food prices is not as much of an issue as it is in other parts of the world like Egypt, where food consumes 50% of their income for two meals a day. Couple that with outrageously high unemployment while the ruling class lives the high life, and you have a powder keg in the making.

UPDATE 06:50:

As if there isn’t enough evidence of how government policies were accomplices in Egypt’s revolution, new evidence points to the role of labor unions and the American Left in orchestrating it:

For all the lack of clarity on where the Obama administration stands, one thing is becoming more and more clear: Signs are beginning to point more toward the likelihood that President Obama’s State Department, unions, as well as Left-leaning media corporations are more directly involved in helping to ignite the Mid-East turmoil than they are publicly admitting.