A New York firm has just been fined $3.1 million by the State for outsourcing work to India. No, this isn't a pre-emptive strike by the Trumpistas against people shipping jobs abroad nor have the Sanderistas managed to do the same. Rather, it's a straight up breach of the terms of the contract and as such the action is just fine. However, reading a little deeper into the story it's possible to see why such offshoring does take place. And, further, why such offshoring makes us all richer. I should, for complete disclosure, point out that I am involved in such offshoring. A small company I work with in the Czech Republic competes against Indian companies for American business--the Czech Republic being in NATO means more opportunity to do military-related work than India offers. You could take this to mean that I'm biased on the subject or you could just think that it means that I am personally informed on the subject. But as I say, to me the real story here is the value to the U.S. of such offshoring.
The basic story is as follows:
A US contractor has been ordered to pay a hefty fine of $3.1 million dollars for illegally outsourcing government-funded work to a subcontractor based in India.
Focused Technologies Imaging Services, its sole owner Charles Tobin and former co-owner Julie Benware agreed to pay the penalty and fees under an agreement with New York State Attorney General Eric Schneiderman after admitting that they violated New York federal laws by illegally outsourcing the work to a subcontractor based in Mumbai in 2008 and 2009.
No, it's not illegal, per se, to offshore work to India. However, it is entirely possible for a specific contract to be illegally offshored to India, or indeed anywhere else. In a very different business I have handled work which can be offshored anywhere anyone likes, as long as it's not China. And yes, such provisions were written into the contract (for military reasons). This is about the difference between contract terms agreed to, not about the law itself.
So, what was the problem?
Focused Technologies Imaging Services of Menands, N.Y., was awarded the $3.45 million contract in 2008.
But according to the authorities, rather than fulfill its contract, it did what so many businesses have done in recent years: outsource the work to India.
For the price of $82,000, an Indian company processed millions of records and performed more than a third of the entire contract’s work — risking the privacy of some 16 million people.
The problem with this was:
The contract for the job required that employees responsible for scanning the records pass background checks and protect the security of the documents. As a 'preferred source' contract, the majority of the work was to be done by people with disabilities.
The Indians had not (and would not, not because they weren't good people but simply because they wouldn't pass a New York test) that security clearance and background check and they also weren't disabled. Two strikes against the contract terms and it's just fine, just and righteous even, that New York State should fine those who abused a contract with said State. One of the joys of the basic Common Law is that you can structure a contract pretty much however you like and then the various parties are held to the terms they freely agree to. It's one of the joys and flexibilities of the Anglo Saxon legal and economic world.
However, to me by far the more interesting part of the story is the price difference there. Assume, just for the sake of it, that one third of the contract's work really does mean one third of the contract's work (programming contracts tend not to really work that way, it's the checking that normally takes the bulk of the time but let's assume). That would mean that the outsourced method of doing this work would cost $240,000 or so. But the contract itself was for $3.45 million. A reasonable assumption now is that that $3.2 million difference, well over 90% of the total value, is the extra cost of doing it in New York, with disabled and approved American workers, rather than outsourcing it to India. And that is, by the standards of these things, a huge difference.
We can indeed consider the value of having the proper security clearances for the people doing this work. And also the value of providing employment for disabled people in New York (I'm absolutely fine with the security issue, think perhaps that aiding the disabled could be achieved in a cheaper manner). But just look at that massive price difference--that's why offshoring and outsourcing takes place.
Leave aside those two specific issues and think just of that cost. Is New York, or are the people of New York, richer or poorer by spending $3.45 million that stays in-State or by spending $240,000 to get the same job done which doesn't? Sure, we can say that the money staying in-State will go around and around in a multiplier but then so will the $3.2 million they don't have to spend on this task in India. With these numbers I think it's pretty obvious that the State, the people of it, are made richer by having the work done in India, however you want to play that nativist multiplier card. They get the work done and also that $3.2 million to spend on something else.
And that of course is why trade makes us richer--because of the imports we get. For this work is indeed an import. This is the point and purpose of trade, that we get foreigners to do for us the things they can do cheaper than we can at home. We could even say that this offshoring increases the trade deficit. It still makes us richer, doesn't it? And thus to our public policy point about trade. Why would we want to make ourselves poorer by imposing a tariff on imports, restrict our access to the very part of trade that makes us richer, the imports we gain from trade?
