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Outsourcing Social Cost or the "Socialization" of Cost!

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In 1993, the Miami Herald asked me to express my opinion about 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 outsource our "social profits" and our "social benefits" to the other countries, depriving American citizens of 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 seriously the outsourcing of our manufacturing jobs to over 2 billion people with a tremendously lower standard of living worldwide versus our roughly 320 million people with a 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 can we 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."

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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 include 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 could have been possible in the nation which outsources those jobs. Social-cost-inducing jobs are predominant in the service sector whereas they can be found to a much lesser extent 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 take a chunk of the social benefits and profits away from the economy. These jobs are kinds 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 "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 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.

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The reason for discussion about considering the above-mentioned sectors of the economy as social cost is at 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 one's health to its original condition. Healthcare must be made as inexpensive as possible. Legal services are similar to healthcare. One suffers healthcare costs because one has to get rid of a physical headache; with regard to the legal services, one needs to pay his/her legal fees to keep the future financial headaches away or deal with them as one may face them in the future. With healthcare and legal services, we have to be on permanent guard--either dealing with "curative" or "preventive" measures! And, that causes plenty of unnecessary cost!

Accounting definitely does not cost as much as healthcare and legal services. Accounting is the easiest task to outsource at a drastically lower cost, achieving the same services as are possible in the United States, especially considering the growing speed and ease of electronic communication systems worldwide. For example, as an average, the accounting cost for a small business runs around $2,000 annually, which could be drastically reduced for 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 the same levels of services and security as he United States provides, but at a tremendously lower cost. The savings could be staggering, considering some of the statistics! According to John Dewar Gleissner, Esq.:

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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

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