McCain's Chief Economic Advisor on Outsourcing

Small businesses have been responsible for generating between 60 and 80 percent of all the new jobs in the U.S. for the last decade, according to the U.S. Small Business Administration's job statistics. Small businesses also employ about half of all the people working in the private sector. As I see it, this means any politician who claims to have a viable plan for reviving the economy must take small businesses into account. An economic plan that overlooks the small business component is simply not credible.

But what, exactly, can the government really do to help small businesses flourish in the U.S? I recently chatted with Douglas Holtz-Eakin, Sen. John McCain's chief economic advisor, about this question. I asked him specifically what government could do, if anything, to make keeping jobs in America more attractive. His response was pragmatic.

"The basic calculus is pretty straightforward. You look at what it will cost, what your productivity is here, and what it is there, and how you'll net out. Business people have to do that arithmetic. But the government can do a lot on both sides of that equation. Cutting taxes and alleviating direct cost burdens and, more slowly, [enacting] health care reforms that take some of the cost pressure off, and education reforms that produce better workers in the U.S.

"The fact that so few of our high school students are finishing, and those that do graduate are unready to go to college is very troubling in the long term. For a small business that typically has to rely on a handful of critical people, having a highly skilled labor force that can switch between tasks and juggle things is everything. It's how those businesses make it."

What about the argument that the net effect of outsourcing for Americans is positive? Even if workers lose job A due to outsourcing and take job B, which pays less, they benefit because the goods they buy every day are much cheaper.

"The arithmetic [of free trade] is utterly compelling. One of the most powerful forces that we've seen is the ability to open new markets. A lot of people are focused on the international dimension, but the same thing happens across states in the United States. It's the same phenomenon where trade taking advantage of a lower cost opportunity benefits the customer, with lower prices, but also builds the scale of the firm and helps people that way.

"The difficulty of course, is that not every single person gains unambiguously from these kinds of changes, whether they're domestic or international, and I think the appropriate course is not to shut off the engine of progress but instead to identify ways to pick up those folks who clearly haven't benefited from these changes and get them back into an opportunity where they might."

The net? Lower taxes, healthcare reform, better education, and help for the dislocations free trade is bound to produce for some.