What went on while we slept
Andy Grove, the Hungarian refugee from 1956 who went on to become the third employee and CEO of Intel, has a fascinating and important piece in Business Week on the heavy lifting that lies before us if America is to re-learn what it has forgotten about being an industrial power:
Today, manufacturing employment in the U.S. computer industry is about 166,000, lower than it was before the first PC, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer manufacturing industry has emerged in Asia, employing about 1.5 million workers — factory employees, engineers, and managers. The largest of these companies is Hon Hai Precision Industry, also known as Foxconn. The company has grown at an astounding rate, first in Taiwan and later in China. Its revenues last year were $62 billion, larger than Apple, Microsoft, Dell, or Intel. Foxconn employs over 800,000 people, more than the combined worldwide head count of Apple, Dell, Microsoft, Hewlett-Packard, Intel, and Sony…
most know the products it makes: computers for Dell and HP, Nokia cell phones, Microsoft Xbox 360 consoles, Intel motherboards, and countless other familiar gadgets. Some 250,000 Foxconn employees in southern China produce Apple’s products. Apple, meanwhile, has about 25,000 employees in the U.S. That means for every Apple worker in the U.S. there are 10 people in China working on iMacs, iPods, and iPhones. The same roughly 10-to-1 relationship holds for Dell, disk-drive maker Seagate Technology, and other U.S. tech companies…
The job machine breakdown isn’t just in computers. Consider alternative energy, an emerging industry where there’s plenty of innovation. Photovoltaics, for example, are a U.S. invention. Their use in home energy applications was also pioneered by the U.S. Last year, I decided to do my bit for energy conservation and set out to equip my house with solar power. My wife and I talked with four local solar firms. As part of our due diligence, I checked where they get their photovoltaic panels — the key part of the system. All the panels they use come from China…U.S. employment in the making of photovoltaic films and panels is perhaps 10,000 — just a few percent of estimated worldwide employment…
Scaling isn’t easy. The investments required are much higher than in the invention phase…How could the U.S. have forgotten? I believe the answer has to do with a general undervaluing of manufacturing — the idea that as long as “knowledge work” stays in the U.S., it doesn’t matter what happens to factory jobs. It’s not just newspaper commentators who spread this idea. Consider this passage by Princeton University economist Alan S. Blinder: “The TV manufacturing industry really started here, and at one point employed many workers. But as TV sets became ‘just a commodity,’ their production moved offshore to locations with much lower wages. And nowadays the number of television sets manufactured in the U.S. is zero. A failure? No, a success.” I disagree. Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution…
the free market is the best of all economic systems — the freer the better. Our generation has seen the decisive victory of free-market principles over planned economies. So we stick with this belief, largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better.
Such evidence stares at us from the performance of several Asian countries in the past few decades. These countries seem to understand that job creation must be the No. 1 objective of state economic policy. The government plays a strategic role in setting the priorities and arraying the forces and organization necessary to achieve this goal. The rapid development of the Asian economies provides numerous illustrations. In a thorough study of the industrial development of East Asia, Robert Wade of the London School of Economics found that these economies turned in precedent-shattering economic performances over the ’70s and ’80s in large part because of the effective involvement of the government in targeting the growth of manufacturing industries…
The first task is to rebuild our industrial commons. We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars — fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations.
The “China Builds / America Buys” model is broken for structural reasons. We can’t simply export debt and import products anymore. Perhaps the trickiest part of re-learning how to re-create large scale domestic job generators is to avoid the potential trade war that Grove seems to take in stride. No, on second thought, the toughest challenge is getting back the can-do attitude that seem to be missing from many in America and its leadership today.
July 3rd, 2010 at 11:11 am
Sadly, Mr. Grove’s desire for centralized industrial planning is the common idea of how to revitalize U.S. manufacturing.
At least part of the reason U.S. manufacturing jobs have declined while consumer purchases of manufactured goods have increased, is the severe penalties the U.S. tax code levies on fixed capital investment. Taxes on capital gains, double-taxation of dividends, the highest effective corporate tax rate in the OECD, and painfully slow depreciation of capital equipment purchases all mean that an investor or corporate decision-maker must think two or three times before investing in production facilities in the U.S.
When the capital investment is subsidized (which makes ROI less important) and union involvement can be avoided, as is the case with foreign automobile-manufacturing plants, American labor is competitive with any labor in the world. The advantages of being based in the U.s. outweigh the disadvantages.
This could be overcome to some extent by adopting a centrally planned capital fund, as Mr. Groves suggests, but that invites the type of corruption and inefficiency endemic in such economies.
A much better route would be to remove the shackles from capital. Increase the income tax to make up for it, if need be, but let’s get America back to work!