The President said this last year:

“The hard truth is that some of the jobs that have been lost in the auto industry and elsewhere won’t be coming back.”

He’s hardly the first to have said it. John McCain, for example, said exactly the same thing. More to the point is a statement by then-candidate Obama in 2008 that is often quoted to his detriment but points out some useful history (part of the so-called “bitter clinger” remarks):

You go into some of these small towns in Pennsylvania, and like a lot of small towns in the Midwest, the jobs have been gone now for 25 years and nothing’s replaced them. And they fell through the Clinton administration, and the Bush administration, and each successive administration has said that somehow these communities are gonna regenerate and they have not.

He’s right, though his reflexive defeatism is precisely the heart of the problem when it comes to government policy. The underlying issue has been around for two generations now, and the US government has not been serious about dealing with it. While is it certainly not possible to prevent all the job losses, a good portion of the losses are self-inflicted. The US jobs policy has become, in many ways, unilateral disarmament, and if you won’t join the battle, the only outcome is defeat.

US industries have been under calculated attack for decades by foreign governments. This is not necessarily sinister — after all, it’s good business. The first great achievement was Japan’s. After WWII, Japan exported cheap junk to the US and “Made in Japan” was a joke stamped on some toy that broke the day after Christmas. In 1949, Japan started MITI to coordinate its industrial export policy. MITI had a wide range of powers, including some controls on capital flows and exchange rates.

By the 1960′s MITI had a lot to work with. The historic zaibatsu had become several major keiretsu, interlocking industrial and service companies, typically organized around a source of capital, and either vertically or horizontally integrated as needs determined. MITI’s goal was to move Japanese companies up the value-added food chain so they could produce and export more complex and profitable products and dominate entire industries. Their secret weapon was the intelligence, determination, and discipline of the extraordinarily hardworking Japanese people.

Among the first targets of Japan Inc. was the US auto industry, which had become fat and lazy. In 1960, GM accounted for about half of all US auto sales (less than 20% today). The US automakers viewed the first Toyota exports, the 1964 Corona and 1966 Corolla as jokes. But by the early 1970′s the declining quality of US products, the increased quality from Japan, and the relative price/value ratio of Japanese products revealed in the first oil shock, set the stage for the secular decline of the US industry. Instead of responding by increasing US quality and innovation, the American car companies responded as declining oligopolies often do, displaying arrogance and using political power instead of addressing the real problems. Hence, instead of product improvements, Americans got “voluntary import restraints” in 1981.

Japan targeted other industries as well, and the story was similar. In some industries, there was genuine outrage and real confusion as to how Japan could do what it was doing. A common refrain was that Japanese producers were selling “below cost” and “dumping” products to capture market share and drive American producers out of business (a complaint still heard today). While no doubt this occurred, there was also often sound business logic at work. Let’s take a look.

You are familiar with the “learning curve” concept. In fact, it is quite specific. Every time you double production, costs go down 20% or so, and this is true for a wide range of products. Bruce Henderson’s Boston Consulting Group made a lot of money in the 1970′s by selling this insight as business strategy around the world. It is powerful and simple. (The following example is for illustrative purposes only.)

It is 1975. RCA and Zenith sell TV’s at $500. You are Sony. Your TV’s also cost $500. But if you sell enough TV’s to capture 50% of the market in three years, your TV’s will only cost $200 to produce. This insight empowers you to ramp up production, sell at a much lower price than your competitor, and make long-term profits. So you, Mr. Sony, sell your TV’s at $300 and capture all that market share. RCA and Zenith yell that the Japanese are “dumping” but Sony’s total profits over the three years on the the entire TV product line are very good. Bottom line: foreign competitors win, US companies exit the business. In 2010 the US TV set market was about $27 billion, and TV’s produced in the US are effectively $0. It is a story that has been repeated in product after product that used to be Made in the USA.

Bruce Henderson famously said: “Dumping should be encouraged. It is a gift from the nation that provides the products.” That is certainly true for consumers, but it is a lousy basis for America’s industrial policy.

In the last twenty years, we have seen this story reprised once again with China. China, suddenly capitalist, started exporting cheap junk, and continues to make hay doing that and more. (5000 of Wal-Mart’s 6000 suppliers are in China.) There are those who say that this migration is inevitable in a world of free trade, and that after China’s costs go up, the cheapest products will be made in Vietnam or Malaysia or somewhere we’ve never heard of. That is true for certain jobs, but it is no excuse for America committing industrial suicide. (The issue of differential wage rates should be the last item on the checklist, not the first.)

It seems a bizarre statistic, but manufacturing employment in the US computer industry today is lower than what it was before the first PC was introduced. During that same period, Taiwan-based Foxconn has grown to be a $62 billion company. Its 800,000 employees, many of whom are in China, number more than the total employees of Apple, Dell, Microsoft, Hewlett-Packard, and Intel — combined.

You would think that these avatars of American progress would be expanding in the US, but they’re not. You can’t build a plant in the US even if you want to. For starters, it costs at least one-third more than building it in China. Almost all of the additional costs come from government compliance. And none of that captures the multi-year delays involved in doing anything in the United States.

Beyond that, the US corporate tax structure is perfect — if your objective is killing jobs. Since the US corporate tax rate is the highest in the industrialized world, the simplest way for a company to make money is to make it offshore and keep it offshore, since repatriating profits is so expensive. It costs 35% to bring the profits back to the US, itself twice as high a rate as exists in competitor nations. And since there are such high structural impediments towards using those funds to expand US production and jobs, the Rube Goldberg tax holidays (dreams of both Bush and Obama) simply don’t work.

It is no wonder then that instead of creating US jobs, large corporations are keeping their earnings offshore, or coming up with schemes that give the appearance of keeping their earnings offshore. This amusing graphic of how Google gets a 2.4% tax rate through such machinations no doubt cost millions of dollars in fees to tax counsel.

We have watched this decline in US industry for far too long. It is past time to get serious about taking the steps that are necessary to creating jobs at home — the model that says “China produces, and Americans borrow from China in order to buy goods from China” is irretrievably broken. The numbers do not work; repeat, they do not work. In industries from natural resources to technology, America needs to get rid of ridiculous, self-imposed barriers to creating jobs at home rather than in distant lands. If we do not, our destiny is continued decline, but such decline is not inevitable.

After all, even after all these years of missteps in government policy, the United States is still the number one exporter of farm products, and nothing is more basic than that. If we can grow wheat and corn, surely we can manufacture widgets. What we cannot abide is a succession of administrations who take it as a given that “the jobs are not coming back” to America. That is a self-fulfilling prophecy of the most pernicious sort.

What we propose is not a panacea — it’s merely an attempt to create an apples-to-apples comparison before we begin to make sweeping judgments about the future. We need to remove America’s unnecessary structural disadvantages in tax and regulatory policies that have crept in over time (and alter the mind-set that attributes zero cost to these measures). We must create as level a playing field as possible on the international stage. We need to remove crazy burdens from entrepreneurs and small employers first. Then we can try to have a meaningful debate about where jobs should go and why.

This entry was posted on Saturday, November 13th, 2010 at 10:24 pm and is filed under business, China, Democrats, EU, General, Republicans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.