A reader was kind enough to send me “How to Make an American Job Before It’s Too Late” by Andy Grove, CEO of Intel during its 1987-2005 ascendancy to world dominance. The article contains some interesting points, including statistics on how much it cost to create jobs at Intel and National Semiconductor ($3600 and $2000 in today’s dollars; compare to estimates of $100,000 to $1 million per job created by the latest government stimulus spending (example; official report)).
The article contains the familiar list of woes that have beset the American worker, as manufacturing industries have migrated to Asia. I rather expected the article to end with an inspiring call to make the U.S. a more attractive place to do business. The wise Andy Grove, an immigrant from the planned economy of Hungary, would advocate for better educated workers, a tax and regulatory environment that encouraged business formation, a government that did not spend all of our money on retired public employees, the world’s dumbest health care system, etc. Instead I was shocked to read that his big solution is a massive tax on imported goods and then recycle that tax into expansion capital for growing companies.
Now that so many of our manufacturing industries are well and truly dead, I don’t see how taxing Chinese-made goods helps American firms. There aren’t any U.S. companies making mobile phones or PC components here, are there? As for the tax revenues being recycled into capital funds, the entire world is already awash in capital. Have we seen news stories about U.S. manufacturing firms eager to expand but constrained due to a lack of capital? If we were to implement Andy Grove’s idea, wouldn’t the government-run capital fund simply displace existing private capital sources? The U.S. private economy isn’t growing, which means that it doesn’t need much capital. If all the capital needs of those U.S. companies that are expanding (taking the place of the shrinking ones) were supplied by a government fund, the private sources of capital would have to lend all of their money in Asia, Latin America, etc.
I’m surprised at how many people think that we can cheat our way out of the economic doldrums, i.e., doing something other than making the U.S. a more attractive place to do business (as I suggest in my economic recovery plan). If it were that easy, why would poor African nations still be poor?
Some manufacturing will be coming back to the US as the Chinese currency gains strength. A spike in oil prices would increase the cost of shipping, making local production even more attractive.
tarriffs are even less likely to work since demand for such goods can now be found elsewhere e.g. Brazil, Chile, India and other emerging markets.
I agree that the capital fund is a dumb idea.
I agree that government pensions are a problem.
But you underestimate the intelligence and productivity of the American worker: companies don’t go to China because the Chinese are *smarter*, it’s because they are *cheaper*, about $0.41/hr according to this[1]. So your plan is to compete by working for $0.41/hr? in these conditions:
http://www.nytimes.com/2007/11/26/nyregion/26manhole.html
If low wages and lack environmental or safety regulations are the criteria for being a Business Paradise, shouldn’t Africa be prospering and Germany be moribund?
The US is still a very “attractive place to do business” for these “firms” when they *sell* the products. Why not say “if you want access to our market, you will operate according to our laws?” China does EXACTLY THAT, by placing restrictions on domestic ownership and requiring “technology transfer” from on Motorola and Boeing in the 1990’s.
How did we get from “life, liberty, and the pursuit of happiness” to “emulate the filthiest and most repressive countries in the world?” (containerization, I suppose)
[1] http://www.manufacturingnews.com/news/06/0502/art1.html
I think that if we ALL blow REALLY hard on the sails, this boat would go forward. And if we could get a fan back here on the quarter deck we would just be zooming along.
Hubbert: http://www.nytimes.com/2010/07/02/business/economy/02manufacturing.html says that many applicants for manufacturing jobs here in the U.S. could not pass a 9th grade math test and were therefore rejected. My economic recovery plan does not advocate cutting wages for American workers. Indeed, I wrote it before the U.S. adopted a planned economy and therefore I did not envision a command-and-control center in Washington, D.C. being able to tell companies how much to pay. I advocated reduced government spending, a change in capital expense deductibility, eliminating public employee unions (starting with those for teachers), congestion pricing for our roads, more predictable product liability, allowing investors to control public company boards (rather than the looting executives and their golf buddies), and immigration policy changes. These are all things within the government’s direct control.
The only time that I advocated for anything like wage reduction is in suggesting the elimination of minimum wage laws, which is really more about enabling low-skill workers, such as teenagers, to enter the workforce legally.
You say that I “underestimate the intelligence and productivity of the American worker”. If you think that the 15 million Americans who are unemployed are a fantastic untapped resource, you can make infinite money by hiring them! The rest of the world’s employers aren’t interested in these folks (otherwise they would have jobs), so you can hire them all at the modest federal minimum wage. If you earn even $100/year in profit from each worker, you’ll have a personal income of $1.5 billion per year.
Poor African nations are poor, largely, because of a complete lack of stable institutions promoting any kind of investment, contract enforcement, and long-term stability.
thepolemarch: Gregory Clark’s A Farewell to Alms debunks the theory that stability inevitably leads to economic growth. He has data going back to the 1200s in England showing that the English had property rights, a relative lack of civil violence, and low taxes. Nonetheless the economy stagnated for hundreds of years. He attributed England’s eventual rise, which started about 100 years before the Industrial Revolution (i.e., it wasn’t technology that go them started on the growth path), to a change in genetics (wealthier people having more surviving children) and a gradual rise in education levels. There is no evidence that the U.S. is changing genetically in a way that will be positive for economic growth. There is plenty of evidence that the U.S. is falling behind, at least relatively, in education level.
How about putting Americans to work by building a state-of-the-art, second-to-none rail system. I mean a system that reaches into every corner of the country. Enable domestic start-up companies to produce everything from the tracks to the computer tracking.
It would utilize educated and non-educated workers, lessen our dependence on foreign oil, and provide employment for decades, as well as tax revenue.
It’s time to chart a new course here. The answer isn’t to dumb down our payrolls to China’s level. It’s to be innovative and progressive. Imagine a system of high speed rail travel with wifi enabled, virtual office capability.
We need something fresh and new.
Phillip:
Addressing the NY Times article later, to your suggestions I would not add a “command-and-control center,” but would seriously consider adjusting trade policy, which is also “within the government’s direct control.” We’ve lived without Cuban cigars since 1960, and survived the Cold War without Ladas, Skodas and other Eastern Bloc cars that were sold in the UK & Canada: would it really kill iPhone aficionados to pay an extra $25 for a product made under Western labor and environmental rules?
The economic orthodoxy has been wrong on this issue since 1817, when David Ricardo recommended that Portugal focus on wine production and import textiles from the UK. The UK applied its textile experience curve and economies of scale to dominate other manufacturing industries and developed a military and economic advantage over Portugal that persists today, and is also the world’s bullion capital in part due to receiving huge quantities of Portugal’s Brazilian gold in settlement of the trade deficit[1].
(At least Portugal’s advantages were related to climate and soil: China’s only “advantage” is the absence of Western standards for Intellectual Property, the environment, and workers, which we should denounce, not emulate.)
Regarding “the productivity of the American worker,” according to the UN’s 2007 report[2], the average US manufacturing employee produced $104,606/year compared to his Chinese counterpart’s $12,642 (overall, Americans were #1 worldwide in GDP/worker and #2 worldwide in GDP/hour). How does producing 8X more than a Chinese worker fit the “Americans are stupid and lazy” thesis?
The NY Times article was mostly about a single individual’s difficulty in paying people $13/hr. Maybe he should pay more. If he’s really being honest about seeking people with basic skills, then he’s very unusual.
The other employer quoted was more typical: he didn’t talk about basic academic skills (in which the US is consistently near the top[3]), but seemed to be rejecting anyone who didn’t perfectly match his exquisitely specific wish list of prior work experience. Is it reasonable to blame someone for not having a specific combination of highly esoteric prior experience, especially when it is:
* Not taught in school
* Can only be acquired in a workplace
* will quickly become obsolete and,
* will be of no value to a subsequent employer (who will probably use a different brand of CNC machine, or a competing software tool).
Internal training and allowing for a ramp-up phase seem to have disappeared.
[1] http://jesusfelipe.com/perils-and-pitfalls
[2] http://www.cbsnews.com/stories/2007/09/03/business/main3228735.shtml
[3] http://www.urban.org/publications/411562.html
JT: I assume that you’re talking about passenger rail. One problem with passenger rail is that it consumes a lot of energy. Freight rail is very efficient because the vehicle is very light compared to the freight. A passenger train is extremely heavy compared to the payload. A family of four traveling in a minivan will consume less energy than one traveling on AMTRAK. Of course, in congested urbanized parts of the U.S. (which will be pretty much all of the U.S. by 2100 when demographers forecast us to have 600 million to 1 billion population), an investment in rail should pay some big dividends and any investment in rail would probably be better than the recent stimulus, which mostly enabled states to continue paying unionized civil servants 2-3X more than their taxpaying citizens.
Hubbert: Productivity per manufacturing employee is primarily a measure of how much capital equipment is installed in the plant. Suppose that Intel makes a $3 billion brand-new fab that is almost completely automated. It turns out $2 billion of chips every year. I am the only employee and my job is to watch for a serious problem, in which case I will press a big red shutdown button. My productivity is $2 billion per year. You can celebrate me for my heroic efforts, but the fact is that the machines are doing everything and I have no skills except the ability to recognize a fire or wafers spewing out onto the floor.
Once again, if you think that American workers, or a subset thereof, are undervalued or underpaid, you can make near-infinite money simply by employing them and then selling the results of their labor.
One possibility for outsourcing being so popular is that rent seeking entities are running the show in the US. Rent seeking entities do not care where the product or service is produced, as long as they can collect a nice markup they are happy and the share holders of the company are happy. To a rent seeking entity producing products where they are the cheapest makes the most sense because they can extract the biggest markup. Currently in China, the engineers are in charge (technocratic government), in the US lawyers are in charge (rent seeking government), but then lawyers are also slowly gaining power in government in China. All we have to do is wait for the lawyers to take over in China, and watch the productivity drop, then the US will be able to get back to manufacturing, this assumes that their is anybody left in the US that remembers how to manufacture products.
http://www.newsweek.com/2009/09/07/right-brain.html
Nice response to Grove’s article:
http://www.marginalrevolution.com/marginalrevolution/2010/07/the-andy-grove-essay.html
“Only he who first shows he understands comparative advantage has license to partially reject it.”
OK, let’s try again. Can any of you who decry the loss of manufacturing jobs in the US explain why it is better to make something that you can drop on your toe than it is to use your brain to create wealth? Would you want your child to work in a noisy, dangerous factory, or sit behind a desk dreaming up things that make money? On the back of my iPhone it says “Designed by Apple in California. Assembled in China.” Who do you think gets most of the profit from that iPhone, California or China? American movies and TV dominate the entire world, most of that money ends up back in the US. The same goes for a large proportion of the music industry. But let’s give all that up and go back to making buggy whips. Hello, McFly?
@Stephen, We already have Americans sitting “behind a desk dreaming up things that make money”; folks on wall street, financial sector, banks, and CxO. They make up less than 1% of American population. When their “making money” dreams didn’t work out, 2% of American population — the government, who also sit behind a desk “dreaming up things that don’t make money” — has to dream up ways to rescue them.
Do we really think Joe six-pack sitting “behind a desk” capable of “dreaming up things that make money”?
On a related topic, retaining the unemployed is not at all what it was cracked up to be.
http://www.nytimes.com/2010/07/19/business/19training.html