Andy Grove: How to Make an American Job Before It's Too Late

[brandon184]

How to Make an American Job Before It's Too Late: Commentary by Andy Grove - Bloomberg

Clearly, the great Silicon Valley innovation machine hasn’t been creating many jobs of late -- unless you are counting Asia, where American technology companies have been adding jobs like mad for years, Bloomberg Businessweek reports in its July 5 issue.

The underlying problem isn’t simply lower Asian costs. It’s our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world. New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called “Start-Ups, Not Bailouts.” His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups.

This is an interesting piece. What I found just as interesting was another discussion about this article that I was following. Some excerpts from that conversation below:

The real elephant in the room, which Grove and practically everybody else knows very well but refuses to talk about, is that nobody starts a company to employ people. People start a company to make stuff. To the extent this can be done with fewer people, this is always a good thing from that company's perspective, with no exceptions I can think of offhand. People suck, and you don't want to deal with them if you can help it. Just as factory farmers would love to be able to grow meat in vats without dealing with the messy parts of animal welfare and husbandry, most managers would love to be able to carry out their missions with fewer people. This is a simple reality of productive life, not a question of social morality or human values.

Why does it make sense for companies like Foxconn to take on more and more of our high-tech manufacturing work? Simply because, in contrast to most of the twentieth century, most consumer products are built pretty much the same these days. There is absolutely nothing about a PS3 that requires different components, production lines, or assembly techniques from a desktop PC. There is nothing about an iPhone that justifies building it in a factory that doesn't also make pocket calculators, handheld game consoles, or, hell, competing phones such as Droids. Massive contraction and consolidation of the manufacturing sector, whether here or elsewhere, is both desirable and inevitable. Right now this is true of high-tech items but soon enough, it will be evident enough across the spectrum of durable goods.

His example of the alternative energy space is a perfect one demonstrating the inability of even new industries invented in the US to remain here. All the "scaling" happens in China, leaving little secondary benefits to the innovating nation. Why can't your oscilloscope be made here? Sure, they have the know-how, but so do we. They have assembly lines, so can we. In theory there shouldn't be a problem. But in the real world, we know the playing field isn't level. Like how China allows externalities to develop by quashing labor/worker conditions and the environment to create the perfect arbitrage situation for offshoring US entrepreneurs. Can't forget their dollar/yuan "managed" exchange rate. Again, they are subsidizing the offshoring startup. China has clearly stacked the deck hence the inevitability of your oscilloscope being made overseas. This is by design and its all policy-driven. Should the US sit idly by as a de facto trade war is staring at them in the face? Or should they follow through with the offshore tariff that Andy suggested?

The American standard of living is higher than China. In order for a worker in the US to continue to enjoy his standard of living and salary, she must contribute to creating something of value equal to what she consumes that is then exchanged at a market price(which determines it's value relative to goods/services created by others). When the US is a leader in technology and innovation, we create things that are very valuable, because rare and productive people make them, and trade them for other, largely commoditized goods, from poorer countries. The reason these commoditized goods are produced in poorer countries is because they can... The ability to produce them is well known so there is more competition, and therefor demand, and the price drops, along with the wages. If you work in a factory cheaply, you do so because replacing your skills in that factory is easy. There are many other people with that set of skills to replace you. The value you produce is cheaper, therefor you are paid less and have less to consume .

Now, back to Mr. Grove's statements. The factory jobs left the United States because wages were higher here than there. It's that simple, but where he goes wrong is say that "managers were happy", which is not quite as harsh, but very close to the usual line, which attributes the offshoring to "greed". Not quite. If an American company has to produce it's goods in a factory where people make 2x the salary of the same good in China, the goods will cost more to buy. If the American company, doesn't outsource, and a Chinese company is able to produce the same or similar good(think commodity again), then they will be undercut in the market and go out of business. Not only will management be un-"happy", but the US as a whole is worse off because the profits now go to a Chinese company instead of an American one. The US has now lost not only the manufacturing jobs, but the high value add jobs as well. Mr. Groves proposes the "solution" that we tax imports and use the proceeds promote American production. This merely shifts the money around. Those imported goods were cheaper than their American counterpart. Assuming current wages remain the same, it now cost more dollars to purchase that good because of the tariff and American's have less stuff because it is more expensive relative to their salary. The other option(without the tariff), is that the American factory worker cannot find other work that will pay him more, so he agrees to accept lower wages for performing that same job here and can therefor buy less stuff. I believe that these, as a whole, offset one another and are probably net a wash.

As for unemployment, I believe that it is caused by many different things, probably many reasons that are poorly understood, but I'll address a few of them that I think are important here. Unemployment can be caused by temporary mismatches between market demands for goods and supply of those goods. Demand changes, prices change, companies don't require as many employees to produce the goods(this can also be caused by changes in the efficiency of production), and people are fired. There may not be a job in their previous line of work. If there is some other skill set which is in demand, that person can learn a new skill and make whatever salary the market demand supports for that skill. It is also possible that the market will not support the workers previous salary. Labor costs go down, but here is where people usually go wrong. When labor costs drop, it becomes affordable to pay people to do things that you might have automated(for a high cost in machinery or software for example). Or, the market might now support the cost of producing a good which must be done with tedious manual labor. Or, if the American worker is more efficient than his Chinese counterpart, then it might be cheaper to start doing manufacturing in the US again. In other words, as wages drop, the unemployment rate will go down, and less will be outsourced. This is just the tradeoff. The fact that jobs are sent to China means that cheaper goods are available here in the US. Mr. Groves states that the trend is towards an economy where there are high value add jobs and high unemployment. This is true only if current wages hold. If wages drop, then outsourcing makes less sense and unemployment picks up. What we really want is lots of high value add jobs here. This comes through innovation, creativity, a highly skilled and motivated workforce and outsourcing production(if it makes sense) to cheaper markets.

Mr. Grove correctly identifies the problem but avoids the obvious solution, perhaps because it's too painful to articulate. The phenomenally elevated standard of living that we have enjoyed in the U.S. since the end of WWII just isn't sustainable. The Chinese aren't devouring the tech market because they manage their economy. They're doing so because the Chinese worker will work for far, far less than any American worker. Americans currently still monopolize the high paying design & research job market but there's no reason to expect that Asia will indefinitely play second fiddle here.

To put it bluntly - the last decade was the beginning of a painful crash of the American economy back to earth. When we finally do reestablish equilibrium Americans will be back at work at assembly lines. A massive re-investment in hard science education, which seems extremely unlikely, might cushion the blow but there's only so much room for jobs in intellectual capital.

Andy makes an excellent point: when we outsource the manufacturing and scaling processes to another country, what we lose in addition to jobs are the innovations and experience necessary to maintain a strong defensive econosystem with respect to our economy.

However, I disagree with Andy's recommendation that we should tax offshore labor - we should focus on making labor in the United States less expensive. Neuter the Department of Labor, get rid of labor regulations with heniously expensive and obnoxious unintended consequences like the mandatory 8-hour work day in California, eliminate the concept of wrongful termination, and put a muzzle on the EPA.

Negative incentives aren't the way to go to encourage job creation. Make the climate more hospitable for large businesses within the U.S. instead.

Have you actually ever been to an industrialized country that lacks an equivalent of the EPA and OSHA?

Go to Beijing, and enjoy the brown air, which is pretty unbreathable on the bad days, and just moderately smelly on the good ones. Whatever you do, don't drink the tapwater, because it'll make even local residents sick. Don't go for a swim in the river, either.

Be careful near construction sites; there are gaping holes with no signs, and if you fall into one and break your leg, tough. Also, if there's construction only on the higher floors of a building, slag from welding may rain down onto your head. Unless you're well-connected, don't even think about getting the construction firm to pay for your medical bills.

If you're a woman and your boss rapes you, and you're not connected, that's too bad. If you're a man and your boss rapes you, and you're not connected, that's even worse.

Californa's labor practices and tax laws aren't ideal, but I'd much rather work in California than China.

This thread would be a nice opportunity, if some of you can put down your partisan hats for a few minutes, to have a discussion about what it will take to create real job growth in North America over the next few years in our increasingly global economy.

[brandon184]

Why would a business want to do manufacturing in the United States when it's exponentially cheaper to do it overseas? Even if they taxed all of the incoming goods to astronomical levels it would probably still be cheaper.

Businesses are constantly punished by doing business in the United States with more and more taxes.

What are the numbers on a business manufacturing in the United States vs. China? Judging by the certainty and conviction with which you speak, I'm guessing you've run the numbers.

Are taxes the largest contributing factor in terms of cost savings? Or is it lower wages? When you are employing a factory of 20,000 workers, are factory property taxes really your concern? Or is it that the Chinese worker works for $2.00 an hour instead of their American counterpart who would work for $15.00 an hour?

[brandon184]

What are the numbers on a business manufacturing in the United States vs. China?

[brandon184]

I think you need to abandon this recurring fantasy that you have of droves of American workers working for $0.80 an hour without benefits, healthcare or protections and think more about how major global players can be influenced to bring their manufacturing responsibilities in line with ours. The current labour climate in the U.S. and China benefits few while disadvantaging many.

[HMMurdock]

The reason why they dont pay the same wages in China is because the Chinese are willing, all on their own, to work for those lower wages. Because if they don't get work, they don't eat. The Chinese people are in competition with each other and will ruthlessly undercut each other, so that they can eat.

America will get there soon enough, umemployment reports still don't track the people who have run out of unemployment benefits. As more people can't find work, watch for the crime to rise as well as increasingly desperate people throw societal convention by the wayside and seek meerly to survive.

[HMMurdock]

You might want to do some research on Chinese sweatshops. The workers are usually the ones that undercut each other. It's not the 'evil corporations'.

Would you buy a gallon of gas for $20 a gallon when someones willing to sell a gallon of gas to you that's just as good, for $1?

No.

Would you pay someone $15 an hour when they are willing to do the same work just as good for $0.80 an hour?

No.

Yeah, and as GM and Chrysler discovered (but failed to learn from) when they had to declare bankrupty, Americans without jobs can't afford to buy over-priced cars...

The entertainment industry (movies, TV, computer/electronc hardware) are soon going to discover that the dropping of standards of living in this country will leave more and more people unable to afford to spend what precious little income they have on their products either.

We're all headed for a huge collapse and it won't be pretty.

[Chuckiechan]

Job #1 is for Obama to force the Chinese to float the Yuan.

Everyone is so dependent on cheap Chinese imports, they can think of dozens of reasons not to do it. I want to see it done and soon.

The Chinese are cheating us and we know it and we just bend over and take it.