America isn’t ‘broke.’ America is just confused.
Somewhere along the journey of the past 30 years or so, America forgot how to do business and build productive capacity. This forgetfulness didn’t happen in America’s boardrooms, it happened in Washington DC.
Two distinctly naive concepts gained wide acceptance in DC and as a consequence among the population at large. One was that because America was so rich and powerful, it could turn it’s productive capacity on at will. No, it’s even worse than that. America began to believe it would happen without America even being consciously involved. The ‘invisible hand’ took care of this issue for America. This magical ‘tooth fairy’ would deliver.
The reality is that competitive markets are the best engine for economic growth and these markets more resemble a mixed martial arts contest than the classroom markets imagined by economists. If the ‘tooth fairy’ existed at all, she would be eaten for lunch in these markets. Counting on the ‘invisible hand’ to deliver is like going into a boxing match and forgetting the opponent has two hands not just one.
The second naive belief was that the government could not help America grow. In the 1980s President Reagan ridiculed his own government, and by association the people it represents, by asserting the government was the source of economic problems and, ergo, not an institution that could help. An incredibly naive pronouncement, but it took hold nevertheless among the public at large.
Large multinational companies knew better. They co-opted government to receive special tax breaks and subsidies. They knew the government could directly help their endeavors.
They also knew they could grow overseas and in order to do so they negotiated with foreign countries for access. In China this normally meant the American company had to build productive capacity in China, hire local talent, sell half the production outside of China and take on a Chinese partner thus assuring that intellectual property was transferred. So much for the ‘tooth fairy’ in China. She apparently doesn’t speak Mandarin.
The results? According to the Wall Street Journal, via an edited version in economist’s view:
U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers, have been hiring abroad while cutting back at home, sharpening the debate over globalization’s effect on the U.S. economy.
The companies cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million, new data from the U.S. Commerce Department show. That’s a big switch from the 1990s, when they added jobs everywhere…
The data … underscore the vulnerability of the U.S. economy, particularly at a time when unemployment is high and wages aren’t rising. Jobs at multinationals tend to pay above-average wages and, for decades, sustained the American middle class. …
While small, young companies are vital to U.S. economic growth, big multinationals remain a major force. A report by McKinsey Global Institute … estimates that multinationals account for 23% of the nation’s private-sector output and 48% of its exports of goods.
So does America negotiate similar concessions from those who wish to gain access to the still rich by comparison American market? That would be a ‘No.’ Why should we? The ‘tooth fairy’ is taking care of America. There are a few exceptions, but America only acts when a private organization forces the issue. One example is where the Steelworkers Union filed suit with the World Trade Organization against Chinese dumping of steel pipe in America. The union won and stiff import tariffs were levied on these steel imports. The result? China spent $1 billion building a steel pipe plant Texas that employs 600 full-time steel union workers. Just try and get the ‘tooth fairy’ to do that.
Of course if we were really serious we would have required the Chinese company to take on a US partner, source most of the product domestically, and sell half the product overseas.
As debilitating as the ‘tooth fairy’ concept is, the idea that our own government can’t help us grow is just as bad.
There is absolutely no debate over the valuable role modern infrastructures play in enabling robust economies. None. The American Society of Civil Engineers estimates that the country needs to spend $2.2 trillion over the next five years just to maintain our existing infrastructure, never mind upgrade things. The University of Massachusetts Political Economy Research Institute estimates as many as 18,000 jobs could be created for every $1 billion spent on infrastructure. Even if that estimate is off by 8,000 jobs, investing $1 trillion creates 10 million jobs–more jobs than were officialy ‘lost’ in the Great Recession.
There are other important means government can apply to grow the economy and create jobs. One is to provide cheap capital to industry, reducing the cost of expansion. Former Intel CEO Andy Grove explains a problem government can definitely help overcome.
“The underlying problem isn’t simply lower Asian costs. It’s our own misplaced faith in the power of start-ups 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. Friedmanrecently 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.
Friedman is wrong. Start-ups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordable, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.
The scaling process is no longer happening in the U.S. And as long as that’s the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.”
Grove uses a personal experience of this, when he decided to use alternative energy in his own home.
“The job-machine breakdown isn’t just in computers. Consider alternative energy, an emerging industry where there is 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. A Silicon Valley company sells equipment used to manufacture photo-active films. They ship close to 10 times more machines to China than to manufacturers in the U.S., and this gap is growing. Not surprisingly, U.S. employment in the making of photovoltaic films and panels is perhaps 10,000 — just a few percent of estimated worldwide employment.”
But wait, there’s more. Remember when we stopped making consumer electronic products because the companies that used to make them domestically started making them in Asia in order to get cheaper labor?
Here’s Grove on what happens because of that movement.
“There’s more at stake than exported jobs. With some technologies, both scaling and innovation take place overseas. Such is the case with advanced batteries. It has taken years and many false starts, but finally we are about to witness mass- produced electric cars and trucks. They all rely on lithium-ion batteries. What microprocessors are to computing, batteries are to electric vehicles. Unlike with microprocessors, the U.S. share of lithium-ion battery production is tiny.
That’s a problem. A new industry needs an effective ecosystem in which technology know-how accumulates, experience builds on experience, and close relationships develop between supplier and customer. The U.S. lost its lead in batteries 30 years ago when it stopped making consumer-electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. U.S. companies didn’t participate in the first phase and consequently weren’t in the running for all that followed. I doubt they will ever catch up.”
These problems aren’t really being created by the average American, who still knows how to show up and work. They are being created by a political class that does believe in the ‘tooth fairy’ and does believe the government can’t help grow our economy. The Republican Party is comprised almost entirely by members of this class, but too many Democrats have been influenced as well. It’s this political class which has damaged our economy and to this day hinders its recovery.
One can only hope that, at some point, a leader comes forward who can sweep aside the cobwebs and simply say: ‘Let’s do this. Let’s get back to building productive capacity. Building new, modern infrastructures. Creating jobs that pay. Forget the naysayers who claim we can’t afford to succeed. No one, no ‘ Tooth Fairy’ is going to do this for us. We must do this ourselves. And we must do it now.’