Risk Latte - Why America Needs more Jobs

Why America Needs more Jobs

Aditya Rana
July 10, 2010

To digress a bit from financial markets, I came across a thought provoking opinion piece by Andy Grove, the former CEO of Intel, on why America is unable to create sufficient jobs and how this is negatively impacting its capacity to innovate.

To summarise:

  • America has a misplaced faith in the power of start-ups to create jobs – a widely-held notion prevalent in the media and academia, as encapsulated by Thomas Friedman in his recent piece "start-ups and not bailouts" and various academic writings.

  • As technology moves from prototype to mass production, companies scale up by building factories, working on design and cost efficiency, and engaging in large scale employment. This is no longer happening in the U.S.

  • Scaling used to work well in America – but as wages and health-care costs rose in the U.S., and china opened up, manufacturing and design was shifted overseas to improve margins and profitability.

  • For example, manufacturing employment in the U.S. is 166,000 - lower than it was when the first computer was built, while Asia employs 1.5 million people including employees, engineers and managers.

  • The computer manufacturer Hon Hai precision, also known as Foxconn, has revenues of $62 billion - larger than apple, Microsoft, Dell, Intel, HP or Sony – companies it builds products and gadgets for. It also employs 800,000 people which is larger than the combined workforces of the above companies.

  • For example, apple has 25,000 employees in the U.S. while Foxconn has 250,000 employees (some unfortunately suicide prone) in southern china making apple’s products like iMacs, iPhones and iPods.

  • While its true that the high value-added work, and profits remain in the U.S., it is leading to an untenable situation by creating a few highly paid people and masses of unemployment.

  • The cost of creating jobs (i.e. capital invested/employees) in, say silicon valley, has risen from a few thousand dollars per employee in the 70’s to $100,000 today - as most of the manufacturing is done in Asia.

  • "There is also more at stake than just job’s – with some technologies both scaling and innovation take place overseas as a new industry needs an effective ecosystem in which technology accumulates, experience builds on experience and close relationships develop between supplier and customer".

  • Scaling needs substantial investment, risk taking and foresight – Intel lost its lead in making memory ships by hesitating to add manufacturing capacity, as it was unsure about future demand, while the Japanese made large investments in building capacity (incentivized by the government) and were well positioned when the demand for chips exploded.

  • There has been a general undervaluing of manufacturing in the u.s. over the years – and by “abandoning today’s “commodity” manufacturing can lock you out of tomorrow’s emerging industry”.

  • The current belief that the free market system is the best economic system– “a conviction based on observation which has been elevated to an unquestionable truism, has made the u.s. oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification which is even better”.

  • Asian countries have (rightly) made job creation the no. 1 objective of state economic policy – with the government setting priorities and organising resources to achieve that goal.

  • Robert Wade from the LSE, in an extensive study, has demonstrated that the key behind the stellar performances of the east-Asian economies in the 70s and 80s has been the effective involvement of government in promoting the growth of manufacturing industries.

  • The current sole focus on profitability, which often involved transferring manufacturing and a large amount of engineering out of the u.s., is hindering its capacity to provide job growth and ultimately to innovate.

  • The first task at hand “is to rebuild our industrial commons” – levy a tax on the product of offshore labour and use the money to help fund scale domestic operations.

  • Unemployment is corrosive – tanks, cavalry and live ammunition were used in the great depression to chase away the unemployed masses.

  • "The imperative to change is real – either we change on our own or change will continue to be forced upon us".

A very interesting piece by a thoughtful u.s. business leader and provides a rare glimpse into the actual thinking process currently taking place at the highest levels of corporate (and political) America. It highlights, what i believe to be the main issue facing the U.S. today - the inability of its economy to create jobs. While this issue has been building-up for years, the financial crisis has brought it into the forefront and will soon become the principal focus of the government. its interesting to note that professor Raghuram Rajan of the university of Chicago (and ex-IMF chief economist) has highlighted the rising income inequality in the u.s. (where 58 cents of each dollar of wage growth went to the wealthiest 1% of households from 1976 until 2007) as the principal cause underlying the massive build-up of debt over the last few decades, eventually leading to the financial crisis. the massive debt build-up, particularly in the housing sector with the active encouragement by the government , allowed vast sections of American households to maintain their purchasing power (and therefore living standards) despite a declining share in the growth of the income pie. this is no longer feasible in an era of de-leveraging, leading to a trend of anti-globalisation, increased trade frictions and increased regulations over the next decade or so. (As forecast by the socio-economist Neil Howe in his book “the fourth turning” that was summarised in an email last year!)

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