Intel’s Andy Grove, Refugee from Communism, Champions Centralized Economic Planning: “rebuild our industrial commons”

July 6th, 2010

If you’re like me, you hear your friends say this a lot about America: “we need to start making things again.” It seem intuitively correct, but there’s a pretty standard economic response: if we’re getting all the profits based on our knowledge and innovation, even though we’re not doing all the work, what’s the problem? Sounds kinda great, actually. Apple pulls a 60% margin on the IPhone 4, spending only $6.54 on assembly costs in China for a $600 item. (!)

It’ll all trickle down, right?

I’ve struggled with my thinking on this a lot; there are obviously lots of problems with the trickle-down idea (some of which I’ve discussed many times), but it’s hard to argue with the phenomenal prosperity (or at least profits) that the Apple model delivers.

Andy Grove’s new Bloomberg article does a lot to help me sort out that thinking, and adds another nail to the coffin to which “trickle down” is increasingly (finally!) being relegated.

His central point, cutting the Gordian knot: as the manufacturing ecosystem disappears in America — along with the jobs — we lose the ability to innovate. I think of the decades-long culture in my home town, Seattle, which has its roots in generations of Boeing machinists and engineers bringing up machinists and engineers. It’s a self-perpetuating culture from which innovation springs.

Grove’s article is brief and concise (and well worth reading in full), so rather than summarizing it I’ll just pull some choice morsels for you. All emphasis is mine.

… our own misplaced faith in the power of startups to create U.S. jobs. …

Startups … 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.

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. …

American companies discovered they could have their manufacturing and even their engineering done cheaper overseas. When they did so, margins improved. Management was happy, and so were stockholders. Growth continued, even more profitably. But the job machine began sputtering.

what kind of a society are we going to have if it consists of highly paid people doing high-value-added work — and masses of unemployed? …

Simply put, the U.S. has become wildly inefficient at creating American tech jobs.

the cost of creating U.S. jobs grew from a few thousand dollars per position in the early years to $100,000 today.

Whoever made batteries then gained the exposure and relationships needed … 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. …

a general undervaluing of manufacturing — the idea that as long as “knowledge work” stays in the U.S., it doesn’t matter what happens to factory jobs. …

we broke the chain of experience that is so important in technological evolution.

Our fundamental economic beliefs, which we have elevated from a conviction based on observation to an unquestioned truism, is that the free market is the best economic system …  we stick with this belief, largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better.

Such evidence stares at us from the performance of several Asian countries … These countries seem to understand that job creation must be the No. 1 objective of state economic policy.

these economies turned in precedent-shattering economic performances over the 1970s and 1980s in large part because of the effective involvement of the government in targeting the growth of manufacturing industries.

Long term, we need a job-centric economic theory — and job-centric political leadership — to guide our plans and actions….

our pursuit of our individual businesses … has hindered our ability to bring innovations to scale at home. …

Losing the ability to scale will ultimately damage our capacity to innovate.

The first task is to rebuild our industrial commons.Levy an extra tax on the product of offshored labor. … Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations.

I fled Hungary as a young man in 1956 to come to the U.S. … I witnessed first-hand the perils of both government overreach … there was a time in this country when tanks and cavalry were massed on Pennsylvania Avenue to chase away the unemployed. It was 1932; thousands of jobless veterans were demonstrating outside the White House. Soldiers with fixed bayonets and live ammunition moved in on them, and herded them away from the White House. In America! Unemployment is corrosive.

If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.

Grove understands what the rabid Norquistista free-marketers seem incapable of comprehending or acknowledging:  there is an invisible hand, but there is also a tragedy of the commons.

He only makes one real policy proposal: taxing offshore work and using the money to encourage onshore employment. There are many others (Robert Frank had some great suggestions in last Sunday’s Times), all rooted in central economic planning by the federal government. I’ll just mention my favorite once again, without further discussion: greatly expanding the Earned Income Tax Credit, and increasing its “salience” by delivering it on weekly paychecks.

And then there’s infrastructure, of course. I just rode the TGV from Paris to Avignon and back — at 200 mph. A great experience, and the prosperity it’s delivered to southern France is incalculable.

China is currently building 42 high-speed rail lines. We have one that we’re sort of, kind of, working on.

I’m sure this is because China is foolishly engaged in centralized economic planning.

And we — obviously far more clever than they — are not.

  1. Chris T
    July 6th, 2010 at 17:31 | #1

    The Bloomberg article directs to a blank page for me.

    I’m a little surprised, you’re usually good at backing up your arguments with data. What evidence do you have that American manufacturing is actually on the decline (roughly 21% of global output from 1980 to 2007)? On what basis do you believe that the Chinese model is, in fact, sustainable (Chinese labor is starting to get restless about low wages and there is evidence that the economy is slowing)? Even accepting the first two premises, what leads you to your conclusion that we’re getting less innovative?

    China slowdown:

    That HSR would work economically in the United States seems to be a bit of an article of faith. Population density in the United States is quite low, ~32/sqr km, versus ~139/sqr km for China. Success in other countries does not necessarily mean success here.

    Pop. Densities:

    A NY Times article on how American manufacturers are actually having problems finding skilled labor at home:

  2. July 10th, 2010 at 08:16 | #2

    Chris T :

    >The Bloomberg article directs to a blank page for me.

    Strange; just worked for me.

    >What evidence do you have that American manufacturing is actually on the decline
    American manufacturing *employment* has been in serious decline for decades.

    >On what basis do you believe that the Chinese model is, in fact, sustainable (Chinese labor is starting to get restless about low wages and there is evidence that the economy is slowing)?
    Might not be. But it is rolling very, very strongly.
    >what leads you to your conclusion that we’re getting less innovative?

    Groves points about batteries, solar panels, and other green technologies (trends that I think everyone has been noticing) are quite compelling, I think.

    >A NY Times article on how American manufacturers are actually having problems finding skilled labor at home:

    “Now they are looking to hire people who can operate sophisticated computerized machinery, follow complex blueprints and demonstrate higher math proficiency”

    This is a pretty tough spot for somebody in the lower-middle of the IQ bell curve: 90-100 IQ. How to bring their talents to bear (and provide a decent share of the pie) in a country that’s at the “knowledge” end of a global economy?

    I should say that I don’t think much of (admittedly haven’t thought much about) Groves’ policy proposal. But the idea that an economy that includes manufacturing/production jobs is necessary to maintain a culture of innovation seems compelling to me.

  3. Chris T
    July 12th, 2010 at 13:16 | #3

    Yeah, for whatever reason the link doesn’t open properly on this computer. It worked on my home one.

    China is reaching the point where continuing the old policy is getting to be problematic (Low wages and growth on the coasts at the expense of the interior). Agitation for higher wages is increasing and the government is trying to shift growth into the interior. To say these will be politically difficult is an understatement. A lot of provincial party officials have grown powerful and wealthy and will be highly resistant resistant to any attempt to move growth out of their provinces.

    The popular conception of China as a monolithic entity where the government points and everyone else happily goes is a highly flawed one. The limits of the central government are about to be tested.

    I question how much of the manufacturing workforce was ever involved in innovation. Most of those who have lost jobs are low skill employees.

    I’ll add more later.

  4. July 30th, 2010 at 22:14 | #4

    How does donating money to a foster home help out?

  5. July 31st, 2010 at 06:58 | #5

    @BMW guy
    Say wha?

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