Made in America — Again

Andy Grove was, successively, the director of engineering, president, CEO, and Chairman of Intel Corporation. In an article last year, Grove proposed levying tariffs on goods produced offshore and dedicating the funds to help companies scale up production in the United States.

Andy Grove was, successively, the director of engineering, president, CEO, and Chairman of Intel Corporation.

There are three distinct causes for the jobs we’ve lost. First, the declining demand for products. So everybody focused on the stimulus—they assumed that the demand cycle and the employment cycle are related like they used to be. But they’re not.

I don’t understand pure Keynesianism at a time of global flows like we have now. If we turn on a spigot to increase demand for consumer products, we need to have some factor that measures the portion that goes to a domestically made product. That portion in the last ten years must have changed in a very major way. You want a measure? How about asking for the sourcing from China as a percentage of the goods sold at Wal-Mart plotted as a function of time? When people run to Wal-Mart and spend their money, the majority of that money may go to the Chinese economy. I don’t know the numbers, but it’s a knowable question.

The second problem is the hysterical love that we lavish on innovation. We never talked about it at my job—innovation was followed by production in the same factories where we innovated. Today in high-tech, there’s a separation between the discovery of the product and the ramping up of production. Discovery can take place here, but it doesn’t follow that the manufacturing will be here.

The third problem is that supply-chain management allows production to move to anyplace. Japanese companies come to the United States, American companies go to China.

There’s no single policy that can address all three of these. The Fed can worry about the first one. The Department of Energy can worry about the second. But somebody should worry about the third! Apple alone employs hundreds of thousands of people abroad. That suggests millions of people working abroad for all our companies. That’s probably half of our job loss.

Why don’t we track the inflow and outflow of existing jobs by company? How many jobs have we brought to the U.S., Toyota-style? How many have migrated out? Instead, we get speeches on competitiveness, clichés wrapped in more clichés. What objection can an American company have about releasing this kind of information? There’s no competitive disadvantage if everyone has to do it. They have to report the square-footage of their facilities but not their employment numbers.

I met with a member of the government six months ago. I made a point that there is a marketing issue—the conventional wisdom that perpetuates the story that the U.S. is a bad place to manufacture. In the absence of good analysis, people respond more than the numbers would justify, and outsource more since “everybody knows the U.S. is more expensive.”

Nobody knows. Everybody takes it for granted. How do we know, I asked him, how do we know what the numbers are? It didn’t mean anything to him.

 I haven’t seen this subject discussed the way I would discuss it as an Intel issue. If somebody inside Intel was assigned this problem, he would have to answer the question, what is our strategy to fix this? But nobody demands this for the economy as a whole.We are working hard to build a comfortable grave for our industry.

***

From 2003 through 2011, Democrat Jennifer Granholm was governor of Michigan, an experience she recounts in her book, A Governor’s Story: The Fight for Jobs and America’s Economic Future (Public Affairs). She is now a professor in the law and public-policy schools at the University of California, Berkeley.

Jennifer Granholm was governor of Michigan from 2003 through 2011. She is now a professor in the law and public-policy schools at the University of California, Berkeley.

I was a believer in the old economic-growth strategies. I listened to the business community, read economic theory that said cutting business taxes was the way to go. In my first four and a half years as governor, I cut taxes 99 times. The corporate tax burden dropped more than in any other state. We cut more state employees than any other state—more than California.

If smaller government and lower taxes led to growth, we’d have had the most robust economy in the United States. We had anything but. I was applying 20th-century solutions to a 21st-century problem. If all you do is cut taxes on big investors without some policy creating investment in the U.S., they invest in multinationals that maximize their returns by producing in developing nations.

What stopped our slide and began our turnaround was a different approach, of strategic partnerships between government and business, of public investment in strategic industries. Those who say government shouldn’t be involved in these things should look at Michigan in 2009 and 2010. [Michigan’s unemployment rate dropped from 14.5 percent in January 2009 to 11.7 percent in December 2010.]

In 2008, Barack Obama campaigned on bolstering the clean-energy industry. We wanted Michigan to be the place where that happened. I got the legislature to provide tax credits for electrical-vehicle-battery plants. Then we went to the Obama administration, which had set aside $2.4 billion in the 2009 stimulus for battery grants. Michigan got more than half of that. The private sector helped us identify those parts of the local supply chain we’d have to build up to manufacture electric-car batteries. There was a hole in the chain for some components, so we went to Japan and persuaded Toda [a battery supply firm] to come to Battle Creek. We now have 18 supplier companies, which will create 63,000 new jobs. This wouldn’t have happened without the federal assistance. We’ve gained the most high-tech jobs of any other state since the recession started.

Rick Perry wants to make government irrelevant in our lives? In Texas, he has an aggressive economic-development fund to attract new factories. The Republican governor of Oklahoma, Mary Fallin, just signed a bill to create a fund to close deals to get companies to come. Every governor has some version of that. But we just move jobs around from one state to another. What a stupid strategy. The states should be able to partner with the federal government to compete against China. We have to create an American economic-development strategy.

I went to China in March to see what it was doing to attract solar-energy providers. They have an aggressive energy policy to create supply and demand. At one presentation, one official pulled me aside and asked, “When do you think the U.S. will actually have a national energy policy?” I said there were all kinds of delays due to our political system and interest groups. He rubbed his hands together and with a big grin said, “Take your time.”

***

David Vieau is the CEO of A123 Systems, which makes the lithium-ion batteries that power electric cars. Based in Waltham, Massachusetts, the company commercialized the battery-technology materials created by a professor at the Massachusetts Institute of Technology. A123 initially did its manufacturing in Asia but recently opened two factories outside Detroit.

David Vieau is the CEO of A123 Systems, which makes the lithium-ion batteries that power electric cars in two factories outside Detroit.

In 2008, we were beginning to get more interest from the state of Michigan in our manufacturing there. The question was, could we be competitive making our product in the U.S.? The reasonable option at the time was to expand our existing operations in China and Korea. On the other side, in Michigan, we’d be closer to our customers, and, as the automobile world collapsed at the end of 2008, we had access to buildings, engineers, and production workers.

We’d worked with the Department of Energy on research starting in 2003. Over the next five years, we received $26 million in research grants from them. So when the federal government [as part of the Obama administration’s 2009 stimulus package] said it wanted to build electric-car-battery factories, there was a really strong set of convergences.

Labor is 25 to 30 percent of the costs in making battery cells. We estimated the cost benefit of manufacturing in China in the 20 to 25 percent range, not including shipping costs. In the U.S., you can substitute machines for some of that labor. But building a highly automated plant is very expensive up front. To offset that cost, we got grants from the state of Michigan. The federal stimulus funds came later. We got $249 million to build two factories in Michigan. Saving those upfront expenses reduced China’s cost advantage to 5 to 10 percent.

It’s extremely important in the early stages of development to have tight links between manufacturing and research and development. It was challenging for us to have R&D in Massachusetts and production in China. Anyone experienced in this field would say, “Never do that!” The gaps that emerged in our learning process were big.

When we started, the United States had university research that was leading the world in these new technologies, but no execution. In 2002, Asia supplied 99 percent of lithium-ion batteries. We didn’t have the equipment or the know-how to make them. Sony had been the first company to commercialize lithium-ion technology, in 1990. Why Sony? They made small handheld devices. So the industry developed there, not here.

Today, our engineers tell us the benefits of manufacturing in Michigan are great. It shortens the product-development cycle. The quality of the product will improve more rapidly. But it’s a challenge to build up a local supply chain for the battery cells. A lot of our materials still come from abroad—there’s not yet enough U.S. demand for them. But as more factories get built, there will be more U.S. sourcers.

The U.S. spends a lot of money in universities and national laboratories on innovation, but there’s a disconnect from actually generating jobs. There needs to be an incentive for making the products in the U.S. The cost of licensing new technologies developed in national laboratories could be made lower for companies that build their products here rather than elsewhere.

***

Ralph Gomory was director of research and then senior vice president for science and technology at IBM. From 1989 through 2007, he was president of the Alfred P. Sloan Foundation, and he is now a research professor at the Stern School of Business at New York University.

Ralph Gomory was director of research and then senior vice president for science and technology at IBM.

We hear a great deal about the importance of education and research and development to America’s economic future. However, I strongly believe that these things, while beneficial, are nowhere near enough to do the job.

Where did the notion come from that our math scores, say, predict economic outcomes? The correlation is very poor. If Lithuania is our peer in math, what does that tell you about our economy? It’s better to be educated than not, but education cannot drive economic outcomes.

People say the U.S. economy isn’t performing well anymore because people aren’t well educated. Nonsense. It’s the lack of positions.We’ve been hearing about the shortage of scientists and engineers for 30 years. Academic openings in the sciences get tons of applicants. There’s no shortage of educated people.

R&D alone doesn’t create anything, either, unless it is translated into a manufactured good or a new service. It may create jobs in another country. Global corporations find it profitable to do R&D in the U.S. and then make the products abroad.

Many people point to Apple as a model of how innovation alone can lift the country, but the lifting is very specialized. The vast proportion of its production is in China. In this country, the beneficiaries of Apple’s success are, first, the designers, who have done wonders working with Steve Jobs to produce products that are beautiful and effective. Next, the shareholders—but the stock is primarily owned by wealthy people. The top 5 percent in America own two-thirds of all the stock. Apple is helping a small segment of Americans and helping create an awful lot of jobs overseas. What’s profitable to our multinational corporations is often not compatible with employing a lot of Americans. How can we better align those goals?

We don’t have the tradition that China and Singapore do of making deals with particular companies. We’re more accustomed to using the corporate income tax to reward beneficial behavior—that’s what the R&D tax credit does.

If we want a company to produce in the U.S., let’s reward companies for doing that, for producing more value-added within the U.S. Give them better tax rates. This alters the tax code to reward not just R&D, whose effects are elusive, but producers of gross domestic product in this country.

More and more of the parts in an American car come from abroad. Boeing increasingly is adding value outside the U.S. and assembling the parts in the U.S. The tax plan I described is an incentive to make things here. It’s the value-added in the finished product that gets measured. Our manufacturing companies should not look like Wal-Mart, which gets its products from abroad. We should incent them to make things in the U.S.

Corporations used to consider the effect of their actions not only on shareholders but on communities they manufactured in, on the people they employed. I’d like to see that happen again. The shareholder motive makes the interests of the corporation diverge from the interests of the United States. This tax proposal realigns those interests.

***

Leo Gerard is president of the United Steelworkers and co-founder of the BlueGreen Alliance. He chairs the AFL-CIO’s public-policy committee.

Leo Gerard is president of the United Steelworkers and co-founder of the BlueGreen Alliance.

What we see in negotiations is companies telling us we’ll give you wage increases, but new hires have to be at a lower level, and we insist on less comprehensive health plans for new workers, and that new workers must have defined-contribution, not defined-benefit, pensions. With very few exceptions, the employers all say this is because they have to compete with China.

For 30 years, since Lynn Williams became our president, the Steelworkers and the AFL-CIO have been screaming about two things: Our trade deals cost us jobs, and the American economy can’t be sustained if we don’t make things. We’ve been ignored, as if we didn’t know anything.

How do you get out of the economic mess without making anything? The stimulus? It helped on projects like the new San Francisco-Oakland Bay Bridge, but they’re building it in China and then bringing it over here. The conventional wisdom was that it was cheaper to do it there and that the U.S. didn’t have the capacity to build the bridge.

We had the capacity to build the first one! We can’t build a bridge? But when manufacturing leaves, the innovation leaves, the technology leaves. As in wind and solar power, if we don’t build it, the innovation goes elsewhere. Of course, the Bay Bridge is two and a half years behind schedule; we had to send 250 engineers over to China.

On trade, there are too many Clintonistas in the administration. They keep talking about how trade deals create exports. Exports may go up by 10 percent, but imports go up 30. Show me a deal that has created net growth in the manufacturing sector.

China plays bare-knuckles capitalism. Obama started talking about renewable energy; China heard him and decided to dominate those industries. They’re developing clean-coal technology where they sequester the carbon underground. Here, we proposed a standard for retrofitting our generators, and the Republicans opposed it. They believe global warming doesn’t exist. The [stuff] they believe! I won’t believe corporations are people until Texas executes one.

How do we compete with China? They’ve got state-owned enterprises, they subsidize energy costs and transportation costs, they manipulate their currency, they exploit their labor force. But the major U.S. manufacturers are afraid to file complaints against them [for violating trade laws, because they don’t want to antagonize China and lose access to its markets]. So the Steelworkers have filed about a dozen cases over the past ten years, and we win them because China cheats in every sector.

We’ve filed an omnibus 301 suit against China on five issues, filed a 5,800-page brief. It’s led to consultations with China—we’ve resolved two of the issues and are pushing on the other three, including China’s subsidies for rare-earth production.

But why the hell does the U.S. government have to rely on the Steelworkers to enforce our trade laws? Why isn’t there a governmental prosecutor for trade-law violations? We agree to these bad deals, then we don’t even enforce them.

 

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