Wednesday, July 14, 2010

A Solution for Job Creation

I’ve just read former Intel chief Andy Grove’s article “How to Make an American Job” in the July 5-11 issue of Bloomberg Businessweek and I have to quibble. He argues that we ship jobs overseas at our own peril. Not only do we lose the jobs, we also are left out of the next round of development in that industry. To solve the problem, he states, “Long term, we need a job-centric economic theory—and job-centric political leadership—to guide our plans and actions.”

Surely, the US cannot survive on knowledge and service work alone. I would agree. Manufacturing in the US gives the country the flexibility to change and grow and to be a part of new technological revolutions. Pressing the government to get involved in this, in any way, walks us straight into dangerous territory.

Incentives provided by the government for job creation can hardly be effective. I would bet that for every dollar of incentive provided, less than fifty cents pass through in the form of wages. Probably a greater portion goes straight to corporate profits. We cannot forget that profit creation is the greater incentive for companies, coming well before job creation. Wringing the profit out of every dollar is the way things work.

Inefficiencies of government spending or tax breaks aside, other methods to encourage domestic manufacturing are dangerous. Tariffs on imported goods may protect American jobs, but often at a higher cost for American companies. They will pay higher prices on imported raw materials, higher wages, and will likely see import tariffs on their own products overseas. Duties are a bit of an arms race. As long as we have the same amount as our competitor, we are secure. An escalation by either side will be equally met by the other. Grove, though, thinks this okay. “Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars—fight to win.)”

What works is when American businesses seize opportunities, finding the right spots to take advantage of things. Here, Grove is onto something. He suggests the promotion of scaling, of moving a product from development and small-run manufacturing to complete large-run, full-scale production. This is a particular pinch-point in the process. US companies have had trouble relying on overseas manufacturers to take a new product to full-scale production because of the normal tweaks to design and production that are necessary. Keeping that work in the US can allow companies to be better tuned to making quick changes, refining processes, and making better products.

But instead of penalizing US companies through taxes or tariffs on overseas production, we need to help them get what they need to keep this scaling in the US: access to capital. A program of government-backed loans available to companies looking to scale up would be exactly what is needed. Let’s face it, shareholders or the bond market are probably unwilling to take this risk and help a company fund the creation of US manufacturing. Why would they when they continue to see the profits that come from displacing American workers for Chinese? Venture capital isn’t interested, as Grove points out. And banks aren’t willing to take the risk without government support. Yet, it is in the country’s interest to create jobs here and to take a little risk in the process. There is no up-front cost to the taxpayer, no taxpayer dollars going to line the pockets of greedy corporate execs or handout-seeking labor. There is market-rate interest to be made by banks and a little downside risk to the government.

The dangers of a US devoid of manufacturing jobs should be apparent. It may provide greater profits to US corporations, their executives, and the smaller base of knowledge workers, but all of their spending cannot support our service and retail sectors. Yes, maybe shipping jobs overseas and rising US unemployment can be severe enough to depress US wages to the level of those of Chinese workers, making it cost efficient to return jobs to the US. Indeed, maybe this is the intent of some. But the US thrives on a diverse workforce. We need not only manufacturing workers, we need the line managers, the division chiefs, and all the other middle managers as well. Maybe with a little government backing (not support, incentives, or protectionism) we can get them back.

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