Would American Industrial Policy Create Jobs?

Andy Grove, the former CEO of semiconductor giant Intel, has written a much-remarked article in BusinessWeek on how the US can fix its economy and create jobs by emulating the example of Asian tigers that have deployed industrial policy to dramatic effect--as well as China which has followed in their wake to shake the world. Other bloggers have covered this article in some detail. While it is well worth reading, here are the key parts before I dive into another article which contradicts Grove. Maybe we shouldn't criticize Grove too much as he even manages to quote the LSE's very own Robert Wade (see my recent post on how Wade advises LDCs on adopting industrial policy post-economic crisis):

How could the U.S. have forgotten? I believe the answer has to do with 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. It's not just newspaper commentators who spread this idea. Consider this passage by Princeton University economist Alan S. Blinder: "The TV manufacturing industry really started here, and at one point employed many workers. But as TV sets became 'just a commodity,' their production moved offshore to locations with much lower wages. And nowadays the number of television sets manufactured in the U.S. is zero. A failure? No, a success."

I disagree. Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution. As happened with batteries, abandoning today's "commodity" manufacturing can lock you out of tomorrow's emerging industry...

The government plays a strategic role in setting the priorities and arraying the forces and organization necessary to achieve this goal. The rapid development of the Asian economies provides numerous illustrations. In a thorough study of the industrial development of East Asia, Robert Wade of the London School of Economics found that these economies turned in precedent-shattering economic performances over the '70s and '80s in large part because of the effective involvement of the government in targeting the growth of manufacturing industries...

The first task is to rebuild our industrial commons. We should develop a system of financial incentives: 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.) Keep that money separate. 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. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability—and stability—we may have taken for granted...[i]f what I'm suggesting sounds protectionist, so be it.

Them's fighting words, Andy Grove. Not only are you offending the economist class, but also America's trade partners by floating impracticable ideas. However, Vivek Wadhwa takes exception to what Grove suggests also in the pages of BusinessWeek. Let's begin with his critiques of following Asia's example too closely:

First, even the bluest of blue chip American companies aren't really American anymore: They typically get more than half their revenue from abroad. Take Hewlett-Packard, Caterpillar, and IBM. They generate two-thirds of their sales in foreign markets. Intel's proportion is even higher: 72 percent of its revenue now comes from abroad. To create jobs, Grove advocates a trade war and says we should "treat it like other wars—fight to win." The problem is that American companies will be the first casualties in such a war, and American jobs will be lost. There is no way to win. [But doesn't this assume that countries America plans to export to and those that will be offended by its presumably offensive trade actions are one and the same?]

Second, do we really want the types of manufacturing jobs being created abroad, at companies like Foxconn? The recent spate of suicides at Foxconn's giant factory complex in Shenzhen, China, was attributed to the mindless work and repetitive tasks that its employees had to perform, day in and day out. Things were different at the turn of the century and after the Great Depression, when American workers did not have the education and skills to perform higher-level chores, or were desperate for any kind of work. I doubt that even the most depressed regions of America would want to be home to factories that pollute the environment, pay minimum wage, and work at the profit margins of these sweatshops. [Take that, Chinese slave drivers!]

Third, the majority of new jobs created in the U.S. aren't created by companies like Intel, but by startups. The Kauffman Foundation's analysis of Census Bureau statistics shows that net job growth in the U.S. economy occurs only through startup firms. From 1977 to 2005, existing companies were net job destroyers, losing 1 million net jobs per year. In contrast, new outfits in their first year added an average of 3 million jobs annually. Having small firms scale into large firms is important, but the cycle of destruction of old industries and the creation of the new has given the U.S. its greatest global advantage. Protecting old industries isn't the best way to reduce unemployment; it is a sure road to downsizing.

Instead, he believes the US should focus on the following:

Let's start by first recognizing that globalization will disrupt industries and cause job losses in one industry while creating jobs in another. We need to upgrade our investment in workforce training and development as a national priority. We need to have the concept of lifelong education become part of our culture. Education doesn't end when you graduate from college; that is when it begins. This is the best way of staying ahead in the global race for skills.

Second, we need to foster entrepreneurship at the source: the workforce. My team's research has shown that most high-growth companies are founded by middle-aged workers who have extensive industry experience, want to capitalize on their idea, and want to build wealth before they retire. What inhibits Americans from starting companies is a lack of knowledge of how to do it, lack of financing, and fear of failure. Clearly, not everyone is cut out to be an entrepreneur, but a significant proportion of the workforce can be taught to start successful companies and create jobs.

Third, we need to recruit the world's best and brightest to the U.S. and do all we can to keep here those already in the U.S. on temporary visas. My team's research has also shown that during the recent tech boom, immigrants founded more than half of Silicon Valley's startups. In recent times, they have contributed to more than a quarter of U.S. firms' global patents and helped boost U.S. competitiveness. These skilled workers tend to be highly educated, to understand foreign cultures and markets, and to be highly entrepreneurial.

Fourth, we need to more effectively tap the gold mine of knowledge and innovation locked in our universities. We've invested on the order of a trillion dollars in university research over the years. Yet we have consistently failed to convert all but a tiny fraction of these lab breakthroughs into actual products and further economic activity. We need to harness this innovation treasure by building mechanisms to break the innovation logjam at the source—the nexus between the scientists who make the discoveries, the universities that market the discoveries to the world, and the entrepreneurs with domain experience who could take these discoveries and turn them into products.

Last, we need to provide incentives to American companies to keep research in the U.S. Grove didn't mention the huge incentives that countries like China provide to Intel and other tech companies. The lure for them isn't just cheap labor (with lax labor regulation), but also heavily subsidized infrastructure and cash subsidies. We may have to level the playing field in industries where other countries aren't playing by the rules. But we need to be smart in how we do it.

Let's just say that I agree with neither to a large extent. In future posts, I will explain (1) why betting on innovation won't redeem America and (2) why the world's elite workers now shun the United States. IMHO the US should just accept that its best days have passed it by. In a world of diminished expectations, it is better not to throw away good money after bad chasing unattainable dreams of yesteryear--bringing back industrial jobs--and live within one's means.