Andy Grove: How To Make An American Job Before It's Too Late
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To put it bluntly - the last decade was the beginning of a painful crash of the American economy back to earth. When we finally do reestablish equilibrium Americans will be back at work at assembly lines. A massive re-investment in hard science education, which seems extremely unlikely, might cushion the blow but there's only so much room for jobs in intellectual capital.
Perhaps you didn't mean that the way it sounded. :)
I agree that a more even distribution of wealth around the world is a good thing, although we may also look back at this era of US hegemony as a kind of Pax Romana.
For an HN-geared example: look at what Ruby on Rails, Django, etc has done for web development. It allows web developers to significantly increase output without extra cost or significant externalities, lowering production costs and freeing capital to be spent more efficiently. The market for developers hasn't crashed through the floor though. If anything, it's increased, because of reduced overheads, the value that can be delivered has increased.
The optimistic scenario is that world population self-regulates down over time as more manual work is automated and a larger fraction of the population moves into intellectual work. The more pessimistic scenario is that the underclass population explodes into poverty and anarchy and eventually brings the affluent elites down with it.
Your bank example is an interesting one. Have banks decreased the number of tellers due to ATMs and online banking? Not really. The tellers can also process more transactions per unit of time because of computer automation. Banking services have just become more convenient and available to a larger audience through reduction of costs. When was the last time you paid for a checking account?
There are some excellent signs that the world population will self-regulate. The more a country develops, the more reproduction falls. The elite have the most to lose in any anarchy scenario, and control the vast majority of resources that can be used to prevent it.
The real future threat is resource exhaustion, not lack of jobs, lack of capital, or robots.
There's also the question of what percentage of the population would be suited to these IP jobs, but geeks are getting more action than ever before, so I think the population will shift in that direction as well.
This sounds a lot like an agricultural-age person saying "the number of people making a real living in manufacturing will remain very small". If all physical goods are really cheap enough, you don't need to earn that much as an artist to afford them.
However, I disagree with Andy's recommendation that we should tax offshore labor - we should focus on making labor in the United States less expensive. Neuter the Department of Labor, get rid of labor regulations with heniously expensive and obnoxious unintended consequences like the mandatory 8-hour work day in California, eliminate the concept of wrongful termination, and put a muzzle on the EPA.
Negative incentives aren't the way to go to encourage job creation. Make the climate more hospitable for large businesses within the U.S. instead.
Enjoy your third world working conditions. But you are an executive and/or a shareholder, are you not ?
The poster has correctly identified the value proposition that causes companies to locate their manufacturing facilities elsewhere, and points out (also correctly) that making our tax codes as unfriendly to business as our labor laws will only encourage _those_ bits of the business to relocate as well.
You cannot have all of:
* high wages for manufacturing workers
* cheap products for consumers
* high taxes on business
* large profits that make it attractive to operate a company.
* cheap products for consumers = higher standard of living.
* higher profit potential = more business growth.For the millions now with ZERO income, even Chinese-made Wal*Mart crap is unaffordable. Yet the unionized workers of the 1950s - 1970's somehow purchased cars, household products, and clothing like domestically-made Levis blue jeans WITHOUT slave labor from repressive countries and without borrowing trillions fro those same countries.
I will gladly trade somewhat higher consumer prices for confidence that I will be employable in safe conditions at a middle-class wage for the duration of my normal working life.
And I'm very pro-manufacturing: but the environmental externalities must be mitigated and properly priced: my health is very valuable to me, even if there's no clear market price for it.
That was only possible because that time period was a window in which our technological superiority made it possible to provide the average working man with that standard of living. That period is coming quickly to a close.
Far more sustainable than the present, which involves unsustainable personal debts, unsustainable trade deficits, and unsustainable federal borrowing.
But please note that CENTRAL POINT OF THE ARTICLE explains WHY our technological superiority lessened, rather than moving exponentially further ahead.
It's only a closed system if you ignore the resources and cheap bottom-tier labor the first world extracted from the third world at a fraction of their potential value. The U.S. in particular was very active in this time period propping up puppet regimes around the third world in order to get cheap access to their raw materials and labor. The world has never been a closed system.
If instead of people spending $28.73 on a cheap toaster at Wal-Mart every 3 years, they spent $150 on a toaster every 20 years, the cost of labor would become much less of a problem. People are conditioned from birth by marketing and advertising that these cheap pieces of shit are really good deals.
There are enough examples of manufacturing companies that have a shred of decency improving their efficiency through process design and intelligence that I don't buy it. But, of course, it's much easier and profitable in the short-term to find some people on the other side of the planet you'll never have to meet. iSupply estimated that it costs $6.50 to assemble the iPhone 3G -- labor, equipment, management, everything. Is the cost of labor in Ohio (at $49/hour) really a problem for Honda?
And that's the department of labor that is keeping experienced crews from running the skimmers that the EPA approves.
I forget which department decided that oil in sensitive wetlands was better than putting up sand berms.
The sandberms fiasco was the work of the Fish and Wildlife Service: http://www.wdsu.com/news/23997498/detail.html
The "A-Whale" fiasco appears to be a joint fail between the Coast Guard and the EPA - among many other things they've had to sit around and wait for an EPA permit before they can start the work, and now that they're actually in the gulf there are even more problems:
http://www.dailypress.com/news/oil-spill/dp-nws-oil-skimmer-...
http://www.wwltv.com/news/gulf-oil-spill/A-Whale-Of-A-Skimme...
You can also Google "Jones Act".
Suppose that my original post hadclaimed that Obama was doing a great job and offered comparable support. Would you have asked for citations?
Yes, it raises costs to force industries to comply with environmental protection standards. Yes, this is bad for the short-term of our economy. But we will continue to suffer the consequences of the environmental harm we do, even at the current regulatory levels, and more so with "a muzzle on the EPA".
This kind of reasoning is tricky, though. Do we shut down the airline industry when a plane crashes? No, we pick up the pieces, study what happened, and move on. The result, over time, is a safety record that almost no rational person could criticize.
Nothing made by God or Man will ever be perfect, and that includes deep-sea drilling rigs. If you want to regulate the industry with the goal of making accidents impossible, well, good luck with that.
The problem is that places like China have low/non-existent standards that are politically acceptable there (or citizens can't say otherwise). This is their comparative advantage -- not accounting for the externalities of their industrial efforts. As Larry Summers said, some countries in Africa are vastly underpolluted. Not great in the long term perhaps, but harmful for western workers competing for the same contracts in the short term.
So what do you do? Tarrifs on imported goods to make US production more competitive? Limiting trade to countries that have similar standards regarding externalities? Or is it okay for countries to have low/no work and environmental standards because that's (at least in the beginning) the road to economic development?
Unless you are worth >$10M, are retired, or live off a trust fund, admit that you're labor not capital: just like highly paid executives, surgeons, and name-brand attorneys are more "labor:" they generate more earned income than asset income.
Go ahead: pull out your 2009 tax return: is the "income from wages, tips, and salaries" greater than the "interest income" and appreciation on your house (ha ha!)? Then you care about WAGES. Stop pretending like you're a Rockefeller: you're not. And your doctor / lawyer / professors / boss aren't either.
(If you persist in an unjustified obsession with your assets, HIGHER WAGES are what will drive housing prices up in the long run...compare incomes and housing prices in Palo Alto and Lubbock, TX, and HIGHER WAGES and GROWING MANUFACTURING will help your stock portfolio: do you really want to see GE and Boeing follow GM into bankruptcy?)
There are only so many Senators and Hedge Fund managers, and they spend their weekends in The Hamptons, not playing with your crappy iPhone game.
Imagine the cost of a Big Mac in a hypothetical world in which fast-food workers are paid 10x as much.
Seriously: How did we get from "life, liberty, and the pursuit of happiness" to "drive down everyone's quality life to match the world's most miserable and backward countries?"
Aside from technology that hadn't been invented yet, people in the West lived did very well in the late 20th century. Most people who bothered to show up for work had a balanced diet, adequate medical care, and usually a car. And they somehow managed to do it without rampant workplace death, child labor, or rendering the ecosystem uninhabitable for decades[1]. They even had fundamental civil rights like freedom of religion, freedom of speech, freedom of the press.
[1] Aside from notable exceptions like Love Canal, etc. But I see that as largely the result of ignorance; we now have a better understanding of the impacts of our behavior on the place we LIVE.
And you're not as clever as you think bringing up asbestos. You're far more likely to die in a fire because your building had its asbestos replaced with shitty fireproofing than from the cancer that asbestos can cause.
The whole point is that "Current trade and industrial policies" favor the former ("Modern Western Wage"), not the latter, which is what is causing the problems in the US. Did you read the article?
Go to Beijing, and enjoy the brown air, which is pretty unbreathable on the bad days, and just moderately smelly on the good ones. Whatever you do, don't drink the tapwater, because it'll make even local residents sick. Don't go for a swim in the river, either.
Be careful near construction sites; there are gaping holes with no signs, and if you fall into one and break your leg, tough. Also, if there's construction only on the higher floors of a building, slag from welding may rain down onto your head. Unless you're well-connected, don't even think about getting the construction firm to pay for your medical bills.
If you're a woman and your boss rapes you, and you're not connected, that's too bad. If you're a man and your boss rapes you, and you're not connected, that's even worse.
Californa's labor practices and tax laws aren't ideal, but I'd much rather work in California than China.
Dude, I was in Beijing two months ago. It's not like you make it out to be. Actually, it's a hell of a lot nicer than Detroit.
In fact, I was in China five years ago and again two months ago. It's trending upwards quickly - the pollution was near unbearable five years ago and is rapidly improving. Infrastructure is improving. Air and water quality are improving. The country is gradually politically liberalizing... almost everything is improving in China quickly. Scary quickly, actually.
Over the last 10 years, China is trending upwards quickly and the USA and trending downwards slowly... you might prefer living in Washington D.C. to Beijing right now (but would you, really?)... but you almost certainly won't prefer D.C. to Beijing in 10 years unless something changes.
All of these things are because of deliberate government policies. I'm sure you know this, but it's worth pointing out. I think you & donw are agreeing with each other here - he's just underestimating how quickly the Chinese government acted to fix what was becoming a problem.
Sort of. If you look at history, every country that's gone through an industrializing process has had an increase in pollution followed by a decrease in pollution. Some of that is attributable to regulation, but it happens in unregulated industries too - almost everyone naturally dislikes pollution, and generally prefer to reduce it.
Saying pollution is down and infrastructure is up because if government policy is almost correct, but slightly misses the mark - pollution is down and infrastructure is up because Chinese people worked to make that happen. But this same process happens similarly in countries with less government regulation as well. Over time, people want lower pollution and waste near them and invest, manage, and produce that result, government or no.
We need to create and become the leaders of Manufacturing 2.0 which incorporates environmental and social externalities. Companies who don't operate along these principles should be taxed and those monies put toward continuously improving global standards.
I wonder if that's really true. Food's pretty cheap nowadays.
Tariffs on chinese goods would up the cost of those goods to slightly higher than what US-made goods could be sold for.
This will create jobs in America as companies create factories here.
There will be more jobs, and more money in the economy.
On the downside, everything just got a lot more expensive, maybe 50% more.
This is inflation. People don't notice it as much as they notice a 33% to 50% wage cut, especially since the most discontented members of society, the un and under-employed are no longer un(der)employed.
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.)
Everybody loses a trade war. And the ensuing impoverishment and desperation can trigger a shooting war.
Looking like a duck and quacking like a duck doesn't depend on your silly definition of "war." What China is effectively doing is waging war on the US. Whether we wake up to this fact or not will determine whether the US becomes a nation of the rich in fortified castles sitting amongst the poor and desperate, or whether we return to the American Dream.
From the trade, we in the USA get cheaper products and low-cost loans/investment.
We then enact counter-productive feel-good policies that make us less competitive:
- employment-depressing labor rules (ranging from minimum wages to complex and expensive mandates)
- corporate welfare (including bailouts)
- subsidies for politically-popular activities (like home ownership and acquisition of often-superfluous academic credentials)
These choices are not the fault of the Chinese. At worst, because our trade with the Chinese makes us wealthier, we can then afford to make bigger mistakes elsewhere before correcting course. We spend the surpluses from trade on our anti-competitive policy luxuries.
"Winning" won't require getting tough on the Chinese, but getting tough on ourselves.
Basically we traded owning our own production for renting production from overseas. Renting often has lower immediate costs but higher long-term costs (and less freedom).
The market for American goods increases as the Chinese middle class grows. Chinese consumers don't prefer cheap knockoffs, they buy them because they can't afford the most expensive genuine article. Look at the Chinese market for luxury cars as an example of what will happen with increasing speed: http://magazine.wsj.com/features/the-state-of-luxury/cars/
Granted, US car makers aren't in great shape right now, but other industries can take advantage of the Chinese appetite for luxury consumer goods (electronics, cosmetics etc). The elecronics may be manufactured in China, but the profit margins are mainly with the US companies who designed and developed them.
Savvy US companies can sell their goods in increasing volume due to the larger overall global market. Many US multinationals make large chunks of their profit overseas, yet you don't hear people saying the US should enter into trade wars with South America, Europe or Australia.
In 1930, the Republican controlled House of Rep, in an effort to alleviate the effects of the… Anyone? Anyone?… the Great Depression, passed the…Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act which, anyone? anyone? Raised or lowered?… Raised tariffs, in an effort to collect more revenue for the federal gov’t. Did it work? Anyone? Anyone know the effects? It did not work, and the US sank deeper into the Great Depression.
Further details are available at http://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Act
The conventional argument goes like this: A trade war causes prices to rise because of the increased tariffs. That price rise flows thoughout the economy as the increased costs are passed on.
The increased cost of living forces a great proportion of household wealth to be non-discretionary spending, which in turn causes the economy to contract.
That contraction in turn causes companies to stop hiring, which increases unemployment.
The increased unemployment reduces demand, and the cycle continues.
I'm not for tariffs actually, but neither do I think 'common knowledge', especially if it's 80yrs old, has earned any right to go unexamined. Globalization and free trade are not without their problems, especially not if Grove is correct (I think he is) in asserting they've cannibalized a significant portion of our economy that both creates jobs and enables innovation.
"But 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?"
(Actually, my guess is the over-dependency of faith of individual meritocracy will cause us to miss the deeper structural problems that Grove is pointing to.)
EDIT: (Anedoctal single point of data with limited context), My friend worked in a Battery startup company in the Silicon Valley. After the initial design phase, the VCs and management decided not scale up into manufacturing, they rather lay most people off and sell the design.
As more and more jobs require less and less work performed by humans, the obvious solution is to work less hours. Instead of family providers working a total of 60-90 hours per week, they should be working closer to 40-50 in the somewhat-near future, with that number continuing to drop over time.
We obviously have 3 possible paths:
1. We return to the single-provider days of old
2. We scale back "normal" hours to be 20-30 hours per week per person.
3. We have high unemployment while many are working 70+ hour weeks.
I think an average of 25 hours per week would hit a nice sweet spot. It would allow companies to have 10-hour work days, either alternating 3/2 10-hour days per week, or 5-hour shifts 5 days a week. Jobs like programming could be designed to have 2 8-hour shifts per week (to perform actual development) along with 3 3-hour shifts (to address meetings, squash bugs, perform customer service, etc.). What is keeping us from this?
Instead, we have something like 15-20% of the population overworking themselves while another 15-20% are under- or unemployed. Something's gotta give.
My social history tells me that no other countries have been successful at creating such a system either.
Whether or not we have such a system, we may well be moving to a world in which the US can continue to increase GDP significantly while unemployment increases (efficiency increases, in other words). Successfully creating a Chinese middle class, and selling them our branded stuff only hastens that eventuality.
What happens to all these American unemployed people? In an ideal world, they would be artists and poets, inventors and writers, people who add to our cultural capital. The end-game here would (in my dreams) look a lot like Ian Banks' Culture books -- a utopian society which has moved past 'the age of scarcity'. Unfortunately, right now, places like Saudi are the closest we can look to for a society with, frankly, enough money for everyone.
In the interim, we are facing a sort of cultural crisis. America's PDI (Power Distance Index) is middling right now; the PDI describes out comfort with and exposure to, high levels of power differences in society, including wealth. Saudi has one of the highest PDIs in the world, meaning that they as a country haven't solved this problem of building an equitable society based on passive income production; in fact, their society is less equitable than many poorer countries. It is hard to imagine that we are aiming at anything else but a Saudi-ish social system if the GDP growth + unemployment growth trend continues.
I say this partly because Americans think of someone who is 'unemployed' as lazy, uneducated, etc. In fact, there's a significant undercurrent of that perspective in this thread. The reality is that if we are able to keep improving productivity while birth rates decline, there will eventually be less work. There might be more money, but there will be less work.
How do we deal with that? I don't have a good answer, but I still am part of the problem -- I would much rather spend capital on an automated solution for my business than hire someone.
I didn't read where Grove was proud of how Intel behaved during the '90s. In fact, I got the opposite impression from this article: Grove is writing from the pain and tragedy caused by competing with the Chinese on entirely Chinese terms. Where was the US during those years? Absent. Like a drunk staring into a Vegas slot machine in the wee hours of the morning going through the motions, but not really being there.
Regarding his scheme, if his economic stimulus plan means to build a bunch of Intels, people will choose to party on and watch the economy go down in flames.
Others in this thread keep talking about "the elephant in the room" but the real elephant in the room is that given other options, almost nobody chooses to work in a factory.
Whenever, someone starts a debate like this, or whenever I see a human being slaving away for a pennies in despicable conditions. I have to ask this question.
If and only if companies are entities that exist to make more and more money (not wealth) then you will inevitably run into such problems. The companies in the USA outsource that labor to China, or India only for earning more money, but are they creating wealth? By destroying the long-term sustainability of human civilization on this planet (I live a few kms from a few of these factories in India. You have to see in order to believe what they get away with)? By ultimately harming the very source of their wealth through such measures?
I have absolutely no idea about the implications of these concepts to make any categorical statement on them, but I think that David Packard and Bill Hewlett may have gotten it right. (see: http://www.jimcollins.com/article_topics/articles/the-hp-way...)
*profits are a pre-requisite to its existence. I want to ask if they exist only to do that?
I.e. with the exception of sports (in the biological sense) like Tesla (also a big political factor there), what new Intel like startups are going to get the serious funding they require in today's political and economic environment.
As far as I can tell, the period of the big VC funded company like DEC or Intel lasted between the late '50s (there's a certain bit of legislation that pushed the concept over the top) to the early '00s, when SarBox was the last straw that ended the game.
Pretty much all of us who are here for the startup game are here for the small capital web/Internet/software type of companies. E.g. I don't see where the next FPGA like think is going to come from (well, in the US).
Maybe at this point in time you have to accept a high unemployment rate, the problem you have to be careful with I guess is you still want to provide incentive to the people currently in minimum wage positions.
My naive point of view sees lowering lifecost (cheaper real state, health insurance, etc) so people needs less money to live in a good way and costs can go down. That can't be done in Silicon Valley or NYC but thanks to the technology and good transportation can be done in other areas of the country with good planning.
The American standard of living is higher than China. In order for a worker in the US to continue to enjoy his standard of living and salary, she must contribute to creating something of value equal to what she consumes that is then exchanged at a market price(which determines it's value relative to goods/services created by others). When the US is a leader in technology and innovation, we create things that are very valuable, because rare and productive people make them, and trade them for other, largely commoditized goods, from poorer countries. The reason these commoditized goods are produced in poorer countries is because they can... The ability to produce them is well known so there is more competition, and therefor demand, and the price drops, along with the wages. If you work in a factory cheaply, you do so because replacing your skills in that factory is easy. There are many other people with that set of skills to replace you. The value you produce is cheaper, therefor you are paid less and have less to consume .
Now, back to Mr. Grove's statements. The factory jobs left the United States because wages were higher here than there. It's that simple, but where he goes wrong is say that "managers were happy", which is not quite as harsh, but very close to the usual line, which attributes the offshoring to "greed". Not quite. If an American company has to produce it's goods in a factory where people make 2x the salary of the same good in China, the goods will cost more to buy. If the American company, doesn't outsource, and a Chinese company is able to produce the same or similar good(think commodity again), then they will be undercut in the market and go out of business. Not only will management be un-"happy", but the US as a whole is worse off because the profits now go to a Chinese company instead of an American one. The US has now lost not only the manufacturing jobs, but the high value add jobs as well. Mr. Groves proposes the "solution" that we tax imports and use the proceeds promote American production. This merely shifts the money around. Those imported goods were cheaper than their American counterpart. Assuming current wages remain the same, it now cost more dollars to purchase that good because of the tariff and American's have less stuff because it is more expensive relative to their salary. The other option(without the tariff), is that the American factory worker cannot find other work that will pay him more, so he agrees to accept lower wages for performing that same job here and can therefor buy less stuff. I believe that these, as a whole, offset one another and are probably net a wash.
As for unemployment, I believe that it is caused by many different things, probably many reasons that are poorly understood, but I'll address a few of them that I think are important here. Unemployment can be caused by temporary mismatches between market demands for goods and supply of those goods. Demand changes, prices change, companies don't require as many employees to produce the goods(this can also be caused by changes in the efficiency of production), and people are fired. There may not be a job in their previous line of work. If there is some other skill set which is in demand, that person can learn a new skill and make whatever salary the market demand supports for that skill. It is also possible that the market will not support the workers previous salary. Labor costs go down, but here is where people usually go wrong. When labor costs drop, it becomes affordable to pay people to do things that you might have automated(for a high cost in machinery or software for example). Or, the market might now support the cost of producing a good which must be done with tedious manual labor. Or, if the American worker is more efficient than his Chinese counterpart, then it might be cheaper to start doing manufacturing in the US again. In other words, as wages drop, the unemployment rate will go down, and less will be outsourced. This is just the tradeoff. The fact that jobs are sent to China means that cheaper goods are available here in the US. Mr. Groves states that the trend is towards an economy where there are high value add jobs and high unemployment. This is true only if current wages hold. If wages drop, then outsourcing makes less sense and unemployment picks up. What we really want is lots of high value add jobs here. This comes through innovation, creativity, a highly skilled and motivated workforce and outsourcing production(if it makes sense) to cheaper markets.
We will not be left with no domestic manufacturing, we will be left with the manufacturing that we are most efficient at. Anything else is just fighting gravity. We need to be making tomorrow's jobs, not fighting over yesterday's. Tariffs will not solve unemployment.
You can't create jobs through tariffs, but you can shift the balance towards the US.
China keeps artificially inflating their currency when it would've naturally increased by now; maybe to the point of being economically infeasible for some companies. Don't forget that there is a huge overhead in shipping products across the Pacific Ocean.
And to fight this economic manipulation, tariffs are needed.
You make that sound so simple.
You left out the bit about that meaning falling standards of living, and the social dislocation that causes.
You mean only being able to buy a 27" TV for $1000 instead of a 50" one? Or having to stick with a 3G phone for another year before getting a 4G one?
This is a problem for a variety of reasons. The poor are, of course, less able to compete for scarce resources such as housing (particularly in cramped places like the UK), healthcare, high quality education, etc. This uncompetitiveness isn't too bad in places with reasonably limited income inequality, but as the inequality scales up becomes a really serious issue. All of this is a bad recipe for social stability - as being part of society becomes less beneficial for the poor, more and more will choose to live outside it.
Over time, income inequality also leads to poor social mobility, which is a real issue with keeping a country competitive.
This is what most of the Western world wants, yet it is very difficult to achieve this - largely because of education. Most of the West, not just America, wants the bulk of it's jobs in high value-added positions because of labour costs arbitrage which many companies are forced to engage in because of intense competition. Where education is concerned, some people don't want to go to college, some aren't suited to it and well, funding education is damn expensive and the pressure on politicians to cut educational spending (which takes a long time to payoff) is huge. So you are never going to get all of the workforce in the country to work in high value-add roles, for various reasons.
I was fascinated by this interview with Andy Grove, because I had read an interview with Craig Barrett (current as chairman of Intel) who took a largely polar opposite view to what Grove has said in this article. Barrett was talking about how Ireland must change in order to move out of recession. I think he would be appalled at the notion of the US entering into a fully-blown trade war with China, as Grove advocates.
Barrett quote [on Ireland]: What I said is that [having] smart people (good education) is important, smart ideas (investment in research) is important, and then letting smart people get together with smart ideas to do something is the third thing (the environment). The very same could just as easily apply to the US.
Full article here (a very good read): http://www.irishtimes.com/newspaper/finance/2010/0212/122426...
IANA Tax Expert, but I like how they've completely rethought the tax system from the ground up, with the objective of making the US a tax haven for all parts of the manufacturing process - harvesting raw materials, milling into useful materials, manufacturing into products, transport, and sales.
In a nutshell, there are 'embedded taxes' at every point in the manufacturing chain. Take a simplified semiconductor for example, made of sand, aluminum, and copper:
1. Mine the copper and aluminum, collect the sand (payroll + income + other taxes)
2. Purify it all, mill the copper and aluminum (payroll + income + other taxes)
3. Deliver to fabrication facilities (tax the transport company)
4. Convert sand to silicon wafers, etch the microprocessors into the wafers with the copper and aluminum, package into chips. (more taxes)
5. Transport to OEMs (tax the transport company)
6. Build computers (more taxes)
7. FedEx/UPS to purchaser (more taxes).
The consumer ends up paying multiple embedded taxes in the final cost of the product. The Fair Tax folks estimate that these embedded taxes comprise roughly 22% of the cost of the average product manufactured in the US.
The Fair Tax would instead remove all the embedded taxes and add them in one lump sum to the final product:
1. Mine the copper and aluminum, collect the sand (no tax)
2. Purify it all, mill the copper and aluminum (no tax)
3. Deliver to fabrication facilities (no tax)
4. Convert sand to silicon wafers, etch the microprocessors into the wafers with the copper and aluminum, package into chips. (no tax)
5. Transport to OEMs (no tax)
6. Build computers (no tax)
7. FedEx/UPS to purchaser (no tax).
8. Consumer pays 23% tax (calculated inclusively, 30% calculated exclusively) on the final product.
The final cost to the US consumer is roughly the same, but the incentives are drastically realigned. It becomes much less expensive to make things in the US, and they are only taxed when sold in the US. Products exported overseas would be tax-free to make and sell (except for taxes in the foreign countries).
The concept potentially solves all sorts of problems, from our trade balance to illegal immigrants not paying taxes. Definitely worth reading more about for anyone interested:
http://www.amazon.com/FairTax-Answering-Critics-Neal-Boortz/...
http://www.amazon.com/FairTax-Solution-Financial-Justice-Ame...
Its only regressive when you lose perspective on the purpose of money.
China manipulates its currency, and so does the US: to keep the rich rich. If we were on the gold standard (not that I'm saying we should be) the dollar would already be worthless and US labor would be competitive. But then Wall Street 20yos wouldn't be able to afford a ferrari.
We must either begin enforcing fair trade, and fair employment, or we must face the fact that tens of millions will be unemployed. We cannot support them either. They will not be able to buy the iphones or the xboxes that pay our salaries, and we wont be able to pay our taxes.
And do you imagine that they will just starve to death? Or is LA a testbed for containing the lawless future?
I do not know what is happening to the USA. It seems as if those who should know better are willfully ignoring the consequences of their actions.
Why does it make sense for companies like Foxconn to take on more and more of our high-tech manufacturing work? Simply because, in contrast to most of the twentieth century, most consumer products are built pretty much the same these days. There is absolutely nothing about a PS3 that requires different components, production lines, or assembly techniques from a desktop PC. There is nothing about an iPhone that justifies building it in a factory that doesn't also make pocket calculators, handheld game consoles, or, hell, competing phones such as Droids. Massive contraction and consolidation of the manufacturing sector, whether here or elsewhere, is both desirable and inevitable. Right now this is true of high-tech items but soon enough, it will be evident enough across the spectrum of durable goods.
This wasn't the case when producing a new widget required a lot of custom tool and die work, specialized worker training, or the development of advanced processes unique to that widget. For a drop-dead awesome example of what I'm talking about, look at the processes Tektronix had to develop in the 1960s in order to build CRTs for their oscilloscopes: http://classictek.org/index.php?option=com_seyret&Itemid... (Flash required)
Grove is basically saying we need to start more companies that "scale up" to require factories where people sit doing stuff like what's seen in that video. He's wrong. Today, if I design a better oscilloscope, I'd be out of my mind if I didn't find a way to use the same generic LCD panels that Chinese factories produce by the tens of millions for sale to everyone from Apple to Boeing. And when my hypothetical design is complete, it will use at most one or two custom ASICs (the fewer the better -- I'll use FPGAs if I can), and Foxconn can start building it as soon as they finish their rush order of iPhone 5G Extremes.
I have a lot of respect for Grove, but as a captain of industry, he's fighting the last war. His subtextual premise is dead-on, though: we need to figure out how to put 200,000,000 underemployed US workers to good use, or things are going to suck.
To me, it's obvious what the future of mass production will look like, but it's not at all clear how to stave off a future where 10% of us are shouldering the entire productivity burden for the rest of the country.
For now.
Also, keep in mind that everything I said about it being economically undesirable to employ human labor in production goes out the window when there are a billion workers available who have nowhere to go but up. There is no (natural) law that says that our robots will be any more economical than low-cost Chinese workers, even though they might be more economical than high-cost American workers.
It'd also be cheaper to have slaves, but we don't do that either. The ends do not justify the means. In order for capitalism to be effective at increasing standard-of-living across the board and allocate resources and capital efficiently, it must be tempered with rules that set limits on what avenues are pursued for profit.
At least some of them will be able to accumulate enough knowledge to build something cool, kits, startups, or something else.
Eventually, you'll end up with a scavenging masses that scavenge junks thrown out by the Doctors, Lawyers, movie stars, and all sort of non-technical people of the world.
It'll be an interesting world to see half of society built on high tech junks and sophisticated hacking.
The book is sort of a meandering opus covering basic machining techniques but also talking about the history of the company and how the business was built. A lot of it involves finding ways to use technology and advanced manufacturing methods to keep U.S. manufacture competitive with Asian imports.
E.g., the Sherline mill is built on an aluminum extrusion filled with some sort of epoxy/concrete for rigidity. Most Asian lathes are built on castings which are machined to final specifications. The Sherline method is more difficult and requires more capital investment, but requires less labor.
Basically in every case he mentions, the way you keep a U.S. based company competitive with Asia is by engineering away all the labor. What you do with 15 people in an Asian factory using 100-year-old methods you do with one guy and millions of dollars worth of state-of-the-art tooling in a U.S. one. And even then it might only buy you a few years of competitiveness, until that machinery can get moved over to Asia and installed, and then they beat you based on the cost of the one guy.
Anyway, it's an interesting book if you're interested in that sort of thing but doesn't do much to restore my confidence that we're not engaged in a race to the bottom as a country.
(Link to book: http://www.sherline.com/bookplug.htm)
If you're currently making a living doing creative, intellectual work (like programming), count yourself lucky to be among the few remaining craftsmen in the world.
btw, do you ever think we'll reach a point where it will be common to have 99.9%+ automated factories? (robotic, possibly even full input/output lifecyle & distribution, etc.)
I think one way to answer this is by analogy to farming. Every year, less and less of our food is touched by human hands on its way to the market.
According to the USDA, in 1900 41% of the American workforce was employed in agriculture. If you went back to 1900 and told a farmer that fewer than 2% of Americans would be involved in the production of food in 100 years, would he believe you?
This tectonic change has gone unnoticed by most because displaced agricultural workers have been able to find gainful employment elsewhere. The whole issue here, I think, is what we'll do when most of the productive labor across all economic sectors isn't needed anymore. So yes, in that sense, whether we use 99% automated domestic factories or whether we build 99% of our stuff overseas, I think we'll reach that point.
Exactly -- science led to technology which led to job creation. That's the whole story of the 20th century, with a couple of wars tossed in to keep things moving.
Meanwhile, in 2010, science and technology are just two more things most Americans take for granted. We still have to fight the Scopes monkey trial every few years, we couldn't get back to the Moon with any less time and money than it took the first time, and especially since 9/11, we're no longer a place where the world's STEM students come to study and live.
That farmer from 1900 would say we're "eating our seed corn."
You're actually very wrong about foreign STEM students (every US graduate school is filled with Chinese grad students and post-docs), but that's neither here nor there. One of the main points of the article was that it gets harder to educate a new generation of high-tech workers when the industries that have all of the institutional knowledge out-source that knowledge to China.
Middle-achieving Chinese students have an incentive to come to the US for higher education -- it helps them get jobs back home. What incentive to middle-achieving American kids have, when the bottom 95% of high-tech jobs are sent to China?
The unspoken Myth of economics is that just because we've transitioned from an agrarian to an industrial economy in the past, we'll be forever able to use efficiency improvements to drive employment in the future. In real life, it's just plainly, obviously untrue. If nothing else, the simple fact that human intelligence follows a bell-curve should tell us that there's always going to be a large class of people who cannot function at the highest level of production. Those people need factory jobs, or farming jobs, or other lower-skill industries that pay a decent salary.
Well said. The jobs we're creating are achievable to a progressively smaller segment of the population, and that's a huge problem.
I wonder if as we run out of easily-mineable resources, we'll start creating low-skilled jobs again, in the recycling of the already-mined resources - garbage mining, effectively. If China's hold on rare earth metals, for example, continues to increase, I can imagine this being an important job area.
Am I?
(every US graduate school is filled with Chinese grad students and post-docs), but that's neither here nor there
What happens immediately after they graduate?
Yes.
"What happens immediately after they graduate?"
It depends greatly on where they're from, and what they've been studying. A lot of my Chinese colleagues have gone back to China...because there are jobs there, and not here.
Which I think you'll find was my exact point. We may still be the world's standard in STEM education, but we aren't necessarily benefiting from that position.
The world's best students come here to study, but not to live.
That's the quote from your original comment -- the one to which I was replying. So, while you may have meant to say something else, I don't see that in the text. If anything, now you seem to be contradicting your earlier remark.
Also, re-reading the original comment, I get the impression that you're arguing that we're falling behind in science and tech because of a cultural failure -- a lack of societal focus on science and technology. I don't think that's true for a variety of reasons, but the big one is the same argument raised by the article: we've out-sourced generations of technical expertise. There's little incentive for the foreign grad student to stay here, when the jobs are over there. The jobs are there because we sent them there, not because we've stopped educating American students.
I challenge the idea that this is a "simple fact", rather that it's even true at all. How do you know? Right now it may appear so because so many schools grade on a bell curve (i.e. no other outcome is possible). In my experience, aside from people with genuine disorders, everyone has a similar (high) potential. The majority are just not properly stimulated. Maybe they have bad teachers, bad parents or are just lazy but if they were properly motivated they could achieve much more than they do.
Personally I find ideas like "the simple fact that human intelligence follows a bell-curve" dangerous. You're framing the potential of a whole species and people tend to assume this is true and act accordingly (e.g. grading on a bell curve).
I suspect war will remain a popular pastime.
And he would be wise not to... well at least not if you add Farmville numbers in there.
Not make stuff, not employ people, not even turn a profit - just increase the share price / pay dividends
Anything else you do, every hire, every contract, every charity donation must be justifiable in this context - unless you enjoy shareholder lawsuits.
There is a great deal of caselaw dealing with this (you can google "shareholder primacy" if you want to jump in) but it is anything but clear cut.
If the duty of directors to shareholders was as absolute as many people on the Internet think it is, companies would have to shut down and go into liquidation every time their market cap dropped below book value. But they don't (even, in some cases, when some investors might prefer it) because directors have the prerogative to seek long term gains at the expense of short term ones.
(They also have the prerogative to do the opposite, and the market unfortunately tends to reward it, but there are many exceptions.)
I believe the only thing legal you are required to do is not to defraud your shareholders. Any idiot can, legally, run a company into the ground.
You have to give Grove more credit than that. Obviously, he does not want to create clock-punching jobs just for the sake of having clock-punching jobs. Grove is known to run a tight ship. His example of the alternative energy space is a perfect one demonstrating the inability of even new industries invented in the US to remain here. All the "scaling" happens in China, leaving little secondary benefits to the innovating nation. Why can't your oscilloscope be made here? Sure, they have the know-how, but so do we. They have assembly lines, so can we. In theory there shouldn't be a problem. But in the real world, we know the playing field isn't level. Like how China allows externalities to develop by quashing labor/worker conditions and the environment to create the perfect arbitrage situation for offshoring US entrepreneurs. Can't forget their dollar/yuan "managed" exchange rate. Again, they are subsidizing the offshoring startup. China has clearly stacked the deck hence the inevitability of your oscilloscope being made overseas. This is by design and its all policy-driven. Should the US sit idly by as a de facto trade war is staring at them in the face? Or should they follow through with the offshore tariff that Andy suggested? Controversial, no doubt, but one must do whatever it takes to win a war.
CB, you make good business argument for the current microeconomic behavior of firms but you must put on a political-economic hat and think decades down the road to really get at his thinking (and he's as sharp as they come). I believe Andy is being long term greedy. He's fighting the next war.
Is it really healthy for Silicon Valley if Apple has a factory cranking out iPhones in Cupertino, Google has a 99%-identical factory for Droids in Mountain View, and Palm has yet another factory producing Pres in Sunnyvale? What's the point? The hardware's all very similar from a production viewpoint, or it soon will be. In a rational business climate, all of these products would be made on the same line, by a company that sells manufacturing capability to the highest bidder. Competition will happen on a purely IP-based playing field, not on the factory floor.
Going back to the Tektronix example, when Tektronix finished one of those CRTs, they practically had a one-of-a-kind relic on their hands, a part that would not only not fit in any one else's oscilloscope, but could in most cases be used only in a single model in their own product line. They didn't have what we'd call excess capacity, and if they did, they darned sure wouldn't use it selling excess tubes to the competition, because those tubes were a big part of what made their overall product competitive. So every manufacturer of those particular widgets had to either build their own CRTs or buy them from a common vendor (in which case their scopes sucked).
Tektronix in 1960 couldn't afford to treat production as a red-headed stepchild in their overall business plan... but they sure can today, when the bulk of the test equipment they sell is OEM'ed out of China just like everything else. Sorry, but IMHO, the production of solar panels, portable fusion reactors, or whatever is just going to take the same inevitable course. The business will be commoditized if it prospers at all. Trade policies and externalities have absolutely nothing to do with that.
You're begging the question; there is a country beyond Silicon Valley, and Grove's argument is that what is best for Silicon Valley (meaning, the bottom lines of a few tech firms which together only employ a small percentage of the U.S. population) isn't necessarily what is best for the country as a whole.
Put more directly, it's not clear that there are enough IP-based jobs to keep the United States at or near full employment. To do that, which we need for social stability, because high unemployment is intensely corrosive, we need to capture some of those manufacturing jobs. And it might be worth doing things that hurt tech companies' profitability in the short term -- taxing outsourced manufacturing, for instance -- in order to achieve that.
If we don't, the "rational business climate" might drive all the manufacturing overseas, leaving the U.S. with a very small number of employed people doing the design work, and hordes of disaffected, unemployable people with nothing to do. As you point out, once you have the production line set up in China, it makes sense to just scale it out there rather than build a second one here.
The long-term social effects of such a 90/10 split would be very bad, and would in all likelihood eventually make it very hard to be very profitable at all. So it might make sense for IP-centric design companies to take a short-term hit and try to maintain something closer to full employment, lest they find themselves first up against the wall when the welfare proletariat they created revolts.
In that case, it is likely that the skilled will hire the unskilled as servants, making the skilled people even more productive (every hour spent doing laundry is an hour spent not designing the latest iPhone). People will probably also work fewer hours, and take productivity gains in the form of leisure rather than money.
You're right on that since we're clearly talking past each other :-) Yes, businesses become commodities over time. We agree here. However this is orthogonal to innovation and job creation. If an old mature industry is on its last throes, then by all means, farm that out. Those jobs are gone. But that's not what we're talking about here. We're talking about new industries that if they can stay put for even say 5-10 years could provide immense benefits to the innovating nation. It keeps the middle class healthy and prevents the have/have-not scenario that you mentioned as troublesome. I share those same concerns. It also creates an in-house knowledge base for future innovation and an investing base for venture capital formation (think Paypal/Google mafia). It also has the effect of incenting the country to implement pro-innovation policies to continually lay those golden eggs. A virtuous cycle if I ever saw one.
Now enter the bureaucrats in Beijing who have created their own "incentives". The main one being cost which they obtain by mortgaging their labor/environment and toying with the exchange rate. These aren't truly economic advantages but are really artificial rules put in place by a planning committee for national interest. Government intervention if you will. Entrepreneurs and startups who must factor in cost to any decision are thus improperly incented to quickly offshore. Thus we have the familiar story of "we innovate and they get the jobs" This is why Grove said creating more startups won't do anything to help US unemployment since they do their scaling elsewhere. The proper course of action is for China to due away with their policies but we can't make them. This is game theory folks. The unfortunate reality is that the rules of engagement are written by bureaucrats and Grove is saying if China is playing that game we must too.
http://en.wikipedia.org/wiki/Suez_Crisis#Financial_pressure
It is easy to be protectionist. But a major selloff of the USD by China would create the mother of all confidence crises, and, while _everyone_ would lose, the world's reserve currency, the USD, would be forever damaged.
This is not a war you can realistically fight to win. I really expected more from someone of Grove's intellect. Much much more.
A currency tied to the dollar is not a subsidy, any more than a common currency between New York and New Jersey is a subsidy for New Jersey exports.
Borrowing creates trade deficits. The US has been borrowing massive amounts to simulate prosperity.
When you borrow for the sake of consumption, you import a lot and export a lot less.
It doesn't matter what other countries do. What matters are the choices we make for ourselves. And massive government borrowing and super low rates are bad choices with bad consequences.
Extrapolating your logic, that 10% will probably shrink to 1%.
And chances are, you or your descendants probably won't be part of that 1%.
Grove isn't saying that we should have more mundane manufacturing jobs. He is saying there is a problem with stratification when 1% of people make all the money while the other 99% are left unemployed because they couldn't patent X technology 1 day faster, or didn't beat the other 99% of applicants for the rare number of jobs left.
Whether or not the only solution to this is to artificially preserve mundane manufacturing jobs is another matter.
Creativity in business requires a fair amount of luck. The successful 1% will need to be drawn from a large, educated, middle class. Even if most people end up striking out, it will be in our best interest to keep as many people within striking distance as possible.
Isn't all of this a really circular argument? I am really sorry, but I am extremely confused about what you are trying to say over here. :(
I know it's extremely stupid of me to ask this, but how is any method of mass production built upon exploiting people whether they are on a piece of land called the united states of america, or china or india help anyone in the longer term?
# http://news.ycombinator.com/item?id=1479902
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Edit: I am sorry if this strikes you as an inane question/off-topic, but I ask this for a reason. The OP states that;
>>>To me, it's obvious what the future of mass production will look like, but it's not at all clear how to stave off a future where 10% of us are shouldering the entire productivity burden for the rest of the country.<<<
That is the conclusion only if you accept that the only way for us to function is to make more new stuff and to consume that new stuff. I somehow don't understand that.
I cannot understand why we have accepted an endless cycle that dwindles our resources as the only means to make a contribution? How do you define the value of all of these things that we churn out in the longer term? By measuring their impact on human beings? By their impact on the environment? By their impact on us? By productivity increased through that device? Some standard of living increased for the shorter term by it?
I want to make beautiful things, but I have to ask myself the question; am I creating wealth? Some would argue that wall street creates wealth (parts of it certainly do, but not all of it). However, everything here is dependent on the assumption that the money that is being generated here is wealth, and that the only way to do this is by earning more money. The only way to do that is to make and sell more stuff, which leads to more money, and so on.
I am not saying manufacturing is evil. It isn't. Neither is capitalism or any other ideology. I am merely questioning the ends for which it is being used. People have argued over the centuries that an action itself is stripped of being right and wrong, but it is the context in which it is performed, due to what intention and what effect that makes it good or evil.
So, as someone who doesn't know anything I just want to ask; why?
I am truly sorry if this is something not suited for this space.
If we honestly look at things right now, the only reason these jobs haven't been automated is because we have people so cheap. Even so, in the US, if you strip away the metajobs: service, marketing, entertainment... our infrastructure and creation now is around ten percent of the population. [citation needed.] http://www.yesvirginia.org/Images/charts/EmploymentMajorSect... shows 24% of the working population in manufacturing, construction, IT, and educational/health services. This does not count the unemployed and children.
We are hurdling toward a world where fewer than a quarter of the population are required to maintain the society.
The idea that we, as a nation, somehow resist the neo-colonialism known as "free trade", and, as Mr Grove says, fight a trade war TO WIN.
Corporations are legally obligated to make the biggest profit they can, which implies cutting costs any way that they legally can (so long as the cuts do not disproportionately impact gross incomes). No one is suggesting that we ask companies to invent charitable make-work.
I believe what he finally gets to at the end of the essay is to suggest that we, as a society, provide financial disincentives to offshore work, and incentives to do the work within our own country.
People making $40,000 per year are much more likely to buy your stuff than people making $20,000 (or $0), and are less likely to crash your gated villa, even if it costs 20 to 50 percent more. He also mentions that doing the grunt work trains (st least some -- enough) people to do the more creative stuff later.
Don't worry, though. The multi-national corporations so own our government, so it's doubtful our national self-interest is going to have much influence anyway. You can continue living the libertarian dream. Unless you end up being one of the untouchables. Ouch.
wow ! just amazing.