Andy Grove on US Manufacturing and Jobs Growth Not Without Controversy

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For those of you who missed an interesting essay by Andy Grove, co-founder and former CEO of Intel, you can read “How to Make an American Job Before It’s Too Late: Andy Grove, right here. For those of you looking for the Reader’s Digest version, we can summarize his main points in the following ways. First, he takes a punch to something that NY Times columnist Thomas Friedman said in a recent article entitled: Start-Ups, Not Bailouts, according to Thomas, “Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he write, it should back start-ups. Grove says simply that Friedman is wrong. He points to the necessity of the “scaling process which involves the capital investment to grow a business beyond a start-up to one which requires factories and American jobs. Though this theme permeates Grove’s essay, he argues several other points worth noting. He argues that job creation must become the “number one priority of state economic policy. He goes on to say that government really has the largest most strategic role in seeing this happen. Finally, he suggests some financial incentives, not too dissimilar to those proposed by Warren Buffet in levying an import tax on goods that come into the US that don’t have a corresponding equal export value. In this case, Grove suggests a tax be placed on any products that come into the US with offshore labor.

The article discusses the US high tech industry starting with Intel but then moves to alternative energy and the advanced battery market. His comments however, are not without controversy. In a well-argued piece by Forbes entitled: How to Kill the American Job, author Reihan Salam argues that Grove suggests using trade barriers and government subsidies to solve the problem of American jobs whereas Salam dismisses the notion that job and income growth will come from the US manufacturing sector (it will come from the caring professions as an example). Instead, Salam argues for tax reforms to improve work incentives, entitlement reform and less “bashing China. He then examines marginal tax rates and says, “large cumulative increases in the tax burden lead to institutional and cultural shifts that are difficult to reverse: Firms become less likely to hire, workers take longer vacations and trade taxable income for leisure, overall spending levels grow slowly or flatten. Finally, Salam concludes that what Grove is arguing for “larger and more intrusive government will, “¦destroy more American jobs than off-shoring ever has or ever will.

But let’s take a step back for a second. Grove discusses a key metric: the employment cost-effectiveness of a company. To get at the number, one takes the initial investment and any fund-raising investments (this could include an IPO) then one divides this number by the number of employees at the company ten years later. Grove says for Intel this number equated to $3600 per job (adjusting for inflation) and for National Semiconductor, this number was $2000. Now, the cost is $100,000 per job. And those costs get levied on a company through regulatory burdens, increased health care costs, wage etc. US manufacturers lose their edge when other countries peg their currencies at less than the free-floating rate (e.g. China, South Korea, etc)

One might conclude Grove argues for big government, subsidies and high taxes (that’s what Salam accuses Grove of arguing for anyways). But hold on a second. What do we call these massive stimulus programs? How about the enormous regulatory burdens placed on US employers for health care, as well as tax increases poised to kick in by January of 2011? Folks, we already have massive government intervention. Why wouldn’t we argue for gulp “incentives, tax breaks and reduced regulatory burdens and even taxes on products with off-shored labor content (as Grove suggests) to stimulate the scale that Groves is talking about? Or, do we really think we’ll survive as the “knowledge economy or the “caring professions helping hand economy? I don’t know but financial advisors always seem to suggest the best investment strategy is a diversified one. Are we prepared to walk from US manufacturing?

–Lisa Reisman

Comment (1)

  1. Liz says:

    It scares me, it truly scares me. Everything I buy has “Made in China” on the label. It’s been that way for a long time now. I can’t remember the last time I saw “Made in the USA” on a label. I’m young, only 26, and like many people my age, I lack a firm understanding in economics. I do, however, have common sense. I’ve thought for a long time now that that’s one of the specific reasons our jobs, and with it our economy, have been chiseling away.

    I can remember my mom telling me about a similar time in the 80’s when manufacturing had left this country in a big kind of way. Then everyone began to cry out for our products to be manufacturing in the USA. She told me there was even a boycott on products made overseas, as well as the stores who carried them, such as Wal-Mart. Then in the 90s, when I saw a lot of “Made in the USA” labels, our economy was really great. I know this story is lacking a lot of details, but I’m sure a lot of you are older than me and remember it first hand.

    I may be naive, but there seems to be a direct connection there. I feel that the surge of Chinese manufacturing and the loss of American jobs is too coincidental. I’d start to boycott those such products not made here now, but I wouldn’t even know where to begin. I don’t think I’d be able to buy anything. (snark)

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