Andy Grove on the Need for US Job Creation and Industrial Policy

Posted on by

Andy Grove, who lead Intel to dominance of an extremely competitive, risky industry, has a very important opinion piece at Bloomberg (several readers pointed to it, including John M, dr, Crocodile Chuck). He makes a series of points that are the polar opposite of the de facto US industrial policy, of the naive view that the US can have a viable society based on “knowledge workers”, rentiers, and service industries that depend on their earnings. Sadly, my Washington contacts tell me that the belief that the US cannot compete in anything other than financial services is deeply entrenched there, no doubt fed by media stories that draw misleading inferences from appealing-seeming case studies (see this New York Times story and Richard Kline’s able shredding in comments yesterday here and here for an example)

One thing American businessmen have utterly lost sight of is the importance of providing employment. The focus on “maximizing shareholder value” when shareholders are on the very bottom of the liability side of the balance sheet, not merely legitimates but extols screwing other stakeholders to the extent management can pull it off (and management, suborned via stock-related compensation, has gotten very good at doing just that). By contrast, in Japan, entrepreneurs like Konosuke Matsushita are revered not because they got rich, but because they created good jobs for many people.

Only some of Grove’s stature could poke such a stick in the eye of visibly floundering conventional wisdom that nevertheless remains firmly entrenched because it serves those at the top of the food chain very well (it doesn’t hurt that his piece is exceptionally well argued). My only quibble is that he unintentionally supports the fiction that we don’t have industrial policy in America. Following the money demonstrates the reverse; tax breaks, subsidies, tariffs, and what issues are front and center tell you who the favored children are, including financial services, Big Pharma, the sugar industry, and real estate. And this isn’t as radical an idea as he intimates. Australia, which ranks above the US in the Heritage Foundation’s dubious Economic Freedom Index (the Heritage Foundation clearly never had an encounter with the ATO, which makes the IRS look like pussycats), has very clear priority industries. For instance, its Commonwealth Scientific and Industrial Research Organisation (CSIRO) is one of the world’s biggest science organization and is focused around priority industries for Australia, with its main divisions being information sciences, energy sciences, agribusiness, manufacturing and minerals, and environment (the latter is involved both in new tech and minimizing adverse consequences of current industrial activities).

Please do read this thoughtful article in full and discuss in comments (if you have trouble with the Bloomberg link, as I did, please try here).

Print Friendly, PDF & Email


  1. MyLessThanPrimeBeef

    What about repalcing machines with humans?

    That will lead to more jobs, though you might have to pay more, which, when you think about it, is not that bad when you are trying very hard to stop deflation, right?

    1. alex

      “What about repalcing machines with humans?”

      Like replacing spinning and weaving machines with their human equivalents?

      Technological progress is essential to improving standards of living, or even maintaining it given our increasing natural resource constraints. And I don’t think that we can just temporarily turn back the clock to fix our current unemployment problem.

      Far better to temporarily institute a reduced hours (work sharing) program like the Germans or like advocated by Dean Baker. That involves say a 20% reduction in hours (4 day work week) with the costs shared between government, business and employees.

      1. Yves Smith Post author

        There are still cases where manual or semi-automated processes yield better quality than heavily automated: clothing, shoes, small leather goods.

        1. alex

          Possibly true, but when somebody says “replacing machines with humans” that’s not what I think of since, AFAIK, machines haven’t replaced humans in those areas.

          This isn’t my area of knowledge in manufacturing, but I don’t think that the manufacture of clothing, shoes and small leather goods has ever been fully automated, so how does the quality issue even come up?

        2. run75441


          Change the paradigm. Since the Marquette SCOTUS decision and Reagan, productivity gains have been skewed towards capital or capital appreciation in particular. That capital appreciation not creating product or service with Labor input.

      2. Ronald

        We could significantly change depreciation rates on equipment and eliminate tax deduction for interest expense, I am sure other tax advantages could be created that would favor labor over newer technologies. My experience in business was that back in the 70’s and 80’s my company was better off with union labor vs the 90’s which was capital intensive and volume driven (lower margin). The other issue is consolidators that raise money to buy up the weak companies (those overburden with debt)then attacking the stronger companies within a market niche using superior capital access.
        Overall we should not be afraid of new technologies but lets not give them unfair tax and capital advantages over labor.

      3. Paul Repstock

        Sorry Alex, I just posted the same sort of message (and used three times as many words)…lol
        I had somehow missed your post.

    2. NOTaREALmerican

      Re: What about repalcing machines with humans?

      True story from about 4 months ago:

      A good friend of mine had just finished “Omnivore’s Dilemma”. He’s very intelligent. Has a PhD in physics and another in artificial vision. He’s a professor at a well known engineering university.

      His conclusion to the book? Robots should replace farmers which would allow all food to be organic. Think of all the good paying jobs there would be for robot makers, he says. The concept of average humans – and the need for something average for them to do – escapes most people, even the intelligent ones.

      When all you’ve got is a hammer…

      1. depublican

        Don’t underestimate the power of robots to provide jobs at numerous skill levels. Remember how the computer was supposed to make every office paperless, and replace workers?

        Yeah. See?

        1. i on the ball patriot

          depublican said: “Don’t underestimate the power of robots to provide jobs at numerous skill levels. Remember how the computer was supposed to make every office paperless, and replace workers?

          I worked on the “make every orifice paperless” project while with the “The Brown Miracles Company”, a small start up housed in Abraham Brown’s two car garage in Milton, Mass. It was everything that Andy Grove described in the Bloomberg article, the great scamerican Horatio Alger story just like his. And, just like Andy Groves said — the scale up is what killed us …

          The Brown Miracles Company actually invented and perfected the paperless asshole (the turd-o-verter robot — a device that used millions of microscopic lasers to convert human turds directly into energy immediately as they left your rectum) about two years ago. It was a device that got woven into the seat of your underwear and sent the produced energy in the form of electricity directly to the waist band battery for storage where it could be used to power your cell phone, computer, etc. It was a really great product. You felt good wearing it and you didn’t have to worry about these ‘awkward moments’. The problem was it used a lot of Intel chips and Abe didn’t want scale up at Andy Grove’s outrageous scamerican prices so he decided to move the scale up to China. The last I saw of him he was driving out of his driveway towing a big U-haul trailer and headed for Long Beach where he was going to get on a ship for China.

          I am really surprised that I have not heard from him.

          Deception is the strongest political force on the planet.

    3. MyLessThanPrimeBeef

      That’s like killing two birds with one stone – you get jobs and you get inflation.

    4. Paul Repstock

      Whoa back my friends….
      While I agree that every person needs access to meaningful work and a fair chance at earning enough for a decent living. We cannot go into reverse and hope to have a positive outcome. If the Ludites had been successful at halting the industrial revolution our present situation would have been far worse. Mechanization has displaced many jobs, it has also as mentioned earlier created other jobs. However, what is more important is that without mechanized production the ordinary person could not dream of having the standard of living we enjoy. The computer you read this message on would never have been built and if by some chance it was, the cost would have probably been in the order of a year’s income for a doctor.

      Perhaps the terrible employment situation is a failure of imagination as much as it is a symptom of the changing world economy. Who can actually define what might be meaningful work for another person. For many perhaps posting on Naked Capitalism would be enough?????

      And while I know it is simplistic and certainly unpopular to suggest this; we may have become so addicted to the lifestyle of the last 20 years that our psyches cannot comprehend retracement.

      It would not be possible for people to return to the land. The land is no longer available and the inefficiencies of sustenance farming cannot be allowed if we all to eat.

      However, I also cannot agree with Mr Kissinger’s assessment, that most humans are “useless eaters”. That is the moronic viewpoint of an Elitist Megalopahth. This is the viewpoint a sector of society which either would return us to the feudal past or perhaps just has no grasp of the complexity of the Earth’s economic fabric.

      Little as I like fiat money, the problems associated with money creation are far less than the problems which would be caused by trying to create jobs by the artificial means of introducing inefficiencies into the system we have. Rather than stilling development with red tape and bureaucracy, we should be seeking to find huge projects specially of infrastructure, which would benefit future generations.

      An example of this would be a Third World country where roads are built with stone crushed by hand. Hundreds of people with small hammers sitting on the roadbed breaking rock. This is not “meaningful work! A rock crusher could do the work of ten man years in an hour. Then the country would have a road to use for commerce.

      I think we need to open our minds. We need to stop being so afraid of loosing what we have, that we are not able to imagine that there actually might be something even better possible. Certainly nobody in North America or Europe wants to live at a Third World norm. That should not be necessary. It is not even necessary to have that “Third World norm”. The only reason it exists is because of ignorance and a policy of exclusion. All people are not created equal. Does that mean that the majority should not have enough to eat?

      Now I’m not only OT, but almost ET as well. In my mind this is all connected. I hope a few people will see some merit in the connections I make.

      1. alex

        ‘I also cannot agree with Mr Kissinger’s assessment, that most humans are “useless eaters”.’

        Good old Henry – expressing the sentiments of an unrepentant war criminal.

  2. Deindustrialist

    Guys like Andy Grove with a lifetime experience make too much sense, and have too much wisdom to be taken seriously by today’s business lobbyists and politicians.

    Of course giving people well-paying stable jobs with good training will not only build the depth of expertise needed to have an advanced industrial society, but would also revive demand and get the economy back on track.

    But then where would neo-liberal (or rather anti-Adam Smith) economics be? What would happen to the wonderful austerity that everyone is looking forward to? Would the financial industry be the only game in town? Could they continue to hijack the economy?

  3. killben

    Great read. Well-thought out.

    All this assumes that the politicians are interested in doing the right thing by the american people .. given the way the politicians have been going about this leaves a bad taste in one’s mouth to say the least. So the fundamental point is the interest in doing this. The first step towards that would be to stop the lobbying industry which essentially is a legal form of horse-trading.

    Levy an extra tax on the product of offshored labor —

    will WTO stand in the way?

    How much — pay ratio (cents in china vs dollars in US) will ensure that the tax has to be in magnitudes of 10s if not 100s else it will only increase the price of the product or will reduce the margin slightly — the jobs will get shipped anyway. probably the way to do that would be to target the savings by offshoring has to be taxed heavily to start with.

    Next target could be the various visas — like H1B which again will not add to american jobs – it adds to asian jobs in america ..

    The problem here is managing the mix of maximising profit and the disparity in the standard of living, which provides the cost advantages.

  4. charles 2

    Paul Krugman gave the macro-economic rationale for commercial war,
    Now, Andy Grove gives the industrial rationale. Both make sense.

    The drums are getting louder. Fall 2010 pre-election period may see the fireworks starting.

  5. The Barefoot Bum

    Sure, we could match China’s manufacturing prowess, and we could do it in a generation. All we need — at least under capitalism — is to reduce the cost of our labor power to match China’s. Start people working at 16, let them die at 50 or 60. Poverty and degradation are cheap; dignity and quality of life are expensive.

    1. Number2son

      Indeed, dignity and quality of life are expensive. And worth it. Which makes taxing products produce overseas without those values priced in such an appealing idea.

      1. depublican

        Exactly Number2son.

        The standard assumption is that we have to slash wages to compete with them (the competition being to see who can have more desistute and miserable slaves). But another alternative is to make them raise wages to compete with us.

      2. reskeptical

        Yes. And no… This simple solution– protectionism– is incredibly complicated. The really good reasons for protectionism include all of the above and more: one of them is simply better government through clearer jurisdictions another broad concept idea is critical regionalism. All great ideas.

        But on the other hand such a move away from globalization would cause instability- we would be back with a system of bilateral type agreements, direct national confrontation over resources… In may ways, its the kind of system that our governmental structure is designed for, but would entail a kind of disruption to the current economic structure, which makes banking reform seem like a walk in the park. Apropos of which, finance industry reform with its huge international markets would per definition be baked in to such a ‘revolution’.

    2. run75441


      US Labor is already as productive as Chinese Labor and also more efficient. LABOR AS A COST OF MANUFACTURING IS ~10% OF THAT COST. Looking at Labor Cost, true direct labor, is like tilting with windmills. Look instead to the cost of operations in the US.

    3. Francois T

      Barefoot Bum,

      I encourage you to take a look at a company called Lincoln Electric. (LECO) They are in the industrial welding sector.

      They don’t do wage reduction, poverty and all that jazz. Moreover, as of 2006, (last time I checked on them) they hadn’t laid off one employee since…1963!

      Yet, they compete heads up with the Chinese, German and whomever is willing to try to beat them.

      And they are based in the US of A.


      How about giving a hint about LECO to your Washington contacts? I truly wonder where the dumb asses in DC got this idea that we weren’t able to compete anymore.

  6. A reader

    A great read. But the view may be too American-centric, thus loosing neutrality.

    From the article 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.

    It’s unlikely that the US could go to another war.

    1. alex

      “too American-centric, thus loosing neutrality”

      It’s written by an American for an American audience. Why should it be “neutral”?

      “It’s unlikely that the US could go to another war.”

      What does that mean? “Trade war” is metaphorical – no shooting involved. And we’re already in a trade war, and have been for years. Maybe it’s time we started fighting back.

      1. A reader

        Maybe it’s time we started fighting back.
        It’s been done for almost 10 years now from 9/11/01 in the War on terror, or even earlier, from the stopping of Florida recount. And the result is you’ve lost almost everything as a superpower. By using such measure like 9/11, and failed, well, never mind.

        This is from the article
        Unlike with microprocessors, the U.S. share of lithium-ion battery production is tiny.

        That’s a problem. A new industry needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer. The U.S. lost its lead in batteries 30 years ago when it stopped making consumer-electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. U.S. companies didn’t participate in the first phase and consequently weren’t in the running for all that followed. I doubt they will ever catch up.

        Think twice, don’t repeat 9/11 and shoot yourself. Well, like the joke about the engineer, also in this article.

        1. reskeptical

          This is a classic case of over-generalization. It is time to “push”-back. But we need a _plan_.

          Change does have to happen it’s what people want and it has to happen ASAP. We’ve gone from Reagan–>Bush–>Clinton–>GWBush–>Obama. I honestly don’t know if GWB was the nadir.

    2. psychohistorian

      If you don’t understand that we are in the middle of a huge finance war then you haven’t been paying attention.

      Look at how country’s economies are being shorted now just like corporations. Just because the media does not report on the war as such does not mean that it does not exist. I see what is happening as the Shock Doctrine being applied to the world economies by the rich oligarchies of the world. Countries are being played off against each other for jobs and investment.

      Unfortunately, America with all the nukes and its Reserve Currency status is being used as one side in this war….the titular Rome of the day.

      For humanity’s sake we can’t fall too fast.

      1. depublican

        That’s exactly right psychohistorian.

        As long as you guys (the non-oligarchy) have something to take, the finance guys are going to think up ways to get it from you, until you have nothing and you’re indebted to them for the next 5000 years.

        Unlike brutal dictatorships of the past where people were worked like slaves, this time there will be no escape.

    3. NOTaREALmerican

      Re: Keep that money separate

      The real problem is that sentence.

      The sociopaths that run the government have no incentive to do anything but loot the system. They aren’t going to “keep is separate”, they are going to steal it – like all the rest.

      Until the intelligent non-sociopaths attempt to address the problem of the sociopaths always winning, these well-meaning “solutions” are hopeless. Right now, having a small number of huge piles of loot just makes the sociopath’s jobs easier. The loot piles need to be made smaller.

      Note to liberals (socialists, progressives, leftists, whatever): you can still have the same amount of government loot, but more and smaller loot piles means the sociopaths need to fight with themselves more (competition amongst the sociopaths). Your concept of a huge monolithic government run by benevolent intellectuals with informed voters is an obvious fantasy. The reality is always sociopaths manipulating dumbasses. You need a government system that accounts for this reality.

      The peasants are dumbasses and will act like dumbasses. Time is running out for the intelligent non sociopaths to influence the future.

      1. Anonymous Jones

        Your arguments about sociopaths are always strong, but your arguments about the absence of well-run, non-looting large state enterprises is clearly contradicted by the facts, as there are loads of examples of such things all around the world. Rein it in a little.

        I am not a fan of socialism or the concentration of loot or power in any one place, but I will not stoop to mangling the facts to fit my argument.

        Yes, a higher degree of socialism may not work with a heterogeneous population whose only common bond is the love of money and a surfeit of stupidity (like this country), but to say it never works anywhere, well…you only do yourself (and your usually apt comments) a disservice.

        1. emca


          Your statement:

          “Yes, a higher degree of socialism may not work with a heterogeneous population whose only common bond is the love of money and a surfeit of stupidity (like this country)”

          is particularly appropriate to today’s environment. It correctly tabs (in my mind) the issue of a socialized system within this country’s populous aspirations.

          One wonders not on the good or evil of a socialized organization, but whether it is possible in a society with such a superficial notation of worth. Where the measured of success is primarily (if not solely) material acquisition, the path of least resistance is always most favored. That path is of course, in its most poignant manifestation, is free marketeering, were immediate benefits to individuals are great, short-term results tangible and the long term consequences, disastrous.

          Whether a (more or less) socialized agenda is good or bad is moot, if the law of the path of least resistance is violated.

        2. NOTaREALmerican

          Re: but to say it never works anywhere

          I didn’t say it didn’t work anywhere. But, there have to be “other circumstances” that make it work. If a society values it members “high enough” then that might keep the sociopaths “at bay”. But, as you said, this society has shown no signs of valuing its member for anything but cannon-fodder.

          Sociopaths are everywhere. What I find interesting (troubling) is why are they so successful here.

          1. reskeptical

            On a neighborhood level NaRA I think it’s not true that sociopaths are everywhere. Well, maybe there are sociopaths everywhere (think about the members of your extended family and there are bound to be a few black sheep) but they’re not in charge everywhere. But you point is valid– what happens to people in the process of assuming power which makes them sociopathic.

            I suggest, it has to do with the structure of government– literally its organization. Big government, like big business has constituents, many of which are opposed to the interests of its citizens or in the case of business, its clients.

          2. Yves Smith Post author

            I differ on this one. Dio you find a lot of sociopaths, say, in rural communities or small towns? Maybe once in a while, in a strongly religious community, a sociopathic preacher could emerge.

            I think sociopathy being a pathology that is highly conducive to success is a recent phenomenon, and it has to do with the erosion of communities (it’s hard for bad actors to prey on more than a few people before word gets out), amoralistic corporate life (which gives you complex social/rule structures you can game, while a mere 80 years ago, JP Morgan held that character of the borrower was his biggest consideration in making loans).

            I know this list is incomplete, but I am convinced that sociopathy is linked to the erosion of social structures.

  7. charles 2

    @ the Barefoot Bum :
    “All we need — at least under capitalism — is to reduce the cost of our labor power to match China’s”
    Absolutely not, there are big cost involved in offshoring (transportation, higher quality control, rejection of lots that don’t meet specifications, expat supervisors). Yves already mentioned in her blog that some companies were offshoring even without cost advantages, just because it was “fashionable” to do so (I.e. it was going to lead to short term appreciation of the stock price, itself enabling more valuable stock options for management), or it was to have production capacity in “promising” markets. If I judge by the last utterance of Jeff Immelt ( ) these two illusions are dissipating.
    Finally, if costs are not adjusted down, the price of repatriated production will go up to maintain profitability. I think that is part of the plan, there is no other way to get the inflation that Bernanke actively seeks, even if, as expected, he denies that (People like Rogoff are more forthcoming)

  8. i on the ball patriot

    Another Vanilla Greed lament …

    Vanilla Greed advocate, Andy Grove, who made big bucks playing in the ‘free markets’ fantasy decoy game, and still even extolling the virtues of the ‘free markets’ fantasy decoy game with this gem; “free markets beat planned economies”, now claims that, “there may be room for a modification that is even better.”

    Stop the movie right there!

    Profit driven Vanilla Greed Andy Grove, having had his clocks thoroughly cleaned by control driven Pernicious Greed, now has a plan.

    Who gives a shit?

    Shut the fuck up Andy! Your a fucking loser!

    Vanilla Greed, the same greed you employed in your lifetime, but now on roids and with totally different objectives, has morphed into Pernicious Greed and eaten your lunch, and you are not bright enough to see that Andy. And so you make dumb ass remedial suggestions — like all of the other Vanilla Greed loser scamericans who have similarly had their clocks cleaned — to a non responsive government which has been hijacked by the Pernicious Greed folks who have stolen your lunch.

    I got news for you Andy, your living in a very well planned, and very well implemented — PLANNED ECONOMY! The Pernicious Greed plan is a Full Spectrum Dominance global two tier society of ruler and ruled with the ruled in perpetual conflict with each other. Sorry your not top tier Andy!

    Andy your a real dick head! Aside from being so non perceptive do you really think the scamerican people want as a first task, “to rebuild our INDUSTRIAL commons”, for a bunch of greedy ass wipes like you who played such a big part in stealing their PUBLIC commons? Get a grip and get a life Andy!

    NC needs a new file tag: vanilla greed lament …

    Deception is the strongest political force on the planet.

    1. Progressive Ed

      Profanity and personal attacks = Maybe the other guy has some good ideas that should be seriously considered.

      1. i on the ball patriot

        Progressive Ed said; “Profanity and personal attacks = Maybe the other guy has some good ideas that should be seriously considered.”

        Maybe the other guy is a privileged by corruption self centered whining loser, who, rather than question the corrupt conditions that allowed him his excessive wealth and control over the lives of others, now instead seeks to maintain his privilege by ‘tweaking’ the make believe decoy ‘free market’ system that gave him all of his advantages.

        Cry Baby, Andy Grove, is just another whiner, lamenting the death of Vanilla Greed and wanting the good old days back as the world sinks into chaos. That is the new national pastime in imperial scamerica, raper of planet earth, and oppressor of the masses. I call it The Vanilla Greed Lament. Self centered Andy Grove –and all of his wealth adoring, ignorant little producers of useless remedial plans for deaf ears, scamerican groupies — would better spend their time on thwarting the now out of control corruption in their government which is now owned and controlled by Pernicious Greed. Said another way; the house is ablaze and they choose their favorite wall paper design. Vanilla Greed is dead!

        And your oblique ‘personal attack’ on my lack of civility and respect is a typically ‘progressive’ deflection from the content I put forward bathed in the now inhibiting labeled ‘profanity’. To this I quote George Carlin;

        • Shit
        • Piss
        • Fuck
        • Cunt
        • Cocksucker
        • Motherfucker
        • Tits

        Yes, especially tits!

        Deception is the strongest political force on the planet.

  9. SteveB

    I think Andy Grove makes an excellent case. Warren Buffett some years ago proposed trade barriers for a different reason: to force our overall trade into balance.

    Image what would happen if trade barriers of some type were to be introduced by law, with a planned gradual escalation in the rates over a period of years, that would only level off when our overall trade was in balance. All sorts of businesses would begin to shift part of their manufacturing back to the U.S.

    Our current strategies of fiscal spending and monetary stimulus may be able to stop our economy from collapsing, but they can’t provide the stimulus to restart growth. They are just life-support efforts. Trade barriers, in combination with some type of conversion of debt to equity, should provide that needed economic stimulus, that spark that set people and businesses in motion. The surge of investment would end our current economic malaise. Trade barriers would of course cause problems for many businesses, but overall they should be a win for the U.S., if they are introduced through a gradual escalation.

    1. alex

      “Image what would happen if trade barriers of some type were to be introduced by law, with a planned gradual escalation in the rates over a period of years, that would only level off when our overall trade was in balance.”

      Often overlooked is that trade balancing tariffs (uniform tariffs on all imports) is WTO legal. One problem though is that includes oil imports, which would probably lead to a 2nd American Revolution.

      I prefer to start with eliminating currency manipulation, and introducing tariffs against currency manipulators if they won’t “do the right thing”.

    2. Progressive Ed

      Isn’t the Tariff act of 1930 (Smoot-Hawley)considered to be one of the main reasons the Crash of 1929 became the Great Depression in the US.

      1. alex

        “Isn’t the Tariff act of 1930 (Smoot-Hawley)considered to be one of the main reasons the Crash of 1929 became the Great Depression in the US.”

        No. Smoot-Hawley, while a bad idea, played a minor role in the Great Depression if you work out the numbers. Even devout free traders like Milton Friedman said as much.

        More importantly in the GD we were a net exporter and creditor (China’s role now). Whatever we do now to reduce our trade deficit is more analogous to the countries that fought against Smoot-Hawley by raising their trade barriers. The spiritual descendants of senators Smoot and Hawley live in Beijing.

  10. AmericaninChina

    As an American married to a Chinese national from Chengdu (China’s 4th largest city), I’ve had the opportunity to frequently travel and at times live in China during the past 5 years. Mr. Grove’s call for a US industrial policy is absolutely right-on; however, he doesn’t address the key issue pertaining to this policy. Allow me to quote from the June 17th edtion of the China Daily (English version) regarding a recent biopharmaceutical conference in Nanjing China attended by major Chinese and global corporations: “..the city (Nanjing) government will invest 10 billion Yuan (approx $1.5 billion) in supporting biopharmaceutical companies in the next three years, helping the output of local biopharmaceuticals exceed 50 billion Yuan by 2012…”. Most in the West think that it’s China’s “undervalued” currency that is the main reason for it’s manufacturing dominance. Not so; it’s the Chinese government’s massive direct subsidies to key industries and companies that’s been the primary factor in China’s manufacturing success. Moreover, almost every major city in China provides these direct subsidies to local companies, China has now become very adept at targeting critical advanced-manufacturing sectors to support (they’ve gone way beyond producing cheap crap for US Wallmart shoppers), and most importantly, these subisidies are designed to maximize the creation of local (i.e. Chinese) manufacturing jobs. It seems that the US has only two options: either demand China cease this practice and slap them with big tariffs if they don’t comply (guarenteed trade war?), or begin doing the same in the US and try to beat them at this game.

    1. alex

      “Most in the West think that it’s China’s “undervalued” currency that is the main reason for it’s manufacturing dominance. Not so; it’s the Chinese government’s massive direct subsidies to key industries and companies that’s been the primary factor in China’s manufacturing success.”

      Maybe both are important factors. I don’t like direct subsidies to industries, but in our new “globalized” world we may have little choice. Certainly we subsidize the hell out of FIRE and certain other “key strategic sectors” like sugar and cotton.

      Another approach is to have “selective difficulties” with certain imports, for reasons of “national security”, “product safety evaluation”, or whatever. Japan was famous for this and China does pretty well too. Companies that offshore too much could also suddenly find difficulties obtaining government contracts.

      1. purple

        The primary position of strength the US has, and it is formidable, is monopoly military power of the world’s shipping lanes. China’s navy is weak, without even an aircraft carrier.
        China is a country dependent on oil imports, and vulnerable to blockade, much like Japan before Pearl Harbor

        I expect that the knowledge of US military supremacy will ultimately force China to back down, but it could get very nasty before that.

        1. alex

          What kind of nonsense are you talking about? We’re talking currency valuations and tariffs, and you go talking about war at sea? I’ll say it again “trade war” is a metaphor. Historically “free trade” hasn’t prevented war and “protectionism” hasn’t promoted it.

      2. emca

        Of course the reason we have subsidized FIRE, sugar, cotton is that it works.

        The problem here is little value is attached to manufactured of goods of a tangible, non-perishable nature. If (external) favoritism, protectionism, support mechanisms etc. were spread around to areas of greater importance to our nation’s future, I could live with that.

        I by the way like your suggestion of imposing ‘selective difficulties’; one part of the arsenal that needs to be activated.

      3. Amileoj

        The problem Grove is pointing to is serious enough to warrant a two-front attack:

        – Gradual trade rebalancing via Buffet-type tradable import credits or something similar that would be WTO legal.

        – A really serious, Cold-War-scale program of “strategic national infrastructure” investment in green energy.

        Both of these have their potential pitfalls. The former risks Chinese overreaction and mounting political hostility at home if energy prices rise too far too fast. The latter would have to contend with the present deficit hysteria plus traditional neoclassical concerns about “picking winners and losers.”

        But deployed together, as part of an explicit, coordinated national strategy to restore both manufacturing jobs and technological leadership, achieve energency independence and save the environment, I think it would have a chance of attracting majority support.

        Naturally these ideas are already in the air, but the key element that is lacking is precisely the one Grove points to: scale.

        For instance, San Diego, where I live, is about to get a little chunk of federal stimulus money to help with clean energy investments. But the operative word is “little”. Something on the order of $3 mil.

        I thought about this in connection with Grove’s point about the photovoltaic panels for all four of the vendors he contancted coming from China (despited the technology’s origins in the U.S.).

        Green energy “stimulus” would be a chance to reverse that trend in a decisive way. But it would take a much larger-scale effort and, ideally, one in which trade policy did not permit the bulk of the resulting demand for the underlying goods from being siphoned away.

  11. Dan Duncan

    Let the Cognitive Dissonance Begin.

    Take the opposite of “patriotism” or it’s ugly brother, jingoism…and it’s safe to say that you will capture the prevailing sentiment of Naked Capitalism. [And I don’t mean that as a criticism, just a statement of fact.]

    For lack of a better term, let’s call that opposite something like “Internationalist”.

    It is neither unreasonable nor unfair to say that the Naked Cap Community looks at the world from an “internationalist” perspective.

    OK, fine.

    Now, reconsider the prescription stated in Andy Grove’s article: “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.)”

    As avowed internationalists who believe in INTRA-national government job creation, you are going to face some difficult decisions. No longer will you be able to hold these latent, but simultaneously contradictory positions.

    Your moral high ground will require some deft juggling.

    “I am an internationalist who recognizes that patriotism is the communism of a simple mind!”

    “Our government should protect our jobs and implement import levies, which includes taxes on outsourced labor!”

    So, let’s see:

    An Internationalist perspective that abhors the antiquated concept of the “nation state”….Coupled with the advocacy of import levies and taxes on products simply because they were produced by the inhabitants of some other nation state….

    Yeah, OK. Good luck with all that.

    Cognitive Dissonance: The feeling of discomfort one experiences as he can no longer refuse to answer the following question:

    Who’s your Daddy?

    1. NOTaREALmerican

      Re: Who’s your Daddy?

      HA! Yes indeed. And the progressive “ism” people are having the same problem admitting that a centralized democratic government can’t exist. It just makes the sociopath’s jobs easier.

      You can have a command economy like “Communist” China or the nationalistic democracies like Western Europe & Canada (probably South America fits in here too), but perhaps it’s impossible to have a centralized democracy like what the US is trying to achieve, in a country inhabited by people (citizens) that all hate each other. (Note: I’m assuming democracy means more than just the ability to vote. And, yes I know the difference between a Republican and democracy.)

      However, maybe there are only two valid political systems, either: a kick-ass daddy system (China) or a smothering mommy system (Western Europe). Societies move toward centralization (and – yes – libertarian decentralization is just a fantasy).

    2. Anonymous Jones

      You almost never cease embarrassing yourself.

      What a definition you must be attaching to the word “fact!”

      One can’t even get through the second sentence of your comment without the idiocy and thoughtlessness overwhelming almost everything in sight. It’s uncanny how often you do this. I still wonder whether this is all some sort of elaborate prank by someone trying to spread disinformation by making these semi-logical, asinine comments.

      Oh yeah, and for you of all people to try to redefine cognitive dissonance. That is rich. You have clearly never experienced cognitive dissonance. You wouldn’t still believe the amazingly stupid things you continue to believe if you had ever been man enough to face something that didn’t fit comfortably into your pre-existing worldview.

      There need be no cognitive dissonance associated with your final question, even though you clearly don’t have any idea what its answer is…

      Our Daddy is and always has been “fate,” one which will forever, despite all our many efforts, remain outside the full control of our conscious desires and actions.

      [While proofing before posting, it struck me that this comment is harsh; yet I’m enjoying myself so immensely. I’m such an a**hole!]

      1. i on the ball patriot

        Dan exposes some real hypocrisy, though with a broad brush that might have been thinner — many, with a once ‘we are all one’ viewpoint, now favor a bit of isolationism.

        Regarding; Who’s your Daddy?

        The question should be, “Who are your Daddies?”

        We have two.

        Perception and deception.

        Individuals control both perception and deception within their sphere of influence. To that degree we control our own “fate”.

        We perceive, and we deceive, and we are ALL cannibals.

        When we form alliances, such as nation states, marriages, etc., we agree to direct our joint deceptions on others. It becomes you and me against the world babe! When members within the group do not honor those alliances and turn their deceptions on those within the group, as has happened numerous times over many generations now within scamerican government, the alliances break down and members of the alliance suffer.

        Many of the cannibals within the scamerican alliance, not seeing the internal deceptions and breakdown of the government, then suggest remedial measures that of course fall on deaf ears.

        This is especially comical when it comes from some one like Andy Grove, whose past benefits have been received, including those in his bullshit Horatio Alger story, from prior corruption. Or when they switch viewpoints as Dan pointed out.

        Deception is the strongest political force on the planet.

    3. borkman

      Even if I bought your gross mischaracterization of NC, which no one who reads here regularly would, tell me what you mean by “internationalist”. It’s easy to throw rocks with completely undefined terms. IIRC, NC was questioning free trade dogma (as in who it really served and how free trade really operated) long before Krugman and now Grove started making it respectable.

  12. Neil D

    Grove’s article make perfect sense to me. Moving up the value chain is going to amplify income inequality. As Grove writes…

    “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?”

    Creating jobs for Americans is not considered worthy goal for managers if it increases the cost of production. I had this drummed into me in my last job when my manager said it would be irresponsible not to consider moving production to India. I worked in manufacturing for evil Big Pharma at the time. While they are guilty of many things, at least they still do some manufacturing and research in the USA.

    It seems contradictory to bash Big Pharma while advocating an industrial policy to keep jobs in the USA. On the other hand, maybe in return for the tax breaks we should insist they stop off-shoring drug discovery and manufacturing.

    1. alex

      “It seems contradictory to bash Big Pharma while advocating an industrial policy to keep jobs in the USA.”

      Why? Many of the criticisms of Big Pharma, like their questionable relationships with doctors “evaluating” their products, have nothing to do with where the drugs are produced.

      My biggest complaint is about government policy, albeit pushed by industry lobbyists. Why are drug prices so much higher in the US than in other wealthy countries? A friend recently had a switch in health insurance which meant a 50% co-pay on “tier 3” drugs. He found it cost half as much to buy the drugs in Canada (completely out-of-pocket) as to buy them in the US (50% co-pay). Those drug prices are not subsidized by the Canadian government, and they’re still 1/4 of what they are in the US!

      1. Neil D

        It is a contradiction, in my opinion, because pharma is relatively high up the value chain. The industry employs chemists, engineers, doctors, and medium and low skill labor. In doing so, they provide a useful product – unlike finance or real estate speculators. It seems like an industry we would want to keep here and a great place to form an industrial policy. Bash pharma for the bad things it does, but make sure you don’t wreck it either. Pfizer, Merck, Lilly etc. are not Goldman, JP Morgan, AIG etc.

        If, as Ms. Smith says, we have an industrial policy for bog pharma then lets at least use it to keep jobs here.

        No one makes doctors prescribe drugs, so it seems they are a partner in the corruption. But no one dares call out the evil doctors. What’s up with that?

        1. alex

          “It is a contradiction, in my opinion, because pharma is relatively high up the value chain.”

          Supporting a domestic industry does not mean tolerating every abuse. That’s the sort of thing that gives industrial policy a bad reputation. And while there may be some cases where tolerating a higher domestic price may be beneficial overall, most people think in terms of 10%, 20% or maybe 30%, not 300%! (4x price) We’re talking about a 300% premium over what’s paid in the wealthy country next door, for the same drugs made in the same factories.

          Furthermore these abuses are tolerated regardless of where the drugs are invented and manufactured. In other words it has nothing to do with supporting domestic over foreign industry.

          “No one makes doctors prescribe drugs, so it seems they are a partner in the corruption.”

          Most certainly.

          “But no one dares call out the evil doctors.”

          I read it all over the place.

          1. crossreferencer

            Cross reference your reply as a reply to Cindy6’s. She thinks the mark up is only 15%!

            In your dreams, Cindy6!

          2. Neil D

            Alex – feel free to amend the constitution and ban patents. Are you also complaining that an iPhone costs more than the cost to build it?

            You know, drugs do cost less in many other countries. So does labor.

            But now that you are ready to dictate to a business what level of profit is acceptable, please extend this to the finance industry. Yes, let’s do price controls all over the world for every product.

          3. depublican

            Too late Neil D. There already are price controls all over the world.

            Plus, pharma is getting multi-billion dollar subsidies in 20 different ways…which they spend on marketing campaigns…which end up in getting doctors to prescribe drugs in ways they were not approved…and killing people with them…and using other corrupt doctors to conduct phony studies…while working on the cure for female hyposexuality…because real disease is not as profitable…
            If this was a war, Pharma would be winning just by body-count alone.

          4. alex

            neil D: “feel free to amend the constitution and ban patents”

            Strawman – I never said we should eliminate patents.

            FWIW that wouldn’t require a Constitutional amendment though. The Constitution permits congress to establish a patent system but doesn’t require it.

            “Are you also complaining that an iPhone costs more than the cost to build it?”

            No, but I would complain if an iPhone cost 4x as much in the US as Canada.

            “You know, drugs do cost less in many other countries. So does labor.”

            Canadian labor is 1/4 the cost of American labor?

            And what do labor cost differences have to do with the same product produced in the same factories selling for such radically different prices in the US and Canada?

            “But now that you are ready to dictate to a business what level of profit is acceptable, please extend this to the finance industry. Yes, let’s do price controls all over the world for every product.”

            I’ll happily excoriate the finance industry, and prioritize those problems higher than pharma, but that doesn’t exonerate pharma. Don’t be so defensive just because you work(ed) for an industry. I used to work for the military-industrial complex and I certainly don’t defend every defense contractor practice. My aunt worked for Citi for 40 years (taking early retirement in 99) and she criticizes finance more than I do!

            As for price controls, medicine is not, for a long list of well established reasons, a free market and never will be. While there’s room for for-profit industries within it, the fact that many drugs cost several times as much in the US as in a neighboring wealthy country like Canada (and other wealthy countries) says that pharma is milking the US market. Or do you think that pharma sells below cost in Canada?

            BTW, another tidbit is that the US is a net pharmaceutical importer, so even the “one of the last American industries” argument doesn’t cut it.

  13. anon48

    Sobering article from Grove. Wonder if he had a touch of good conscience late in life.

    Seems to me Richard Kline’s comment, that you pointed out, captures the essence of the quandary- “…And if the company making the low ball pay offers can’t make their business model work with real numbers than they don’t have a business: they have a sweatshop, and no one with a choice is going to work for them, something the reporters of this piece also couldn’t get their heads around.”

    How does an American company effectively compete against overseas sweatshops without itself evolving into the same? To make matters worse, how do they do compete with offshore competitors that have none of the costs associated with ecological constraints faced by onshore companies?

    Conscience won’t solve this one. Browbeating American entrepreneurs with philosophical arguments about the good to society that arises by creating onshore jobs won’t get us anywhere. There must be economic incentives. That’s why I think that Grove’s suggestion of implementing tariffs is the way to go. (BTW consideration of this alternative was much easier after having read Yves’ book ECONNED. It allowed me to take a step back and re-evaluate my prior delusional reality groupthink perspective of “Free Markets”.)

    The Tariff system should be incentivized(as an attempt to minimize international retaliation). That is – they should be set up in a way that would allow offshore competitors a way to avoid the toll charge if they comply with an agreed upon set of employment and environmental rules and regulations similar to those faced by US companies. This implies the need for effective monitoring and enforcement programs to be established…

    Deep breath…sigh…is something like this even possible…

    1. psychohistorian

      Going backward into protectionism is not the answer. We all know too many humans all over the world to have this make any sense. Why be forced to fight amongst ourselves for the scraps while being slaves to the rich?

      Wake up folks!

        1. NOTaREALmerican

          The sociopaths always win. Gotta fix that problem to have “free” anything.

          It’s the sociopaths manipulating the dumbasses, with a signification proportion of the population looking on in amazement at how it’s all happening.

          (Primarily because the decent people can’t admit there are so many sociopaths).

          1. depublican

            Here it’s not just a matter of U.S. sociopaths.

            Free trade might work, if the trading partners had some notion of free trade. In reality, every country imposes as many trade barriers as it can get away with and the words “free trade” and “protectionism” are just fighting words to try to get other countries to “open their markets” for unfair exploitation.

        2. Anonymous Jones

          No, what is considered “free trade” is not the answer. If there is an answer, it probably begins with…

          “free and fair competition in which a concerted, yet cost-effective, effort is made globally to internalize most negative externalities created during production”

        3. Hrm

          An alternative to all the above listed models:

          “Another smart man, Warren Buffet, has proposed a way to bring US trade into balance. Exporters would be awarded import certificates in the dollar value of their exports. The certificates would be sold in a market to importers, who could import goods in the dollar amount of the certificates. This way imports cannot exceed exports. Moreover, as the certificates would be profit to exporters, it encourages more exports. Free trade theory never intended for economies to be in permanent trade disequilibrium. The US experience of a worsening disequilibrium over a quarter century is outside the bounds of trade theory.”

      1. anon48


        Sorry but I completely disagree.

        Are trade tariffs that get implemented to deter dumping (if facts prove that sales are being made at less than the offshore producer’s cost) considered a form of protectionism?

        How about the required compliance with SEC regulations if a company desires to list on the NYSE- is that protectionism?

        How about insurance- are the various state laws and regulations required to sell insurance in the US- is that a form of protectionism? I guess you would have us just step aside and let the markets function freely. I’d like to hear your thoughts about the effectiveness of the unregulated free market for CDS insurance? How did you see that turn out?

        Psycho:”Going backwards into protectionism is not the answer.”

        Seems to me that this comment is ill-informed, naive and superficial. It’s as though you’re assuming that we still exist in the 1950’s where the “free markets” were limited to the “free world” countries and tended to operate more to our liking. Further, the scope and scale of America’s economy (along with its nuclear umbrella) provided a level of influence back then that we no longer enjoy.

        Please tell me what other viable options are there?

        1. psychohistorian

          I am sorry the history of my comments does not show here.

          I am speaking of our situation from a different perspective than you think.

          I believe in a competitive market society within the bounds of regulated environments. I believe in transparency and evolution of the regulatory process.

          I guess I, naively as you call me, look for answers in deprecating our militancy and developing ways to share what is left of our planet. I also believe that society only lacks the will to conquer its fear of the future, other of our species and evolve more humanistic social organizations. We are very creative but are locked into a rich/poor win/lose paradigm that needs to be destroyed.

          I realize it has only been 500 years since the Enlightment period but it is time to move on and evolve or die.

          1. anon48

            “I guess I, naively as you call me, look for answers in deprecating our militancy and developing ways to share what is left of our planet .”

            Are you speaking about military (I’ll agree with you) or economic militancy? The problem with the US in recent years has been relatively little push-back on economic trade issues- i.e. economic militancy has been non-existent.

            I wish I could see your post history because then I might have a better idea from where you are coming.

            So I’ll ask the same question of you again. Please tell me what other viable options are there when our overseas counterparts are not playing fair?

          2. reskeptical

            You need to define, what “playing fair” means. I don’t have a link to this, so forgive me if the figures are more figurative than they should be– there are better examples (Walmart for example), but the Chinese manufacturers of the Iphone “cost” approximately 2% of a new Apple iPhone! 50% of the profit goes to Apple! For what? Is that “rational”? And you know what- it’s even worse when you look at clothing and the crappy “Chinese wrist-watch” market or children’s toys?!!

            What /is/ fair?

            I’ve got an idea, why don’t we pay everyone in the US a living-wage, say $500 a week and we just import cheap stuff from OS? Everyone can go and learn yoga or the piano, take pottery classes or whatever… The Chinese are nice people, when they completely own us, body and soul, they’ll look after us. After all, we’ve been so generous to them– haven’t we?

          3. Yves Smith Post author


            I suggest you refrain from resorting to prejudice and stereotypes in lieu of facts and analysis.

            Manufacturing labor costs are a very small % of the total costs of most products, as has been pointed out earlier on the thread. So your rejection of a living wage has perilous little grounding. For instance, conventional wisdom is advanced economies can’t compete in low end clothing. Yet American Apparel, which makes T-shirt and sweat shirts, has a factory in Los Angeles which pays people $12 to $13 an hour and is profitable. People who have looked at the company says it has a very well run factory, and does well despite the rest of the business being pretty poorly managed.

            So I submit the inability to be competitive when people are paid decently is a failing of management in America, and I can give you lot of other examples.

            Similarly, Australia DOES have a minimum wage which is a living wage Guess what, they’ve had better growth rates than the US since 2000 and now have lower unemployment too.

    2. Francois T

      How does an American company effectively compete against overseas sweatshops without itself evolving into the same? To make matters worse, how do they do compete with offshore competitors that have none of the costs associated with ecological constraints faced by onshore companies?

      The same questions could be asked about the German companies, no?

      Yet, Germany does compete, and rather effectively. I’d wager that our problems have much more to do with policies and politics.

  14. brian t

    One issue that needs to be looked at, I think, is that of legal protection for companies that invest in the USA. Investing in US jobs will reduce a company’s profit margins and thus reduce shareholder value and dividends. As things stand, that opens the company up to a class action lawsuit from shareholders. It makes sense, therefore, that Grove focuses on startups in his piece, since existing multinational companies are NOT going to reduce profits voluntarily for ANY reason.

    1. alex

      Strawman. Nobody is expecting “American” companies to voluntarily do the right thing – they’ll need some government persuasion.

      “Grove focuses on startups in his piece, since existing multinational companies”

      Grove doesn’t focus on startups. In fact his main point is that, fun as they are, you can’t run an entire economy on startups. His concern is explicitly with what happens when they move beyond startups.

      Furthermore even startups these days are expected by the VC’s to have an offshore strategy. “Micro-multinationals”. My experience with that was that it was a fiasco, but you gotta do it to keep the VC’s happy.

  15. scraping_by

    The substitution of finance for all other American industries began in the late 1980’s, according to Kevin Phillips in American Theocracy, and fleshed out further in his book Bad Money. Whatever the motivations, it’s mercantilism for financial assets just as surely as the Asian mercantilism for manufactured goods. The notion that wealth doesn’t need to be created, only rearranged, is enforced and rewarded by the policies and laws enacted since the small Crash of 87.

    Phillips points out not only that a dominant finance sector is based on huge private debt (dwarfing the public debt) but that it requires government guarantees for that debt. Debt inevitably grows until the only possible recourse is default. It’s easier to sell debt when the risk of default is on the government. Or in the current case, on our seniors.

    One of the real downsides to manufacturing is that it doesn’t require a lot of middle management. Despite propaganda exercises like the recent NYT article, most factories can be set up so the guys on the floor don’t need suits telling them what to do. Finance, especially retail operations, require a lot of people in suits interpreting and enforcing pages and pages of arbitrary rules and conditions. More lawyering, the verb.

    So Mr. Groves is within bounds calling for a realignment of the nation’s economic policy away from paper wealth to real wealth. It would upset a lot of apple carts, and not just of the high and mighty, but we would all live better for it.

  16. M W M

    He makes a series of points that are the polar opposite of the de facto US industrial policy, of the naive view that the US can have a viable society based on “knowledge workers”, rentiers, and service industries that depend on their earnings. ”

    Groves certainly says something that hit. But he doesn’t say the ugly side of intel. Why is it that such lucrative business like microprocessor is dominated only by one company? Why is it that everything dies and intel appears to be the only gigantic one left? (what happen to AMD, SUN, MIPS, etc etc)

    What intel is not saying, some important aspect of US failed industrial policy and political corruption. Monopoly, lobbying money, IP court battle/patent trolling/strategic litigation, government funding/tax break for the big guys, military contracts, etc etc. Intel is notorious in that department. Only company backed by huge soverign money can survive. (TSMC, Samsung, AMD(dubai/germany) ) Intel is great company but it is not a picture of success for the country. It is one of the absolutely wrong thing that happens in “industrial policy”. Intel will end up in to big to fail in less than a decade. (due to ARM, MIPS)

    Why is it we always end up with TBTF? Why is it that start up always end up running their manufacturing in other country and ask for money from someone else? Why is it that Kodak sold/liquidate themselves to the korean? Why is it country like korea and japan with no natural resource export more petroleum and ferrous product to the world than US?

    why is it e-ink being sold to PVI? etc. etc…

    Somebody has to really dig the “dark secret” that keep creating this TBTF again and again…. I want to hear the “detail story” and decision making mechanism, not big picture and cultural generalization mumbo jumbo.

    Yves, please consider little space about the fubar-ness of US industrial and trade policy, if you plan to write more books down the line. Somebody really needs to poke a stick and tell the truth. I don’t know exactly what, but something is going very-very wrong. It is more than one variable like forex. It’s systemic.

    btw, Jack Welsch, aka neutron jack. Is an A-hole. GE is premier example of what’s wrong with US manufacturing long term policy. But the guy can talk and do the right jingle.

  17. Tim

    The ratio of average CEO compensation at large U.S. companies to the average production worker’s pay was about 40 to 1 in 1980, according to The Economist.[4] The magazine reported that the ratio had risen to 85 to 1 by 1990, and then soared to about 400 to 1 by 2003.[5]

    Let them eat chemistry-created-cake until they won’t take it any more.

    1. Francois T

      Many thanks for bringing our attention to this book.

      Sure worth a serious look.

  18. Frank Ohsen

    Protectionism in a global economy is a sure prescription for more war. Big wars. That in of itself is the plan today. But besides that even without the accelerator of protectionism the obvious is before you: War is business. The Business of America IS war. We don’t manufacture in this country primarily to provide jobs, to raise our standards of living, or to beat the global competition for the sake of competitive spirit. Leave any such patriotic economic ‘altruism’ at the front door. Strike it from your minds.

    What we strive for today is a better way of conducting future war. We are the best at it and we have pretty much cornered that market for quite some time. And what a hell of a market it is. If we didn’t have the military industrial complex keeping everything humming along underpinning what we do best we’d have been Greece 50 years straight by now.

    The perpetual battle between Oceania, Eurasia, and Eastasia, is the only true U.S. manufacturing policy you need to understand. Everything else is merely diversionary distraction and academic masturbation.

    1. alex

      “Protectionism in a global economy is a sure prescription for more war.”

      Oh please, not the old free trade brings peace line. That’s what they they said during the so-called first great age of free trade, from the mid-19th century until 1914. Then right in the midst of all this utopian free trade, WW1 started.

      1. Tran Sen Dentalist

        While protectionism could possible set off a war, the converse is not true as Alex correctly points out. Moreover Frank Ohsen’s logic means that any excuse will do for starting a war. So even with out protectionism, Frank, be rest assured there won’t be peace, ever.

        The more war, the more money the war-economy can make and the more booty to be plundered. It’s the second oldest kind of economy–the economy of primitive accumulation.

  19. Cindy6

    Industrial policy, while maybe laudable for some strategic goal, needs to be paid, mostly through higher domestic prices. Chinese cars are 2x-3x that of other markets. Wines prices are doubled, at least. If American consumers are complaining about the 15% premium they need to pay for prescription drugs, what’s the chance of imposing higher prices on the consumers across the board?

    1. alex

      “If American consumers are complaining about the 15% premium they need to pay for prescription drugs …”

      How did you come to the conclusion that there’s only a 15% premium on pharma? Do you have a cite? My impression is that we’re talking N times the price, not mere percent. Are you talking manufacturing or retail cost?

  20. Tom Hickey

    He makes a series of points that are the polar opposite of the de facto US industrial policy, of the naive view that the US can have a viable society based on “knowledge workers”, rentiers, and service industries that depend on their earnings. Sadly, my Washington contacts tell me that the belief that the US cannot compete in anything other than financial services is deeply entrenched there,

    Yves, you left out “defense.” The US economy is now dependent on financial “innovation” and “military Keynesianism.” Expect more financial crises and more war.

  21. MichaelC

    “Sadly, my Washington contacts tell me that the belief that the US cannot compete in anything other than financial services is deeply entrenched there,..”

    Thanks, Yves. I didn’t think about the situation in those terms. If Wash believes finance is the only game in town and finance owns the town to boot, that sheds some more light on the 11th hour (further) gutting of the bill and the extent Wash is willing to go with the bailouts.

    It seemed to me that Scott Brown, Dodd and Rham were actually on the same page, so if your Washington contacts include WH and Congress maybe that’s not such a loony view.

  22. Glen

    Andy Grove also touches on the myth that “knowledge work” and actual manufacturing are somehow separate entities, a myth that is well understood in the engineering world, but submerged in the MSM and the general public (because they’ve been fed thirty years of bullshit).

    If we continue to oversea/outsource our manufacturing, in five or ten or twenty years (the time scale varies depending on the technology), the “knowledge work” will also move to where the manufacturing is done.

    Given the American assumption that we can continue to dominate with a hi-tech, high dollar military while we outsource our ability to create/sustain hi-tech and our high dollar blue collar jobs (tax base), it would seem industrial policy is also key to our military’s capability and resulting foreign policy implications: i.e. the titans of industry and masters of the universe are not only sacrificing the American middle class, they are undermining our military and world standing. They are uniquely and overwhelmingly anti-American and unpatriotic.

    1. alex

      “If we continue to oversea/outsource our manufacturing, in five or ten or twenty years … the “knowledge work” will also move to where the manufacturing is done.”

      Excellent point, but there’s no need to wait so long. Much of the “knowledge work” has already been offshored, like IT, engineering and even R&D (e.g. Applied Materials putting its new R&D center in China). In many industries you’re not so much predicting the future as observing the past.

      This is as people, like this dirty hands engineer, predicted years ago based on our “in the trenches” knowledge of the link between engineering and manufacturing. But most of us lack degrees in economics or business, so what did we know?

      1. Glen

        Agree, there are many industries that are long gone from the US. This has been an ongoing theme since Reagan and the push for cheap labor and union busting.

  23. dave

    1) Start a trade war
    2) Do nothing to address the underlying reasons why off-shoring exists…

    3) Somehow “win” that war

    1. alex

      “Do nothing to address the underlying reasons why off-shoring exists”

      So illuminate the underlying reasons why off-shoring exists.

      1. dave

        1) Our education system is bad.
        2) Our health care system is bad.
        3) We heavily subsidize the FIRE sector at the expense of manufacturing.
        4) What manufacturing sector we have is a bastardized mess of subsidies, bailouts, and cronyism.
        5) Our corporate governance structure is messed up.
        6) Our currency was (is?) overvalued.
        7) Our energy infrastructure is bad.

        I could come up with others. What it all boils down too is simple:

        American workers are not productive enough in the manufacturing sector to compete in that market.

        I don’t think it has to be that way, Germany manages. However, fixing it is more complicated then throwing down a tariff, it means fixing all the broken things in our society.

        1. Neil D

          Or Americans could stop buying crap made overseas. We mocked the “Buy American” campaigns because they were run by the hated unions. Turns out, the unions were right about the evil corporations.

          We shop at Wal-Mart and celebrate their low prices while ignoring all the American businesses that were driven into bankruptcy. And still we shop…

          We pretty much deserve whatever happens to us.

          1. dave

            It is unrealistic idealistic thinking to believe the problem will be solved by people making a conscious choice to “Buy American”. People don’t act that way, we have lots of experience to show us this. So either you can find a way to make products people want or you can bitch and watch things not change.

        2. alex

          “6) Our currency was (is?) overvalued.”

          Was and is. Yet you caution against “starting” a trade war when one has been fought against us for years by various trade “partners”, particularly China, who have policies of keeping their currencies undervalued against the dollar.

          The other factors you cite, some of which are red herrings (e.g. education) and some of which are valid (e.g. inefficient health care) have the effect of reducing our standard of living, or making manufacturing a smaller part of our exports than other areas (e.g. financial services), but would, absent currency manipulation, have no effect on our trade balance.

          1. dave

            While I believe the Chinese currency peg should be addressed, but we have deficits with many other countries that don’t have currency pegs.

            Moreover, the peg itself is not necessarily disastrous. They gave us cheap capital to maintain it. Had we used that cheap capital to invest in infrastructure, education, etc. then it would have been a blessing instead of a curse. We choose to squander it on consumption.

          2. alex

            dave: “While I believe the Chinese currency peg should be addressed, but we have deficits with many other countries that don’t have currency pegs.”

            China defends the peg by accumulating enormous reserves of dollars, which drives the dollar up against all currencies, not just the renminbi. Japan didn’t even have a peg, but they still managed to keep the yen undervalued by accumulating large dollar reserves. The Plaza Accord reduced our trade deficit with Japan, but more importantly dropped the dollar against other currencies because Japan sold much of their excess reserves.

            “Moreover, the peg itself is not necessarily disastrous. They gave us cheap capital to maintain it.”

            How kind of them. Why do you suppose they did that, and why did they want the opposite for China?

            “Had we used that cheap capital to invest in infrastructure, education, etc. then it would have been a blessing instead of a curse. We choose to squander it on consumption.”

            Infrastructure and education are largely government functions. In order for our government to have used that money from China as you suggest we would have had to run even larger budget deficits than we did in the pre-crash 00’s, which would have left us in even worse shape than we are now when we need fiscal stimulus. Remember, the Chinese are _loaning_ us the dollars from their forex reserves, we can’t tax them on it.

  24. Haigh

    Strategies promoting tariffs and trade wars put the cart before the horse. If the Federal government was serious about off-shoring it would fix the tax policy that PROMOTES exporting jobs.

    “US corporate tax policy allows deferment of profits overseas, but profits in the US have a tax rate of 35%. This policy literally begs corporations to move profits and jobs, overseas.”

  25. Ronald

    The money quote from Yves: “My only quibble is that he unintentionally supports the fiction that we don’t have industrial policy in America. Following the money demonstrates the reverse; tax breaks, subsidies, tariffs, and what issues are front and center tell you who the favored children”

    What has been occurring the past 20 years is not an accident or the by product of a few political donations but an intensive effort to change the economic and industrial structure of the United States with all the top players,FED,White House, CIA, Congress,military all acting in a coordinated bi-partisan effort.
    The post world war two economy based around expanded auto and urban sprawl failed and did so many years ago but has been keep alive with cheap available credit which conveniently is the life blood of volume manufacturing but
    now it has all become a huge pile of debt which nobody wants. Its a giant WTF happened for the American middle class as they have been fed endless economic candy stories to keep them shopping but that looks to be ending and maybe reality will rear its ugly head.

    1. Sundog

      I too applaud Yves for pointing out how US industrial policy is undertaken. The NYT has an article up on tax breaks for the oil industry, which somehow neglects to mention that the IEA recently found that global subsidies for fossil fuels are running at $550 billion per year.

      David Kocieniewski, “As Oil Industry Fights a Tax, It Reaps Billions From Subsidies”

      David Roberts, “IEA stunner: global subsidies to dirty energy top $550 billion a year”

  26. run75441

    Hi Yves . .

    Late to the party as usual. I could only answer in brevity earlier due to other commitments. The costs of manufacturing can be broken out as follows and are approximations until measured. Direct Labor (actual labor to make the product) ~10%, Burden (bennies, legislation, utilities, etc.) ~30% and Materials ~60%. In a vertical manufacturing scheme, the average holds true unless you are in startup, etc.

    There are several things going on in the US economy today. I mentioned one of them earlier, Marquette National Bank versus First of Omaha (SCOTUS-1978) struck down state usury laws leading to the 30+% credit card limits we see today. Even the credit card laws activated February 2010 did not cap the limits at a miserly 24% because senators such as Stabenow felt it would limit credit to the lower income brackets. Instead, we promote usury and theft. It is more profitable to loan money than invest in labor intensive business with all of its bennies and restrictive legislation.

    1983(?) and Greenspan became the Fed Chairman and by a vote of 3-2 (Volcker voted no), began the demise of Section 20 of Glass-Stegall. Banks were allowed to place 5% of gross profits on to Wall Street in various forms. The percentage grew to 25% over time. The flood gates opened with the final repeal of Glass-Steagall under the 2001 Financial Modernization Act (Gramm). If anyone wonders the impact of those changes, 40% of corporate profits are associated with the financial services sector and 31% of GDP. BIS does a nice report on it here: “How might the Current Financial Crisis Shape Financial Sector Regulation” Our last hope of having any control on the derivative sector (CDS, Naked CDS, Synthetic CDS, etc.) disappeared with the hatchet job done on Brooksley Born by Summers, Greenspan, Levitt, etc. In effect, it is even more profitable to invest in the derivative market than to invest in Labor intensive business (redundant alert).

    2001/2003 and the biggest tax breaks ever passed were skewed towards 1% of the taxpaying population. At least during Hoover, everyone suffered. The 1 percenters lost a little money and recovered nicely, much of which is attributed to these two tax breaks. Here again, the direction was towards those who have no interest in investing in Labor intensive Service or Manufacturing. More money to be made elsewhere. To what degree has Productivity Gains been skewed away from Labor and towards Capital? Spencer at Angry Bear has a nice chart here: “Labor’s Share”

    I am sure there are other points to be made both pro and con to the ones I have made. Joel Garreau in “300 million and Counting” points out the 300 million US Citizens are living on 5% of the US land mass, the locations of which does not make sense. We could go back to an agricultural economy; but, I suspect we would have a large training issue and it doesn’t make sense. Tom Walker points out the need to reduce the number of hours work so more people are employed in a shorter work week scenario at the same pay. There are productivity arguments to support his contention the 40 hour work week is dead. Martin Ford in the “The Lights in The Tunnel” gives a sound argument to the increasing impact of automation and computerization. Textiles and other labor intensive industries have moved overseas leaving thousands of people unemployed. Tariffs to protect the Textile industry and allowing industry to be profitable ended up in shareholder dividends and owner equity. The companies never reinvested in the industry to improve its efficiency. The cost of manufacturing direct Labor input has not changed much and the impact of the labor cost reduction is minute when compared to the reduction in Burden cost.

    What we are witnessing today is a decreasing Participation Rate or that percentage of the Civilian Non-Institutional Population in the Civilian Labor Force. 65% last month, it has been decreasing since 2001 when it was 66.7%, and reversing an ~40 year trend upwards. Elizabeth Warren in “The Coming Collapse of the Middle Class” argues effectively, we as a people are not doing better and we have been on the decline since the seventies. The High School education and a good work ethic no longer can guarantee a person a job and entry to the Middle Class in a nation that is shedding those jobs that require high school diplomas and has increasingly shed those jobs requiring college degrees. People not working and being productive is a huge cost to the economy superseding Unemployment Benefits.

    Job creation is still the issue in the US and has been since 2001 and we can’t all be a Wall Street broker, which appears to be the fastest growing part of the economy today. The Wall Street reform bill is a joke, does little to reduce the profit driven risks Wall Street has grown accustom to having, and would do nothing to change the paradigm of creating good paying Labor intensive jobs. The creation of Labor intensive jobs more profitable than the derivative driven Financial Services (not tellers) should to be the goal. It is still more profitable to invest in capital appreciation than labor intensive industry or services. Change the paradigm.

    There was a time when automation was looked upon as providing Labor greater leisure, higher pay, and a healthier work place. The result of automation has not impacted salary that much for the remaining worker, leisure has not increased, and I don’t know about you but I still do 50 hour work weeks and more. We are just doing it with fewer workers. The gains resulting from automation are going elsewhere rather than into Labor. Make it more attractive to create Labor intensive industry than investing in credit card business and derivatives.

    Globalization has moved many jobs overseas and some rightfully so. Many companies have jumped on the band wagon not realizing the cost of the 4-5 week supply chains by doing such. Inventory is the larger cost of manufacturing and distribution. Much of this cost can be negated by avoiding Social Security, Unemployment Compensation, Workman’s Compensation, Child Labor Laws, Overtime Laws, OSHA, etc. In itself, this is the reason for movement overseas with jobs as labor is not more efficient than US Labor. The resulting Labor tradeoff is small. We just have greater Burden to Labor and operations.

    The US is still the largest economy in the world and many of these companies from the other parts of the world, and those who have taken there manufacturing and service portions overseas, still want to and need to sell in the US. Some countries when signing WTO treaties also wrote into there treaties exemptions for industry. The US didn’t. The cost of an unproductive Labor is a drag on the economy. It makes perfect sense to collect from those companies who have moved overseas a tax to compensate. Why should they be able to avoid these costs?

    1. Paul Repstock

      You’ve made some good points Run..
      However, I think that what is really needed is to bring out a great humongous scraper and level the playing field. This applies not only to the United States but also here in Canada and any Western country.
      The current socioeconomic structure makes working in Third World locales attractive (even with the attendant political and economic corruption) when compared to the mish mash of conflicting interests at home.
      Between special interest arm twisting and Government extortion, we have created a climate that negates any advantages of innovation. This insures that corporations will grow regardless of economies of scale. The only way to survive is to cobble together enough capital mass that the entity achieves the TBTF threshold. All of that insures inefficiency and corruption. In the end, the jobs will still be ‘outsourced’ until there is not enough domestic wealth to fund the imports. Then the rotting carcass implodes. The realestate will have some value, the people will not.

      1. run75441


        I am probably one of the few who inhabits this board with my home at Angry Bear that truly works in a manufacturing environment and consults in it from time to time. It can still be salvaged. The three countries in NA have much to lose unless they collaborate together. NAFTA was not that bad.

  27. Karen

    Mr. Grove makes a lot of sense, except that trade wars create and/or magnify bad feeling between countries, which can lead to real war.

    And it looks like the Chinese and many others will move forward whether we fight against it or not, so over the long run it will be better for the USA to be seen over there not as an enemy but as an ethical, fair business partner (“friend” would be better, but just isn’t in the cards with China right now).

    So I don’t think we should really be approaching globalization/outsourcing as a problem in itself. We need to figure out how to scale up at home without losing moral stature abroad.

    I suspect a very serious clampdown on casino capitalism would help.

    I also think David Walker may be right, that the world economy’s real problem is that not enough wealth is getting into the hands of those who will spend it, but is instead languishing uselessly on the books of corporations and in the investment accounts of individuals whose wealth far exceeds their spending needs and desires.

    1. Paul Repstock

      Karen; it is always seductive to bash ‘the rich’. I do it myself.
      However, Robin Hood was a thug, and he did little to improve the economy. We have coasted on ‘Robin Hood’s’ coat tails for many years now. It has not improved anything. For our ‘hero’ to prosper, the rich must stay rich or get richer.

      We need to empower and encourage the creation of new wealth.

      1. Dr. Repstock I Presume

        Yes! It’s much better to take from the poor to give to the rich as we have done and will continue to do.

        While the other direction is “seductive”, it would be “thuggery”, and would likely destroy our trickle down economy.

        1. Paul Repstock

          LOL…Certainly not “Dr.”
          I don’t think you understood my statement.
          When we encourage “Robin Hood” (read popular governments) to ‘steal from the rich’, they are only motivated to do so if they benifit. Therefore, this “Robin Hood” actually ends up having a closer relationship to the rich than to the “poor”, who after all contribute little and have no power. Therefore also, “Robin Hood” has every incentive to pave the way for ‘the rich to get richer’ so that there is more to “steal”/graft. Such is the benchmark of ‘good government’ in the current era. This fosters stability while accomplishing little.

      2. Karen

        I’m not “bashing the rich”! I’m taking a totally practical engineering view.

        Companies are saying their problem isn’t a lack of any of the inputs they need for production, it’s a lack of customers. Yet we have lots of people who would love to spend more money if they only had more, and there are others who have so much they don’t know what to do with it all so they just park it instead of buying stuff with it.

        A lot of corporations are hoarding, as well. They aren’t investing in production because they don’t think they would sell more if they made more.

        Hoarding is a huge problem for an economy, and we have a lot of it going on right now.

        1. Paul Repstock

          I don’t doubt you are right about many people being willing to spend more if they had it. But, look at the several ‘other sides’.
          First, I abhor conspicious consumption. Most people do if someone else is practising it..:) Many of our imbalances stem directly from wasting money and resources.
          Second, is entitlment. By the same metric of saying that the rich should not have so much, we are acknowleging the right of starving Somalis and Haitians to say that we should not have so much food??
          Third, Hoarding is basic higher animal instinct. I consider it prudent if not carried to extremes. Sadly, most people don’t do it very rationally. Remember the huge waste and inefficiency of the Y2K hoarding.
          The root of all these inequalities is within our personal failings. We are lazy, greedy, and mean.
          Eventually however, forces greater than ourselves will take over and perform a huge reset. (No matter that in our arrogance we cannot concieve it now). The big question is what if any form civilization will have in the aftermath.

          Although I may appear to ‘pontificate’, I am no better and certainly less smart than many of the people posting here. I’m 60 years old and still trying to build a believable view of the world..:)

          1. Paul Repstock

            I am. I admited that. In this I also speak for the vast majority of mankind.
            Your comments and sniping would have much more credibility if you used your own name…:)

    2. alex

      “trade wars create and/or magnify bad feeling between countries, which can lead to real war”

      Long debunked. The original free traders of the 19th century claimed free trade would reduce the chance of war, but the so-called first great age of free trade ended with the start of WW1, which had nothing to do with trade. Meanwhile the US, which was highly protectionist from its start until the 1940’s, avoided foreign wars with major trading powers before WW1.

  28. ChrisPacific

    Good article by Grove. I agree with his diagnosis but disagree with parts of his proposed solution. If countries such as China are doing better than the US in certain areas, it’s because they are choosing to prioritize the building of capability in those areas and the US is not. (As for what the US is prioritizing: as Yves says, follow the money. Front and center is finance). I agree the solution is to identify and invest in the key sectors, but I don’t agree that it should be funded via tariffs. As the MMT group would remind us, if we find something that will provide a positive economic return on public investment in the long run, then money can and will be available for it.

    It is high time that we thought about what we would like the USA to look like in 50 years and began investing proactively in order to achieve it. Other countries have been doing it for years already. It seems a safe bet that continued investment in ‘extend and pretend’ won’t get us there.

  29. WayneJett

    Yves, thanks to you and others for calling the Andy Grove commentary to attention. He makes valid points which deserve attention of U. S. policymakers but are unlikely to get it. U. S. policy towards business and employment is not merely negligently bad, it is intentionally bad. Business and employment is where the middle class work, produce and compete. The U. S. dominant elite are not the political or financial functionaries, but those who own or control the mega-billions and trillions which they have looted and drained using monopolies, manipulation and financial fraud. They intend that the American middle class – their only real competition in political influence and business – should not succeed; indeed, that the middle class should be destroyed. The federal tax system, the financial regulatory system, pension/retirement and healthcare policy all serve to drive jobs offshore, thereby impoverishing the middle class.

    The middle class must stop allowing itself to be divided by the ideologies of the left and right. All are being driven off the cliff by those who influence government power for illicit private gain. Thanks for your efforts in shedding light on this reality.

    1. D. Warbucks

      On behalf of America’s Dominant Elite, I’d like to wish you and all the other middle class people the very best of 4th of Julys.

      We look foward to plundering your pensions and health care next year, and getting you into a world of debt.

      Hurrah for the flag of the free!

  30. Charles G

    Andy Grove Said:

    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.)


    AND WE’RE LOSING! The Unemployed are casualities. Declining industry and deflation are damage inflicted upon our economy by our ‘partners.’ The hoarding of all our money, which they could just as well spend, tactics. See:

  31. gordon

    I suppose Andy Grove’s piece could be quoted to show that you can have your industrial policy rorted without even having (officially) an industrial policy. That would cut the ground out from under the people who say that industrial policies are always corrupt.

  32. Steve Roth

    On the humans/machines/employment issue, I’d just like to bang my spoon on the highchair for a major expansion of the Earned Income Tax Credit (and increasing its “salience” by delivering it via weekly paychecks) — perhaps the best program we have in place for cutting the Gordian knot.


Comments are closed.