Ev Ehrlich's Everyday Economics

Coconut Grove

A variety of people I know – from a tech industry face guy to a leading neo-liberal former Senator – have sent me the same article, with reactions ranging from enthusiastic support to reserved intrigue.  The article is called “How To Make an American Job Before It’s Too Late,” by former Intel CEO and Chairman Andy Grove.  In it, Grove argues that we need a “job centric” policy that encourages the scaling of start-up companies and that preserves industries that otherwise can’t cut it because, for example, we don’t produce lithium-ion batteries (which are to electric vehicles “what microprocessors are to computing”) because we stopped producing consumer electronics.

If a wide swath of intelligent people are considering or even proselytizing for what Grove has to say, it’s worth plumbing his thinking for a bit.  And it’s even more important insofar as he has linked his theorizing to the driving question of the moment, namely, where there hell are the jobs?

First, Grove.  At the risk of representing the thinking of someone with whom I profoundly disagree, it comes down to this.  First, invention has to be accompanied by investment – “scaling” start-ups – in order to create jobs.  No argument there —I direct you to an essay I wrote for the Committee for Economic Development a few years ago – chapter 2 talks about how growth and jobs happen in as simple a set of terms as I can muster.  Second, planned economies such as China’s are beating us to the future by maintaining a manufacturing base that gives them a base camp for scaling the summits of tomorrow’s industries.

Third, giving up “old” industries “can lock you out of tomorrow’s emerging industry” – Grove takes a moment to dissent from former Fed Vice-Chair (and Smart Guy) Alan Blinder, who regards our getting out of low-wage TV manufacture as a positive thing.  Not only should we keep these industries (which account for “an untold number of jobs”), but we should “rebuild our industrial commons” by taxing “the product of offshore labor” and using the proceeds to subsidize companies that “will scale their American operations…If what I’m suggesting sounds protectionist, so be it.”   Businesses that outsource cheap work abroad are like the engineer who repaired he guillotine that was used to behead him.

Now, first, Grove and Intel have never been free markets’ best friend.  Back in the late 1980s, when I was Chief Economist Unisys, a (then, mainframe) computer manufacturer, Grove waved the bloody shirt about Japanese memory chips, leading to “voluntary” limits on Japanese chip exports.  These added something like $100 or so to the average price of an American laptop that went directly to Intel’s pocket.  And when, as a representative for chip users, I would advocate for an alternative approach at industry meetings, the Intel flak told me that I didn’t get it.  “It’s like dominoes,” he told me.  “Once they get memory chips, they’ll go after microprocessors, and then it’ll be low end machines, and then mainframes.”  The most interesting problem with that argument – which is like saying vegetable farmers end up high-end chefs – was that Intel was already producing microprocessors and low-end machines.  “If I believed that,” I told him, “I’d be more worried about you.” 

The many problems I have with Grove’s argument can be broadly grouped into two.  The first and most immediate is that job creation is weak right now not because the Chinese are taking jobs from us or because we failed to keep low-paying work like television assembly.  It’s because we had a housing bubble and ensuing financial crash that devastated demand (as I argued here).  We could be doing everything Grove would like us to do and we’d still have the same problems that are plaguing us at this moment – an economy full of “After you, Alphonse/After you, Gaston”   businesses and lenders, the product of pervasive uncertainty.

But even more fundamental is Grove’s view of the economy.  The idea that we need to preserve the activities of the past in order to have a future defies one of the basic precepts of the economy –that growth and change are inseparable.  The economy doesn’t grow by adding new activities to a roster of old ones – by producing horseless carriages alongside buggies and buggy whips.  The very essence of economic growth is displacement – new activities and new productive techniques displace old ones, and those who master them supplant those who don’t.

Twenty years ago, the Census Bureau began a landmark project in which they lined up all of the information provided to them regarding specific manufacturing plants – how much they produced, how many people they employed, and so on – and tracked what happened to these plants over time.  The result was the first statistical movie of the economy, and the results were in many ways remarkable.    

Perhaps two findings best summarize what the economists working on this project discovered.  The first was that productivity in the U.S. doesn’t grow because everybody gets more productive, as in the rising tide that lifts all boats.  Instead, two-thirds of the measured productivity gains occurred because plants and establishments with higher productivity took market share away from competitors with lower productivity – our productivity grows because the more productive among us displace the less so.

And the second finding was that there’s a similar pattern to job creation.  Two-thirds of the jobs created come from plants or establishments – and “establishment” means a specific plant or other center in a company, not the entire company itself – that were newly established or growing by more than 25 percent in that year, and that two-thirds of the jobs lost were lost at places going out of business or shrinking by a like amount.

Perhaps that sounds like a validation of Grove’s viewpoint – that we ought to subsidize the “scaling up” of start-up companies – but I don’t think it does.  In fact, it argues that this underlying churn takes place all the time.  For example, the Bureau of Labor Statistics, which started making this data accessible once the Census had taken hold of economists’ thinking, tells us that around 6.5 million jobs were created in each quarter through the recession.  The problem is that in the years leading up to the recession, 7.5 million jobs were being created each quarter.  Gross job losses rose from about 7-and-a-quarter million jobs each quarter in the boom years to a peak of 8.5 million at the end of 2008, and then returned to their previous level.

So, again, the problem is not that there aren’t start-ups and scaling and new, dynamic enterprises in the economy.  The problem is not that the activities that are leaving the U.S. for low-wage locations really belong here and would stay were it not for managerial greed and myopia.  The problem is not that poverty abroad is an unfair trade advantage that’s being used to steal the future.  If Grove is really worried about our losing our competitive position in lithium-ion batteries, it must be because he thinks that climate change is a legitimate problem.  And if he does think that, then he should be pushing for a carbon tax or cap-and-trade system that lets battery start-ups and other producers get the right economic signal.  That would do more for the nascent industries with which he’s concerned than any protectionist, industrial policy experiments – although the term “experiment” suggests that we don’t know how it will end, and here , I think, we do.

 The “jobs problem” is that post-crash economic conditions haven’t abated.  We could turn here to whether there should be a new round of stimulus and in what form, but I’ll postpone that for now.  The point is that Grove’s solutions to the “where are the jobs?” question is to pull the economy into a protectionist regime that favors the status quo over the future, even if, in Grove’s construct, we preserve the present in order to create the future.  It doesn’t work that way.  So long as you favor today’s activities over tomorrow’s, you’ll get less of the latter.