There was a lot of good stuff in the President's State of the Union address last night, but a lot of it is not going to happen unless the Obama administration stops contradicting itself.
Repairing and upgrading infrastructure and education, facilitating and investing in production of more and cheaper energy, fostering domestic manufacturing and the re-shoring of production and jobs, reforming how we do healthcare to cut costs by paying for results rather than procedures, stoking R&D and innovation, and fixing our broken immigration system are all important and largely (or should be) bipartisan undertakings.
But does the White House understand that it is operating in a global economy, have any idea of what that is, or of how other countries conduct themselves in that environment?
The President announced that he is launching talks to conclude a Trans Atlantic Free Trade Agreement (TAFTA) between the United States and the European Union. This is a worthy initiative that I, along with a few others, have been promoting for nearly twenty years. It's worthy because the EU is by far the world's largest economy and the economic relationship between the U.S. and the EU dwarfs any other. The United States sells three times as much to the EU as it does to China, for example. Furthermore, the EU's attitudes and policies on international trade and investment are very similar to our own and its markets most nearly match ours in terms of openness to outsiders. EU wages are, if anything, higher than ours, as are its environmental, health, and safety regulations. So there will be no race to the bottom in a TAFTA. Nor are the euro and the pound sterling manipulated currencies, and the EU anti-trust regime is fully as tough as that of the United States. I believe a TAFTA could add 2 to 4 percentage points to U.S. GDP. So far so good.
But then the President reiterated a line from his inauguration address which said that the Trans Pacific Partnership Free Trade Agreement that he is hoping to complete with Canada, Mexico, Peru, Chile, New Zealand, Australia, Brunei, Singapore, Malaysia, and Vietnam (and possibly Japan) by October will level the playing field and promote American exports and jobs. He essentially equated the two proposed deals.
But they are in no way comparable. For starters, the TPP is likely to undermine the North American Free Trade Agreement (NAFTA) and the Caribbean Area Free Trade Agreement (CAFTA) and result in the loss of more than a million jobs in Mexico and the Caribbean, along with nearly 200,000 jobs lost in the United States. This is because under NAFTA and CAFTA textile producers in the Caribbean and Mexico who use U.S.-made fiber and yarn receive duty free access to the American market. The only manufacturing industries in the Caribbean are based on this deal, as is much of Mexico's manufacturing industry. These deals were done in the 1990s in part to mitigate illegal immigration and illegal production and shipment of drugs to the United States. A TPP will remove the tariffs on textile imports from much of Asia and take large chunks of the U.S. market away from Caribbean and Mexican producers and give it to Vietnamese producers that are heavily controlled and backed by their government, according to studies by the Mary O'Rourke Partners Group of economic analysts.
But that's just a small part of the problem. The main part is that the TPP does not at all address the issue of trade-related currency manipulation in which governments actively adopt policies aimed at promoting their exports and reducing their imports by lowering the value of their currencies. A good recent example is that of Japan. Before being elected, the new Prime Minister Shinzo Abe called for devaluation of the yen. Upon election he immediately began introduction of policies and rhetoric aimed at reducing the value of the yen. Not surprisingly, the yen has devalued by nearly 30 percent over the past few weeks. That would far outweigh any removal of a 5 percent tariff that might be achieved in a TPP deal. Yet the TPP has nothing with which to combat this kind of currency policy.
And it gets a lot worse. On Monday, I received an urgent email from an old friend in Tokyo who is a former top economist for Goldman Sachs. He had just seen on Bloomberg a comment by Treasury Undersecretary Lael Brainard saying in answer to a question about Tokyo's recent actions that the administration supports Abe's policies to stimulate the Japanese economy. In other words, the Obama administration apparently approves of Abe's efforts to weaken the yen as a way of subsidizing Japanese exports, many of which come to America, a country that needs to reduce its trade deficit in order to keep economic growth and job creation going.
Asked my Tokyo friend: "Do these people have any brains? Who do they work for? Who?"
Well, they all work for the president, and he hasn't figured out yet that the TPP and fiddling with currency values to promote trade surpluses and promoting manufacturing in America don't go together. So it was a good speech, but a very mixed message.
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"Fiscal cliff" has become such a catch phrase that it now shows up regularly in non-U.S. media around the world. Avoiding going over it is certainly President Obama's number one concern between now and the end of the year.
Or is it? Well, if it is, it's not stopping him from leaving Washington and flying half way around the world to Cambodia next week to attend the East Asia Summit meeting of top Asian leaders. So "take that" John Boehner. You may be the Speaker of the U.S. House of Representatives, but you're no Xi Jinping or whomever the Chinese pick as their new leader. This is the first time an American president has attended the summit, and it is a measure of the importance of China/Asia to the United States that Obama is taking part despite the fiscal pressures he, America, and the world are facing.
This is not the first move Obama has made that reflects his concern with China and Asia. The so-called "pivot to Asia" that he adopted earlier in the year as the main focus of American foreign policy in the post-Iraq, post-Afghanistan war world has already resulted in an ongoing shift of U.S. troops, ships, and military presence to the Asia-Pacific region. It has also been manifested by the attempt to negotiate a free trade agreement under the rubric of the Trans Pacific Partnership and by the reaffirmation of U.S. ties with, and support of, Asian countries such as Vietnam, the Philippines, and Japan in some of their contested issues with China.
That Obama's concern is justified is evident on the basis of many factors. There is a constant din of triumphal commentary in Asia and much of the rest of the world about China displacing the United States as the world's largest economy. Put aside for the moment the fact that the U.S. economy is not the world's largest economy -- and hasn't been since being displaced by the EU a number of years ago -- and put aside the fact that China will not soon displace the EU, and may well not surpass the United States if its growth rate continues its broad slow down. The fact is that there is a widespread anticipation and even fervent hope that America will fall behind in terms of the size of its GDP. Many around the world see this as a kind of liberation from American hegemony. As one Chinese analyst said to me recently, "America must at last face facts. It's power is ebbing rapidly and it will no longer be able to get what it wants as easily as in the past."
Good advice. Face the facts. My concern with Obama is not that he's going to Asia in the middle of the fiscal negotiations with Boehner, but that he's not properly facing the facts.
The main fact is that while it's true that U.S. power is ebbing, it's not ebbing for lack of military presence or capability. It's ebbing because the U.S. trade deficit appears to be irreducible and U.S. industry continues to offshore not only production but also R&D and innovation while some of America's greatest educational institutions slash their budgets, even as those of China and most of the rest of Asia expand geometrically. In short, the U.S. is seen in Asia as a declining power because it can't compete, not because it can't fight.
Increasing the American military presence in the Asia-Pacific region will only cost more money and goad the Chinese to redouble their own military efforts. It won't produce a single new semiconductor or new company or higher American wages. In his post election speeches, the President has frequently talked about doing nation building at home and about rebuilding America. He's right. An economically stronger America wouldn't have to deploy 2,500 marines in the northern reaches of Australia or put 60 percent of its naval ships in the western Pacific. So how do we rebuild America?
For starters, we pivot not to Asia, but to America. Look, the Aussies are reducing their own forces. Why are we sending more troops to Australia? China has an economy growing at 7.5 percent while we struggle to hit the 2 percent mark. Why do we want to challenge China to an arms race that is likely to be more costly to us than to them? Remember that U.S. oil does not come across the Pacific. There has been a lot of concern about the off-shoring of U.S. jobs and technology. Yet, the U.S. military presence in Asia promotes a degree of stability that makes the Asian supply chain safe. In effect the Pentagon guarantees corporations who offshore their operations that they have nothing to fear in terms of disruption by doing so. This is like a subsidy for off-shoring. Why is America paying this subsidy?
Halting its payment would be a good way to avoid going over the fiscal cliff.
Similarly, the negotiation of the Trans Pacific Partnership (TPP) and other free trade agreements should be halted and re-defined. These deals are not about creating American jobs. No serious analysis is being done about how many jobs they might actually create or destroy. It is likely that the TPP would result in an increase in the chronic U.S. trade deficit and a net loss of jobs, but the negotiators are not thinking about that. Obama should. His negotiators get points for doing deals whether or not they create jobs, but Obama doesn't. He should put the talks on hold until an analysis has been done that shows in concrete terms how such a deal might contribute to rebuilding America.
Of course, these steps are only a beginning. They are measures to remove distractions while we concentrate on the main thing by adopting a whole new set of domestic policies. I'll tell you what they should be in the next installment.
I told you Obama is lucky didn't I? Everything fell his way one more time. The EU moved a half step toward eventual euro bonds and of all people, it was arch conservative U.S. Supreme Court Chief Justice John Roberts who saved Obama Care by making the tax argument that Obama's own lawyers had downplayed. I mean, you have to admit it. Luck is better than skill any day.
So, with the Supremes backing him up and the Europeans taking decisions that have the markets soaring today, it looks like the skids are being greased for an Obama return to the White House in November.
But while the news from Europe was positive, it was far from signaling the end of the game. To be sure, establishing the European Stability Mechanism (ESM) as the single body in charge of recapitalizing Europe's ailing banks is a big step in the right direction, it still leaves much unclear and undecided. For starters, the bailout fund still doesn't technically exist. It must be formally approved by each of the 17 countries that use the Euro by July 9. That's coming up fast. So there is not much time for further conferencing if there are any unseen bumps in the road. Then there is the small question of where the money is coming from. The main focus of the ESM at this moment is to assist Spain and Italy by recapitalizing the Spanish banks and be reducing the cost of public debt issues for both countries. But 30 percent of the ESM's capital is supposed to come from Spain and Italy. Does this mean they're partially going to bail themselves out?
Even assuming this all gets sorted out quickly and smoothly and that the ESM gets enough money to achieve its objectives, the fact remains that they are still short term objectives. Italian Prime Minister Mario Monti has succeeded in persuading and scaring the Germans into recognition of the need for unified banking and for measures to reduce the cost of Spanish and Italian public debt service. That is a signal accomplishment. But by itself it won't stop the repetition of market ups and downs and crises over the euro. There will have to be further follow on measures to establish credibility and confidence.
These will have to include some kind of centralized control over European national budgets along with pan European taxation and the issuance of Eurobonds guaranteed by all the member states or at least by those that share the Euro. At the same time, the problem countries and even countries like France that aren't yet identified as problem countries but that are suffering from declining competitiveness must demonstrate their long term commitment to fiscal responsibility, labor market flexibility, and the achievement of lasting competitiveness. Finally, the European Central Bank must act more like the U.S. Federal Reserve in acting to do whatever it takes to stimulate growth.
I just watched an online interview by the New York Times' Tom Friedman with Bill Gates. Friedman notes that as recently as six years ago there was no Facebook, no cloud, barely a Twitter, no iPad, and 4G was a parking place. Gates nods emphatically and says this shows that America is still number one in innovation. Indeed, he emphasizes that more innovation occurs in America than in the rest of the world combined. Then he gives a puzzled face and says that in view of all this innovation, he can't understand why poll after poll now shows Americans to be worried about their future and that of the United States. He adds that he guesses it must be because of uncertainty created by the political gridlock in Washington.
Well, it's always safe to blame Washington, but what I wonder is what Gates knows about innovation or worry. Don't get me wrong, I admire Gates as one of the great business minds of our time. But he's no Steve Jobs. Jobs knew about innovation. Gates knows about negotiation and standard setting and business strategy, but he's never been an innovator. The original MS DOS personal computer operating system on which the Microsoft empire is based was bought by Gates from a friend and then licensed by Microsoft to IBM. Gates bamboozled IBM by persuading it to take only non-exclusive rights to the system, but he didn't invent the system.
Or take the Microsoft Explorer browser. Mosaic and Netscape were the first browsers. Microsoft had no clue and was scared to death when Netscape debuted. Gates bundled Explorer to his Windows monopoly operating systems and, with the help of sleepy U.S. government anti-trust oversight and friendly courts, killed off Netscape. Brilliant, perhaps, but not innovative. More a copy of the Rockefeller Standard Oil model than of Apple.
Gates also doesn't know much about worry because he's a rich kid who always had a job and then bargained his way into one of the history's greatest monopolies. Again, let's give him credit for single-minded drive and focus, clever bargaining, and great business strategy. But he never had to worry. He never had to look at life through the eyes of an everyday American.
He does, however, present a perfect view of the world as seen through the eyes of the American elite. It worships at the alter of innovation and sees the future as an endless series of Facebooks, Twitters, and Groupons. If America is suffering from declining competitiveness and rising trade deficits, innovation, according to the elite, is the philosopher's stone that will turn everything around.
Well, as Santayana said, "Those who cannot remember the past are condemned to repeat it." The British have a long tradition of innovation. Indeed, Japan's Ministry of International Trade and Industry (MITI) once found that 54 percent of the world's most important inventions were British while only 25 percent were American and 5 percent Japanese. The first commercial jet liner was the British Comet. The first digital audio system was British, as was the first operating television system. I could go on and on, but the point is that British industry wound up far behind U.S. industry in all of these sectors, and in many more as well. The British economy reaped very little benefit from these innovations because it did not fully commercialize or mass produce them. They created nice jobs for a relatively few brilliant scientists and engineers in Britain, but none for the average bloke. It was the American companies who came along behind and copied the Brits that garnered most of the sales and profits, American workers who got most of the jobs, and the American economy that gained most of the GDP growth from the innovations.
This history is now being repeated between the United States and Asia with the United States in the role of Great Britain. Average Americans are worried because they can see that, even as the elite is blinded by its own brilliance.
Another great American business leader has been making this point recently from his base in Silicon Valley. Former Intel CEO and Chairman Andy Grove, whose company accounts for half of the WinTel standard that has dominated the PC industry for the past thirty years, wrote in Bloomberg BusinessWeek a bit over a year ago that innovation without follow-up on scale and production is not a great wealth producer. In short, it is a necessary but not sufficient generator of jobs, wealth, and economic growth.
PAUL J. RICHARDS/AFP/Getty Images
This Black Friday is likely to be a particularly bleak one for patriotic-minded U.S. Christmas shoppers. From perennial bestsellers like the iPhone and Legos, to this year's new arrivals like the Kindle Fire and the MyKeepon musical robot, the most popular gifts this year all seem to be manufactured overseas. This may be the season that U.S. retailers pull themselves back in the black, but it looks like another grim winter for American manufacturing.
Or is it? You might not yet see the evidence on the shelves at Wal-Mart, but with a bit of good policy and good luck, U.S. manufacturing may well experience a renaissance over the next decade.
A recent report from Booz and Company, based on a sector-by-sector analysis of U.S. industry, concludes that, in principle, the American market could be supplied most economically by factories located in the United States in about 90 percent of all manufacturing industries. For the ten percent of industries like apparel and shoes that are truly labor-intensive, off-shore production is fully justified. On the other hand, U.S. manufacturers are already competitive in about 45 percent of manufacturing industries -- microprocessors and polysilicon, for example -- not only in the North American market but globally. As for the remaining 45 percent -- a category that includes such industries as machine tools and optical fiber -- Booz and Co. conclude that there's no reason U.S.-based manufacturers couldn't effectively compete to supply the U.S. market, if only corporate executives, labor, and the U.S. government worked together to optimize productivity and minimize costs.
One of the main obstacles in reaching this type of cooperation, may be overcoming the conventional wisdom that there's no way for companies to turn a profit by manufacturing in the United States. But as the following five examples of companies both large and small show, it's not only possible, it's already happening:
The company that produces more than 85 percent of the microprocessor chips that power the world's computers makes most of them in the United States. Making these chips is not labor intensive because it's mostly high-tech robots in sealed factories -- inexpensive Asian workers provide no particular advantage in their production.
The economies of scale, the high quality, and the high productivity generated by Intel's large U.S. facilities in New Mexico, Arizona, and Oregon and its highly-skilled and experienced work force make the United States the most competitive place in the world on an operating-cost basis to make these chips. Of course, there are important Asian microchip producers like Korea's mighty Samsung, but without special financial subsidies like tax holidays, free land, and capital grants their cost competitiveness is no better and often worse than that of U.S. based producers.
Just last week, it announced that it is moving production from of its compact machines from Japan back to the United States in order to be able better to serve the markets of North America, Europe, and the Middle East. This represents a kind of historic shift. I was living in Japan in the 1960s and 1970s when Cat began producing these machines there on the grounds that Japan-based production was more cost effective.
Caterpillar executives say the demand for small tractors and semi-hydraulic excavators, once primarily came from job sites in Japan's cramped urban centers, but the majority of the customers are now in North America and Europe. The new facility is expected to create as many as 1,000 new jobs. The company also opened a new plant in Winston-Salem, North Carolina, this week.
This French manufacturer produces industrial gases like liquid oxygen, carbon dioxide, and liquid nitrogen that are used in the steel, oil, and natural gas industries. Just two weeks ago, it started up its new factory in Rancho Cucamonga, California, to better supply increasing demand for its products in the southwest United States. This factory will double the company's production capacity in America, along with its U.S. workforce.
The U.S. Auto Industry
Cars, of course, are not products you never think of. In fact, you think of them all the time -- and for the past 40 years you probably thought of them as being better and less expensively made abroad for export to the United States. Now, however, America has suddenly become the place where all auto companies, both U.S. and foreign, want to make cars. For example, Ford Motor Company is bringing production of its Fusion model back to Flat Rock, Michigan, from Mexico despite the fact that its Mexican workers are paid $3.35/hour compared to the more than $33/hour earned by its Flat Rock workers. Honda is investing more than $300 million to expand production of light trucks and engines at its Alabama factory. Chrysler is investing $1.7 billion to develop a new Jeep and upgrade its Toledo, Ohio, production facilities that will employ 1,100 new workers. General Motors is expanding its former Saturn assembly plant near Knoxville, Tennessee, to make the Chevrolet Equinox. This will bring 1,900 new jobs to the state. GM is also expanding production of the Chevy Volt. It plans to make 60,000 of them next year at its venerable Hamtramck plant in Detroit; 15,000 will be exported.
Bob's Space Racers
The Daytona Beach company, an industry leader in arcade gaming with business in every state and 118 countries, is bringing production of the Whac-A-Mole game back from China. Why? "The costs are more equal now, so we're able to manufacture some of those products in the United States," says CFO Mike Lane. "Labor costs in China are increasing. Shipping across the ocean is expensive. Plus, we have better quality control in the U.S."
Lane and his colleagues found that the travel and verification costs of manufacturing outweighed the advantages of cheap labor. Now, Whac-a-Mole is being brought back to the United States where it was first developed over 40 years ago.
* * *
So the force may be with U.S. manufacturing after all. But for the "re-shoring" wave to really build momentum, the government needs vigorously to offset the currency manipulation and match the financial investment incentives that lure U.S. companies toward manufacturing abroad. For example, Washington should take steps to impose countervailing duties on imports that are being indirectly subsidized by currency manipulators, who buy dollars on a steady basis in order to drive up the exchange rate of the dollar -- thereby making U.S. imports cheaper and exports more expensive than they ought to be, based on market forces. And Washington should also coordinate with state economic development offices to and arrange to match the free land, capital grants, and tax holidays that countries like China, Singapore, and France use to lure investment and production that should remain in or go to the United States based on the dictates of market forces.
Maybe the Obama administration and U.S. economists and business leaders will wake up to this potential in the coming year. Now that would be something to really be thankful for.
President Obama and his administration no doubt richly deserved the victory laps they took this week in the wake of their high stakes success in tracking down and doing away with Osama bin Laden. Now, however, they must quickly confront the fact that in a fundamental way he is still winning.
I don't mean that the terrorism and medieval brand of Islam he fomented are gaining support. Indeed, if anything, we have been over-estimating the terrorist threat posed by al Qaeda for some time. I even allowed myself briefly to wonder this morning if we might again be allowed to keep our shoes on in airport security lines. But terror was only a tactic for bin Laden. His larger strategy, as he wrote to Taliban leader Mullah Omar shortly after 9/11, was to force the United States to over-reach in its reaction to the terror attacks and thereby to incur "great long-term economic burdens" that would "lead to further economic collapse." In that, the late al Qaeda leader continues to be only too successful.
The news of his demise is providing only a brief respite from a looming political clash over the United States' rising debt and how to cap and reduce it. Moreover, this debate is taking place in the context of an international flight from the dollar, slowing recovery from the recent Great Recession, stubbornly high unemployment, rapidly rising trade and current account deficits, and a Standard and Poor's warning of a possible downgrade of the AAA rating on U.S. sovereign debt. Over all this, bin Laden is smiling from his watery grave.
Thus, to really defeat him, President Obama must change his emphasis from geo-politics to geo-economics and revitalize the United States' flagging economic competitiveness. Here's how:
Cut total U.S. national security spending (military and intelligence) in half over the next six years. Even at this reduced amount the United States would still have by far the largest, most powerful military forces in the world. Part of this could be achieved by rapidly drawing down U.S. force levels in Afghanistan and Iraq and by withdrawing U.S. ground forces that have now been stationed in Europe, Japan, and South Korea for well over half a century even as these countries have prospered and become powerful in their own right.
Spending and taxes
Get federal budget deficits under control by closing tax loopholes and adopting a combination of tax increases and spending cuts similar to those recommended by the Bowles/Simpson Commission. Marginal tax rates might actually be reduced if the tax base is broadened. In particular, the mortgage interest deduction should be substantially limited.
Adopt a Value Added Tax (VAT) similar to those of virtually all other advanced industrialized countries which rebate these taxes on their exports.
Reduce the corporate tax rate to the 25 percent levels prevailing in most of the world.
Gradually increase the age of eligibility for early Social Security to 65 and for full Social Security to 70.
Shift the medical payments system from pay for procedures to pay for care and adopt a national system of digitized, on-line medical records.
Set a target not just to double exports but to halve the trade deficit in the next three years. Because there can be no more stimulus spending and no further cuts in interest rates, this will be the only way to cut unemployment.
Adopt the Colombian and Panamanian Free Trade Agreements, but reject the Korea-U.S. Free Trade Agreement. The Korean deal will increase the U.S. trade deficit and impose a net loss of jobs as it is presently structured. It should be renegotiated to cover the items like currency policy that are the main drivers of our bi-lateral trade.
Establish a new template for free trade agreements with the Trans-Pacific Partnership by including coverage of currency manipulation, competition policy, investment incentives, and third party adjudication of intellectual property disputes.
Emphasize INVEST IN THE UNITED STATES. Establish a fund to match the investment incentives being used by many other countries to induce both foreign and domestic direct investment. Ensure that no business person leaves the presence of the President or any other top U.S. official without being asked about plans to invest in the U.S. Make it the top priority of the Commerce Department to maintain awareness of the investment thinking of the United States' and the world's leading corporations.
Embrace and lead global efforts to reduce the role of the dollar as the world's major currency. A system of several competing reserve currencies or of a global basket of currencies or of a global currency backed by commodities would place discipline on all global market participants to avoid chronic trade surpluses and deficits.
Self-initiate enforcement of U.S. and global trade rules to offset the impact of mercantilist policies on the U.S. productive base. Aggressively use the facilities of the World Trade Organization to challenge practices that tend to negate the intent of the global free trade rules.
American economic strategy
Recognize that the sum of regulatory, anti-trust, tax, government procurement, and a host of other policies greatly influences the structure and productivity of the economy. It is a de facto national economic strategy. Because it is never recognized as such, it is never analyzed in a coherent, comprehensive fashion. It should be the job of the National Economic Council to do this. At the same time, a Congressional Economic Strategy Office a la the Congressional Budget Office or inclusion of a strategy analysis as part of the budget office's remit would be advisable
I could go on, but have probably gone too far already. The main point is very simple. The top priority of Obama in the wake of the demise of bin Laden must be to reconstitute America's economic vitality.
MANDEL NGAN/AFP/Getty Images
President Obama deserves some credit for declaring the improvement of the United States' global competitiveness the focal point of the last half of his term in office. Competitiveness underpins everything else -- jobs, rising standards of living, budget surpluses in place of deficits, and the ability to project power globally. Without being economically competitive, the United States cannot be the United States. So a big nod to the president for finally focusing the American attention on the main game.
But that is as far as my praise can go. The substance of the State of the Union speech was a list of knee jerk conventional wisdom proposals that not only won't make us more competitive but that are at odds with the budget austerity the president also proposed. Let's start with the knee jerk proposals.
Right up front was innovation. The U.S., said Obama, must out-innovate other countries if it is to stay in the lead and create the new jobs needed to replace the old factory jobs the president suggested are gone forever. Okay, innovation for sure is a good thing. Nobody's against it and it plays so well to the American self-image of being smarter, more entrepreneurial, more flexible, and more dynamic than anybody else. But has anyone noticed that we've been leading in innovation for the past thirty years and that has not prevented us from suffering an erosion of our industrial and technological leadership or from running up enormous trade deficits while suffering loss of jobs and stagnation of wages and living standards. This despite the fact that we have innovated with the deployment of the Internet, the evolution of start-ups like Google and Facebook, and the development of smash-hit new products like the iPad.
Of course, innovation is to be desired and promoted. But one of this century's great innovators, former Intel CEO Andy Grove, pointed out in a recent article in Bloomberg Businessweek that innovation is not enough. I actually gave a copy of Grove's ideas to the president, but it didn't sound last night as if he had read them. In any case, Grove has a set of graphs showing that the United States continues to innovate pretty much at the pace it always has. What has changed, notes Grove, is the pace of moving to mass production and commercialization. We don't do that much in the U.S. anymore because our companies take the innovation and move the production and commercialization offshore. Indeed, increasingly they are moving the innovation offshore as well -- in part because once you stop producing and commercializing it becomes increasingly difficult to innovate.
Next was education. Good stuff that education. Just like innovation we need more of it and we need it to be better. No arguments about that here or anywhere else I guess. But just as with innovation, for most of the past thirty years we've had, on average, the world's best educated work force. Certainly, companies aren't moving their factories to China because its workers are on the whole better educated than American workers. The movement of U.S. production to offshore locations has taken place despite the generally superior educational level of the United States. And, even if we fix education, which we definitely should do, we won't feel the effect for twenty years, by which time our competitive fate will have long ago been determined.
Infrastructure was next on the list and its renewal and modernization actually is a good, immediate idea. But that gets us to the big internal contradiction in the speech. Innovation, education, and especially infrastructure all cost money. But in the second half of the speech, the president said he was going to freeze government spending for five years on all non-entitlement expenditures. So he seemed to be offering with one hand while taking away with the other.
Completely unaddressed were the questions ironically raised just last week by announcements surrounding the visit of China's President Hu Jintao to Washington. First, General Electric announced that it was forming a joint venture with China's state owned Avic corporation to produce avionics products in China for China's new commercial jet liner that will compete with Boeing jet liners. The avionics technology will be transferred to the joint venture from GE. Unsaid, but obvious was the fact that GE believed it had to transfer the technology to have a real shot at selling any avionics to China in the form of exports from the United States even though the United States has a comparative advantage in such exports. Then a few days later, the White House announced the GE Chairman Jeff Immelt had been appointed as President Obama's chief outside economic adviser.
So I'm left wondering how we are supposed to be innovative when our top companies transfer important technologies to would-be foreign competitors and how we are supposed to deal with those foreign competitors when the president's chief outside economic adviser is among the chief transferers.
TIM SLOAN/AFP/Getty Images
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.