This article broke my heart: (BusinessWeek, “Can the Future be Built in America?“) . Every day business executives do the math, and every day the math tells them to build their factories overseas. Entire new growth industries are launching with no manufacturing foothold in the USA, even while the underlying science behind these industries originated here.
I will admit to being a manufacturing fan. Few people appreciate the intellect embodied in a well-run manufacturing operation, with a relentless attention to detail and creative solutions to difficult problems required every single day. To me, it’s a noble pursuit, which is why I found the article distressing.
I also thought this put our current public policy debates into perspective. We’re debating healthcare for the uninsured, but ignoring the health of the Golden Goose, the productive economy that allows the debate to be about high tech healthcare and not food and shelter.
We live in an era where we compete economy-on-economy, not simply company-on-company or job-on-job. I had to chuckle at Seattle’s disappointment a couple years ago when the Seattle Sonics NBA team moved to Oklahoma. The debate raged on about how “unfair”, “disloyal” and “wrong” it was that the team would leave Seattle. Let’s all wake up and recognize that Oklahoma chose to compete and came up with the money to do so. It has nothing to do with loyalty and everything to do with Seattle’s failure to perceive its real-world reality, and thus failure to compete for the now-departed Sonics.
Because I worked in the cold-war defense industry briefly, I’m also reminded just how Ronald Reagan “won” the cold war. Using our superior technology and manufacturing base, the cold war was won in factories. For every $25 million fighter jet the Soviet Union built, we built a $1 million missile that could take out the jet. Every expensive move on their part was parried with a less expensive high tech move on our part. We could do this because our electronics technology and manufacturing prowess were superior. Eventually, the Soviet Union was forced to spend so much of GDP on defense that the system collapsed.
To a certain extent, we’re letting the same thing happen to us. When a factory opens in China rather than the USA, it’s not just a few people whose jobs disappear. It’s the forgone income tax and social security tax revenue on those jobs that disappear. It’s the taxes on profits and capital gains that disappear. It’s the upstream suppliers and their jobs and taxes that disappear. But the demands to pay for social services for those people don’t disappear. So when that business executive does the math and locates the factory offshore, we’re forced to pay a higher percentage of our GDP in social services (social costs, the numerator, rise, while taxes, the denominator, falls). So just like we forced the Soviet Union into paying higher-than-affordable defense costs, competition from China et al is forcing us to pay higher-than-affordable social costs.
In microcosm, we’ve watched California show us the way to ruin. Executives uniformly count California as among the USA’s least friendly business climates. So they take their jobs to Arizona and beyond. So as its numerator grows and denominator shrinks, we behold our future.
How do we fix this? First, we can’t take the attitude Seattle took during the Sonics departure. Oklahoma had every right to compete for our NBA team, just like workers in China have every right to work hard and compete for our jobs. We need to wake up to that and compete back.
Second, we need to focus public policy on feeding, not bleeding, our economy. While it will take a lot to get me to relinquish my citizenship and take my economic activity elsewhere, corporate activities are fungible. Executives make decisions every day about where to focus growth. Unfortunately, our public policies make the math pretty clear, and the clear choice is offshore. To fix this, we need to lower corporate taxes, where we’re clearly among the highest corporate tax rates in the world. It’s just math. We need to pursue an energy policy that recognizes our interconnectedness to other economies. The current cap-and-trade legislation is the economic equivalent of unilateral disarmament, except with little uncertainty about the outcome. That energy policy is an economic double whammy, simultaneously raising our numerator while decimating our denominator. We need to turn our immigration policy on its head, welcoming every engineer and scientist who cares to come, bringing with them the brainpower that will design and run those factories. We need to reduce the unfunded mandatory burdens on corporations that take armies of lawyers, dozens of weeks of delay, and millions of dollars to overcome. It’s just math.
While we debate healthcare, let’s make sure we give the Golden Goose a thorough checkup. The only way to fund any of this is to build the world’s most competitive economy.