At the same time, many job opportunities in the United States are shifting away from the sectors that are experiencing the most growth and to those that are experiencing less. The result is growing disparities in income and employment across the U.S. economy…. The U.S. government must urgently develop a long-term policy to address these distributional effects and their structural underpinnings and restore competitiveness and growth to the U.S. economy.
Professor Spence reached these conclusions from a careful analysis of government statistics.
With this type of analysis of statistics as well as theory and the evidence of our own eyes, why do thing continue unchanged? To see why we must look at the motivation of the American corporation.
Why Corporations Choose China
We might wonder why U.S. Corporations are playing such a strong role in the development of China when that it is likely to have a negative impact on the U.S. However this is a direct outcome of the present dominant beliefs of the two countries.
The Chinese government, as their five-year plan shows, is focused on having in their country the leadership of most major and growing industries. In the U.S. in contrast the dominant ideology is laissez-faire; there is a faith that the U.S. corporations, venture capitalists, etc. if left alone, will through the pursuit of profit create the greatest GDP for the country.
Such a complete hands-off policy was not in fact the belief in the earliest days of this country. Initially the mercantilist policies of Britain aimed to keep the colonies as suppliers of natural products while manufacturing and shipping were to the greatest extent possible reserved to the British. After the Revolutionary War, however, Alexander Hamilton urged, eventually successfully, the adoption of protectionist measures to shelter the start of manufacturing in the newly formed independent country.
There have been other periods of protectionism in our history, but most of the time the natural protection of great distance and poor transport has been enough.
Today, with container ships and optical fibers, we are in an entirely a different world. Today a global corporation can maximize its profits by sourcing its products or services wherever they can be obtained the cheapest, and sell them wherever the demand is greatest.
The Chinese government, as Singapore’s had done earlier, makes intelligent use of this motivation. Through direct subsidies, abated taxes, and mispriced currency they can supplement cheap labor to the point where China becomes the most profitable place to locate the industries China is interested in. China is also able to add to this the lure of a giant growing market and to make, in practice, technology transfer a condition for market entry.
Our corporations, aiming to maximize profit and shareholder value, only hesitate at the thought that the companies they are helping to found might become their future competitors. But in the end it is not surprising that corporate leadership finds the bird in the hand superior to the two in the bush, since profits are reported quarterly, not every five years. Our present executive compensation policies for executives, strongly tied to stock price, then strongly reward these decisions.
Nor is there any strong reason for our corporations to believe that they are harming their country. Our own government, ignoring in practice Chinese mercantilist policies, has clearly supported the notion of free trade and has even in its official pronouncements supported the idea that outsourcing is good for the country.
Even the rapid decline of the manufacturing sector, which makes up a large part of international trade, has, until very recently, not caused many cracks in the wall of opinion and self-interest that protects the laissez faire status quo.
I want to make clear that our corporations themselves are neither greedy nor evil, though there are people who ascribe our problems to these qualities. In fact they are simply pursuing the widely accepted mandate of maximizing profitability. They are playing the game by the rules of the game. But in this game, as it is presently constituted, the interests of our global corporations have diverged from the interests of our country.
Rationalization of the Status Quo
I will not catalog here the many rationalizations that enable people to look at this scene and see nothing to worry about. I will, however, discuss one briefly – the notion of the “New Economy” since it appears so often. This is the idea that we in the U.S. don’t need dull jobs like manufacturing jobs, we will just do design and innovation and let other nations do the grunt work.
The poster child for this is the Apple iPhone. The iPhone was far from being the first smartphone but it was the one that finally got things right and the result was explosive growth. It is beautifully designed, a collection of parts from different areas of Asia, assembled in China. The high tech components come from Japan, Korea, and Taiwan, the low-tech assembly from China, and the whole can be sold way above the cost of the assembled parts because the designers finally got it right.
Advocates of the New Economy ask in essence – Why can’t our whole economy be like that? Why can’t the country design wonderful products for the world and let them be built in Asia and sold around the world?
There are only two reasons: One is that a whole economy like that is unattainable; the other is that a whole economy like that is undesirable.
Why is it unattainable? There are two things we must realize: first the huge profits are unlikely to last. Others can and do imitate. The Google Android has already edged ahead of the iPhone in the smartphone race. Second, events like the iPhone are rare; we will never have a country in which most of the companies are like today’s Apple. Apple itself was not like today’s Apple until it hit the iPhone. To imagine a country of Apples is somewhat like going to a baseball game and watching Babe Ruth hit three home runs and then turning to your neighbor and saying “I’ve got a great idea for a winning team, let’s have a team of all Babe Ruths.”
Why is it not desirable? Except for a small number of designers, and the retailers who sell the iPhone in the United States, most of the jobs are in other countries. The huge profits, while they last, benefit the shareholders; there is little contribution to jobs or wages in the U.S. Since most stock is held by those who are already wealthy (Reference 4), an all-Apple America would be a country of a few rich stockholders and a huge low-paid lower class.
There is no Royal Road to Prosperity
We need to get used to the idea that there is no effortless road to prosperity. To prosper a country needs to make a range of good products and services, and then keep after them year after year, constantly learning, and improving their capabilities to stay with or ahead of competition. Many products and services of this sort are dismissed as “old hat” or even as “commodities” but many things we consume are of this type. Even commodities can be products or services of high value add per person. They may not be immensely profitable, but profits are not the only thing. High value areas with average profit can contribute strongly to wages and to a widely distributed GDP. And maintaining technical capabilities in competitive areas allows entry into new industries as the technology advances and finds new uses and starts new industries (References 2 and 6).
