June 01, 2011
In Defense of Andy Grove: Toward a More Effective Industrial Policy
By Matt Stepp and Sara Mansur, Breakthrough Generation Fellows
The economy lost 125,000 jobs in the month of June--largely due to layoffs of temporary Census workers--and while unemployment declined to 9.5%, more Americans exited the labor force and are no longer looking for work. A new analysis by the Brookings Institution shows that the "job gap"--the number of jobs it would take to return to pre-recession employment levels--has increased to 11.3 million, and is estimated to take more than 11 years to fill.
Debates about how the government can promote growth and boost job creation have thus taken on renewed urgency and great scrutiny. High-tech industry titan and co-founder of Intel Corp., Andy Grove, dove head first into that debate recently with an impassioned call for a U.S. industrial policy targeting high-tech manufacturing industries, which have been gravitating abroad in recent years. Grove highlighted the difficulty that companies have scaling their operations in the United States, and the importance of high-tech manufacturing to the overall innovation "ecosystem." He also suggested that the U.S. should tax the product of offshore labor--even if it causes a "trade war"--to protect American manufacturing jobs.
The reaction was swift. Vivek Wadwha, a prominent scholar on globalization and competitiveness, noted, "American companies will be the first casualties in such a war, and American jobs will be lost." Former Clinton-era Labor Secretary Robert Reich similarly argued that Grove's suggestion "would almost certainly lead to retaliatory tariffs against American exports."
While Grove's suggestion of a "trade war" is ill advised from both a political and a practical standpoint, such criticisms miss some very important insights of Grove's article--insights that business leaders and policymakers will have to wrestle with as they search for ways to advance a new era of economic prosperity in America.
We are already in a "trade war"
First, the U.S. and countries around the world are already engaged in a trade war, just not in the traditional sense. As Information Technology and Innovation Foundation President Rob Atkinson writes, the US is battling a global war against foreign mercantilism. Many countries, including most notably China, are pushing export-led, protectionist policies in quickly growing markets like clean energy. China, for example, is effectively excluding foreign clean energy technology manufacturers from competing for government procurement contracts for massive, state-sponsored wind farms--which will account for the majority of the Chinese wind market over the next 10 years. China has also implemented a "buy Chinese" requirement for wind turbine components, mandating that at least 70 percent of components for projects be sourced domestically. Such policies have greatly tilted the playing field for high-tech products in their favor.
The United States must be vigilant in fighting export subsidization that is clearly negative sum, while being weary of advancing similar and overtly protectionist policies of its own. A more positive sum, long term and sustainable approach would be, as ITIF's Atkinson writes, for nations to focus on increasing domestic productivity through innovation policies that will ensure that everyone benefits from free trade now and in the future.
It's important to recognize Grove's argument in the context of foreign mercantilism. As CNET journalist Brooke Crother's wrote in Grove's defense:
"The free market is a powerful force and invaluable for creating companies and jobs. But it's not perfect and not, in its pure form, practically applicable in a world that plays by other rules. That's what Grove is saying. Far from radical, it's a prudent and necessary argument."
In contrast to a trade war that attempts to tilt the playing field drastically in one direction, the US must implement productive policies to accelerate innovation and even the playing field.
High-tech Manufacturing and the Innovation Ecosystem
The preoccupation with Grove's comments about trade policy risks obscuring his more important argument about the critical importance of manufacturing to the overall innovation system:
"With some technologies, both scaling and innovation take place overseas...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 did not participate in the first phase and consequently were not in the running for all that followed. I doubt they will ever catch up."
Grove's point, which was made forcefully by George W. Bush's Council of Advisors on Science and Technology (PCAST) in 2004, is that the off shoring of manufacturing may erode the nation's ability to drive new technology and innovation. Research and manufacturing do not exist in a vacuum, but rather are woven together in a network that drives toward the development of leading edge technologies as well as improvements in manufacturing processes that boost productivity. According to the 2004 PCAST report, "Sustaining the Nation's Innovation Ecosystems," design, product development, and process evaluation all benefit from proximity to manufacturing, so that new ideas can be tested and discussed with those working on the ground.
So as manufacturing moves abroad, research and innovation activities are starting to follow, threatening America's historic leadership in technology innovation. Case in point is Applied Materials, the global leader in supplying the manufacturing equipment used to make solar cells, which recently decided to construct the world's largest, most advanced solar R&D facility in Xian, China.
The idea that "comparative advantage" always leads to benefits for the US is ignorant of these realities. It's not just low-skill factory jobs that are being offshored, but also high skill, high value-added manufacturing - and complimentary R&D capabilities - that are moving to other countries.
The lesson is that not all manufacturing jobs are the same. The traditional theory of comparative advantage assumes that US workers will automatically shift into high-value industries but these industries are already being created abroad. Grove says it best, especially within the context of the current recession:
"You could say, as many do, that shipping jobs overseas is no big deal because the high-value work -- and much of the profits -- remain in the U.S. That may well be so. 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?"
Recognizing this growing skills gap and correcting it will be crucial to ensuring that high-tech manufacturing positions itself in the US and the country emerges from the recession wealthier and more economically stable than before.
Picking Winners and Losers
Grove argues that China and other East Asian countries have quickly developed in the past few decades because of their government's active role in establishing environments conducive to the scaling up of business and for manufacturing in particular. He points to the example of China's "golden projects," a series of digital initiatives targeting the information technology sector that contributed to the quick development of China's information infrastructure and therefore economic growth.
Other examples of governments successfully targeting the growth of high-tech industries abound. Grove cites the work of LSE economist Robert Wade, which found that the economies of East Asian nations grew so spectacularly in large part because of the effective government involvement in targeting manufacturing industries. Today, China has become the global leader in the growing clean energy industry through direct and targeted public investment in the sector.
Critics, like the New America Foundation's Reihan Salam, lambasted Grove for suggesting that the U.S. target high-tech industries. "Government's have historically done a very poor job of anticipating job growth," wrote Salam. But the United States, like most other nations, has always had an industrial policy--even if we haven't called it that. And in many instances those policies have been widely successful. For example, the government has been instrumental in the development of the Internet, microchips, personal computers, and a multitude of other groundbreaking technologies through acting as an early adopter to bring down the price of these technologies, funding critical researchers, and building the infrastructure to enable for the deployment and commercialization.
It's certainly true that there are examples of government choices that have had negative consequences, but the evidence of such spectacular successes in the United States and abroad should put to rest the idea that industrial policy is necessarily bad. As Harvard political economist Dani Rodrik recently stated:
"Fostering structural transformation and innovation is a central public purpose. Governments cannot evade the challenge. The only debatable question about industrial policy is not 'whether' but 'how'."
We need less rhetoric, and more substance in the national debate about how to remake the U.S. economy. Instead of debating whether we have an industrial policy, let's recognize that one exists and debate how we can make it more effective.
A New Innovation Policy
Our current economic troubles call for reforming the old school growth strategies currently employed by US policy thinkers changing our focus to productivity and innovation. In short, we need a national innovation policy.
Grove was dead right in worrying about the weak manufacturing capacity of the US, and the best place to rebuild a domestic manufacturing base is the clean energy industry.
Take China. Recently, their National Energy Administration announced a clean energy development plan that will invest $740 billion over 10 years in nuclear, wind, solar, biomass, geothermal, a smart grid, distributed energy, alternative fuel vehicles, carbon capture and sequestration, and other new technologies.
While the sum is stunning, the most astonishing statistic to come out of this announcement is that the investment is expected to create 15 million new jobs. Regardless of how much this number is inflated, the total dollars put forth and the number of jobs created will be considerable.
Worse yet, these are highly valuable jobs that are both desperately needed now in the U.S. due to the recession, but also necessary to ensure that innovation and growth continue to occur domestically.
The clean energy sector represents a major growth opportunity, and the US response should be immediate and comprehensive. We need a national clean economy plan that provides a framework for both near and long-term technology innovation and commercialization goals. This plan would reduce long term uncertainty inhibiting the private sector from acting on a large scale. Such a national plan is not new and has been utilized before for nanotechnology and broadband.
The next step is to invest in clean energy research, development, manufacturing, infrastructure, and deployment.
Investment in clean energy R&D on the order of $20 billion (from $5 billion) annually, is needed to catalyze the breakthroughs in solar, energy storage, carbon capture, and vehicle technology necessary to make clean energy cheaper and more accessible.
To bring high tech manufacturing back to the US, policy makers should provide significant incentives to level the playing field with nations like China. The US needs an explicit manufacturing agenda, and policymakers must do more to provide access to low-cost capital to help manufacturers scale up in the United States.
Lastly, new institutions, like the proposed Clean Energy Deployment Administration (CEDA), are needed to bridge the gap between R&D and commercialization and accelerate the deployment of high-risk technologies to the private market.
These policies would lay the groundwork for a robust clean energy sector. The additional funds would unleash the private industry forces that are held back by uncertainty and begin putting Americans back to work in large numbers, like the IT revolution did in the early 1990's.
We can either create our own clean energy R&D and manufacturing industries or continue lose them to foreign competitors. With a new clean economy strategy, we can make the necessary investments to create millions of new jobs and unleash a new wave of economic prosperity. Without such growth strategies in clean energy and other sectors, the American job machine will remain broken. Like Andy Grove said, the choice is ours.