Why Andy Grove Is Wrong About Job Growth

Reigniting job creation in the U.S. won't happen by becoming more like China and India

By Vivek Wadhwa

In Bloomberg Businessweek's recent cover story, Intel co-founder Andy Grove writes of the need to create American jobs. He points out that although invention still happens in the U.S., the manufacturing—of even the most advanced technologies—is done abroad. America's consumers benefit from lower prices, and its corporations reap higher profits; but American industries lose the critical knowledge of how to scale technologies from prototype to mass production. Grove is right about the importance of creating jobs and keeping R&D in the U.S. But his proposed solution—levying a tax on the products of offshored labor—will do nothing more than resurrect the ghost of the 1930s Smoot-Hawley tariff. Many historians credit this tariff with igniting a global trade war that contributed to the Great Depression. Things have changed a lot since Grove was building Intel (INTC) in the 1970s and '80s. We cannot recapture a bygone era. So let's start by understanding the new realities and develop more enlightened policies.

The New Realities

First, even the bluest of blue chip American companies aren't really American anymore: They typically get more than half their revenue from abroad. Take Hewlett-Packard (HPQ), Caterpillar (CAT), and IBM (IBM). They generate two-thirds of their sales in foreign markets. Intel's proportion is even higher: 72 percent of its revenue now comes from abroad. To create jobs, Grove advocates a trade war and says we should "treat it like other wars—fight to win." The problem is that American companies will be the first casualties in such a war, and American jobs will be lost. There is no way to win.

Second, do we really want the types of manufacturing jobs being created abroad, at companies like Foxconn? The recent spate of suicides at Foxconn's giant factory complex in Shenzhen, China, was attributed to the mindless work and repetitive tasks that its employees had to perform, day in and day out. Things were different at the turn of the century and after the Great Depression, when American workers did not have the education and skills to perform higher-level chores, or were desperate for any kind of work. I doubt that even the most depressed regions of America would want to be home to factories that pollute the environment, pay minimum wage, and work at the profit margins of these sweatshops.

Third, the majority of new jobs created in the U.S. aren't created by companies like Intel, but by startups. The Kauffman Foundation's analysis of Census Bureau statistics shows that net job growth in the U.S. economy occurs only through startup firms. From 1977 to 2005, existing companies were net job destroyers, losing 1 million net jobs per year. In contrast, new outfits in their first year added an average of 3 million jobs annually. Having small firms scale into large firms is important, but the cycle of destruction of old industries and the creation of the new has given the U.S. its greatest global advantage. Protecting old industries isn't the best way to reduce unemployment; it is a sure road to downsizing.

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