Immelt Speech: U.S. Companies Begin to Realize Their Mistake

Posted by: Michael Mandel on June 27

I’m going to make a forecast: Over the next couple of years, U.S-based companies will begin to realize that they made a big mistake relying so heavily on off-shoring.

Ironically—or perhaps not so ironically—it may be GE leading the way, just as GE and Jack Welch led the massive offshoring wave to India. Here are excerpts from a speech by Jeff Immelt, GE’s CEO, in Detroit last Friday: (Thanks to my regular commenter LAO for pointing this out)

Throughout my career, America has seen so much economic growth that it was easy to take it as a given. We prospered from the productivity of the information age. But, we started to forget the fundamentals and lost sight of the core competencies of a successful modern economy. Many bought into the idea that America could go from a technology-based, export-oriented powerhouse to a services-led, consumption-based economy – and somehow still expect to prosper.
That idea was flat wrong. And what did we get in the bargain? We’ve seen a great vanishing of wealth. Our competitive edge has slipped away, and this has hit the middle class hard.

As a nation, we’ve been consuming more than we earn, saved too little and taken on far too much debt. Growth in research and development has slowed. Our country has made too little progress on some of the defining challenges of our time – like clean energy and affordable health care. Our budget and trade deficits have reached levels that are clearly not sustainable.

While some of America’s competitors were throttling up on manufacturing and R&D, we deemphasized technology. Our economy tilted instead toward the quicker profits of financial services. While our financial services business has performed well, I can’t tell you that we were entirely free of these errors. We weren’t.


Leaders missed many opportunities to add to the capabilities of America. In 2000, the U.S. had a positive trade balance of high-tech products. By 2007, our trade deficit of the same products reached $50 billion. We have already lost our leadership in many growth industries, and other new opportunities are at risk. Trust in business is badly shaken, and it is going to take awhile to get it back.

Third: We must make a serious commitment to manufacturing and exports. This is a national imperative. We all know that the American consumer cannot lead our recovery. This economy must be driven by business investment and exports.

We should set a national goal to create high value added jobs and have manufacturing jobs be no less than 20 percent of total employment, about twice what it is today. And we should commit ourselves to compete and win with American exports.

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Reader Comments

Paul

June 27, 2009 04:12 PM

I totally agree and we need a government policy to support this. My proposal to help even the playing field is:

1) Get rid of the Corporate and Personal Income Taxes and replace them with a VAT tax concept. This way companies that build overseas and import have to pay the same level of taxes for access to the American market as American companies. (this is allowed by our trade treaties)

2) Credit back the VAT tax on all exports (this is already done in Germany) and is allowed in our trade treaties. This would again make the tax situation even between American manufacturers and those in the country they export to.

3) Get healthcare cost/management out of Businesses balance sheet. The simplest way to do this is to offer at least a barebones government insurance that everyone would be a member of. (if you want higher service pay for it).

The bare bones plan would be covered by the VAT tax and would have rules designed to control costs.

4) Do what ever is necessary to balance the budget (cost cutting and tax increases). This is necessary for step 5.

5) Take China and the other Asian countries that are manipulating their currencies to task. Establish a tax based on the level of manipulation to push them to bring their currencies up to a more balanced level.

6) Work with high schools and companies to reestablish vocational training so that non-college bound kids will be capable of stepping right onto the manufacturing lines and being productive quickly.

Thats my plan to turn it around. Anyone else want to toss in their ideas.

cm

June 27, 2009 06:41 PM

While Immelt has to be lauded for forming this insight and articulating it in public, the quoted piece certainly conveys a flavor of "mistakes were made" and "ashes on YOUR heads".

cm

June 27, 2009 06:49 PM

From small anecdotal indications I'm under the impression that quite a few if not many organizations have been realizing that offshoring has not delivered on the hype, but we are still in the stage where nobody wants to lose face (and potentially their job) by being among the first acknowledging it.

Having said that, there are some things that can be successfully outsourced or offshored, but the fad has gone way beyond that.

For example, it went as far as tech VCs making offshoring almost from day one a precondition for startup financing.

Ajay

June 27, 2009 07:16 PM

Sounds like a typical politician, spewing platitudes that people want to hear right now but that have no connection to reality. Outsourcing is not some new trend that was a mistake, it's a global phenomenon that will only amplify in the coming decades. Knowledge work is increasingly dominating the economy and with the information superhighway of the internet winding all over the globe, there's absolutely no reason for us to limit such work to a single nation. A computer programmer from Africa can and will contribute to large software projects with contributors from all over the globe. There is absolutely no reason for manufacturing work to be done in developed countries when wages are so much cheaper in developing countries. Nobody, including those bellyaching about the loss of US manufacturing jobs, flips over their iPod to see that it was assembled in China, then avoids buying it. If you think this outsourcing trend is going to diminish, you haven't seen nothing yet. :)

2Bob

June 27, 2009 07:32 PM

Nice words but Mr Immelt is fighting against two immovable barriers.

1. Walmart and American consumers will not pay more for "Made in the USA"
2. GE shareholders will not accept that the company must be a good US corporate citizen, sacrificing short-term profits for US jobs. In the long term the bulk of GE jobs and probably share ownership is heading to China and India.

I don't doubt his sincerity but his room to do more than make token gestures on this is effectively zero.

cm

June 27, 2009 10:09 PM

2Bob: I believe offshoring/sourcing decisions are viewed as mistakes to the extent that they are NOT cheaper (or otherwise advantageous, but money talks the loudest) once all current and delayed costs and losses of opportunity are included.

It was quite obvious that most offshoring decisions were "me too" moves carried out in a climate of pundit and peer pressure. Most decision makers are always penalized or at the very least questioned when they don't cater to "best practices" and current fads.

Many businesses probably never went beyond the "inwastement" stage with this.

LAO

June 27, 2009 10:24 PM

Paul,

That was one of the most cogent defenses of VAT that I have ever encountered. It is just such a hard sell when state and local governments are already taking 10% in sales tax, and it burdens those who are already forced to spend 100% on necessities.

I am totally in favor of your #5 -- simply set tariffs etc. according to currency manipulation (easier said than mathematically done, I'm sure). I am under the impression that the currency manipulation that is happening absolutely violates trade agreements. I think there is more that is in violation as well (if only I could find the text) -- export subsidies, etc. These are things that give the American worker no chance of competing or expanding their import purchasing power.

How about dropping oil industry subsidies? Every action that gets transportation to cost what it "should" will bring more rationality to trade and encourage more local manufacturing. It surely is becoming clear to Asian exporters that their western export growth model is dead when the American consumer can't earn any more and there is nothing left to outsource.

Holly Garfield

June 28, 2009 12:15 AM

One of the most important considerations when it comes to assessing the US lead is that the rest of the world is catching up to the US. We are advanced so far beyond many of the developing countries that we face the diminishing marginal returns principle. The emerging markets can, and are, progressing rapidly based on the developed world's proven existing technology and social structures.

But there are also emerging market handicaps for the more advanced development area. As someone once said about engineers from India: first you teach them English, then you teach them engineering. All of India's vaunted high number of engineering graduates are graduating because the colleges in India are not teaching the same engineering skills being taught in developed contries. Project management, teamwork, problem solving, etc. are being left out of emerging market higher education curriculums in order to get quantity graduate numbers.

As far as US manufacturing, we still excel in skilled, custom manufacturing. We have lost the manufacturing jobs best done by robotics or minimum wage workers. Robots now do a better job at less cost than the formerly well paid US assembly line worker. So those well paid jobs would be lost whether they go offshore or not.

But the points of changing to a consumer/service orientation are a very serious problem in the long run. We are no longer producing valuable goods in enough quantity to continue our spending growth. That will come back to haunt us.

LAO

June 28, 2009 12:33 AM

Ajay,

Did you catch the part of the speech where Immelt wants GE to loan to small business instead of playing (adopting your language style now) stupid financial games? That means you. Stop your bellyaching and go for it if you're so convinced you are on to something.

That goes for the rest of us, too. Did anybody see that simple air conditioning about to come out of Germany -- hot sun makes steam run a compressor that cools the air -- no carbon dioxide, no fossil fuel, no refrigerant. GE would love to finance the likes of that, if not own it. It's just simple physics, a touch of railroad history, and follow-through. Get thee to a garage and start inventing something that will actually help people.

Ajay

June 28, 2009 01:12 AM

LAO, nah, I just read the excerpt above that had no mention of small business. If you think GE has any idea who the best small businesses are to make loans to, I've got a bridge to sell you. Haha, so I write a comment saying that outsourcing/globalization is an unstoppable wave and you irrationally throw the bellyaching term back at me, how childish. Meanwhile, all you backwards-looking people whine about is jobs and suggest "solutions" like tariffs, that have been discredited for almost a century now. Nobody cares about air-conditioning; the next revolution is the information revolution, all the opportunity is online. That information revolution will then drive great efficiencies in energy and every other market, but IT will be the catalyst for all that change.

Bill

June 28, 2009 03:14 AM

Nowhere in the story or in the comments are thoughts relative to the depreciation of the dollar. What's going to happen when it's cheaper to make shoes and toys in the US versus China or India because no one will take the US Dollar. What's going to happen to global supply chains when unforeseen events stop the importation of anything from the Far East - Nukes in North Korea, Iran. Climate change, political unrest, war. What would happen if Wal-Mart (or anybody else) was told that it can only import 90% of what it wants due to currency controls. What about safeguarding intellectual property. How has Germany maintained and improved its manufacturing economy in the face of globalization? Without physical, tangible assets - all the information processing, etc is useless and worthless. What do we do as a society with the large proportion of people that never graduate college; yet can and do make and repair things. This article and its comments are just a start; much more needs to be discussed.

Bill

June 28, 2009 03:16 AM

Nowhere in the story or in the comments are thoughts relative to the depreciation of the dollar. What's going to happen when it's cheaper to make shoes and toys in the US versus China or India because no one will take the US Dollar. What's going to happen to global supply chains when unforeseen events stop the importation of anything from the Far East - Nukes in North Korea, Iran. Climate change, political unrest, war. What would happen if Wal-Mart (or anybody else) was told that it can only import 90% of what it wants due to currency controls. What about safeguarding intellectual property. How has Germany maintained and improved its manufacturing economy in the face of globalization? Without physical, tangible assets - all the information processing, etc is useless and worthless. What do we do as a society with the large proportion of people that never graduate college; yet can and do make and repair things. This article and its comments are just a start; much more needs to be discussed.

Mike Reardon

June 28, 2009 03:58 AM

This might help, Richard Posner on the Charlie Rose show said the Fed now had about $13 trillion out holding up some places in question within the markets. Loans, insurances, money out to foreign banks, its not all money lent but backstops for something or new extra debt held.

If your adding 20% to the industrial base then returning all of that Fed insurance in short order is not that needed. Like the TARP fund now out, that the Fed and Treasury are now seeing as revolving account, a more market driven Fed balanced fund from these $13 trillion, could give further investment a constant open reserve base.

Balanced has to be acceptable to the market, and also get me health care out of the investments while your keeping the Fed engaged in making work. Ok.

Capitalism is trade by mutual agreement of all concerned, so go sell 20% industrial growth to the markets. Its going to be another geodesic dome of financial manipulation, a bubble. Just see it makes sustainable work as it should and not end a newer GM.

And Paul‘s #5 above is in fact a tariff against Chinese currencies that may be included as part of a basket of future monetary reserve currencies. They are not going on the naughty chair any time soon, we will be put there first if any one will.

Rick

June 28, 2009 08:38 AM

Immelt states: "As a nation, we’ve been consuming more than we earn, saved too little and taken on far too much debt."
**************
My wife and I have scrimped and cut back a lot, and now we have about $200,000 in CDs. But over the past 6 years interest rates have been less inflation, so our savings has less purchasing power as each year goes by. To make maters worse, even though our interest earned represents negative "real" income, we are taxed on it. Also, the interest added to our joint income pushed us over the income level where Roth contributions are allowed and pushed us over the income level so that we did not get either of the two stimulus tax rebate checks. Meanwhile our indebted neighbors are having the principle on their mortgages written off. With our luck they'll means test social security and we won't qualify for either.

Lou Carney

June 28, 2009 10:17 AM

Right on Jeff.....you hit the nail right on the head. And the comments do too. The question is what are we going to do about it. This is the first time I have heard a businessman stand up and say what all of us out here know "where are the jobs?". Now its time to get this position moving in politics and in the written media. All I've heard from these guys for the last year is the fear of protectionism..........

Take a moment---this one is not new, but certainly worth a listen for the first time or the second time............

http://www.bornagainamerican.org/

jdrosos

June 28, 2009 11:08 AM

A bit predictable, and coming from a guy with a strong vested interest in manufacturing. I am getting very tired about hearing of all the wrong things Americans do as it relates to the economy. Despite our recent issues the American economy has been dominant for decades. Even today, other countries are hurting much more than we are, especially those that did focus on manufacturing and exports, like Germany and Japan.

Economies need to be fluid. Sometimes consumption goes up, while investment declines and vice-versa. In the last 25 years or so we rode a consumption boom that allowed us to consume much more than we produced, and we did it cheaply with discounted foreign funds.

Now that cycle may have ended, and sure enough our savings rate has skyrocketed and consumption is down. Exactly what you would expect from the most powerful and flexible large-country economy in the world.

Don't worry about the relatively free-market U.S. economy. Worry about all the political meddling guys like Immelt want to shield their companies from competition. That's the more frightening issue.

cm

June 28, 2009 01:33 PM

Holly: Not only are there diminishing returns effects, but also a certain complacency that has led to underinvestment in social capital.

The last time I have heard of a similar grand speech by a CEO was Intel's CEO calling for more investment in science and education (to make the US workforce more "competitive"). But the subtext is always "not with my tax money".

Lord

June 28, 2009 04:59 PM

Leave it to a businessman to notice after they have lost many of their customers. Unstoppable? It is already reversing with the decline in trade. Decline in the dollar will slow it more and more.

It wouldn't be that difficult to apply a VAT tax only to goods that are primarily or substantially imported, just exempt food, shelter, physical services. With the decline in trade it might not raise that much though.

Lou

June 28, 2009 05:33 PM

HISTORY LESSON: HOW WAS IT THAT ANCIENT ROME WITH A POPULATION NEAR THE SIZE OF PRESENT DAY NYC OR CHICAGO WAS ABLE TO FALL TO INFERIOR ARMED, TRAINED AND NUMBERED INVADERS?

THEY DESTROYED THE AQUADUCTS THAT FED WATER TO THE POPULATION AND TO INDUSTRY AND TO AGRICULTURE.

HOW EASY WOULD IT BE TO CONQUER THE UNITED STATES IF THE US GLOBAL SUPPLY CHAINS WERE CUT...NO MORE ACCESS TO MIDDLE EASTERN OIL, CONSUMER GOODS FROM CHINA, HITECH GOODS FROM JAPAN AND SOUTH KOREA.

WHAT WOULD HAPPEN IF THE ONLY GOODS AVAILABLE CAME FROM THE AMERICAS?

THE MILITARY WOULD BE STRANDED OVERSEAS LIKE MccARTHER IN THE PHILIPINES.

JAPAN AND SOUTH KOREA WOULD BE DEFENSELESS

TRANSPORTATION IN THE US WOULD BE LIMITED TO RAIL AND MASS TRANSIT.

CONSUMER GOODS WOULD BE NON-EXISTENT, THOUGH THE AMERICAS PRODUCE ENOUGH FOOD TO PREVENT STARVATION.

NOW...IMAGINE THIS...WAR COULD CUT OFF THOSE GLOBAL SUPPLY CHAINS, SO COULD A CRASH IN THE DOLLAR, LOSS OF THE US DOLLAR AS A RESERVE CURRENCY, ETC.

juliansmith

June 28, 2009 08:52 PM

no "wave" is unstoppable. In particular, in the global economy, things can change in an extremely short amount of time (look at how large these outsourcing firms have grown just in the past 9 yrs).

There is always a breaking point, and some would say, we're there right now. I knew it in the 3rd year when i saw the H1B's driving used cars with rust and dents. They can sock away the money, but they for sure don't spend a penny if they don't have too, thereby negating their usefulness to the US Economy.

GLL

June 28, 2009 10:11 PM

Global trade is a joke. The work will always move to the cheapest labor force that can be easily exploited by the multinational corps. Only when Congo is cranking out Intel chips will they run out of the lowest common denominator labor force to exploit. The US lost the trade war, we have forfeited the future for short term gains. We are quickly becoming a beggar nation and only have the illusion of wealth thanks to our insatiable appetite for debt. The idiot financial wizkids that have trashed our economy are just now beginning to grasp the obvious. Nothing is permanent and if we are getting screwed by globalism there is no need for our country to continue this experiment. Of course we would have to replace both of our political parties for any real change as the current crop of politicians could care less about protecting their country from economic destruction.

Brad

June 28, 2009 10:39 PM

To quote a great philosopher of our times "Doh!"

Anish

June 29, 2009 12:39 AM

Immelt is stating what we hear in the news everyday. What's different?
How did Mandel make a forecast of offshoring going away from this speech?If you look at really understanding capitalism, you will know the major defining feature of a capitalist economy is the use of wage-labor and the existence of labor markets (and to make profit!). So his forcast just defies logic?

raj

June 29, 2009 12:58 AM

Cheap sensationalization by blog author - What's the connection between offshoring and Immelts speech? Just poor brains.

dorobou

June 29, 2009 01:11 AM

Yes, we're all going down in flame. And instead of people in the developing world working in factories to produce things for us to consume, we'll be working in sweatshops to satisfy their hunger now.

The US will fall. It just a matter of how and when. Whatever the path, The US will not have the same standing as it had yesterday...But that's only fair, I guess.

Tommy Paine

June 29, 2009 06:00 AM

Enough already of the dittohead BS about the "inevitability" of outsourcing blah blah blah. This ain't the laws of Physics, this is pure Politics- specifically political corruption, in which the national decision-making apparatus has become rotten to the core.

The wholesale destruction of the US technological-industrial base was a conscious decision of the selfish, greedy overprivileged executive classes, and GE is among the worst offenders. The House that Edison Built is being torn down and shipped off to our enemies in China. That's right-America's Enemies: militarily, economically and politically.

Don't let their weasel words fool you, these greedheads are Free Traitors, who belong in the Enhanced Interrogation cellblock at Guantanamo for their vast and continuing crimes against their own country.

kuei

June 29, 2009 07:58 AM

DUH!
People are finally realizing this? How stupid are americans anyway? They buy their china junk from wal mart, drive their foreign cars, and have the audacity to cry about not having any jobs. This was a no brainer. If you do not support your fellow american worker, your fellow american worker can not support you. Very easy economics, at least I thought so. Do you really need GE's CEO to shed light on the obvious?
Pretty soon China, Russia, Brazil and many others are going to try to completely cut us out of world trade. And we gave them all the toold to do it. We gave them our blueprints, trained their people and purchased their garbage just to try and save a buck. America will not be able to sell anything anywhere. Got any idea why China is talking about blocking the Hummer deal? Think about it. They do not want American companies like GM to survive. What ya gonna do america? Probably nothing.

Holly Garfield

June 29, 2009 08:07 AM

CM, I thnk you are right about complacency. In sports it is often easier to become number one than stay number one. That's because when you are on top every one is gunning for you, putting in that extra effort. The heart of the US space program is gone. No moon, no Mars, no shuttle replacement. We got to the top and then quit. One estimate put a man on Mars project at $55 billion. Less than the AIG bailout. And the space program did huge amounts of research that paid off here on earth. The programs may still be alive, but with no sense of urgency any more. There are other indications of complacency as well such as no CERN class supercollider or fusion research. We are weak on solar thermal projects, haven't built a noted hydro dam for how long, geothermal is limping along, high speed and maglev rail are barely breathing. We need the competition to push us again. And then we will have to overcome the inertia in that complacency.

Anne Stallworth

June 29, 2009 09:09 AM

It's about time but it still doesn't solve the issue of what's happen to manufacture workers that lost their goods because they were outsourced!

Some of us still haven't been able to replace the income that we had when we worked. I worked at Sony for 10 years. I am making now less the half of what I made at Sony. I did go back to school but I still havent found the job to replace the job that got outsourced.

Gary

June 29, 2009 09:56 AM

It seems the same people who killed American manufacturing now want to ressurrect it. There were profits to be made by outsourcing our manufacturing jobs, that's why it was done. The sad part is that Congress just stood by and watched it all happen. There is an old saying - 'you reap what you sow'. The American worker was betrayed by greed. Its going to be very difficult for Americans to readjust to a lower standard of living, especially since it could have been prevented if our business leaders would have been just a little more patriotic. The unrelenting drive to maximize profits destroyed the American Dream. Its no wonder Obama got elected on the message of hope and change. We're going to need both in the struggle to rebuild America into what it used to be.

dan

June 29, 2009 10:59 AM

Good discussion on outsourcing American manufacturing jobs. U.S. business owners, executives and skilled workers have lost our competitive edge, not just low cost but also in technology. Taxing U.S. industry per "Cap & Trade" legislation is another example of driving more outsourcing along with U.S. manufacturing jobs. Our American manufacturing sector needs to be revitalized and supported (not thwarted) by regulations.

Brad

June 29, 2009 11:33 AM

Does this fit Ricardo's comparative advantage theory? Or does Immelt want America to directly compete in areas where the U.S isn't competitive? Is he envisioning 21st century American industries that look like 20th century American industries because that's how GE is configured? Does he see American workers lacking the talent to thrive in this century's knowledge-based economy in and condemn us to decline instead?

Maybe his, and GE's, interest lies not with the best interest of the country, but only with the efficiencies and saved wages GE can gain. Is he trying to reinvigorate American manufacturing, or is he just trying to wean GE from the heavy reliance on its riskier-than-assumed gigantic Financial services unit? Healthymagination indeed!

CompEng

June 29, 2009 01:09 PM


I think one of the things people often miss about comparative advantage is both the stickiness and risk associated with it. In order to become competitive in anything, you need to determine if enough raw ingredients are there to make competitiveness possible, and if so, then make sufficient investment to make that competitiveness a reality. There is a lot of risk involved, and it tends to involve a modest return over a relatively long period of time. Capital investors see a better short-term return selling capability to foreign investors who are wiling to make the long term play.

In fact, America's current of culture of short-term thinking is a huge impediment to maintaining current competitive advantages and an even bigger impediment to generating new ones.

Chuck Gaffney

June 29, 2009 01:55 PM

I completely agree that companies will eventually see the mistake in outsourcing. As a former computer scientist, I've seen many of my colleagues watch their hard work in college (and wasted money) be thrown out the window when their "career's" IT department got moved to India. Even my Uncle, a once respected teacher and programmer has no job and is contemplating on taking a job at Walmart. I luckily deterred from that path before I put my life into financial ruins by quitting my expensive college life & running my own web-based company.

Talent is needed in any industry and great talent is found world wide. As mine grows, I will undoubtedly need that talent; but I will make sure my first employees and IT department will be located here, in the US. The talent that, say is in India, should work for the Indian branch of that particular company and not take jobs from here in the US or elsewhere. In other words, globalization should be allowed to continue but for global or future global companies, keep the work for localized.

GM Daughter

June 29, 2009 02:14 PM

While it's too little, too late, Immelt should be commended for at least publicly admitting that "The Emperor has no clothes".

Brad

June 29, 2009 02:30 PM

According to the below link Microsoft is shifting R&D to India to be where the growth is. Knowledge work is never local, the power of ideas and innovation rapidly globalizes. To have, and maintain, a competitive advantage the local labor market has to be smarter, more creative, more innovative and far more productive. Will Bill Gates or Steve Ballmer be giving a speech similar to Immelt's one of these days?

http://blogs.harvardbusiness.org/radjou/2009/06/microsoft-reinvents-its-global.html

"the diversity of the complex Indian society and the scarcity of its multifaceted economy make India an ideal playground for piloting the R&D 2.0 model, a model that can help multinationals effectively serve emerging markets which are poised to power their future growth in decades to come."

Doug Terry@terryreport.com

June 29, 2009 02:38 PM

American business, over the last two or more decades, has concentrated in quick, growing profits over sustained, rational growth. Anything that makes a manager look good over the next few quarters was thought to be a wonderful thing. Look at banks: what happens when they reach the end of the line on adding and adding fees? What happens when a person finally realizes that it is costing them over a thousand dollars a year to keep a checking account? A bad deal is just that and sooner or later, people catch on.

Off shoring production and jobs is a symptom of the same short term thinking. What happens when all the jobs are gone? Who buys the stuff your company makes? If no one has any responsibility for the general welfare of the country, no one need worry. Who cares? I'll be retired by then.

Prosperity breeds prosperity, but only when that prosperity is shared. When the upper 10% take 90% of the pay increases, buying power for ordinary goods goes down, while the market for yachts and jets goes up, temporarily. Long term prosperity depends on wealth of the entire population, even if a few people are denied the chance to ride in a new G-4.

As for the quoted "Wal-Mart" effect, what did generations of lower wage Americans do before they came along? They made do with fewer, better quality goods and saved up for big purchases. With cheap, low quality, but abundant goods, they get to buy things that are not likely to last more than a season or two. Value includes quality as a key part of the equation, not just price. Buying, and paying for, junk goods five times instead of once or twice is not a bargain, it is a rip-off. Again, what happens as people discover they've made a bad bargain? Wal-Mart could wind up as thousands of empty spaces in shopping areas across America.

You can't treat your home country, the US, as though it is just another marketing opportunity on an ever growing world scale. Even dogs, with very limited cognitive abilities, are careful not to foul the area where they live. The corporations that succeed long term will be those that recognize the innate human need for aesthetic beauty and lasting value in what people use. Right now, most business want to sell us cheap junk or expensive luxury goods, products where the margin of profit is the highest. Don't discount that people are, and will continue, to catch on to what is being offered, and done to them, and become ready to show their power.

It happened last year with gasoline prices: without any broad movement being started, with no celebs pleading on television and no exhortations from politicians, Americans reduced their use of gasoline by billions of miles per month. Gas price went way down, dramatically. Right now, the giant is sleeping. If American business insists on continuing on the same path, the giant will one day awaken.

GM

June 29, 2009 03:36 PM

I'm not necessarily disputing Mr. Immelt's sincerity, but I'm a skeptic by nature. Keep in mind two of GE's biggest product development projects that they have invested in - so called "Clean Energy" such as wind turbine and IGCC systems AND health care records management systems. The biggest competitors to GE in these fields are offshore companies Legislation (such as Waxman-Markey and health care reform) bolster GE's market while "buy American" supresses his competition. Why do you think that GE was such a huge contributor to Obamas' campaign which was more likely to pass this legislation and NBC/MSNBC (a GE subsidiary) such a mouthpiece for Obama and these two legislative initiatives?

While I'm all for Amercian jobs as I am an American in the workforce and I am not trying to debate the virtues of so-called "Climate-Security" or nationalized health care, I am giving some advice....Don't listen to words, follow the $$$$. Mr. Immelt is not giving some hear-felt apology about offshoring, he is merely positioning GE's strategy to make a couple more billion.

Dog Guru

June 29, 2009 04:58 PM

@Doug Terry@Terryreport.Com

"Even dogs, with very limited cognitive abilities, are careful not to foul the area where they live."

Not really; puppy mill dogs living in cages crap in the cage and get what is called "Dirty Dog Syndrome". That is the overcoming of the instinct to take care of their home area. It's very difficult to re-establish that instinct once lost. Our leadership class has clearly lost that instinct.

Zillion Dollar CEO's and both parties of congress and every president since Reagan have been crapping in the cages nonstop. Now that a few have had to step in a little of it, they're all boo hoo hoo.

I'll believe any of their big weeping when I see it.

Meanwhile, I'll continue to believe that the aforementioned's main goal, perhaps their only goal, is the extinction of the American Middle Class and the enslavement of what's left to their global buddies.

Perhaps a little r e v o l u t i o n is in order? If we could just get Bubba off his ESPN-watching butt and out in the street with his guns, then we might just get "Change We Can Believe In"!

Regular Americans, not our primped and pampered leader class, have very little to lose, anyway.

ArrKay

June 29, 2009 06:44 PM

Rick, your comments strike home more than anyone else's yet, I think. The fact that saving simply isn't working anymore is rather terrifying. Of course, the fact that our 401ks are in the dumps isn't any comfort, either. I share your feelings: those of us who acted responsibly, took on debt we could afford, saved, or otherwise kept our heads above water are now worse off for it.

sam

June 29, 2009 07:56 PM

Just today a guy asked me if his son should go into IT. I told him no. It used to be a good career but now it's not. So if industry starts to on-shore again they will encounter a real shortage of labor that will persist for years. Meanwhile, most of us won't be buying much because we can't afford to. Congratulations, all you smart guys.

Tommy Paine

June 29, 2009 08:56 PM

In the days of GE founder Edison, his contemporary Henry Ford pointed out that he paid higher wages because he wanted American workers to be able buy their own products. This was the foundation of the 'consumer economy'.

The corporate strip-mining that has occurred over the past 30 years has gutted American industries founded by the Fords and Edisons, which made the USA the world's most prosperous nation.

Nowadays, modern-day Robber Barons have looted the economy by cheating American workers out of the rewards of their higher productivity (see stats on wage stagnation vs. productivity gains). Like Bernie Madoff, they have conned the public and paid off the politicians to look the other way. These scammers traded our solid and profitable industries for a mountain of worthless paper.

Examples, you ask? Start with General Motors, until 2008 the world's largest auto manufacturer, and for much of the 20th century the world's largest corporation. Wall Street, via the likes of Goldman Sachs and their former execs in the revolving doors of the US government, have taken the opportunity to gut yet another American industrial icon.

Of course, this entails 'cost cutting' through decimating industrial jobs and cheating retirees out of their pensions.

Meanwhile, their media PR propagandists spread lies about 'overpaid workers', while conveniently omitting the facts; e.g.,
Labor costs account for only about 10% of the cost of an American car.

How much do these 'overpaid' workers actually make? New hires-about $14/hr; workers with the most seniority top out around $28/hr. Read the UAW contract if you doubt this, it's online. Decent not lucrative wages; but nobody is getting rich at these companies except the grotesquely overpaid executives, who make millions no matter what happens in the economy.

Mads

June 29, 2009 09:53 PM

Remember Madoff said sorry to the people he ripped off. So saying sorry for screwing america up isnt something I would take as a response. Ask this retard to bring the jobs back? Will he!!! Abosolutely not. But GE will go and modify the bill in the house to qualify as a bank so that they can get easy money from the fed. What a crime and what a criminal? Now he comes out saying they made a mistake. Why not put Immelt in jail for 150years. His ponzi scheme is bigger than Madoff's.
Half my friends are laid off and havent found a job in months. By the way GE is still hiring in India and this jackass comes and makes a comment as if he cares. The irony is unbelievable.
What an asshat.

LAO

June 29, 2009 11:46 PM

I don't know if I can articulate this clearly and concisely, but I am going to try. We need government policy, whatever it is, that reflects humility. We run our lives and careers, if we are to be successful in the face of the unexpected, by planning and humbly monitoring to discover if our plan is any good, learning all we can, understanding risk and hedging and making fallback plans. That is how we ought to run our nation. Human beings are not smart enough to act otherwise.

Trickle down economics. The service economy. A rising tide raises all boats. Deficits don’t matter. Price/earnings ratios don’t matter. No need to regulate transactions between sophisticated players. Spend – it’s patriotic. If any of these ever delivered on the implied promise, they are not delivering now. Why did we not demand the tools of management and accountability? Why are so many people still holding onto these things or trying to rewrite the story in the face of so much evidence to the contrary? This is not about rooting for your favorite football team – it’s about our lives and the lives of the next generations. I’m not against being part of an economic experiment, but I insist on being in on it and I don’t want to argue with anybody when it’s obviously not working.

There is nothing sacred about domestic manufacturing or energy, or energy efficiency, if you don’t care whether the nation can survive having no expertise in making things, no domestic components for the military, no way to recover from extortion through twists of the currency markets or international relationships, no defense if the climate flips. A leader from any sector could just as easily have stood up and said that we need to reinvigorate the American workforce if we value the American marketplace. In the end, of course, GE can’t do it alone, if Immelt is even sincere; we all have to do it. I believe that if we don't do it, whether via manufacturing insourcing, or some other way, then the world economy will stagger for decades, except perhaps China.

Can somebody explain to me what’s holding us back? Consider Rick’s comments above. I sympathize, but he’s got talent and money, and no thought whatsoever of turning a good idea into a business. Why?

Marty Glover

June 30, 2009 09:26 AM

While much of this is bvious to the most casual businessman in the US, the key is the change needed in the capital markets. We have a unique opportunity at this time to refocus success for public companies on more realistic long term growth metrices over a 90 day profit cycle in whcih they get punished heavily for any short term hit from supporting the exact things this post talks about.
The competition (Europe,Asian markets) tend to measure success over longer periods that allow real business management. That frantic cycle of quarterly earnings meeting targets etc. drives most of the bad behavior such as massive offshoring, short term gain, long term deterioration, the opposite of the strategiesfor the "global" competition.
This is once again driven by the lack of understanding that BRIC and others see this as a nationalistic competition to win or lose and we are staking them to a chance to catch up that they will use if they can for their country to win, not the global economy.

Harley

June 30, 2009 10:14 AM

We elect lawyers and appoint financial types, not manufacturers. Manufacturing is not on our government's radar screen, and it isn't on the Business Schools' radar screen.
Anybody who has been alive for a while saw this coming decades ago when we sacrificed one industry after another in an attempt to placate foreign countries so that they wouldn't lean towards communism.
The rewards from manufacturing are slow. The quick bucks on Wall St. focused the Business Schools to contrive new investment stragtegies that chase around a moving stock price and call it real work.

Harley

June 30, 2009 10:43 AM

The business schools taught quick bucks from finance are better than slow bucks from manufacturing, and helped devise ways to straddle, strangle, collaterialze, tranch, CDO, and derivative anything real until it choked the real and substituted the real with smoke and mirrors.
And our government aided and abetted and took all the tax money that the short sighted brain trusts scammed out of the citizens, and squandered it.

LAO

June 30, 2009 12:34 PM

Though I wouldn't know how to prove it, so many people believe that American madness for short term performance is at the heart of so many ills that it seems some innovative financial type would see a market opportunity for a new, "long term" class of stock. I would buy.

K Grable

June 30, 2009 03:42 PM

LAO,

I think that your first paragraph above is the most essential or fundamental part of the learning process. Unbiased, honest, and humble reflection on things gone right and things gone wrong are the key to learning.

As a nation and as a global community we need to reflect on the past ten years and try to sort out not only what went wrong but also what went right. If you want to find the better solution then all stakeholders need to be unbiased. Perhaps a better solution lies outside the normal range of thinking.

Immelt may be right that a good target for domestic manufacturing is 20%. It is possible that the dollar will fall to a level that increases exports and provides a business case for more domestic and green supply of energy as foreign oil gets too expensive. Perhaps the current savings-rate trend will continue and investment, not consumption, will be the growth driver. These factors would likely push domestic manufacturing back up.

However, we should not try to shift too far back the other direction. Even though manufacturing has the benefit of tangible output the real value lies in the intangible. The well paying jobs in any sector are intangible. I work in manufacturing. The folks that work on the shop floor who are actually making parts are our lowest educated and our lowest paid. Our engineers and managers are the most educated and the highest paid but they only work with information - they (I) don't manufacture anything. The intangible process of organizing elemental things into systems and then systems into higher-level systems is how wealth is created. Investment into R&D and technology and better business models will create wealth.

Regarding your question, “what’s holding us back?” Until now the business case held us back. It doesn’t make sense to save money if interest rates are lower than inflation. As long as foreign oil is significantly cheaper than green energy it doesn’t make sense to develop it. As long as reasonably good quality goods and services are cheaper from China and India then buy from them.

This was the thinking in the past and I don’t think it was all wrong – it certainly lifted hundreds of millions of humanity out of poverty. But now the environment has changed. Interest rates will likely increase as developed economies borrow more leading to more savings as it will make more sense to save. Energy prices will increase providing the business case to develop green alternatives. The costs of capital and logistics will increase as interest rates and energy increase thus diminishing the benefits of lower labor costs in India and China. The future looks great as long as we reflect and learn and adjust.

Ajay

June 30, 2009 07:41 PM

Grable, thanks for making the observation that information work is where all the value is now, something commenters in this thread need to have pounded into their heads despite many of them making a living at information work. As I've pointed out elsewhere on this blog, US manufacturing output has actually grown a lot (updated link - http://mjperry.blogspot.com/2009/04/manufacturing-more-output-with-fewer.html), what has changed is how many workers we need to do it. So all you whiners are wrong about manufacturing disappearing, what you're really whining about is that we need less people to do the same work, which normally is looked at as progress. The real issue is that our education and retraining systems are so worthless that these workers must often cast about for new work for a long time before finding anything worthwhile, but then you same morons will not let us improve education by even letting people choose where they want their education dollars spent, with school vouchers. The real problems come with the data-void, outdated mentalities of the commenters here, not with the great uptick in manufacturing productivity that we've seen.

Doug

June 30, 2009 10:25 PM

Tom Friedman, please write an article with your current thoughts on this important matter.

Doug

June 30, 2009 10:33 PM

What is Jack Welch's response to this speech?

Doug

June 30, 2009 10:38 PM

Why don't we set up a consortium of our top engineering universities and offer a top-flight graduate program in manufacturing engineering with extensive facilities and manufacturing equipment so that it can be a manufacturing r&d center too?

I would like to see it set up in California where we have top-flight engineering universities -- Cal Tech, Stanford, Berkeley, UCLA, Harvey Mudd, UCSD, USC, etc. But at the moment our politicians have crippled the state.

cm

July 1, 2009 12:40 AM

Doug: What is the purpose of the grand master plan? R&D for what? Most R&D is only useful in the context of an application. Otherwise it's called "developing IP" (to be licensed to somebody else who will build it).

The problem is not the lack of competency, it's the lack of an industry (and eventually paying market demand?) that would make it worthwhile to pursue that research and education at larger scale.

In our YOYO society, people are well advised to pursue educations that dovetail into credible job prospects. There are more than enough competent sci/eng graduates underemployed in jobs that don't utilize their skills, to the point that they eventually atrophy.

For a time, the rational thing to pursue has been middleman careers. Now that the debt bubble has (probably) crashed, even that is in question.

cm

July 1, 2009 12:42 AM

Doug: "What is Jack Welch's response to this speech?"

Not to put words in his mouth, but something along the lines of "F U, I'm retired" (with contractually guaranteed perks).

CompEng

July 1, 2009 10:33 AM

Ajay,

I think everyone realizes that the greatest value-per-capita is in information work, but that's because information work is so "productive": it doesn't take a lot of people to do the work. But that doesn't mean all the value is in information work.

For example, Intel is a manufacturing company. I believe over half its employees work in the manufacturing end of things: fabrication or test. Many of the rest work in finance, sales, marketing, IT, or otherwise managing the shop (they're "information work", but wholly tied to the manufacturing!). And then there are a few thousand jobs in honest-to-goodness R&D. And one Intel's main competitive advantages is its manufacturing-centered approach: throwing a lot of people relative to its competitors to tuning its designs to its specific manufacturing process.

If you think the moral of this story is that manufacturing is not important, then you've got the story wrong, my friend. It tends to be the center of a lot of value creation, even a lot of the manufacturing itself is low-margin.

Mark Perry is correct that more efficient manufacturing is producing fewer jobs than it used to for the value creation that is done, and it's true that manufacturing value creation in America is going up, it's going up less than in other areas and less than our competitors. If you talk to people in manufacturing (chemical, semiconductor, steel, machining, you name it), you'll get a story that most manufacturing is in the cash cow stage: milking the value of previous investments and basically only making small incremental investments. There's nothing about manufacturing that says we shouldn't invest in it in the US except that foreign governments subsidize investments in manufacturing because they know it creates jobs. It's true that when somebody next door consistently overbids for something, that's the time to sell, but that time won't last forever.

Ajay

July 1, 2009 06:08 PM

CompEng, clearly not ALL the value is in information work, manufacturing output is still around 20% of GDP. Even most of Intel's employees who work in fabrication or test are really information workers, in that they're constantly figuring out new ways to instrument and improve the process, not simply keeping the machines running. As for the rest who're not directly tied to manufacturing, there's no reason why they couldn't work for a fabless IC design company, like so many in Silicon Valley now do. As I've noted previously, even Intel has started spinning off fab work to Chinese fabs, like every other IC company on the planet. It is nice that Intel has such a manufacturing-driven approach that drives innovation, but such an approach is not exclusive to having your own fabs. Also, there are a few exceptions in manufacturing who still produce high margins and desktop CPUs are one of them, one of the few products worth more than its weight in gold. Yes, I think the moral of the story is that manufacturing is not important enough to keep in the US, which is essentially what's happening.

That linked graph that shows ever-increasing manufacturing worker productivity is probably more driven by the low-productivity manufacturing jobs being sent offshore. Thus, these companies are doing something greatly beneficial just by responding to market forces, that you clueless bunch cannot comprehend and fight against, letting other countries take the low-productivity work that doesn't justify higher-paid workers while keeping the high productivity stuff here. It makes perfect sense for current manufacturers to milk the cash cow, as it's likely that's what's left will soon be shipped overseas also. If you look at that jobs graph, the 3 million manufacturing jobs lost in '02 never came back and we're almost 2 million down this time around. Manufacturing is heading out the door and good riddance, with the few high-margin exceptions of course like Intel or Applied Materials. ;) Foreign subsidies to manufacturing are probably a drop in the bucket compared to the cheap cost of foreign labor. Yes, it's the time to sell and manufacturing isn't coming back, just as McCain truthfully said in Michigan last year and paid the price.

cm

July 1, 2009 10:06 PM

Ajay: The cheap cost of foreign labor (significantly - though not exclusively - a "managed" exchange rate effect) and supplying a large educated workforce *are* substantial subsidies. Part of Western outsourcers' reciprocation is in providing experience to the workforce by supplying the industries and jobs (and "free" training by Western staff) with which to build the experience.

Ajay

July 1, 2009 11:33 PM

Cm, if foreigners want to "manage" their exchange rate to get paid much less, I for one am hoping for much more management. :) As for the educated workforce, the US is providing a much larger "subsidy" to its people, so if anything that "advantage" washes out in favor of the US. Even counting currency manipulation and education alone and ignoring US subsidized education, I suspect that the money put into those two is swamped by the cheap labor costs, as the PPP-adjusted GDP for those countries is still nowhere near the US. There is no Western "reciprocation," US companies and their shareholders here enjoy fat repatriated profits from these offshored projects, another example where the invisible hand of the market knows far better than the isolated dimwits opining against the market here.

SC Steve, I wish I was involved with some kind of outsourcing, never got near it though. If you have nothing to add, shut the fuck up and listen to the grownups talk; I'm the only one bringing data to this discussion, other than Mike occasionally. ;)

cm

July 2, 2009 10:23 AM

Ajay: Where are the data about which you are waxing?

On the topic of "reciprocation", if you think that workforce training and technology transfer are not part and parcel of the industrial policy of "low cost geographies" you are either misinformed or in denial. The Western staffers who are sent abroad to train and hand-hold the replacements will hold a view different from yours.

You are correctly observing that outsourcers' management and shareholders have enjoyed large profits for a time, as well as "consumers" having seemingly profited from low prices. The principal gain for low cost geographies was that the West was effectively building their industries, at the long-term expense of its own labor. The bill is coming due about now in the shape of ever more precarious living conditions in the West.

There are always the few top percent of those who will turn out to be largely unaffected by the mess, or who will even profit. But many seem to think they are part of this, and will find a rude awakening from their smugness. It's similar to the phenomenon that some 70% (?) of people think they are above average in their respective reference groups.

Aside from that, looks like Steve's comment was censored, so you are now our king of swear words.

CompEng

July 2, 2009 05:05 PM

Ajay,
I agree with much of what you've said, but, just to take a few points:


1. "As I've noted previously, even Intel has started spinning off fab work to Chinese fabs, like every other IC company on the planet"
TSMC and its brethren have a great story, but Intel and GlobalFoundries have much better manufacturing processes except in a few areas related to low power SOCs: watch for that to change. What Intel doesn't have are 1st-class tools for design modularization, especially with 3rd party IP. That's the only thing Intel outsources fabbing for. It's a niche market now for Intel, but definitely something to watch.

2. "As for the rest who're not directly tied to manufacturing, there's no reason why they couldn't work for a fabless IC design company, like so many in Silicon Valley now do"
Hopefully that's true of individuals, but there are huge classes of design where instruction set compatibility or other kinds of IP ownership drive who can reasonably do what. Right now in netbooks, for example, it's Qualcomm (And anybody with a 3G license) with linux vs. x86, and anybody else can get out of the way. An individual can work for anybody, but on the scale of companies, IP shapes the markets.

3. "That linked graph that shows ever-increasing manufacturing worker productivity is probably more driven by the low-productivity manufacturing jobs being sent offshore. Thus, these companies are doing something greatly beneficial just by responding to market forces"
I agree that if you assume full employment, this is an unmitigated good. In reality, this is perhaps a mitigated good.

4. "Foreign subsidies to manufacturing are probably a drop in the bucket compared to the cheap cost of foreign labor"
A common misconception. That was true of the initial set of manufacturing that went overseas or to Mexico. That is not true of the manufacturing I'm mostly concerned with.
In some of the cases I'm talking about, labor cost is a single digit factor in overall costs, well within the range that can be compensated for by other means. Energy cost, land cost, water cost, supply chain costs, pollution mitigation costs, other regulatory costs, cost of capital, and taxes are much bigger factors. Energy cost and water costs are generally US competitive advantages, but all of the others are typically not, and in many cases because they are subsidized directly or indirectly. I think you can make a pretty strong case for evening the odds at least on taxation, pollution costs, and regulatory costs. And for the rest, maybe we shouldn't do anything about them directly, but accepting the "inevitability" that manufacturing ought to go overseas because the market has led us that way is about as smart as believing Wall Street will always do the right thing. Market actors are human and indulge in a lot of herd thinking.

Doug

July 2, 2009 05:27 PM

I wish that Wal-Mart would adopt a policy giving preference to U.S. manufactured goods.

Doug

July 2, 2009 05:30 PM

What happens when the price of oil skyrockets again, as it will, and the price of transporting goods from China to the U.S. increases?

Doug

July 2, 2009 07:11 PM

Time to buy GE stock.

Ajay

July 2, 2009 08:30 PM

Cm, check out the link in my third comment above for the graphs referenced in subsequent comments, I'm going to assume you just didn't see that link. So you're claiming that the industrial policy of the low-cost countries forces Western staffers to train their replacements? If so, how does that qualify as Western reciprocation? I think you're confused. I will agree that the West hasn't prepared for how to retrain people after shipping manufacturing jobs offshore, but that's mostly because adult education is a joke here. However, the coming tech boom will float all boats and destroy the existing education system while completely remaking online learning, so this won't last long. If you think living conditions are "precarious" in the West, I'd like to introduce you to the lifestyle of the lucky foreigners who got those jobs, it's usually worse. The reason we all think we benefit from offshoring is because we see the lower prices everyday, not because we're overestimating our own skills (how is skill self-estimation even relevant here?). I'm glad to take the title from Steve. :)

CompEng, Qualcomm does alright but there's plenty of competition and 3G licenses are irrelevant, as the carriers don't force any hardware standards on the hardware companies. It's true that ARM and x86 are the dominant hardware standards but that hasn't stopped plenty of competition from flourishing (http://en.wikipedia.org/wiki/Snapdragon_(processor)#See_also), I hear even MIPS is getting into mobile. :) Funny that you would choose to make such an argument for mobile, since IP certainly hasn't stopped all comers from entering that market, particularly considering how ARM licenses their IP to all these fabless companies. I don't care much for your idiotic academic terminology of unmitigated vs mitigated goods: it's better for us consumers that the prices drop. If there are some workers who then lose their jobs and need to retrain, so be it, that's how life and capitalism work.

For you to assume labor costs are negligible for manufacturing overall just because they are low for your particular field is just silly. The point is that savings from unsubsidized costs like labor, land, or energy far outweigh regulatory costs or govt subsidies. Even if govt costs are non-negligible, that's competition for you, perhaps California shouldn't be taxing the shit out of businesses and losing them all. Agreed that a market can herd but this offshoring market consists of companies doing stuff, which is different from the speculators on Wall Street. The market's not always right but it's right far more often than you or I, as it agglomerates the bets of millions of interested parties.

Doug, if Wal-Mart did that, they'd go out of business as their whole brand is cheap goods and those come from abroad for the aforementioned reasons. I suspect that oil is a minor cost compared to the savings from manufacturing in China.

cm

July 2, 2009 10:07 PM

Ajay, I didn't claim anybody in LCG's forces training by Western staff, Western outsourcers are seeing to that.

Mike Reardon

July 3, 2009 04:05 AM

If you want to start the US industrial base, you first need force oil company investment in in enough new regional oil refineries to give the nation the extra refinery capacity to force price competition at the gas pump.

Forget nuclear generators go for what forces gas prices lower now.

If you want to add Ethanol then separate the domestic corn production from any effect on international the market. Have it only be domestically grown corn production that can go into the production of US Ethanol. Fell free to subsidize this as a direct tool to cut our foreign oil imports. Oil investors will feel the pain of this price competition, but it will relive the real tax that high gas prices are on the economy.

J. G. Hospel

July 3, 2009 06:58 AM

Making money the easy way is not the best way. Its easy to be copied and be out done. Our business thinking has to be long term and keeping in mind that we are all (the world) in this together. Competition is the best way to do a better job with PRODUCING the best quality and the lowest price that consumers can afford. It is the old fashion way: YOU HAVE TO EARN IT. It is fashionable again. Short term thinking can only lead to bursts that are not sustainable. The fast buck sundrom fizzels as we have seen in the last economic syndrom.

CompEng

July 3, 2009 12:46 PM

Ajay,

First, mobile is in the early stages. When the PC was new, everybody and their brother sold computers, monitors, etc. under a different brand. When mobile matures, it will consolidate. If 3G isn't important, then the folks planning their investments are awfully confused. I think Intel and Qualcomm are in the best position now, but it's true those things can change fast.

"For you to assume labor costs are negligible for manufacturing overall just because they are low for your particular field is just silly."
I don't and they aren't. But there's a sizeable chunk of manufacturing for which that is true. Would you believe high-end Nylon for carpets snags 30% margins and is not dominated by labor costs? Would you believe that Chinese offers to basically buy the land and build the factory are often decision makers in that field? Back in fabs, how much do you think it cost Intel to build a fab in Israel or the new 65nm fab in China? India wouldn't put up enough cash and that's why they *don't* have one. I agree California is an example of government gone nuts and generally not being competitive.

"I don't care much for your idiotic academic terminology of unmitigated vs mitigated goods: it's better for us consumers that the prices drop."
As consumers, that's true. As long as we're not cut out of the production market, we could care less from an economic standpoint. But artificially low prices screw up the production market and can inhibit production growth. Why is that hard to understand?

AgreeCompletely

July 3, 2009 01:48 PM

It's nice to see somebody finally wake up and realize that the idea of a consumer-driven economy is insanity. Of couse, Mr. Immelt will probably lose his membership in the Heritage Foundation or the Hoover Institute for such blasphemy.

cm

July 3, 2009 02:54 PM

Ajay: If my previous comment is too terse, I can elaborate. What "LCGs" do is arrange favorable conditions for "first world" businesses, and provide graduates of sci/eng and vocational programs in force. That's the "when you build it they will come" part.

The "first world" businesses will then open shop, and will do technology and know how transfer and workforce training in order to make it work, while denying training and opportunity of experience to their own aggregate domestic workforce.

What the LCG gets out of it is (1) employment opportunity for its young population, (2) industrial development, and (3) foreign competitors shooting themselves in the foot gutting their present and future domestic workforce and outmaneuvering themselves. Phase (3) has not yet completed and perhaps never will, but it's well on its way.

This looks like rational and prudent policy on the LCG's part. I'm not blaming them.

Ajay

July 4, 2009 01:58 AM

CompEng, mobile has been around forever and still hasn't "consolidated," extending the Intel precedent to every other market is silly. I said 3G isn't important to hardware IP, nice try changing the subject. I would say ARM is in the best position now, with nVidia's new ARM-based Tegra platform looking very promising. One of the bright spots in tech right now is mobile, with lots of interesting new offerings entering the market and the hardware finally ready to take off in the mainstream. I see no reason to award the pole positions to Intel and Qualcomm as you do. Ultimately, my point about govt subsidies is that on the whole they're far outweighed by intrinsic manufacturing costs that are lower in the developing world. Whining about those negligible foreign govt subsidies is just a distraction, nor can US govts claim the high ground on that score. Again, my point is that the "artificial" part of the low prices, presumably from govt subsidy, is negligible and only benefits us consumers. If foreign govts think they can end the subsidies someday and raise prices, new US entrants will easily prove them wrong. It is hard to understand you because your comments often consist of vague assertions like "screw up the production market and can inhibit production growth" that could mean anything.

Cm, you're not filling me in on anything new here. What is at issue is your use of the word "reciprocation." At first you seemed to claim that the Western companies were altruistically reciprocating LCG actions; then you claimed that it was LCG industrial policy for that tech transfer to happen, implying it was forced; now you finally say that the Western companies are just morons "shooting themselves in the foot." Make up your mind. My point is that it's none of the above: they're simply chasing profits, as their responsibility is not to their US workforce but to their shareholders and to their customers. If they can find a foreign workforce that can do a better job, the beauty of our capitalist system is that it incentivizes them to do so. If you think the disadvantages of offshoring outweigh the advantages, you're in a distinct minority, particularly with the economically literate.

CompEng

July 4, 2009 10:10 AM

Ajay,

"CompEng, mobile has been around forever and still hasn't "consolidated," extending the Intel precedent to every other market is silly"
Forever? 1983 (cell phones, in America) may seem like a long time ago, but it's really not. Besides, today's smartphones can barely handle any voice recognition at all. Apple shook the field up badly just by putting in a touch interface. That's a mature market? :)
This not a new or specific trend. Plates, plastics, refrigerators, you name it. There's always a flood of players until competition drives the margins down and kill the weaklings. How many car companies were there at the turn of the century until they settled on a specific type of combustion engine?


"would say ARM is in the best position now, with nVidia's new ARM-based Tegra platform looking very promising"
That's a defensible position. Key in the market is how important you think the low end of mobile is vs. the high end. I give Intel and Qualcomm attention because I'm more familiar with the high end towards netbook. But there I might be biased by personal preference or what I don't know.


"If foreign govts think they can end the subsidies someday and raise prices, new US entrants will easily prove them wrong."
Agreed, although I'd guess "quickly" here refers to a period of greater than 3 years, more than most people's economic attention span. But I agree monopoly prices aren't a big concern here. I think much of Asia's manufacturing focus is about jobs and security as much as money.

"Ultimately, my point about govt subsidies is that on the whole they're far outweighed by intrinsic manufacturing costs that are lower in the developing world"
I understand that assertion, and it makes sense for a good chunk of manufacturing. I just don't buy it for the whole of manufacturing. Japan and Geermany make a lot of interesting things in the high end of manufacturing, and US manufacturing, despite failing in many areas, still has some areas of strength. And I am aware of specific examples (not only in semiconductors) where it's incentives and not intrinsic advantages that are causing a plant to get shut down in one place and built somewhere else. But it's the sense of inevitability that is truly deadening innovation in manufacturing in America.


"Whining about those negligible foreign govt subsidies is just a distraction, nor can US govts claim the high ground on that score."
I don't think they're negligible. I suppose it could be a "distraction", but I don't think so. I think there's something real and interesting in trying to figure out the appropriate means of responding to protectionism. We know some responses don't work, but I don't think we've proven none do. You're welcome to disagree, of course.

"It is hard to understand you because your comments often consist of vague assertions like "screw up the production market and can inhibit production growth" that could mean anything."
That's a valid criticism, I suppose. Basically I think that if you've got deep pockets and are willing to take a ten-year return on investment instead of a 5 year return, or a 20 year return instead of a 10 year return, as long as you get another side benefit, like say jobs, that just might make you more competitive in a number of industries. But even if you're not competitive enough to make money, you can certainly drive others out of the market. So if China wants to make money on its manufacturing subsidies, that might be difficult, but if its goal is to take enough market share to keep its migrant work force employed in a 20 year time frame, it might be able to do that.
And if you're a competitor who gets displaced by that, in America, in Malaysia, wherever, you might not be very happy about that. Especially since if you develop a large job-creating industry, China or some other player is quite willing to take a 10 year loss to put that one out of business too. That kind of thing can be quite a deterrent to new investment (screw it, no point in investing in manufacturing here if the Chinese will just come whomp us: I don't have the pockets to take 10 or 20 years of losses). That could have a negative effective on growth and innovation overall.

It's basically like the argument that you don't start a company to make a a desktop OS or document software unless you're thinking really long term, because even if it's better, Microsoft will take whatever losses necessary to keep you from ever making money on it (if possible). That doesn't mean Microsoft has no competitors in those markets, but Microsoft spent a long time as a powerful deterrent force.

cm

July 4, 2009 12:33 PM

Ajay: I did not switch positions, and neither was I implying anything.

What I described is for the most part "voluntary" as far as the outsourcers are concerned. There is no altruism involved, only greed or if you will profit incentive.

As for the meaning of "reciprocation", please consult a dictionary.

I'm not willing to debate the documented facts of considerable "investment" in offshore workforce training, technology transfer, and eagerness to learn on the part of offshore business staff or governments that goes as far as being considered industrial espionage by some.

The same happens with outsourcing at national and regional levels. None of this is restricted to Asia. Those are fundamental features of human endeavor.

cm

July 4, 2009 12:40 PM

As for "intrinsic" manufacturing cost, I don't know what that's supposed to include or exclude.

Certainly aside from labor costs, offshore locations have been making outsourcers "deals" including lower regulatory and enforcement overhead as well as tax breaks. Getting your disposal issues "resolved" and regulators and enforcers staying off your back on labor, safety, environmental, and other misc. compliance issues can make a significant difference as dealing with those can lead to substantial "overheads". And favorable financial arrangements, that doesn't need explaining.

Ray

July 5, 2009 08:50 PM

It's true that manufacturing is the only thing that creates real wealth. Investments in labor, machinery, equipment, raw materials, and the production process can create and SUSTAIN all other forms of business. I guess it's taken two bubbles to figure out there's no substitute. Now it's too late. Globalization has created the wealth shift from The high cost producer to other nations. Until there's an equilibrium America will continue to suffer.

Ajay

July 10, 2009 10:22 PM

CompEng, I see, so 26 years is not forever in tech? Your voice recognition comment is a non sequitur. Apple has done well in the new segment of smartphones, they move almost no product in the larger market of cell phones. Competition driving the margins down and killing weaklings does not imply consolidation. As I've said before, fragmentation is the big trend going forward, not consolidation, for a variety of reasons, including search costs going to nil. nVidia and VIA and everybody else are aiming for the high-end, at netbooks and MIDS, not the low-end, which is already dominated by ARM. The new Zune HD runs on Tegra. As we've discussed before, I see no reason for us to subsidize manufacturing as Japan and Germany do, it only delays the inevitable offshoring while losing taxpayer money in the process. The fact that there are exceptions to the rule of manufacturing moving abroad cuz of lower costs does not disprove the rule. The appropriate response to protectionism is to thank the idiot Japanese, Korean, and Chinese taxpayers for subsidizing lower prices for us. :) You keep positing that China is subsidizing the move abroad, when the reality is that their vast poor population will work for much cheaper. If their government contributes negligible subsidies, so what. Their taking over manufacturing will only slow growth and innovation if they're incapable of either innovating or working with our innovators, neither of which passes the laugh test. Microsoft is only a deterrent because their would-be competitors are too stupid to come up with something better. Now is the perfect time to take them down, as MS has grown fat and lazy at the top. Again, the analogy doesn't hold as China's subsidies are not the dominant factor, it's their cheaper intrinsic costs.

Cm, perhaps you should consult a dictionary if you don't understand that reciprocation implies something more altruistic than greed. It's nice that you're unwilling to debate the fact of offshoring since nobody offered to debate it, only your constantly shifting rationales as to the reasons why. Tough to label voluntary, greedy reciprocation as industrial espionage, isn't it? I'm not sure why you don't know what intrinsic manufacturing costs includes when they were enumerated above. The point was that your listed regulatory and govt cost savings are negligible compared to the intrinsic cost savings from offshoring.

Ray, if you think that manufacturing is the only source of real wealth, you need to consult the stats that show that consumer durables are a small fraction of household wealth and that service jobs dominate the US economy, the largest in the world.

CompEng

July 11, 2009 11:33 AM

Ajay,

"CompEng, I see, so 26 years is not forever in tech?"
In the context of Moore's Law, yes (at least 13 doublings of capacity). Otherwise, absolutely not. The very existence of computing changed the world drastically, but posterity will view that more or less as a step function, and most of the software outfits today just ants building hills in the sand. Read some old Sci-Fi and you'll see that we're still marching towards ideas understood 80 years ago, just taking a lot longer than they thought we would.
Moore's Law isn't dead yet, but it certainly can't last forever. In nature, all exponentials are only to the nearest asymptote.


"Competition driving the margins down and killing weaklings does not imply consolidation."
Once margins lower to the point to provide a barrier to entry, you do in fact have consolidation. The primary exception in history has been sales and distribution, which has always been local in the sense that local knowledge is a competitive advantage that can trump size. The internet doesn't change that completely, it just means that "local" applies in terms of preferences rather than geography.

"As we've discussed before, I see no reason for us to subsidize manufacturing as Japan and Germany do, it only delays the inevitable offshoring while losing taxpayer money in the process."
I'm convinced that in general this is true, but not in every case. But the exceptions are of a variety that I would have great difficulty defending to a stark individualist, so I won't dive down that rathole.

"If their government contributes negligible subsidies, so what."
I disagree that they're negligible in many of the industries that didn't already go overseas by 2000. We've come to factual contradiction. At this point, if I cared enough, I would have to look up specific business cases and provide the official data. Given that that's not where my background is, the effort is simply not worth it to dig up the sources. The information I do have is secondhand and the details are probably confidential.

"Their taking over manufacturing will only slow growth and innovation if they're incapable of either innovating or working with our innovators, neither of which passes the laugh test."
They could certainly deter Americans from participating in that innovation. Maybe that shouldn't bother me? I guess a true globalist would just say, "Be willing to move".

Ajay

July 12, 2009 11:31 PM

CompEng, it really doesn't matter what people thought before or after Moore's law, the fact is that we lived through this step function of extremely rapid change. Who cares what old scifi writers thought? I can throw out a 100 predictions about the future and 10 of them will turn out to be right, doesn't mean I knew which 10, same with them. As for progress taking longer than they thought, since they had no scientific basis for that prediction, I don't much care that they thought we'd have nuclear cars by now. Nobody said Moore's law would last forever, all laws apply to a finite domain. I see no connection between low margins and consolidation. Instead, I blame idiotic, academic economies of scale arguments that were coopted by investors and executives who simply wanted to be big swinging dicks over bigger companies/staffs. The internet further moves this environment towards fragmentation by dropping search costs to nil, among other reasons. In the past, if you went to Seattle, you might just eat at McDonald's or Burger King cuz you didn't want to take a chance on a crappy local Thai place that might give you indigestion later. Now, you can just look up the best local Thai place on Yelp on your iPhone and go there. This will apply to EVERY product, greatly changing EVERY market.

Given the tiny GDPs and local labor costs abroad, along with the resultant low real estate and raw materials costs, I think you'll find it hard to make your case, since govt spending is again a fraction of their tiny GDP. As for the Chinese eschewing US innovation, HA! We'll just build new fabs in Malaysia or elsewhere. Apple has most of the power, as they're the ones who make the fat profits, not the commoditized Taiwanese manufacturers that they deal with. Of course, the Chinese will also figure out what Apple does someday, though they haven't yet, but they were going to do that regardless, whether we offshored to them or not. If we choose not to offshore, we'd just be stupidly passing up some easy and fat profits in the meantime.

CompEng

July 13, 2009 01:19 PM

Ajay,

Yes, we're living in an era of rapid change. My only point for the first bunch of stuff was that, if you track technology too closely, you'll focus on a lot of intermediate milestones you wouldn't care about 10 years from now. Mobile is still pretty immature, and you can tell that most clearly not by product names and specs but by how it affects your life. Looking at past predictions is useful because it helps you gauge what you'd want if you weren't gated by this year's technology. You get a sense on what technology is converging towards. Of course it's far from a perfect sense, because there's a lot of bad assumptions built in. But a lot of the variety you see now is just different people placing bets on where we're going and how to get there. When the technology matures, fewer of those bets will be necessary. Even if there's no economies of scale, you still get some consolidation.

Yes, at least some economy of scale would be necessary to prevent entry by smaller players in the market, but why would they enter if there's no money (margins) to be made? In the situation of low margins, you need high volume to
make money, and except for some markets where start-up costs are also low (granted that a number of internet information work ventures would fall in that category), you just wouldn't bother. You wouldn't open that new Thai restaurant if there were 4 on the block: maybe you can cook better than they can, but it would take years to make any money here: you'd have to take it to the other side of town, at least.

As for the rest, today Apple makes all the money, but all it takes is once decent competitor in China for what they do, and then China could tell Apple where to stick it. We could build fabs in Malaysia or elsewhere, and 2.5 billion dollars and 3 years later we'd be competitive again. A lot of investors would just say screw that and sell now. I'm not too worried about that today, but my argument basically boils down to competitive advantage in one market giving splash benefits to adjacent markets. But... that boils back pretty much to one facet of the economies of scale argument.

Ajay

July 14, 2009 07:48 PM

Mobile is nowhere close to where it's going to get but I wouldn't call it immature, only the new smartphone segment perhaps. Being able to call anyone from anywhere has been around for awhile and has already been hugely useful. I disagree that fewer technology bets will be neccesary, you assume your conclusion: that every tech market tends towards a Microsoft or Intel dominating it, never mind that most tech markets haven't done so. Consolidation is often driven by idiot investors dumping money into one stupidly favored stock or another, aided and abetted by moron investment bankers looking for M&A fees, not for any valid reason. Most smaller players don't enter for the margins, they enter for the revenues, they just want to get paid for doing something they can do. High volume is only supposedly necessary for economies of scale, not to make money, high margins don't allow you to sell low volumes either. You've now changed the argument with the Thai restaurant example, arguing instead about oversupply, not low margins. You open a new Thai restaurant if you think there's enough demand to meet your prices, low or high margins are often beyond your control and besides the point. Besides, the fact that new entrants are not going to enter a saturated market doesn't imply consolidation of the existing players, the existing 4 Thai restaurants.

Yes, of course, some Chinese version of Apple will supercede Apple someday, but considering they still haven't been able to, I'd guess Apple shouldn't worry much about that. What they should worry about is somebody in the US doing so, as there are lots of english-speaking innovators here. The Malaysian fab would keep the Chinese honest, reason enough to build it before you consider their low prices too. Given that the Taiwanese have been manufacturing for years and HTC is still the only ODM of note, and they still don't sell most of their products under their own brand, who knows when it will happen and I certainly don't see any splash benefits. Clearly that economies of scale argument has failed the empirical test.

CompEng

July 15, 2009 11:31 AM

Ajay,

Profit = margins * volume. When you own your own business, salary and profit are strongly tied. There's some truth to the fact that you'll expect lower profit/salary if you love what you do. Low margins and market saturation are also inextricably tied: if supply were lowered compared to demand, prices would rise. All else being equal, prices would riser faster than costs. So I'm mystified how your criticisms hold together in a consistent fashion.
Consolidation is merely market players leaving faster than entering. Players leaving is driven by rate of mistakes, effective competition, and other random events that weaken the ability to fund the enterprise. Players entering is driven by perception of profit, with desire to work in the area capable of replacing some portion of profit.

Good point: it's true MNCs diversify manufacturing where possible, which is just good strategy.
As far as failing the empirical test, I don't think a factor like economies of scale is overwhelmingly dominant, but that doesn't mean it's not real. It's like people complaining that becoming a famous actor is all luck, connections, or talent. It's not: you need all 3. In a mature market, economies of scale can matter a lot: they're just not unbeatable. Microsoft, Intel, GE, ATT, none of them end up dominant forever due to other factors, but they can have pretty good runs where economies of scale are a competitive advantage. You point out HTC is the only ODM of note: why is that true?
But Google, Microsoft, and Intel in the tech sector (and a number of manufacturing giants like GE and Caterpillar) play splash effects to the hilt.


Ajay

July 15, 2009 03:48 PM

CompEng, I'm not sure what you expect that simple definition of profits to contribute to a discussion of what the critical threshold of volume is for different levels of margins. Considering most business is services in this country, salary is crucial to profit for every business, not just if you own it. My point wasn't that you'll take less money if you love what you do, it's that you don't know what to expect when you start a business. The revenues and profits work out where they do and you keep trying to optimize as you go, but you don't go in expecting anything more than to make a living. Obviously oversupply leads to price wars, my point was that you were changing the subject from low margins leading to consolidation to another one about oversupply keeping new entrants out. However, I did comment on that also, that oversupply/low margins don't usually keep new entrants out, for the aforementioned reasons. My criticism ranges because you keep bringing up irrelevant sidebars that I also choose to address. Whatever your definition of consolidation and the reasons for exit and entry, you make no real argument for why one would be more than the other and lead to consolidation.

Who said economies of scale wasn't real? I've been very precise in my criticism: I said before that it might apply for individual fabs or printing presses, but certainly not for the many that are owned by large corporations today. As for HTC, I'd guess that it's because they just don't think big and the english language is a barrier. Also, the hiring process and education are horrible here, imagine how abysmal they are there. They'll figure all that out someday, it just might take awhile. I see no splash effects for any of the giants you note, with the possible exception of Microsoft and their twin bulwarks of Windows and Office. However, considering that's the exception to the rule- Google makes 99% of its revenue on one product, AdWords, Microsoft has lost billions on the XBox, Itanic is well Itanic- I don't think you can really attribute splash effects there, just the one competent company that was able to come up with a second successful project.

CompEng

July 15, 2009 05:27 PM

Ajay,

I'll try to narrow my focus then. If demand is elastic, aren't low profits oversupply pretty much equivalent? Aren't low margins and low profits pretty much equivalent without high volumes? Except in information businesses where there's no solid link between production volumes and sales volumes, doesn't that mean there's a link between low margins and oversupply? In oversupply, it's hard to enter a market and make money, and you generally can't enter a market successfully and not make money. I don't think anything I brought up was irrelevant, but maybe I didn't connect the dots clearly enough.

"Who said economies of scale wasn't real?"
You've certainly implied it in over half a dozen different postings I've read.

Google may not have demonstrated a splash effect, but their business plans still reflect the belief that it's there to capitalize on if they make enough bets. X-box may not be a profit-making venture, but splash effect was a piece of its gaining market share. The original Itanium was an experiment in pandering to the compiler-writers as all the papers of 2001 would tell you, and an absolute dog in performance in most cases. The only reason Itanium is still around is because Intel managed to build sufficient hype and FUD to make a space for it, and because it had the fab and testing capacity to keep the experiment from being too expensive. Mips, Alpha, and PA-Risc didn't die because Itanium was a superior processor: they died because the whole industry knew Intel was committed to being the low-cost supplier in the mission-critical space with something that wasn't x86/Windows and because Intel was willing to put in the money up front to do the software conversion. I remember public announcements of $10B software spend to do the software ground work. Itanium is probably *the* perfect example of a rich company with economies-of-scale bulldozing into an adjacent market for strategic reasons. X-scale was an attempt that didn't quite work out, partially because the hardware performance wasn't a sufficient differentiator in that market. We'll see what happens with Larrabbee. But that's just my own personal opinion of what went down.

Ajay

July 16, 2009 12:37 AM

Heh, funny how you narrow your focus on the one argument that I didn't really dispute, that oversupply usually leads to low margins. This is not always the case however, luxury goods were probably oversupplied this decade but kept high margins because of the status effect they gain from high prices. Anyway, my point was that there was no reason to talk about oversupply when we were already assuming low margins, particularly when you made an extraneous point about new entrants when we had been talking about consolidation. Of course, low margins and low profits are equivalent, that's by definition, nothing to do with volume. Your point about new entrants was irrelevant because you hadn't yet laid out your theory about how the only two factors leading to consolidation are existing players leaving and new entrants coming in, ignoring M&A apparently, and still haven't said why one factor wins out. Like I said, low margins are not the determining factor in keeping new entrants out. As for whether economies of scale are real, when they're inflated to the point where a company owning 10 fabs or a hundred banks is still claiming them, the argument has been so exaggerated as to lose any meaning. Considering I already stated the precise, limited places where economies of scale do apply in a previous thread with you, I shouldn't have to repeat that.

Google can believe what it wants, history has shown that splash effects have never materialized. I see no splash effects with the XBox, which just broke even on a quarterly basis and will never make back the billions lost. To claim splash effects, a new product has to benefit from the old product's economies of scale and be a success, meaning profitable overall: you haven't named any examples that qualify. The fact that Itanium has only lost money despite Intel being behind it certainly doesn't qualify, nor do they come anywhere close to dominating their segment at fourth place, despite those other players exiting. If your definition of splash effects is only that an established competitor makes dumb money-losing bets using the profits from their main product to subsidize an unprofitable second project, I wish lots more splash effects on all the dumb companies out there, so that we can get cheap products at their expense. I suspect their investors, or at least the ones with a brain, won't be so gung-ho however. ;)

cm

July 16, 2009 12:59 AM

CompEng: "There's some truth to the fact that you'll expect lower profit/salary if you love what you do."

How can there be "some truth" to a FACT? :-)

CompEng

July 16, 2009 08:38 AM

Cm,

It's not true in every case. There are some people who love what they do who expect to make *more* than average because they're so darn good at it. ;)

CompEng

July 16, 2009 10:00 AM

Ajay,

Yes, I ignored M&A because that didn't support my argument (as you say, most mergers are pointless empire building as far as I can see) and I didn't need the distraction. And certainly I've admitted economy of scale arguments tend to be exaggerated, although I've never agreed with you on the precise bounds.
If, as you state, low margins and low profits are the same, how do low margins not prevent entry unless the people trying to get in are too dumb to do economic planning and yet smart enough to displace existing firms?

"and still haven't said why one factor wins out"
Well, when two factors like market entrance and market exit are opposing, they typically come into balance at some point. But if profits are low and competition is high (as you'd expect in a "mature" industry with a lot of players), you'd expect market exit to temporarily dominate as the weaker firms are culled. I called this consolidation because you end up with fewer and bigger players in the market, although I suppose most people would restrict the term to M&A that happens when the winners buy the good assets of the losers. There are certainly markets where this doesn't happen, but I still believe that in mature markets, the winnowing down to relatively few players is more the rule than the exception. And that's why I believe that in 10-20 years, mobile will also shake down to a few players (the original argument).

As for your example of luxury goods, that's a special case because it's so difficult to predict what will sell, and it's hard to segment the market according to what will. So in oversupply you end up with high item margins but low average profits because you carry a bunch of costs. But in this case, I would expect smart new entrants could do well, because their value proposition would be better understanding consumer preference.

CompEng

July 16, 2009 10:27 AM

Ajay,

"The fact that Itanium has only lost money despite Intel being behind it certainly doesn't qualify, nor do they come anywhere close to dominating their segment at fourth place, despite those other players exiting"

I know too much inside information to feel comfortable really discussing all the details, but given sunk costs, Itanium is not a net loss to Intel. And how is Itamium in 4th place? I believe it's Power, Itanium, and Sparc in the segment, with other players being substantially smaller. Or do you define the segment differently than I do?

It's true that a lot of such ventures either don't directly profit the investors or do so only over a very long time frame. That doesn't mean they're not common or that they don't wipe out a lot of the smaller players and shape the innovation that does occur.

Mike Mandel

July 16, 2009 05:22 PM

A very interesting discussion! I just wanted to add one thing to it. The government figures which show that manufacturing output is still strong are almost certainly wrong, because of undercounting of real imports, especially in high-tech. More to come on this.

Ajay

July 17, 2009 06:56 PM

CompEng, while high margins are an incentive for late entrants, they're hardly the be-all that you make them. People just want revenues that pay salaries, margins are a nice perk. So your thesis is that consolidation is caused by weaker firms failing, that's it? What about all the markets where the weaker firms just shrink and then come back with a winning product, like Apple or Palm? Plus, like I keep saying, your argument against new entrants is silly. I say that consolidation occurs most often because of idiotic and overblown economies of scale arguments that were co-opted by idiot empire-builders and conniving investment bankers. Not only will we realize those arguments were dumb but the internet drives fragmentation: look at how there are tons of webhosts out there more than a decade later. Not sure how you believe that high item margins can lead to low average profits, but the luxury goods makers actually did spectacularly this last decade. Also, better understanding consumer preference would help any new entrant enter any field, which is why new entrants constantly enter most fields.

As for Itanic, sunk costs are a reason not to ditch a failed project, they don't make a loss-making project otherwise. According to wikipedia's Itanium page, they're fourth in enterprise, that's what I was referencing. I don't much care if these companies have fantasies of making it all back someday, it's not going to happen. As for them affecting the field, that's great for us, more competition at a cheaper price. If they're willing to sustain losses to make that so, it's their moron investors loss, certainly nothing we should be encouraging though.

cm

July 17, 2009 08:33 PM

Ajay: "People just want revenues that pay salaries, margins are a nice perk."

I have to hook you up with my management, maybe they will see the light when you preach to them a little. :-)

CompEng

July 18, 2009 09:10 AM

Ajay,

"People just want revenues that pay salaries, margins are a nice perk."
You're confusing businesses (and investors) with individuals who need a job. Businesses exist to make money on money: some margins are required. Individuals just want a living. They require profits, but they're trying to make money off their skills and talents above the standard of living they desire. They are less concerned about making money on their initial investment. My earlier comment about salary and profits was a weak attempt at explaining this.

"while high margins are an incentive for late entrants, they're hardly the be-all that you make them."
There are always late entrants in markets, but then, most of them fail with a short period of time because they don't make money. You always have companies like Transmeta that don't have a snowball's chance in hell but make a go at it anyway just because they have a good idea and a bit of talent. They don't affect the market macro picture that much.

"I say that consolidation occurs most often because of idiotic and overblown economies of scale arguments that were co-opted by idiot empire-builders and conniving investment bankers."
I think I agreed that this drives a lot of the M&A, but it's not the most interesting part of the boom-bust cycle for markets.

"What about all the markets where the weaker firms just shrink and then come back with a winning product, like Apple or Palm?"
That does happen: weak portions of a company being sloughed off to make a stronger one. If they were weak all the way through, the outcome would be different. But if you're trying to point out that making generalizations can be dangerous, you're right, it can be.

"Not only will we realize those arguments were dumb but the internet drives fragmentation: look at how there are tons of webhosts out there more than a decade later."
The internet is driving a lot of fragmentation today for a number of reasons, but the effect isn't as broad as you say. You've accused me several times of painting the world with a tech market brush. I think you're wearing internet glasses.

"Not sure how you believe that high item margins can lead to low average profits, but the luxury goods makers actually did spectacularly this last decade."
I took you at your word that there was oversupply and filled out the rest of the equation on a hypothetical basis. But the answer is obvious. Jewelry stores especially face the problem that while they make huge margins on their products, most of their products don't sell or don't sell quickly. So they struggle to make money because they carry high inventory costs.

Itanium:
"4th most deployed" is referring to the whole enterprise space, but I wouldn't divide the space that way, and I'd go by revenues and margins, not units. So "4th" is misleading. Did I say that this was a practice we should be encouraging? I thought I was referring to discouraging it in our trade partners.

cm

July 18, 2009 12:34 PM

CompEng: "You always have companies like Transmeta that don't have a snowball's chance in hell but make a go at it anyway just because they have a good idea and a bit of talent."

And "free" funding! I don't know off the bat how TM was funded, but a lot of dotcom-time startups probably happened because of VC funding. I doubt the boom would have happened in a "traditional" lending environment. This was part of the problem back in Europe - the big "conundrum", why can the US pull off "innovation" and we (allegedly) can't, and the corollary, we have to ape everything the US is doing from labor market "liberalization" and welfare "reform" to creating elite colleges and establishing an H1B style program (called "Greencard" in Germany - go figure). And why are the Indian super programmers not coming - dang.

CompEng

July 18, 2009 06:31 PM

Cm,

It's always interesting to me to hear the European perspective on some of these things, because it differs in so many ways from American conventional wisdom. That was one of my favorite parts of graduate school: being one of the few Americans in a group gives a more cosmopolitan perspective.
But I do buy into labor market liberalization to a fair degree: you simply can't guarantee a certain standard of living without some people taking advantage of it. The effect on attitudes is toxic. There are people who turn there nose up at "charity" while feeling that welfare payments are something they've earned. If we can't get by, we should accept gifts gratefully, but be very aware that someone else is paying the bill out of their own choice and try to avoid the situation if we can.

cm

July 19, 2009 12:45 AM

CompEng: My take on the specific issue you mention is that there is no objective truth or divine ordainment. It is very much a matter of social consensus, or perhaps rather an equilibrium of constant renegotiation.

As far as I can see, European companies have no problem staffing their positions. The only thing they cannot do (or couldn't prior to recent "reforms") is to pay less than what the social "consensus" has determined to be a rock-bottom dignified income. Germany, for example, has not had minimum wages until recently - wages were largely determined by collective bargaining, and the wage floor in good part by safety net benefits.

What is better - leaving your unemployable "surplus" population to neglect and deteriorating conditions, or provide a minimum standard that society apparently can afford, and that will lead to some "advantage-taking"? For the most part, Germany doesn't have the problems of constant neighborhood shootings, gang crime, and drug related activities, or not nearly at the levels plaguing US metropolitan areas. The phenomenon of meth is all but unheard of.

This way or that way, it's not like the paying demand is there to provide enough jobs for most of the (structurally) unemployed.

cm

July 19, 2009 02:44 AM

CompEng: Maybe I misread your comment. Perhaps you are speaking solely about entitlement mentality and advantage-taking.

On that point, there is a nontrivial segment of jobs which have low, no, or even negative value add (the proverbial office critter converting O2 to CO2), and which are largely of the paper pushing (physical or digital) and "information" relaying (information flow controlling?) middleman variety (management designations of varying description figure prominently in that - many are managers only in name), without going into much further detail. My experience tells me that many people in such a position have a rather high opinion of their contribution, sense of entitlement, and in cases toxic attitudes. Their bill is paid out of the actual work in the trenches.

I will hasten to add that a substantial (large?) part of those positions are needed, or else those occupations wouldn't exist. And it is close to impossible to tell who is genuinely needed and who is just coasting, as the test would be essentially to eliminate the position(s) and see whether the work is missed (and even that wouldn't be a very reliable test as there is no objective reference against which to measure group/organization performance).

Contrast that to the problem of determining who is "genuinely unemployed" and who is just coasting by at public charge. It may be largely the same, or at least analogous, issue. But the unemployed are usually getting far less than well compensated surplus paper pushers.

And let's not get started on the governmentally sponsored US prison industry. The latest variety of sob stories following the California budget debacle is companies being paid with IOUs. In all such stories I read in the paper, those companies were invariably catering to the prison system.

It is claimed that Europe has lower incarceration rates, and one can make a plausible case that some number of people who stay out of prison there are a lower cost public charge and contribute to unemployment and welfare numbers.

I want to make it clear that this is not meant to be along similar lines as the popular beating on prison guards and their unions, as those are not the people who are supplying the prison population but merely the caretakers.

But I have a rather strong impression that the "public charges" and related toxic attitudes in the US are in the aggregate not lower, only it was chosen to structure them in a different way that is arguably of lower aggregate utility.

cm

July 19, 2009 02:52 AM

And while it is far from me to endorse coasting on the dole, I have little sympathy for allegations of advantage taking by "public charges", considering the appalling leeching of the bloated financial system and its attached corrupt elites on the productive segment of the society that lets everything else pale in comparison. After seeing how this "bailout" was and is being executed, I don't want to hear any complaints how some members of the labor surplus are coasting on taxpayer expense.

CompEng

July 19, 2009 12:43 PM

Cm,

Let's see, you're drawing a parallel between parasitic elements in a bureaucracy, parasitic financial drones, elite "owners" ala Gordon Gecko, and lazy welfare recipients. I agree that those are good parallels: you could make an argument that even Ayn Rand would agree with you on that.

The question of what to *do* about these things is the hard one, isn't it? I agree that a certain percentage of non-productive members in society is unavoidable. Given that, I'd rather my money went to supporting the earnest and incompetent than the clever vultures. If the choice were as simple as prisons vs. welfare stations, I'd chose the latter. But this is a set of issues I'd rather delve in person because they are complex. I view the specifics you've brought up not as a set of tradeoffs in one dimension, but a myriad of them: freedom vs. security, flexibility vs. stability, efficiency vs. fairness, church vs. state vs. rationalism, centralism vs distributed responsibility, self-determination vs. duty, and more. That's why I'm interested in better understanding Europe's social contract, to help me unravel all these tangled strands in my mind.

But if you want to know what I want... well. My value system in fundamentally Christian: I want society to at base be as fair as possible, but on top of that people should be as merciful and generous as possible also. I can't be happy watching people starve outside my door or stealing or killing because they feel they have no place in the world. But neither should they feel I have a duty to sacrifice whatever is necessary to provide them the choices they want. Instead, an unfortunate should know that I view them as equal in dignity and they shouldn't have to suffer alone. If I fall into misfortune, I would want the same bargain: respect and that anyone walking through a door hold it open as long as they can. But no outcomes in life are guaranteed, for me or anyone else. How that works out as a social contract, I haven't figured out yet.

cm

July 19, 2009 02:55 PM

CompEng: Nothing is one-dimensional, and navigating/negotiating the "design space" of the myriad dimensions some of which you mention is the difficult part of society, which will probably never go away. I could go on for more than I already have, but I want to keep it short.

In a nutshell, you cannot (reliably) tell who is unproductive because there is no place for them, and who is unwilling to contribute. (And then one can be unproductive by not producing, or by producing no or negative value.) There is of course a share of coasters among the unemployed, but there is also a fair share of people who are not pulling their weight in any workplace, or who pursue occupations that have more focus on "business process" as opposed to actual creation of products or service delivery.

My point was not so much to focus on so called "parasitic elements" in business, which is too easily mistaken for dissing the people this would apply to, but to suggest that the "social efficiency" of the US socioeconomic paradigm with its absence of a "first world" safety net is not all that great for it.

CompEng

July 19, 2009 04:41 PM

Cm,

And my response was that you're not completely wrong, but that simply grafting a "first world safety net" on the U.S.'s existing structure would not necessarily get us where we want to go either, because it wouldn't be a part of coherent design.

cm

July 19, 2009 05:06 PM

CompEng, not to beat on your remarks too much, but on the point of gratitude, I have not seen much gratitude from anybody (probably even including ourselves) whose career or commercial success was enabled by the unprecedented credit expansion of the last few decades. Everybody with a job pushing paper, administering or brokering other people's products or labor, or producing in the end highly discretionary or marginal consumer/business products/services thinks they deserve it because of their merit. In truth their (our?) jobs are only enabled by leveraging the work of others and extracting a price that is paid out of cheap credit.

Neither have we seen gratitude, nor will we ever seen it, from the financial jugglers who got just bailed out, bonuses and all, at taxpayer expense. Not only are these guys thumbing their noses at us, they are also lecturing everybody how to best get rid of us cost factors or how many of us are really needed to produce the wealth they are leeching of off.

People who think those at the very bottom are the parasites unworthy of help are being taken for a ride.

cm

July 19, 2009 05:08 PM

Even our esteemed host, whom I should probably not piss off, is disappointingly lecturing us on how the space program was an "economic failure". To which I can only respond with a big uppercase "WTF?".

cm

July 19, 2009 09:30 PM

CompEng: My latest two comment were written before I saw your latest.

I'm not the first to make the point, but a lot of the rationales underlying US social policy are considered to be of Puritan origin.

With the caveat that simplistic stereotypes are never accurate, as far as popular stereotypes go, in the US individual worthiness and merit is almost entirely judged by how much money one "makes", associated the visibility of one's commercial success and social visibility. One central tenet of US society is (supposedly) that the combination of hard work and merit will always pay off, and whoever cannot realize the payoff has not tried hard enough or has made imprudent choices that can in hindsight always be pointed out, or failing that, alleged.

As long as failure (to obtain an approved as normal lifestyle) is not a majority phenomenon, this way of rationalizing will be easily bought. The secular growth trend following WW2, followed by a long time successful credit boom and externalization of costs have enabled this. Whether this paradigm can be continued, or the trend has been broken, and "eurosclerosis" and the concept of limited aggregate opportunity will become undeniable and force themselves into public awareness will be seen.

I expect it will certainly not be pretty.

CompEng

July 20, 2009 11:42 AM

Cm,

Well, yes, America's social policy is largely of Puritan origin, and there are certainly people that still think as you describe. But then, the Puritans also had a strong tradition of charity and obligation to neighbor to counterbalance that problem: but the church was the vehicle, not government. And of course, discussion of finances has generally been considered rude. The 20th century counter-culture movement has changed a lot of that.

But the 20th century bargain (absent globalization) of corporate fear of unionism keeping wages reasonable, market flexibility keeping unemployment low, and progressive taxes and a strong tradition of charity picking up the slack... worked pretty well under the circumstances. Globalization changed that by breaking unions and exposing our labor markets and tax structures to new levels of competition, and the general global hypocrisy on protectionism has been toxic to wages as well. Globalization will force a new bargain, but I don't think Europe has the answer to today's (and tomorrow's) problems either. They may have a piece of it, though. We do live in interesting times.

Mike Reardon

July 20, 2009 04:32 PM

From above I said: June 28, 2009 03:58 AM

(This might help, Richard Posner on the Charlie Rose show said the Fed now had about $13 trillion out holding up some places in question within the markets. Loans, insurances, money out to foreign banks, its not all money lent but backstops for something or new extra debt held.

If your adding 20% to the industrial base then returning all of that Fed insurance in short order is not that needed. Like the TARP fund now out, that the Fed and Treasury are now seeing as revolving account, a more market driven Fed balanced fund from these $13 trillion, could give further investment a constant open reserve base.)

Today the TARP Inspector General has the numbers from the Treasury and Fed totaling $23.7 trillion. That big a push, fills the losses from the stopped up shadow banking economy. It may help to afford what needs to be done to restart real investment in industry.

Ajay

July 23, 2009 02:08 AM

Cm, your management is on the right track by trying to make profits, it's only new entrants that are willing to take the risk for salaries. I believe Transmeta got a fair amount of VC funding, as did the recently failed Dash, as is the soon to fail Ning. No doubt idiot VCs puffed the tech boom into a silly bubble, but they wouldn't have been able to get away with it if it weren't for credulous institutional and retail investors. Europe's problem isn't innovation, it's the govt killing initiative through your favored socialism. Of course when that leads to slower growth, you then ape the US cargo-cult style as you have no clue why you're left behind, although labor market liberalization certainly would help. The Indians probably didn't come cuz they don't speak German. The demand is always there for the unemployed who want to work and learn, it's only minimum wages and enforced work minimums that make the environment less hospitable. Obviously large companies can have parasites just like any govt, but at least the company has an incentive to shear them off, as their margins will be lower compared to competitors who who do cull the leeches, while the govt has very little incentive, hence fat and lazy public school teachers. I see, so welfare keeps people out of prisons, what an optimistic perspective! ;) Govt spending in the US as a percentage of GDP is around 33%, compared to the high 40s or 50s in many European countries. We don't just spend differently, we spend much less. Considering that it's your beloved govts that are bailing out the financial elites too, I don't see how you can complain. Your argument appears to be that because the financiers occasionally leech the system, the far greater leeching by others is okay, which is just ridiculous. Also ridiculous are your assertions that it is impossible to tell who's unproductive, at the very least you can compare output across workers. Considering that the US is one of the richest countries in the world, we're fine with how our social contract has worked out, though there's much we could do to make it better, such as killing off govt-subsidized medicine and education. Your notion that cheap credit was the primary driver of recent success is just silly and shows your economic ignorance.

CompEng, you're confusing businesses and their workers as two separate things. Businesses exist so that people can make a living from the salaries, margins merely determine how long they last. The point is that no new entrant knows exactly how well things will go, they figure they can do the same job and rush in, then figure it out as they go. New entrants like Transmeta greatly affect the macro market picture because for every three Transmetas, there's an ARM. The internet drives fragmentation but it isn't as potent as it will be because it's missing the final piece, monetization through micropayments. I wear internet glasses because it will greatly upend many markets, they're the right glasses to wear. Huge margins on jewelry are not being calculated right if you're leaving out inventory costs, however the luxury goods makers had huge profits because they cultivate a status effect that allows them to keep prices and margins high. The fact is Itanic has not been anywhere close to a success, particularly financially. Your argument was that we should encourage national leaders, such as Toyota or BMW, by subsidizing them through the govt, as those foreign govts do, so that these corporations can then throw money away on secondary projects, such as how Microsoft has lost a ton of money on the Xbox. The argument is nonsense and I see no way for us to discourage it from other countries, except for them paying the price and learning for themselves. I don't see why you'd want your money to go to the incompetent or the clever, best to neither. What you don't seem to understand is that unions and taxes have hampered innovation and growth, we'd have been much farther along and everybody'd have been richer if not for those two. Europe not only does not have the answer, they're falling farther and farther behind because of their socialist choices. That's their choice and they will have to live with it, but it's very hard to say they're doing anywhere close to as well, unless you value egalitarian poverty over material well-being.

CompEng

July 23, 2009 09:37 AM

Ajay,

"CompEng, you're confusing businesses and their workers as two separate things". Nice work turning my phrase against me, but um... no, you're nitpicking. You've said nothing I disagree with on the point in the last post, but neither have you contradicted a point I have made.

"The point is that no new entrant knows exactly how well things will go"
True, but the ones that succeed are often differentiated by things like a solid business plan and a technical competitive advantage. ARM had (and still has) these things.

"however the luxury goods makers had huge profits because they cultivate a status effect that allows them to keep prices and margins high."
I'll buy that. But then why did you say they were in oversupply? Btw, margins often *are* measured in a screwy way, AFAIK.


"The fact is Itanic has not been anywhere close to a success, particularly financially."
A point I can't really argue, sadly. :) But they strength of my argument is that Itanic is competitive enough to still be around today, and if you knew of all the mistakes Intel made... well I find it quite notable where the competitive advantage it *does* have comes from.

"I wear internet glasses because it will greatly upend many markets, they're the right glasses to wear."
In many cases, yes. In every case, no.

"Your argument was that we should encourage national leaders, such as Toyota or BMW, by subsidizing them through the govt, as those foreign govts do, so that these corporations can then throw money away on secondary projects, such as how Microsoft has lost a ton of money on the Xbox"
No, my argument was that other governments do these things, and because of a splash effect, it hurts our overall national competitiveness in current and future high-margin endeavors. That is, it reduces somewhat my ability to get a job in America doing what I like. I find that an interesting problem with no real solution defined so far. You dismiss this as not a problem, which I reject. I also reject running off with half-cocked "solutions".

"What you don't seem to understand is that unions and taxes have hampered innovation and growth"
The immediate effect of taxes is always a direct hindrance to growth. Some hold that the value you get back in terms of government services is worth the cost. I'm not going to revisit our argument on the value of government.
I believe the key aspect of my point was "corporate fear of unionism keeping wages reasonable". As you said, "Businesses exist so that people can make a living from the salaries". Leverage plays a strong role in the partitioning of profit between labor and capital. If GDP grew at 20% per year, but all of the profit went to capital, you could count on nearly 100% employment, but median living standards would not rise much. Unions may be ham-fisted and dangerous, but corporate fear of unions is useful in the goal of increasing living standards, which in my mind is the very purpose of economic growth.

cm

July 23, 2009 11:27 AM

CompEng: I suspect that the charity model works only in social units up to a certain size and where "mobility" (constant uprooting of people and communities) is limited. Because there is stability and a sense of feedback and "supervision", people are willing invest or help others as they perceive they can evaluate the situation, and exploitation of goodwill is limited. "Back in the day", community cohesion formed by people being largely "stuck" in a place, and the parish was the vehicle of moral enforcement, perhaps to a lesser extent gossiping in the grocery store. When societies and municipalities grow large, it is difficult to organize community of any sort, and this mechanism stops working. Then the state has to step in as an arbiter of consensus and customs as small-scale arbitration and global consensus forming is impossible. Or rather, whatever "global" body constitutes to take on this role WILL be the state.

cm

July 23, 2009 11:39 AM

Ajay: "Your argument appears to be that because the financiers occasionally leech the system, the far greater leeching by others is okay"

"Occasionally"? "Far greater"?

"Also ridiculous are your assertions that it is impossible to tell who's unproductive, at the very least you can compare output across workers."

No you cannot, in a practicable way, when "teamwork" is involved. You can compare when the output of each worker is individually measured (and measurable to begin with). Otherwise you have to rely on people, usually managers and other power brokers, to relay their perceptions.

For example, when people take turns or interact in drawing up a document, you could track who typed which words, but that wouldn't capture the work input as most of the input is "intangible", i.e. defying (direct) observation.

As a rule of thumb, anywhere the work involves meetings and frequent interaction between individuals and groups, work input cannot be accurately attributed. That's the factual basis for "performance reviews", "360 feedback", and other attempts to measure "performance". They simply don't exist on the factory floor.

CompEng

July 26, 2009 10:04 AM

Cm,

In other words, there is no organized church which you sufficiently trust to take on this role? Understandable, but my perspective there is a little different. :)

cm

July 26, 2009 12:59 PM

CompEng: It is not a matter of trust. IMO establishing general welfare and prosperity as well as management of social policy are secular affairs that cannot be served by churches, which are almost by definition run in a strictly top-down way. For effective and sustainable social policy, bottom-up feedback provided by e.g. elections is a necessary (but not sufficient as is amply demonstrated) condition.

CompEng

July 26, 2009 03:53 PM

Cm,

I was more referring to the function of charity than general social policy. There are a myriad of secular and religious institutions which can combine to fill that function, IMHO, ranging from Catholic Relief services to Islamic charities to Non-Denominational Christian Outreach Organizations to the United Way. People believe in this stuff: on my last day of work in Arizona before our design team was "redeployed", the whole team participated in painting a local children's center. It's true that these don't reflect a centralized policy, but there's a lot of money involved, a lot of good done, and a lot of resources for people that need to get back on their feet. Even in the complete absence of a government safety net, you'd see a lot of help given to those who really need it. If you want an example of how strong a role churches and private organizations can play, look at history around the time Henry VIII kicked the Catholic church out of England.

cm

July 26, 2009 07:40 PM

CompEng: I see your point and don't mean to dispute it, but perhaps we are talking past each other.

Let me try to rephrase my point differently. Please be assured I don't mean to be disrespectful or patronizing in any way, as speaking about such matters can be all too easily misconstrued.

Saying that charity works only in limited-scope groups (as I alluded to earlier) is probably too simplistic and on second consideration does not really describe what I wanted to say, which is that charity can only *replace* "state welfare" in groups of limited size, i.e. where group members participate in a community, everybody is (effectively) under everybody else's watch (both the receivers and the providers of charity), and the most successful cannot opt out of the "system". This "semi voluntary" charity model does not scale, which is closely related to the phenomenon of anonymity in large settlements or large groups. (And there is certainly a link to "individualism".)

In the "parish" charity model, the needy are not really all-out at the mercy of the wealthy - the moral code (or rather its tacit enforcement by the penalty of public shame and ostracism) *requires* the wealthy to share, in other words, the needy "deserve" the charity (by the very definition of the moral requirement of giving). It is this very enforcement mechanism that doesn't scale - we no longer live in a society where villages and small towns, or strongly demarcated city districts, serve to define "local" communities. Our society and its economic/social relationships are very much globalized - we don't even have to go to the international level, just look at the US or its metropolitan areas and the surrounding regions.

That's not to say there is no place for charity, but it cannot plausibly replace state welfare.

Maybe I'm missing the point again?

CompEng

July 26, 2009 11:06 PM

Cm,

"That's not to say there is no place for charity, but it cannot plausibly replace state welfare."
I should say that for much of history, it in fact has, although that's not proof of much, I suppose.

I interpret what you're saying as truly voluntary giving will never be "enough", and will certainly not be fair. And you probably are right. But if voluntary giving is not supported by the average person, then involuntary giving also can't be for long: it veers towards communism. State-offered "welfare" has really no business being anything but the bare minimum, in my mind. I do not think health care is a "basic human right", and I'm already negatively amazed at how many elective procedures are partially or wholly covered by health insurance. But charity is absolutely an essential quality of humanity, in my mind. We don't give to other people necessarily because they deserve it in the sense that they have done anything to merit it, but because every single one of us required the benefits of mercy before we could offer anything to the world. And we have the capacity to pay that forward.

cm

July 27, 2009 02:24 AM

CompEng: Even in the "communist" Eastern Bloc, the social model was called "socialism", with communism a nominal long-range vision.

In recognition of elite corruption and self-enrichment, and in reference to the phrase of the party being the avantgarde of society, there was the sarcastic adage "the politbureau has already arrived in communism".

As you raise the specter of communism, something similar can be said about US elites, especially considering the recent bailouts.

And all those appeals to what is not deserved and not rights for the general public sound pretty hollow considering the full insurance mentality (and reality!) of the upper crust -- at taxpayer expense, where applicable. And the entitlement mentality goes beyond insurance, as evidenced by $1400 trash bins and 5-6 digit amounts for office furniture (Merill).

CompEng

July 27, 2009 09:59 AM

Cm,

Yes, the "masters of capitalism" in the US are no better, and we should certainly dismantle their perks and leverage.

Hugh McCann

September 29, 2009 10:37 AM

Love the give and take but at the end of the day the electorate is worried and having a job is fundamental to a persons/families security. All the blather means zilch if folks vote for change.
A potential helpful idea: please visit www.helpformanufacturers.org
Tax policy does matter. Do we continue to tax the higher producer and risk taker at greater marginal rates or do we create an environment where there is a fair return on risk here in the USA?

JONNY

March 23, 2010 05:36 PM

THE IDEA IS GREAT EXCEPT THIS IN BUSINESS YOU MOST SOMETIME TO BACK UP THE SELL SOO IF YOURE GOAL IS TO SELL THE PRODUCT DONT BE GREED BE WISE... PEOPLE ALWAYS EXPECT A BARGAIN A GOOD BARGAIN MAKE THEM SMILES, CHEAP/ GOOD QUALITY IN THE PRODUCT / KEEP HIGH LEVEL CUSTOMER FOREVER BUSINESS GROW EVERYONE HAVE JOB / EVERYONE HAPPY THE CAUSE EFECT IS APPLIED IN BUSINESS IF YOU SEE PEOPLE ARE NOT HAPPY WITH THE PRODUCT PRICE YOU GOT LOWER UNTIL YOU GET THE SATISFACTION THAT MAKE EM SMILE AT THE SAME WAY YOU DO / EQUALITY A GREAT WORD IN BUSINESS THAT MEAN ALL GOT A GOOD BARGAINS WITH HIGH STANDARS AND HIGH EXPECTATION

JONNY

March 23, 2010 05:43 PM

ART OF BUSINESS / SELL CHEAP / WHOLESALE / JOB FOR EVERYBODY / HAPPY HAPPY ,HAPPY ... SIMPLE LIKE THAT NOTHING COMPLEX IN ADVERTISING IS GIVE TO THE PEOPLE WHAT THEY REALLY WANT NOT WHAT YOU WANT THE ART OF BUSINESS IS LISTEN WHAT THE PUBLIC WANT NOT WHAT YOU WANT.

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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