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Leo Hindery, Jr.

Leo Hindery, Jr.

Posted: March 15, 2011 09:30 AM

Obamanomics: Guess Who Came to Dinner; Guess Who Didn't Even Get Asked?


We just saw a pretty good 'official' unemployment report for February, wherein for the first time since April 2009 the official unemployment rate dropped below 9.0% (to 8.9%). However, the real unemployment rate, which is the only rate that really matters, remains at 17.8%, including all categories of the 28.4 million out-of-work Americans. The all-important "jobs gap" that needs to be filled in order to be at full employment in real terms is a staggering 20.4 million, and the number of workers unemployed a half year or longer is at least 10 million. Each of these figures is unprecedented in modern times.

So, it's not without moment that we look long and hard at President Obama's dinner last month in Silicon Valley with his eight new BFFs ("Best Friends Forever") -- each the CEO of an Internet-related company -- since the purpose of the dinner was to "discuss his competitiveness agenda and find new ways the government and private sector can work together to lift the shaky economy." This of course is pretty weighty stuff.

Staffed only by his long-time confidant Valerie Jarrett, who is his 'liaison to the business community' (which says something in itself about his confidence in his overall economic team), Mr. Obama was joined by: Carol Bartz (Yahoo), John Chambers (Cisco), Dick Costolo (Twitter), Larry Ellison (Oracle), Reed Hastings (Netflix), Steve Jobs (Apple), Eric Schmidt (Google), and Mark Zuckerberg (Facebook). In describing this two-hour soiree among titans, Conan O'Brien said that, "Friends of Obama met with Facebook founder Mark Zuckerberg today. Yes, the good news is Zuckerberg said he could create new jobs -- the bad news is they're all in FarmVille."

For those of you who don't know "FarmVille", it's the massively popular farming social network game that allows players to manage a virtual farm by planting, growing and harvesting virtual crops and by raising virtual livestock. FarmVille has grown to be Facebook's most popular application, with over 62 million active users.

Let's just say that FarmVille, with its emphasis on virtual, is no Flint, Michigan or Dayton, Ohio with their emphasis on real workers and, sadly today, massive real unemployment.

And that, my friends, is the problem. And it's a big one -- for the millions of unemployed American workers, for the economy today, and, if job creation remains dismal, then come 2012 for the administration as well.

You see, the president and Ms. Jarrett keep talking about jobs and competitiveness as if these tech companies are the end-all and be-all to economic recovery. Again and again, he seeks counsel among the Silicon Valley crowd, while staying away both from the non-virtual manufacturing facilities found in all fifty states and, it seems, from talking with the nearly 30 million real unemployed workers for whom we're trying to find those new jobs.

Following the dinner, Ms. Jarrett closed out the evening's theme by saying, "Who are the Mark Zuckerbergs of tomorrow? We want to make sure we harness that innovative spirit."

But let's look at the "employment credentials" of some of those attendees.

Facebook has all of about 2,000 employees, and Twitter about 350. (FarmVille is, after all, virtual.) Google and Yahoo have about 35,000, with many of Google's increasingly overseas and with Google's earnings all the while largely escaping paying any U.S. corporate income taxes. Cisco and Oracle have maybe 170,000 employees, which is a bunch, but more than half of these jobs are now offshore, as is at least an equal percent of their intellectual property (or IP).

And then there is Apple, the company so revered by the president as the perfect model for the future American economy that Steve Jobs sat at his left hand during dinner. (Zuckerberg sat on his right.) Apple has about 50,000 direct employees, 25,000 or so in the U.S. and 25,000 overseas. And of course it has the brand loyalty of millions of American consumers.

But what Apple also has, which never came up in discussion at the dinner or in any newspaper article that covered it, is its offshore manufacturing relationship with a company in China called Foxconn that makes virtually all of the Apple products which the President and Ms. Jarrett extol as the future of American manufacturing. This single company, with its more than one million employees total -- a number larger than many of the standing armies of the developed world -- accounts for 40% of the entire U.S. consumer electronics industry. 400,000 of these employees work in a single location outside of Shenzhen, China, of whom 250,000 are dedicated solely to manufacturing Apple products sold in the U.S.

In other words, for every 1 of the 25,000 American workers now employed by Apple mostly in marketing, administration and R&D, there are 10 Foxconn workers in China physically manufacturing the iPads and iPhones which Apples sells everyday -- 250,000 in total. But to fully appreciate the outright cruelty to American workers and the American economy of this arrangement, one only has to back as far as 1997-1999, when Apple products were the real apples in the American workers' eyes and there was only de minimis offshore manufacturing.

So it is that the day after their FarmVille dinner, when Mr. Obama and Ms. Jarrett traveled north to Oregon, they were greeted at a factory tour by about three dozen high-tech workers who justifiably accused the President of advancing trade policies that keep shipping their jobs overseas. At the same time, and clearly related, the leadership of the International Association of Machinists and Aerospace Workers -- the women and men who know what a true tech industry is -- forthrightly called out the White House for not advocating for them. ("Obama and Unions: Many in Labor Movement Frustrated with President", Peter Wallsten, Washington Post, 2-19-11). Nationwide, Machinist brothers and sisters give President Obama only a 17% approval rating on job creation, which could hardly be lower and is less than half the 42% overall job approval rating they give him.

A study last year from the United States Business and Industry Council (USBIC) shows that the past decade-long surge of advanced manufacturing imports very much helped set the stage for the ongoing economic crisis. USBIC's calculations show that had imports in these sectors remained flat in absolute terms from 1997-2008, U.S. output would have been $405 billion (or 21%) higher, which is an amount more than twice as great as the $185 billion in output lost overall in the first two years (2008-2009) of the Great Recession.

Even when not noshing in Silicon Valley and instead dealing with the President's new Council on Jobs and Competitiveness, Ms. Jarrett fails to distinguish among (i) Silicon Valley's devices-related jobs-exporting juggernaut, (ii) the reality that the Internet-dependent technology sector does not employ that many people (and is not looking to add many), and (iii) meaningfully reinvigorating the nation's domestic manufacturing sector, which is the real sine qua non. In fact, the Bureau of Labor Statistics has just recently estimated that employment in 'information technology' will be lower in 2018 than it was as far back as 1998.

As I've written recently, the president's choice of Jeffrey Immelt, the CEO of General Electric, to be the Council's chair was, to start off, a strange one. It is rivaled, however, by his decisions to then include on the Council chief executives such as American Express's Kenneth Chenault, Southwest Airlines' Gary Kelly and, most recently, Intel's CEO, Paul Otellini, and by his earlier decision to appoint James McNerney, the CEO of Boeing, as head of his Export Council.

Mr. Immelt, clearly a very successful executive, is a staunch free-marketeer and a registered Republican who gave $15 million to the Ronald Reagan Library and proudly voted for John McCain in 2008. And with the possible exception of Intel and Boeing, few American companies have drunk more deeply from the offshoring trough than has General Electric. American Express and Southwest Airlines, in turn, have absolutely nothing to do with manufacturing and our global competitiveness. The Boeing Company under James McNerney is not the Boeing Company of Bill Boeing -- McNerney's Boeing has its own huge commitment to offshoring (to China) and its own ongoing search for lowest-cost labor settings (most recently in Mexico).

I have written at length about Reginald (Reg) Jones, who was the CEO of General Electric immediately preceding Jack Welch. When he became CEO in 1972, Jones distinguished himself by declaring in his maiden speech that henceforth he had equal and concurrent responsibilities to shareholders, employees, customers, communities and the nation. Later, in 1981 he was responsible for the Business Roundtable (the public policy arm of the nation's largest public companies) formally adopting this perspective for all of its member companies.

By 1998, however, this corporate responsibility train was so off the track that Jack Welch substituted his own vision for corporate America, which he characterized thusly: "Ideally, you'd have every plant you own on a barge to move with currencies and changes in the economy."

This perspective is apparently the 'big business' construct that President Obama finds acceptable as a complement to FarmVille, a construct that now sees half of the revenue of the Standard & Poor's 500 largest publicly traded U.S. companies coming from abroad (Harold Meyerson, "The American Prospect", 1-28-11). And if viewed from the vantage point of employment, a recent study by Capital Economics found that from 2002 to 2008, overseas employment by U.S. multinationals increased 23%, while employment here at home increased by less than 5%.

In industry after industry, but especially in the technology industries that give us iPods, iPhones and Androids, offshoring practices offer more short-term profit opportunities than does pursuing domestic manufacturing. Meyerson cites the McKinsey Global Institute's 2010 report on U.S. Multinational Corporations: "U.S. multinationals must pursue new growth opportunities and continually improve operations to remain globally competitive. They go where the markets are expanding, where the talent lives, and where they can earn superior returns."

Yet this premise and its commitment to offshoring fly in the face of everything we know about achieving and sustaining prosperity in a very large and extraordinarily complex economy such as ours. Given relative multiplier effects, no less than 20% of America's workers need to be employed in manufacturing, and the sector needs to be contributing a like percentage of our GDP. As it is now, however, from its high point in the summer of 1979, employment in manufacturing has fallen from 20 million jobs to only 12 million today, with 6-plus million of this decline coming just since 1997 when China's trade with the U.S. really exploded. Less than 9% of Americans now work in manufacturing, and as a percent of GDP, the sector represents just 11% of our total, down from a consistent 25-30% during the first twenty-five years after WW II.

Manufacturing has by far the largest multiplier effect of all job sectors. It creates $1.40 of additional economic activity for each $1.00 of direct spending and, most important right now, 2.5 other jobs on average for each job in it. And at the upper end of the sector, as many as 16 associated jobs are created for each high-tech manufacturing job.

However, there is no strong, clear commitment from the Obama White House to bring the manufacturing sector back to the needed levels of employment and economic contribution. And as long as Mr. Obama focuses on CEOs in Silicon Valley to the neglect of rebuilding manufacturing in America, we won't see anything near the official, let alone the real, unemployment rate that his economic team predicted in early 2009 and continues to premise.

FDR said that, "We have always known that heedless self-interest was bad morals; we know now that it is bad economics." But hey, pass the (virtual) arugula.

Leo Hindery, Jr. is Chairman of the US Economy/Smart Globalization Initiative at the New America Foundation and a member of the Council on Foreign Relations. Currently an investor in media companies, he is the former CEO of Tele-Communications, Inc. (TCI), Liberty Media and their successor AT&T Broadband. He also serves on the Board of the Huffington Post Investigative Fund.

 

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