In the United States, innovation has become almost synonymous with economic competitiveness. Even more remarkable, we often hear that our economic salvation can only be through innovation. We hear that because of low Asian wages we must innovate because we cannot really compete in anything else. Inventive Americans will do the R&D and let the rest of the world, usually China, do the dull work of actually making things. Or we'll do programming design but let the rest of the world, usually India, do low-level programming. This is a totally mistaken belief and one that, if accepted, will consign this nation to second- or third-class status.
The latest offender to advance this line of thought is Thomas Friedman, who has prominently displayed this familiar and entirely incorrect line of thought in the New York Times. Unfortunately, this idea is one that is widely accepted without careful thought about either its truthfulness or its consequences.
Truth and Consequences
Cheap labor abroad is cited as the incurable handicap that explains why the United States cannot compete. But cheap labor doesn't explain the fact that Japan and Germany, both high-wage countries, are successful in the automobile industry. Nor does it explain how semiconductors, a model of a high investment, low-labor content industry, are mainly made in Asia. The premise that the inescapable burden of competing against low wages means failure is simply not correct.
Perhaps even more disturbing than the lack of truthfulness is the fact that we are not addressing the consequences of not competing. There are some inescapable truths about any economic good, be it a manufactured good or a service: (1) you either produce it in your own country, (2) you trade something you do produce for it, (3) you do without it, or (4) you import it and promise to pay later.
We are moving steadily away from producing what we need in this country. We are also moving away from producing on a scale that enables us to trade for what we do need. Rather than do without, we are increasingly importing things with a promise to pay later. This cannot go on. When our trading partners, especially China, no longer want to loan us hundreds of billions of dollars a year to be paid later, we will have little productive capacity left and we will be a poor nation.
Friedman is only the latest to assume that we can avoid this fate by emphasizing designs, ideas, and R&D and trading them for the items we need. This is an attractive idea; we often hear about innovation parks and university research centers and often their work is both exciting and good.
But the chasm-sized flaw in this otherwise alluring proposition is scale. Balancing trade on ideas and R&D simply cannot be done. The most elementary analysis shows that the scale is entirely wrong. As one who spent many years as the head of research of a large corporation, I know how much R&D matters; I also know how small it is. Eight percent is a very large percent of revenue to spend on R&D. Even in manufacturing, which is relatively R&D intensive, 4 to 5 percent is typical. It is really wrong to think that you can scale up R&D to be big enough so we can trade it for the huge quantity of things we need but don't make in this country.
A Strange and Unworkable Strategy
Ignoring the issue of scale, Tom Friedman goes on to quote authoritative Chinese sources who say that by the end of the decade China will be dominating global production of the whole range of power equipment. To Friedman's approving eye this just means that China is going to make clean power technologies cheaper for itself and everyone else. Friedman says that Chinese experts believe it will all happen faster and more effectively if China and America work together with the United States specializing in energy research and innovation, at which, he asserts, China is still weak, while China will specialize in mass production.
It is probably true that all this will happen faster with the specialization Friedman describes, but where will we be at the end of that process? China will be making power equipment cheaply, but the chasm is still there, so what will we have to trade for it? Power equipment will be cheap in China, but if we adopt this approach it may well be unaffordable in the United States.
Meanwhile the Chinese wisely welcome our nascent innovations and turn them into products. They are building plants, making things manufacturable, and adding them to their growing GDP. Friedman's article contains an excellent example of this. He describes a U.S. developer with a new approach to solar-thermal power, whose proposal to the U.S. government asking for small scale support was easily outbid by a Chinese offer that was far larger and was aimed at much larger scale plants.
Specializing in R&D, but sending its fruits on to others is a strange and completely unworkable strategy for a nation.
Other Issues
Thinking of innovation as a standalone activity without production has other major flaws. First, our global corporations, understanding that innovation and production are in fact closely tied, are rapidly moving not only production but also R&D overseas. Intel's CEO made this very clear when he said that the goal of Intel's new plant in China is to support a transition from "manufactured in China" to "innovated in China".
In addition, the standalone innovation approach leaves most Americans entirely out. After all, only a very small portion of Americans are engaged in R&D. At a recent meeting I heard "The only thing that matters is innovative and passionate people." These people do matter, but they are very far from being the only ones. This attitude misses the point that it was all our people, working in many different work settings, that made this country prosper. And all of them will all be needed in any viable future for our country.
What We Must Do - The Role of Trade
We need successful industries and we need to innovate within them to keep them thriving. However, when your trading partner is thinking about GDP rather than profit, and has adopted mercantilist tactics, subsidizing industries, and mispricing its currency, while loaning you the money to buy the underpriced goods, this may simply not be possible.
The ability to compete in a world that is half-mercantilist, half-free is inescapably tied to effective trade policy. Our present policy is to beg. We ask countries like China to stop the subsidies and currency mispricings because they are creating a one-way flow of underpriced goods; goods that are destroying jobs on a large scale in many of the most productive sectors of our economy. But why should they stop? It's working for them.
We must move to balanced trade. With balanced trade every dollar of imports is matched by a dollar of exports of goods or services produced here in the U.S.A. We are fortunate that there are in fact ways to balance trade. One very attractive way is to adopt some version of Warren Buffet's Import Certificates plan, which Buffet has described in a remarkably insightful Fortune article.
We should act now to balance trade. We should not continue to beg while jobs disappear and our productive ability erodes.
What We Must Do - Motivating our Companies
Today our companies are motivated to take innovations abroad, produce there and import the goods into the United States. Increasingly we can expect services also to go overseas. We must produce here in the U.S.A., to employ the people of this country, and we must keep their activities effective by a steady stream of innovations in design and production. While other countries roll out a welcome mat of tax breaks and subsidies for our companies because their common sense tells them that their people being employed in productive work is the road to being a rich country, we provide no incentive for U.S. companies to produce here.
We cannot continue to have our corporations, faithful only to the interests of their shareholders, engage in a one-way flow of jobs, technology, and innovation out of the country. We need to realize that with globalization the interests of our country and of our global corporations have diverged. We can realign the interests of corporations with those of our country by rewarding companies that are productive here. And that can be done in ways that are consistent with our history and with the limited capabilities of our government.
Conclusion
Specializing in innovation is an attractive idea, but a misleading one; an idea that blinds us to what we really need to do.
We need to do more than produce exciting new ideas; we must also be able to compete in large productive industries. This requires us to both balance trade and to motivate our corporations not only to innovate, but also to produce in this country. While this is hard to do, it can be done. Specializing in innovation, though often recommended, is in fact a delusion, an alluring path that in reality will lead us straight downhill.
I'm a research mathematician.
I agree 100%. What Gomory is writes is obvious.
What is not obvious (since I'm not an economist) is why do the economic models seem to indicate that free trade is necessarily beneficial.
I also cringe whenever politicians talk about how the USA is the most innovative, greatest country on Earth as it propagates the American Exceptionalism myth.
I also cringe when politicians talk about needing to educate ourselves to be competitive. Obviously, education is important - but our problem isn't that we don't have enough college graduates.
This is not an anti-American rant. It just saddens me, as I get older, to see our country making so many (obvious) mistakes that will cause hardship as jobs leave.
Unlike Mr. Gomory I do not think that there is any solution to this problem due to political and class structural issues. I.e. `nobody' is going to vote for higher prices at Walmart -- which is what Gomory basically advocates.
Although the overall welfare effects of free-trade is unclear when markets are less than efficient, but what is clear is that there will be an increase in consumer surplus and decrease in supplier surplus.
Also, we should keep in mind that China's far from perfect. The living standards in China (especially rural areas) are far, far below that of the US. We can't and shouldn't compete with a country that's willing to accept a much lower standard of living.
The gov takes orders from big business in exchange for campaign donations to help get re-elected. Big money is required to get re-elected because as a county we choose not to fund our own democratic process, therefore big money has stepped in and filled the void. (that and gerrymandering)
We have failed to pay for our own form of government and all manner of malady has resulted. The fact that:
===Intel now "innovates" in China
===that being very wealthy is almost a prerequisite for running for national office
===that getting a decent education requires mountains of debts and decades or repayments
===that we can't agree as a county that health care is as important as something like roads and that we should pay for it
===That we have been almost at war constantly since the early 90s
=== That banks can be too big to fail but the middle-class isn't.
ARE ALL ULTIMATELY CAUSED BY THE SAME PROBLEM!
We have let Democracy fail us because the People's interest are no longer adequately represented in Congress. This is not going to change without something pretty radical like a Constitutional Convention run by the People that changes to rules to favor the People.
Hell, I wish. I got all kinds of ideas. But like Gomory says, we have to actually have something tangible to export. If innovation is the key, that'll come with a strong education system that teaches us how to think more creatively and critically. We have that now, but for how much longer? So we produce some innovators; a lot of them come from overseas and then all of them go to other countries where their ideas are more profitable. Why not?
Ideas can be taken from anyone anywhere and made to work. We can't corner the market on innovation and any belief in that is jingoism. It's only a matter of time before nothing "new" comes out of the US if the markets are all elsewhere. The middle-class is dying, and without any money to buy things with (because we can't all work as "innovators") we'll have to wait until our standard of living becomes lower than China or India, and then we'll be the cheap labor.
I agree with many of the points Mr. Gomory correctly states about the importance of maintaining manufacturing in the U.S. and the enormous drain on our economy if we continue the off-shoring trends.
Where I disagree with his comments is somehow equating that focusing on innovation takes away from driving productivity. I also don't agree that focused efforts in innovation drive companies to automatically go off-shore with their manufacturing. Further, innovations do not exist singularly in the "product development" category... many of the best ways of gaining efficiencies are by creating "process innovations".
So while we off-shore manufacturing jobs to "low labor cost" countries, they are leveraging the "multiplier effect" of manufacturing and building innovation clusters in hopes of actually leading key markets worldwide.
To combat this trend we need to change our way of thinking... we need to adopt Innovation Economics as the basis for our policy. First suggested by Joseph Schumpeter, Innovation Economics suggests that economies are driven by innovation, and companies that excel at "adaptive efficiencies" and "productive efficiencies" will drive sustainable growth.
The point to all this being "innovation" is not the problem, it is the key ingredient for our companies and policies. Mr. Gomory is correct regarding the importance of manufacturing to our economy and on the negative impact of off-shoring... just don't throw INNOVATION under the bus!
Innovation is not synonymous with giving away the farm. MAKE vs BUY is a competitive business strategy decision.
IP and trade secrets are better protected when you scale production domestically, and then market your innovation. Build a profit center, protect it and then leverage it to expand into more markets - the Japanese manufacturers have done this for years and the Chinese are learning fast. We (consumers) have taken for granted the value of our own production capabilities.
Thanks Professor Gomory for reminding us how important our long term competitive capabilities are - innovation and production capabilities are both relevant and both to be valued.
I think one thing the US really needs to do is to rethink the way we fund R&D. With one minor exception: the first few years of the Clinton presidency, over 90% of our R&D since the 1950's has gone to defense related efforts. This is just insane. There have still been some nice technology transfers in spite of this. Who could have predicted that R&D on making a network that could survive nuclear war would result in the enormous benefits of the Internet. But we need to stop relying on these accidental dual use technologies and go back to programs that focus on R&D for business as well as defense. A nice start would be to change the name of DARPA back to ARPA.
Mr. Gomory's piece is perhaps the Final Word of what lies directly underneath the 'phony economy' that has existed since the mid 1980's. That of unrestrained, easy 'credit' and its attendant consequences. Not the least of which (as yet undiscovered by the masses), are the consequences of 'Outsourcing' and its attendant, 'Off-shoring'.
Bottom line? You cannot sustain a 1st-world economy without a vibrant and Large Scale Manufacturing capability.
What does that mean?
In short, it means that we are not Above making Shoes, Socks, Pants, Shirts, Belts, Suits, Plastic containers, Tools, Household appliances, Televisions, etc., etc., etc., right here on our own soil, employing our OWN CITIZENS.
I know, it's tough to get your arms around that concept - especially after almost 30 years of pulling it off for next to nothing for your shareholders...
Newsflash: Those days are GONE.
And rising unemployment along with rising costs of imported goods are going to tell the story.
Watch it and see.
What if there was no other country?
Then we would have to figure out how to make it work, without always farming it out.
If that single country had equal rights and laws for all, as we supposedly do.
If there was one country, one continent, one people. We would have it working that way. We would adapt to the problems, solve them. Not just export them, and try to import solutions.
This is not a what if, it is a has been, over and over. Nobody really tries to make a solution, as long as there is somewhere or someone else to use to put off the solution. Use at least two brain cells and you see that eventually it becomes as one country. Then what? It is past time to find solutions that work as if we were all in one country.
In the west we export good jobs and import low wage workers for the bad jobs, and are befuddled at why we have unemployment, lowering living standards.
This article is one of many I have read for decades that have predicted and explained what is happening. Nobody in power is listening to anything but money. Money now. More money now. Whatever the cost to everyone else.
- Since 9/11, the US security rules have forced a large number of non-US innovators to return to their home countries after getting exposure to the US innovation environment. They have taken what they have learned, and made significant changes to their home countries cultures.
- China and India, sensing an opportunity because of a wealth of talent returning form the US, have invest lots of government money in lots of innovative start-up companies. Often these grants have few restrictions, except to innovate stuff to beat the US with . The Chinese government now has an well funded VC systems with excellent managers, with extensive experience from helping start up companies in the US.
What really needs to happen is for the US to have an industrial policy like most other countries on Earth. That policy would require US companies to completely design product using US citizens (no H1Bs) and manufacture entirely in the US. The US will need to figure out how to make the products competitive with non-US products.
The bottom line is unless the US forces companies to do everything in the US, the US will continue to decline as a real country.