Sunday, June 19, 2011

The Trouble with An Innovation Economy, The Entitlement Drag

Innovations Are Great, But the Jobs are in China

I was reading a magazine article the other day on Chinese manufacturing giant Foxconn. You may know Foxconn as the company that manufactures the iPhone, as well as many other high tech electronic devices. You may also know Foxconn as a place that famously had a rash of worker suicides last year, that prompted reforms in pay and work practices. Or you may never have heard of them. I don't have a view on Foxconn as a company one way or another, but the article struck a cord with me for a different reason. It mentioned, in passing, that number of people that Foxconn employs.

Think about this - Apple and Foxconn are approximately the same size as measured by revenues or profits. Apple develops unbelievable innovations - iPods and iPads, smart phones, computers, etc. It is a crown jewel that politicians talk about when the mention American ingenuity and the innovation economy. Foxconn is nobody's idea of an innovator, it's simply a manufacturing firm that leverages cheap labor in China at a lower cost than competitors in other countries can.

Here is the problem...Apple employs 30,000 people, Foxconn employs 1,000,000. Granted, the 30,000 people at Apple by and large do very well. Senior management has made themselves very rich. Even middle management and the programmers that build the innovation make excellent livings and get great benefits. It's a heck of a lot better to work at Apple than Foxconn, no doubt. But only 30,000 people get to live an Apple-sponsored lifestyle.

It's hard to build a middle class economy this way. Apple is a giant technology company. At 30,000 per company, you'd 493 new Apples to employ all the unemployed in this country. Never mind the fact that most of the unemployed would be vastly unqualified for a job at Apple.

My point is that we need to be more than an "innovation economy" to be sustainable. Innovation is great, but if we export the manufacturing to China and the customer service to India, then a small group of people in the US will get rich on the innovation, but the rest of the country won't benefit.

We would be wise to steal a page from Germany's playbook and invest in some real industrial policy. Germany has done an outstanding job growing high-dollar manufacturing jobs by investing in its industry and its trade education. Alas, I fear in the current Washington gridlock, that ideas like this are a complete non-starter.

Would you like fries with that?

The Entitlement Drag
If we spend all our money on Social Security, Medicare, Medicaid and Unemployment Benefits, how will we ever invest in the infrastructure and the education needed to build a full employment economy?

Our mass transit systems are far inferior to Europe and much of Asia. Our air traffic control system is from the 1950s. Our power grid is still largely powered by coal plants built 100 years ago. Funding for education at all levels is being cut.

We used to find ways to invest in big things - the Apollo missions, the Eisenhower Interstate system, the precursor to the internet. Now, I fear, we are spending too much money just on social programs which have no long term payback. No, I don't favor slashing and burning the social safety net - it's part of the values of a modern society. I'm just saying we need some balance. And probably some higher taxes to pay for it. Another non-starter these days.

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