Saving the US Economy – Effective Involvement of Government and Business

The rapid development of the Asian economies				challenging. To the Obama administration's credit,
provides numerous examples of methods to				stimulus funds have been provided to support
develop job growth, incubate new technologies				high-tech battery production.
and new products, scale-up to production and				Adversion to risk may be another problem
manufacture of the new product, and develop a				companies face. Foreign governments often
strong economy. In a study of the industrial				mitigate the risk of companies through
development of East Asia, Robert Wade in his				government funding. The scaling and
book Governing the Market: Economic Theory and				manufacturing process is very costly and can be
the Role of Government in East Asian				very risky. The investments required are much
Industrialization found that Asian economies				higher than in the invention phase. And funds need
performed at record numbers over the 1970s				to be committed early, when not much is known
and 1980s in large part because of the effective				about the potential market. As Dr. Grove from
involvement of the government in targeting the				Intel points out: The investment to build a silicon
growth of manufacturing industries. As Tom Blair,				manufacturing plant in the 1970s was a few million
in his book Poorer Richard's America: What Would				dollars. By the early 1990s, the cost had risen to
Ben Franklin Say?, "the government of China				several billion dollars. The decision in the 1990s to
spends their money to build industry and sell				build the plants for the Pentium chips needed to
products, and the USA spends money to make				be made years before Intel knew whether the
the world safe." If the USA wants to continue to				Pentium chip would work or whether the market
be the world's superpower and leader for peace,				would be interested in it. Because of good
and indeed we should, for think about the world				technology and good business decisions, along with
rife with tyrannical governments and militaristic				acceptance of the associated risks, the Pentium
groups causing anarchy, killing, raping, and torturing				was a huge success.
if we are not there to lead, then we must regain				However, in previous years, when Intel's business
our economic might in order to support our world				focused on making memory chips, Intel hesitated
leadership role.				to add manufacturing capacity, not being sure
Consider the USA where recently the mantra has				about the market demand in years to come.
been "free market" and the US government				Japanese competitors didn't hesitate and invested
viewed as "the problem." Not long ago in California,				in the plants. When the demand for memory chips
and in particular the Silicon Valley, the most				rose exponentially, the Japanese roared into the
dynamic economy on the planet was in place,				U.S. market and Intel began its descent as a
thanks, partly, to local, state, and federal				memory-chip supplier.
government, where a tremendous incubation of				Now in even in our biotech and pharmaceutical
new companies and new technologies was				business we see some of the same trends
occurring. Those companies went on to produce				emerging. The biotech revolution began in the
their products in California, realizing great job				Silicon Valley area, South San Francisco to be
growth and bolstering the economy. The				precise, at Genentech. The biotech industry
birthplace of semiconductors and biotechnology,				flourished in the Bay Area and along the California
this area has thrived with the incubation and then				Coast especially north of Los Angeles where
the scale-up to production and manufacturing of				Amgen became the world's largest biotech
new technologies. Seated next to one of the				company, and also in San Diego where over 500
world's wealthiest communities with much				biotech companies now exist, including such
disposable income, packed with venture capitalist,				promising new start-ups as Craig Venter's
ringed by three of the great universities on the				Synthetic Genomics that has partnered with
planet (UC Berkeley, Stanford, and UCSF), and				Exxon-Mobil to produce algal biofuels. However,
many other institutes providing a vast quantity of				many of the active ingredients or raw materials
intellectual assets and intellectual property, loaded				for biotech and pharmaceutical products are being
with entrepreneurs, supported by federal dollars,				outsourced to companies in India and China,
and even supported by state initiatives such as				sometimes with disastrous consequences beyond
the 1980s California Commission on Industrial				the economic implications. Witness the deaths of
Innovation instituted by then Governor Jerry				81 people from the drug heparin produced in
Brown ( a noted fiscal conservative, but				China. Investigations found a contaminant,
proponent of high-tech industry and education),				over-sulfated chondroitin sulfate, tainting raw
the Silicon Valley has long been the champion of				heparin coming from China that was linked to the
the world economy.				deaths. Along with India, China supplies more than
However, something is changing and the change is				40 percent of the active pharmaceutical
not good. Iconic to this change, witness where the				ingredients (API) used to make U.S.
birth of the world's first silicon chip happened in				pharmaceuticals. And Pfizer and Johnson &
Mountain View, CA, where now that seminal site				Johnson have announced plans to set-up research
of the chip industry is a nice place to pick up				and development facilities in China. Again, technical
some fresh produce. This produce stand once				knowhow and innovation are being exported
was the world's first semiconductor lab,				overseas, with long-term economic consequences,
established by the American physicist William				as well as the killing and sickening of people
Shockley and where the founders of Fairchild and				because of poor quality control overseas.
Intel first worked. However, nowadays just a				Why is the US no longer interested in scaling up
couple of marks on the sidewalk indicate a				to production? Perhaps the answer has to do with
glorious past of America's chip making industry,				a general undervaluing of manufacturing, and the
among all the fruits and veggies.				idea that as long as innovation process stays in
Unemployment in the Bay Area is about 10%,				the U.S., all will be well with our economy. This
which is higher than the national average. Clearly,				way of thinking seems wide spread.
the great Silicon Valley innovation machine hasn't				Princeton University economist Alan S. Blinder in
been creating many jobs lately in the USA.				Offshoring of American Jobs by Bhagwati and
Instead, those jobs are headed to Asia.				Blinder have written: "The TV manufacturing
The underlying problem isn't simply lower costs in				industry really started here, and at one point
Asia. Rather we face a number of problems that				employed many workers. But as TV sets
are self-inflicted. To paraphrase Tom Blair,				became ‘just a commodity,' their production
American companies eat their young, often for a				moved offshore to locations with much lower
few years of heightened profits, then they				wages. And nowadays the number of television
disclose and transfer their expertise and				sets manufactured in the U.S. is zero. A failure?
technologies to China. Another words, we give				No, a success."
away our know-how and hence the long-term				The overseas production of TVs not only caused
survivability of our US companies for the sake of				a loss of jobs, but also broke the chain of
several years increased income for the short				experience that is so important in technological
term gain of entry into the Chinese market.				evolution. Just as happened when the US
Further, we have our own misguided belief in the				abandoned the production of batteries, abandoning
power of startups alone to create new				today's "commodity" manufacturing may very
technologies and U.S. jobs. Americans love the				well lock the US out of tomorrow's emerging
idea of the guys in the garage inventing				industries.
something that changes the world. We all think of				Again, the economic mantra of today seems to
the Apple Computer start-up in a garage				be "free market is best, and government is the
somewhere in Northern California back in the 70s				problem." Such fundamental beliefs that have
or the more recent version of Google with a				been elevated from a conviction based on
beautiful campus where innovation runs rampant.				observation and reasoning to an unquestioned
Often I hear businessmen espouse the view that				truism are leading us down an uncompetitive path.
we are living in a country where we create ideas				In the past we have seen the decisive victory of
but not products, and this is exactly what the US				free-market principles over planned economies.
should be doing. Recently New York Times				We now ignore the role of government in what in
columnist Thomas L. Friedman in an opinion piece				reality was controlled capitalism, largely oblivious to
called "Start-Ups, Not Bailouts," pointed to our				emerging evidence that while free markets beat
significant economic problems in the USA resulting				planned economies, totally free markets have
from a combination of problems, including a				never worked well and we must consider
deteriorating educational system, lack of a healthy				modified capitalism as a system that works even
political and governmental atmosphere, and				better than free markets.
immigration policies that turn away "high-IQ risk				Evidence of government working through a
takers," leading to a diminution of entrepreneurial				controlled free market to develop economies and
activities and thus the creation of new businesses				advance innovation, jobs, and a strong industry
and new technologies.				presence is observed in several Asian countries
Startups are important for our economy, but also,				during the past few decades. These countries
as Dr. Andy Grove of Intel will argue, start-up				seem to understand that job creation and building
activity alone, where products are conceived but				industry must be the No. 1 objective of state
without the subsequent scale-up to production, will				economic policy. The government plays a
lead to a less than robust economy and erode job				strategic role in setting the priorities and arraying
growth, and eventually diminish further innovative				the forces and organization necessary to achieve
start-up activity. Yes, I have argued in front of				this goal.
congress to back start-ups with loan and SBIR				One example is the "Golden Projects," a series of
programs, and support of our great research				seven digital initiatives devised and managed by
universities, but start-ups alone without scale-up				the Chinese government in the late 1980s and
to production and development of the technology				1990s. Beijing was convinced of the importance of
and products here in the USA cannot by				electronic networks that are used for
themselves increase tech employment and sustain				transactions, communications and coordination in
an innovation-based economy. Equally important is				enabling job creation and economic growth,
what comes after that moment of creation in the				particularly in the less developed parts of the
garage, as technology goes from prototype to				country. Over time, the Golden Projects
mass production. This is the phase where				contributed to the rapid development of China's
companies "scale- up," a process whereby the				information infrastructure, job creation, and the
employees work out design details, figure out				country's economic growth.
how to build their products affordably, build				What do we learn from the Asian experience?
factories and infrastructure, develop business				First, let's remember that government has had
partnerships often with other local businesses, and				much to do with our success as a nation and our
where management hires people by the				continued success will depend on a strong
thousands. Scaling is hard work and, in the eyes				government that attracts the best minds. As an
of Americans, maybe not as glamorous as the				example in the great success of California, the US
innovation process, but is necessary for innovation				government helped establish important institutions
to be realized in a commercial product, and equally				for research and teaching including the University
important, is necessary for further innovation.				of California through the university land grant
The scaling-up process and manufacturing is now				system in the 1880s,and established the
rarely occurring in the U.S, and as we fail to do				Livermore National Labs with the University of
our own manufacturing, plowing capital into young				California in 1952. According to the
companies that build their factories elsewhere will				Semiconductor Industry Association(SIA),
continue to yield a poor return in creating jobs in				"Reversing the Decline in Federal Funding, In the
American, decrease economic gains in the USA,				1990s, federal funding declined precipitously in the
lead to the eventual deterioration of innovation,				areas most critical to our industry's continued
and fail to build a healthy economy with a robust				success: the physical sciences, mathematics, and
middle-class.				engineering. This has seriously reduced the
In years past, scaling-up to production and				number of faculty and students in these
manufacture worked well in the Silicon Valley.				disciplines, slowing the pace of university research
Entrepreneurs invented something new and useful.				and creating a shortage of skilled workers for our
Investors provided money to build the new				companies. In the past year, SIA has energetically
business. If the founders and their investors				addressed this problem." Furthermore, in
developed good technology and business ideas,				Business and Economic History (1995), Daniel
worked hard, and were lucky, the company grew				Holbrook writes that the US government did
and had an initial public offering (IPO) that brought				much to develop the semiconductor industry in a
additional money to finance further growth.				number of ways, including its procurement policies
Examples in the Valley are Intel, then Tandem				and an ability to lead the dissemination of
Computers Inc. went through a similar process				important technological developments to the
(was purchased by Compaq in 1997), then Sun				industry. Further, the birth of the biotech industry
Microsystems Inc., Apple, Cisco Systems Inc.,				in California was largely a result from work at a
Netscape Communications Corp. (now a part of				number of great research universities, supported
AOL), and recently Google, Facebook, Twitter,				by government, including the University of
and many others.				California.
As time passed, wages and health-care costs				Viewing the Silicon Valley and the rest of the
rose in the U.S., and the Chinese government				California tech industry, a community with a
devised a system to compete. American				strong tradition of science and engineering exists,
companies discovered they could have their				this community is eager to solve whatever
manufacturing and even their engineering done				problems they encounter. If profit margins are
cheaper overseas. Doing so improved the				the problem, the scientists and engineers work on
company's margins. Management and stockholders				margins. Each company, independent and
were happy. Growth continued, and so did				individualistic, does its best to expand efficiently
profitably. But the long term results of such				and improve its own profitability. However, in
overseas outsourcing began to show and the job				pursuit of our individual businesses and a short
machine in the great Silicon Valley began to falter.				term view to the yearly financial accounting goals,
Unfortunately, today, manufacturing employment				which often involves transferring manufacturing
in the U.S. computer industry is about 166,000,				and a great deal of engineering out of the
which is lower than it was before the first				country, has hindered our ability to bring
personal computer, the MITS Altair 2800, was				innovations and manufacturing at home, and has
assembled in 1975. Meanwhile, a very effective				imperiled our economy. Without scaling to
computer-manufacturing industry has emerged in				production and support of our educational and
Asia, employing about 1.5 million workers, including				research institutions, we don't just lose jobs, but
factory employees, engineers, and managers. Hon				we lose our hold on new technologies and
Hai Precision Industry Co. of Taiwan is the largest				eventually erode our economy.
of these Asian companies with revenue last year				Our current state of economic ills is partially due
of $62 billion, larger than Apple Inc., Microsoft				to our short term goals to increase the bottom
Corp., Dell Inc. or Intel. Hon Hai Precision employs				line of the financials and as a consequence of
more than 800,000 people, more than the				many of us taking actions focused on our own
combined worldwide head count of Apple, Dell,				companies' next milestones. In the biotech
Microsoft, Hewlett-Packard Co., Intel and Sony				industry this is reflected by many companies
Corp. Indeed this is company making you I-Pod				developing an "Indian" or "China" strategy to
and your I-Pad.				move production or studies overseas because
The deterioration of US job creation is endemic to				their competitors are doing so already. And as the
much of US industry, not just in our computer				companies moved production or research
industry. Alternative energy is another example,				overseas, they often found that the lower costs
where an emerging industry is replete with much				overseas were really not so low when studies
innovation. Photovoltaics are a U.S. invention. Use				were not performed correctly and products were
of photovoltaics in home-energy applications was				delivered late and/or were of inferior quality. As
also pioneered by the U.S. Unfortunately, most of				Dr. Andy Grove has suggested, companies and
the photovoltaic panels are now manufactured in				VCs should have a partner in charge of every
China. Although a Silicon Valley technology				company's "U.S. strategy."
company sells equipment that is used to				To better compete in the world economy, the US
manufacture photo-active films, the company				will need to view business in the long term as well
ships close to 10 times more machines to China				as the short term. Outsourcing overseas and
than to manufacturers in the U.S., and this gap is				giving away our scale to production for short
growing. Not surprisingly, U.S. employment in the				term profits needs a disincentive, thus rebuilding
making of photovoltaic films and panels is perhaps				our industrial base. Government needs to support
10,000 -- just a few percent of estimated				our great research institutions, provide liquidity in
worldwide employment. New concentrating				the financial markets for all businesses, including
photovoltaic (CPV) systems were recently				start-ups and small businesses, and should develop
invented in California, and hopefully this new				a system of financial incentives, such as to levy a
technology will continue to develop in the USA				tax on products produced offshore. Then use the
with companies such as SolFocus of Mountain				dollars from this tax to provide liquid capital to
View, California.				those companies creating innovative products in
And job creation is just a part of the problem.				the USA and/or scaling their production within our
With some technologies originally developed in the				borders. A government supported system such
USA, such as advanced batteries, both scaling-up				as this would provide an incentive, and a reminder,
to production and innovation are occurring				that all of us in business have a responsibility to
overseas. Although years in the making,				maintain the industrial base on which this country
mass-produced electric cars and trucks are finally				has prospered and on which we depend for our
on the market. New companies are emerging in				long-term viability. Further, during our current
the USA, including Tesla in Northern California and				economic crisis, allowing our great academic
Fisker in Southern California. These cars rely on				research institutions to fall from their current lead
lithium-ion batteries. Unlike microprocessors, where				in science and engineering will lead to the eventual
many are produced in the Silicon Valley, Texas,				decline of our great ability to innovate and
and the East Coast by Intel, AMD, and others, the				incubate new technologies and new companies. To
U.S. share of lithium-ion battery production is small.				accomplish this revitalization of our business,
The small presence of the USA in the production				government will need to become less acerbic.
of high-tech batteries presents a problem for				Instead of politics being played like American
growing this, and related industry in the USA. A				football, where there are two competitors and
new industry needs an effective infrastructure in				people choose one side or the other and defend
which technology knowhow accumulates,				their side irrationally, politics need to be played
knowhow and innovation builds on experience, and				rationally. Our current state of demagoguery
close relationships develop between supplier and				between Republicans and Democrats is leading to
customer. The U.S. lost its lead in batteries 30				our economic decline. We no longer have rational
years ago when it stopped making				debate; rather we have two demagogic
consumer-electronics devices. Those companies				monologues with no positive interaction leading to
producing batteries then gained the exposure and				inaction. As Martin Luther King III has said, "We
relationships needed to learn to supply batteries				need to learn how to disagree without being
for the more demanding laptop PC market, and				disagreeable." Perhaps with a civil political discourse
following that, for the even more demanding				as in past times in the US, and with business
automobile market. U.S. companies didn't				viewing the long term consequences of their
participate in the first phase of production and				actions, we can begin to realize a political and
consequently weren't competitive for all that				business view to the future that will rebuild our
followed. Any attempts by US companies now to				once great US economy.
gain entry to that market will prove very

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Saving the US Economy – Effective Involvement of Government and Business