The Great Government Job-Destruction Machine

Bureaucracy destroys jobs.

On September 17, 1985, I gave an address "Successful Strategies for Competing at Home and Abroad" at the Assembly Technology Expo in Chicago, Illinois.  It was a vast trade show exhibiting all the latest robots, process control systems, quality inspection, materials handling systems and all sorts of gadgets and gizmos which were intended to help manufacturers keep costs down and increase productivity.

There were essentially no foreign cars on American roads when I entered college in 1963, but by 1985, everyone connected with the Big 3 automobile manufacturers had realized that there was Trouble Right Here in Motor City - foreign nameplates were taking sales, and jobs, away from Detroit in favor of assembly plants in the American south.

I was working for a conglomerate called Gould.  Among many other things, Gould made special computers for use in factories.  These were very rugged units which were programmed in a special language called "ladder" which, although unintelligible to the uninitiated, led to very reliable programs.  Software has to be reliable when a software crash means that two robots slam into each other, costing many dollars and possibly killing the programmer.

It Was A Good Speech

Our marketing department asked me to focus on the automobile industry because that was where most of our sales originated.  They wouldn't have cared about Detroit if the foreign companies had been buying their controllers, but the Japanese, who were the big foreign players at the time, were buying process control systems from Japanese vendors, surprise, surprise!  They wanted to encourage their customers to stay in business.

My talk explained that it would be fatal to allow the Japanese to take over the low end of the US auto market as they had in TV, consumer audio, copiers, and many other products.  People beginning their careers were buying "starter cars" from the Japanese and then buying more expensive models from the same vendors as their incomes rose.

Despite this unarguable fact, the Big 3 were not making low-priced cars.  Industry rumor had it that one of the reasons Henry Ford II fired Lee Iacocca from his job as President of Ford in 1978 despite Ford's making $2 billion profit that year was that Mr. Iacocca wanted very much to sell smaller cars.  "Small cars, small profits," sniffed Mr. Ford.  His name was on the building; he won.

Mr. Iacocca went on to rescue Chrysler from bankruptcy and stole sales from Ford.  Ford concentrated on larger cars and lost market share, just as Mr. Iacocca and I predicted.

The speech was so well received that I was invited to present it again at a conference sponsored by the Productivity Improvement Group at the University of California under the slogan, "Made in America is Here Again!"  This group had been funded because American manufacturing jobs were disappearing.  Nobody connected with manufacturing in any way believed that non-manufacturing jobs could pay as well as manufacturing because of the lower value added by each worker.  They thought that if we could increase productivity enough, we could overcome other countries advantage of lower wages.

Manufacturing jobs were important because wages can be higher when 800 workers generate $12,000 worth of automobile engines per minute, or $900 worth of value per worker-hour, than in flipping fries at Burger King.  Some of the $900 goes to pay for materials, rent on the building, and profit, but still, $900 per hour is a lot more cash flow per worker than in most non-manufacturing situations.  Our economic history since then shows that we were right - losing manufacturing jobs has brought on a great deal of working-class suffering.

During the second address, I pointed out the irony of the Assembly Technology Expo being held in Chicago, Ill., instead of in Detroit, MI where there was a great deal more manufacturing going on.  The reason, as I had found out from talking to exhibitors, was that unionized workers who controlled Cobo Hall in downtown Detroit were charging $50 to plug in a lamp, and woe to an exhibitor who attempted to do his own plugging!

Exhibiting in Detroit was so expensive that the Expo had switched to Chicago in alternate years.  The Detroit unions had driven half the jobs offstate to Chicago.  I had an example with which to warn that unionized workers would do the same thing to the automobile industry as a whole.

It Was The Wrong Speech

In a sense, the speech was correct in that union wages would have bankrupted both GM and Chrysler without massive gifts of taxpayer money, but it was wrong in that Ford has survived without government help.

Foreign car makers know that they can be barred from the American market unless they make cars here, and as long as they stay non-union, they can grab more and more market share over time.  This has destroyed unionized manufacturing jobs in the Midwest, but it's created good non-union manufacturing jobs in the South - unfortunate for Midwestern Americans but very nice for Southerners.

I was so focused on the special case of the automobile business that I missed the real threat to American manufacturing jobs - government regulation.  When Toyota had made enough money selling starter cars to move up-market to the Lexus, they had to manufacture it in Japan, not because of unions, but because the EPA would not permit them to use the required painting technology in the US.

As increased capital gains taxes and corporate income taxes led to American businesses "going global" and investing money outside the US, there have become fewer and fewer manufacturing jobs here.  I should have ignored foreign competition and warned that government regulation was the major threat to American jobs of all sorts.

The Cost of Regulation

We're seeing the fruits of years and years of government interference in the economy.  An American light bulb factory closed recently, and 200 people were put out of work.  Why?  Because our government has mandated that American consumers must use twisty fluorescent light bulbs instead of incandescent bulbs.

These bulbs take a lot more labor to make and require mercury which is hazardous waste.  It's so expensive to run a plant that handles "hazmats," as the cleanup industry calls hazardous materials, that it's essentially out of the question to make the bulbs in the US.

The Wall Street Journal has researched the total cost of regulatory compliance in the US; "The Regulation Tax Keeps Growing" says:

The annual cost of federal regulations in the United States increased to more than $1.75 trillion in 2008, a 3% real increase over five years, to about 14% of U.S. national income. This cost is in addition to the federal tax burden of 21%, for a combined cost of 35% of national income. One out of every three dollars earned in the U.S. goes to pay for or comply with federal laws and regulations, and new policies enacted in 2010 for health care and financial services will increase this burden.  [emphasis added]

One third of our national income is spent coping with government regulations and taxes!  The burden is particularly heavy for manufacturers:

Small manufacturers bear compliance costs that are 110% higher than those of medium-sized firms and 125% higher than large firms' costs. As much as it is fashionable to blame China for the demise of small manufacturing in America, the evidence suggests that looking for some reasons closer to home is warranted.

The regulatory cost for small businesses is $10,585 per employee!  Competing against countries which don't impose such costs is like running a marathon in ski boots.  You can finish the course if you're in really good shape, but don't expect to be among the winners.  No matter what you do to increase productivity, you can't beat a cost handicap of $10,000 per worker.

This cost estimate assumes that the business can operate at all.  In "Licensing to Kill," the Journal reports the case of a Pakistani immigrant who saved money from working in restaurants and sold his wife's wedding jewelry to open a hot dog stand in a "fixer-upper" building in downtown Milwaukee.

Despite following all the rules, his food license was retracted at the request of Alderman Robert Bauman, who suggested he would rather see a place "with a little class" in the location, instead of Mr. Khan's restaurant. Reopening Judy's Red Hots, he argued, would somehow encourage crime and disorder and stall the redevelopment of the community.

Mr. Khan followed all the rules, yet the government had the authority to retract his food service license just as he was about to open his store.  Even Jeffrey Sachs, a left-leaning economist who claims to have helped parts of the former Soviet Union prosper by introducing market reforms, points out that excessive regulation stifles the Russian economy.  Writing in Scientific American, August 2010, p 32, he said:

I left St. Petersburg feeling that so much more economic reform was still possible in that glorious city and throughout Russia.  the people's high education and technical expertise do not adequately translate into new businesses and higher incomes.  The bureaucracy keeps its traditional grip, even maintaining the internal registration from the time of the tsars that constrains Russians from moving from city to city.  Small businesses are similarly encumbered with arbitrary regulations.

Except for lack of freedom to move to a different city, Mr. Sachs might as well be describing the American regulatory regimen.  No less an expert than President Obama explained why our economy isn't creating jobs:

No business wants to invest in a place where the government skims 20 percent off the top, or the head of the port authority is corrupt. No person wants to live in a society where the rule of law gives way to the rule of brutality and bribery. That is not democracy, that is tyranny, and now is the time for it to end.
           - President Barack Hussein Obama, on the need for reform in Africa, New York Times quote of the day, July 12, 2009

Truth doesn't get any more vivid than that.  Read Mr. Obama's first sentence again - "No business wants to invest in a place where the government skims 20 percent off the top..."  He knows this, yet on his watch, regulations have increased to the point that our government takes more than 30% off the top of the entire economy.

Is it any wonder that American businesses are siting on piles of cash instead of investing it?  How would a CEO explain to his stockholders how he invested millions in a lightbulb factory which wasn't even permitted to start production?  It's much safer to invest the money overseas and simply import the products.

The Beat Goes On

Assembly Expo is still operating, albeit only every other year.  The next session is September 20-22, 2011, in Chicago, not in Detroit.  The inventors and gadgeteers will be there, but they'll be expecting to sell their productivity tools into overseas factories.

Who in his right mind would manufacture anything in the US?  As the Journal put it, "The business of America is no longer business.  It's bureaucracy."

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Reader Comments

The Times doesn't want to admit it, but they point out that even with a Federal grant, an American solar manufacturer can't compete with the Chinese:

Solar-Panel Maker to Close a Factory and Delay Expansion
Solyndra, the Silicon Valley company that won a federal grant to build a robotic factory, faces stiff price competition from Chinese manufacturers.
http://www.nytimes.com/2010/11/03/business/energy-environment/03solar.html

SAN FRANCISCO - Solyndra, a Silicon Valley solar-panel maker that won half a billion dollars in federal aid to build a state-of-the-art robotic factory, plans to announce on Wednesday that it will shut down an older plant and lay off workers.

Robotic factories don't create all that many jobs. They had to reduce capacity even with being given a half-billion of our money.

November 4, 2010 6:32 PM

Cnet reports what Andy Grove, the chairman of Intel, had to say about why major investments in American manufacturing are so rare:

http://news.cnet.com/8301-13924_3-20021804-64.html?tag=nl.e703

Among the scores of fabless chip companies and product design houses in Silicon Valley, Intel is a standout. It's an American high-tech company that not only creates but builds some of the most sophisticated tech products in the world here. That contrasts with others, like Apple and Hewlett-Packard, that consign virtually all product manufacturing and assembly abroad.

...

Apple illustrates the difference between creation in the U.S. and carrying that creation to fruition abroad. Apple CEO Steve Jobs, speaking during Apple's fourth-quarter earnings conference call, had a lot to say about what Apple creates. "We create our own A4 chip, our own software, our own battery chemistry, our own enclosure, our own everything," he said. And, later in the call, he said: "We engineer so much of it ourselves. The A4 chip inside it is an Apple creation...We develop a lot of our own components."

But on the manufacturing side, like Dell, Hewlett-Packard, and others, Apple makes key products overseas. Previously, all of those companies at one time built computers in the U.S. Compaq--acquired by HP in 2001--for a long time built PCs in Houston and even made its own circuit boards there. Apple used to assemble its computers in the U.S. And Jobs' former company, Next, opened a high-tech plant to great fanfare in Fremont, Calif., in the late '80s. And IBM assembled PCs in North Carolina, before it got out of the PC business.

On this point, Grove says it's important to judge companies by what they do, not what they say.

U.S. companies move jobs, move production, move added value abroad. Judge from the actions."

The problem is U.S. companies are left to their own devices because of the lack of government policies or incentives to mitigate the behavior, he said. "I was basically left to decide. Every American CEO gets to decide what's good for the company. Because the U.S. does not provide preferences, priorities, or directions. On the other hand, we are competing with a very effective country [China] that's beating the shit out of us," according to Grove. "And I don't blame them. I blame us." A Chinese phrase that roughly translates as "indigenous innovation" says it all, according to Grove. "That is the byword."

U.S. businesses "follow the invisible hand. And the United States follows the black vortex into the abyss, as a result," he continued. U.S. businesses "just follow their own optimum outcome."

Government needs to do something dangerous
So, what's the solution? "Come up with a policy that mitigates or reduces the incentives to move all scaling work to foreign countries," Grove said, referring to the process of scaling up a product from design to manufacturing. "Somebody in the government (needs to take) a step that is dangerous enough to invite targeted criticism. Unless they are willing to do that I don't believe that they are serious about it."

And it's certainly not impossible to create and build in the U.S. Brian Krzanich, a senior vice president and general manager for manufacturing and supply chain at Intel, echoes Grove's sentiment. "Each of (Intel's) factories has 1,000 to 2,000 highly trained and highly technical engineers...Getting to the point of taking something from the lab into high-volume manufacturing. There's quite a bit of innovation in that."

November 5, 2010 7:14 PM

NYT reports that the costs and disincentives for developing antibiotics are so great that the government is considering giving incentives to drug companies to develop them. First, the government spends money making research difficult, then it has to spend even more to get the research we need.

Looking for a Superbug Killer
Government officials are considering financial incentives to spur the development of vitally needed antibiotics.
http://www.nytimes.com/2010/11/06/health/policy/06germ.html?nl=todaysheadlines&emc=tha25

“For these infections, we’re back to dancing around a bubbling cauldron while rubbing two chicken bones together,” said Dr. Brad Spellberg, an infectious disease specialist at Harbor-U.C.L.A. Medical Center in Torrance, Calif.

For example, scientists have become alarmed by the spread from India of a newly discovered mutation called NDM-1, which renders certain germs like E. coli invulnerable to nearly all modern antibiotics. About 100,000 Americans a year are killed by infections acquired in hospitals, many resistant to multiple antibiotics. Methicillin-resistant staphylococcus aureus, or MRSA, the best known superbug, now kills more Americans each year than AIDS.

...

“There is a market failure,” said Representative Henry A. Waxman, a California Democrat and the chairman of the House Energy and Commerce Committee, who said he was considering introducing legislation. “We need to look at ways to spur development of this market.”

NOTE - Mr. Waxman won't admit that government interference is the cause of the market failure!

...

Only five of the 13 biggest pharmaceutical companies still try to discover new antibiotics, said Dr. David M. Shlaes, a consultant to the industry and the author of a new book “Antibiotics: The Perfect Storm.”

One reason is that antibiotics are typically taken for a week or two and usually cure the patient. While that makes them cost-effective for the health system, it also makes them less lucrative to drug companies than medicines for diseases like cancer or diabetes, which might be taken for months, or even for life, because they do not cure the patient.

“There’s this perverse disincentive against antibiotics because they work so well,” said J. Kevin Judice, chief executive of Achaogen.

Another factor is that new antibiotics are likely to be used only sparingly at first, to stave off the emergence of resistance. While that might be medically appropriate, it reduces the ability of a drug company to recoup its investment, said Dr. Barry I. Eisenstein, a senior vice president at the antibiotic maker Cubist Pharmaceuticals. Another factor discouraging investment, some experts say, is that the F.D.A. recently made it harder for new antibacterial drugs to win approval.

NOTE: we're running out of antibiotics, so the FDA makes it harder for new drugs to win approval. Great, just great.

November 6, 2010 10:07 AM

The Times points out that Geneva is booming. Why? Low taxes and light regulation.

http://www.nytimes.com/2010/12/01/business/global/01geneva.html?_r=1&ref=global&nl=todaysheadlines&emc=a2

GENEVA — The financial crisis may have crimped corporate investment across the West, but companies still appear willing to spend in one corner of Europe — the Lake Geneva region — for a simple reason: It saves them money on taxes.

Companies from Europe and the United States, and more recently, Asia, are being drawn to the area by low taxes, generous write-offs and labor laws that are more flexible than much of the rest of Continental Europe. Then there’s the central location and, of course, all that fresh air.

The influx has brought this placid region revenue, jobs and other benefits. But the growth has not come without a price, pushing up the cost of living and, some say, detracting from the quality of life for local residents and expatriates alike.

In October, a leading Geneva politician broke a taboo by suggesting the city had reached its limits in its ability to absorb large foreign companies.

“We would hesitate to welcome a company with more than 5,000 employees because we would not know where to house the employees and their families,” Pierre-François Unger, the city’s economy and health minister, said during a news conference.

A senior official at an international organization, who spoke on the condition of anonymity out of fear of offending the authorities in Geneva, used to work in the United States for a nongovernmental organization. In Geneva, she said, she earns twice as much, “but now I’m clearing much less.”

“Most other cities have a range of price points,” she added. “Here, it’s all expensive.”

Geneva officials mostly play down the problems, arguing that the city will manage its growth through smart infrastructure choices and a focus on smaller investors like the online travel company Expedia, which decided this summer to move the division that handles its hotel and lodging business from Washington State. That created more than 40 jobs in Geneva.

“It’s never been the case that we’ve welcomed a firm of 5,000,” said Daniel Loeffler, director of the Economic Development Office. “When you move headquarters or set up a service center, it tends to start with 20 to 50 people and then a big project grows to maybe 100 to 200.”

According to his office, Geneva is host to 569 multinational businesses, including small hedge funds and corporate giants like Procter & Gamble, which employs 3,000 at its European headquarters here. Arrivals in recent years include Yahoo, McDonald’s Europe and Nissan.

In addition, more than 20,000 civil servants from other countries and international organizations work in Geneva.

In the competition to attract business, Geneva considers its primary rivals to be Amsterdam, Brussels, Dublin and Dubai. Mr. Loeffler said expressions of interest were rebounding after tapering off during the global financial crisis, with companies from Asia among the newest arrivals.

December 1, 2010 7:53 AM

America isn't the only nation where taxes and government regulations affect economic growth. The Economist says:

http://www.economist.com/node/16743035

The fortunes of Indian manufacturing differ not only from state to state, they point out, but also from industry to industry. Tough states have not impeded Indian industry as a whole, they find. But industries that are labour-intensive do better in states that have relatively flexible labour markets. Such industries grew by about 7% a year from 1984 to 2004 in flexible states, such as Andhra Pradesh and Karnataka. In inflexible states, such as West Bengal, Orissa and Maharashtra, they grew by only 3.5%. “Pro-labour regulations hurt where it matters the most—industries which employ more labour,” the authors write.

Even minor reforms of the labour laws can be controversial. Some lobbyists have concluded that their energies would be better spent elsewhere. Indeed, only 15% of the manufacturing firms surveyed by the World Bank in 2006 identified labour regulations as a big obstacle to their operations; 36% worried about electricity. But just as history is written by the victors, surveys are answered by the incumbents. Researchers can only question the firms that exist; they cannot talk to all the ones that might exist, if India’s labour laws permitted them to prosper. Unless those laws are reformed, no one will ever know how many of India’s extra 110m workers such companies might have hired.


January 8, 2011 9:29 PM

The NYT is demanding that businesses create jobs, but they totally ignore the regulatory uncertainties that make that very hard.

What Is Business Waiting For?
Our current government isn't going to create jobs, so it's up to business to do it.
http://www.nytimes.com/2011/08/16/opinion/nocera-what-is-business-waiting-for.html

Business is waiting for regulatory certainty and stability, that's what.

August 16, 2011 6:59 PM
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