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 What made America great was her unsurpassed ability to
innovate. Equally important was also her ability to rapidly adapt to
the change that this innovation fostered. For decades the combination has
been a self reinforcing growth dynamic with innovation offering a
continuously improving standard of living and higher corporate productivity
levels, which the US quickly embraced and adapted to.
This in turn financed further innovation. No country in the
world could match the American culture that flourished on technology
advancements in all areas of human endeavor. However, something serious and
major has changed across America. Daily, more and more are becoming
acutely aware of this, but few grasp exactly what it is. It is called
Creative Destruction.
It turns out that what made America great is now killing her!
Our political leaders
are presently addressing what they perceive as an intractable cyclical
recovery problem when in fact it is a structural problem that is secular in
nature. Like generals fighting the last war with outdated perceptions, we
face a new and daunting challenge. A challenge that needs to be addressed
with the urgency and scope of a Marshall plan that saved Europe from the
ravages of a different type of destruction. We need a modern US centric
Marshall plan focused on growth, but orders of magnitude larger than the one
in the 1940’s. A plan even more brash than Kennedy’s plan in the
60’s to put a man of the moon by the end of the decade. America needs
to again think and act boldly. First however, we need to see the enemy. As
the great philosopher Pogo said: “I saw the enemy and it was
I”.
THE
PROBLEM IS NOT CYCLICAL, IT IS SECULAR.
The dotcom bubble
ushered in a change in America that is still reverberating through the nation
and around the globe. The Internet unleashed productivity opportunities of
unprecedented proportions in addition to new business models, new ways of
doing business and completely new and never before realized markets.
Ten years ago there was no such position as a Web Master; having a home
PC was primarily for doing word processing and creating spreadsheets; Apple
made MACs; and ordering on-line was a quaint experiment for risk takers.
The changes in ten short years are so broad based that a whole article
would be required to even frame the magnitude of the changes. What needs to
be understood is that this is precisely what is destroying America. Let me
explain.
The process of
Creative Destruction is the essential fact of capitalism. It is what
capitalism consists in and what every capitalist concern must survive within.
America as the birth place of modern capitalism was rooted in a clear
understanding of this process and the indisputable reality of survival of the
fittest.
“CREATIVE
DESTRUCTION: … the competition from the new commodity, the new
technology, the new source of supply, the new type of organization –
competition which commands a decisive cost or quality advantage and which
strikes not at the margins of the profits and the outputs of the existing
firms but at their foundations and their very lives”.
Joseph A.
Schumpeter
From Capitalism,
Socialism and Democracy (New York: Harper, 1975) [orig. pub. 1942], pp.
82-85:
In 1997 prior to the
‘go-go’ Dotcom era unfolding, America’s unemployment was
less than half of what it is today at 4.7%. At that time the US added 3
Million net jobs which reflected the creation of 33.4 Million new positions
while obsolescing or cutting 30.4 Million old positions. Job losses
occurred in old vocations such as typists, secretaries, filing clerks,
switchboard operators etc. Hired were new occupations such as C++
programmers, web masters, database managers, network analysts etc.
As the chart above
illustrates however, the additions have fallen off precipitously while the
job losses have stayed relatively flat. In 2009 job losses were 31.0M and
only slightly larger than 1997 which would be expected with further internet
application development. New job creation however was only 24.7M which is
dramatically lower than the 33.4 in 1997.
The result is 40.8M
people on food stamps in the US, as seen below.
This net creative
destruction chart reflects closely the US economic output gap.
Employment levels at
58.5% are now near 30 year lows and do not show any signs of significant
improvement. This is despite nearly $13T in artificial stimulus to restart an
economy that appears to refuse to restart or unarguably is minimally a
‘jobless recovery’.
Once again Tyler
Durden and the folks at Zero Hedge did an excellent analysis of the July unemployment numbers by
correctly adjusting for shifts in workforce participation. It is surprising
that no one other than Zero Hedge understands how to properly assess the
monthly labor rate. Their analysis, using government BLS numbers, is shown
below and reflects an unemployment rate of 14.7% adjusted for workforce
participation.
Is it any wonder
Christina Romer as head of Obama’s Council of Economic Advisors
resigned the day before the July Non-Farm Payroll numbers were released, when
she once again would have had to spin and justify the unemployment rate to
the media?
ITS
STRUCTURAL, NOT THE FAMILIAR CYCLICAL BUSINESS CYCLE
All the preceding
graphics have been labeled with a December 1999 vertical bar. In every
instance it shows a major cusp occurring near that point in time. The dotcom
market bubble finally popped 3-4 months later. There are anomalies that
create some distortions after this period, such as the explosion in both the
residential and commercial real estate sectors that temporarily fostered
massive hiring from brokers, agents, contractors, trades personnel,
developers, etc. Much of this has subsequently been pulled back.
WHAT
HAPPENED?
The short answer is
the US is no longer innovating fast enough. Innovation needs to sustain its
exponential growth to absorb the creative destruction job losses. It no
longer can. Mathematicians would have argued some time ago this was a
certainty to happen, but precisely when this would occur however was the
unknown.
We have been cutting
Research and Development expenditures in the US dramatically. I warned of
this in 2009 in my article: America, Innovate or Die! It
has only gotten worse since. Corporations may be reflecting minor cuts
on their balance sheets in this area but it obscures the fact that the money
is increasingly being re-allocated and spent offshore. Jobs and innovation
follow R&D.
The Financial Times in
the UK featured this global analysis to the right, which to the best of my
knowledge never saw the light of day in any US publication. The rate of
growth in research papers in the US is not keeping up.
Total researcher share
is shrinking and falling further behind as the chart below demonstrates.
Even more alarming is
the number of US patents being filed. Other than IBM and Microsoft the
numbers are stunningly small. It needs to be fully appreciated that both IBM
and Microsoft now have large numbers of major world class research facilities
outside the US and the US filings numbers below are likely reflecting this
(see America, Innovate or Die!).
“The numbers of engineering graduates in China and India
far outpace that of the United States. In China, it is 600,000; in India,
350,000; in the United States, 70,000, and many of these are foreign students
who, more likely than not, will be returning to their home countries.”
Senator Edward Kennedy -- 10-25-05
Testimony - Senate Record
 Let me relate a personal story if I may. In the early 90’s
I was a Vice President of Engineering for a S&P 500 corporation in
Massachusetts. This engineering facility in Massachusetts consisted of over
900 engineers supporting an enterprise with 28 facilities and over 10,000
employees. Today it is all gone. The towns in the immediate area of this
enterprise also had major facilities of two other S&P 500 corporations.
They are also both gone. There were companies in Massachusetts at that time
by the name of DEC, Data General, Prime, Wang to name but four, that employed
hundreds of thousands of highly skilled personnel. They are likewise gone. So
where are the jobs to replace them?
Communities in this
area now reflect those who have temporarily found jobs as a result of the
over building of retail stores and malls during the last ten years in almost
every available piece of land that could conceivably be built on. I walked
into yet another Home Depot and found one of my former employees working in
the electrical department who happened in the ‘90s to be one of the
world’s best power supply design engineers. He told me there was one
other with him from his old department. Both as I recall had Master’s
degrees in electrical engineering.
The new technology in
the area is now Bio-Tech. These new Bio-Technology corporations however only
employ in the 5 and 10 thousand range of employees. Not the 100s of thousands
that the four corporations I mentioned above once did. These Bio-Tech
players additionally have an extremely high percentage of Master’s and
PhD level employees. What about the high school and/or college grads?
Few need apply. I personally see this demographic lined up for Dunkin Donuts
application forms each morning while relaxing after my morning jog. More also
out of work PhDs due to reduced teaching positions is not the solution. This
is the state of affairs in R&D that our politicians don’t see nor
fully comprehend.
IS IT
GOING TO CHANGE?
 I
told you the above personal story as a way of leading into one of my primary
goals in the early 90s as VP of Engineering of this particular operation. It
was something called Cycle Time reduction. This is the process of shortening
the time to market of products from concept to revenue generation. The chart
to the right shows a graphical representation of this.
We were so successful
at reducing this through computerization such as the implementation of
CAAD-CAM-CIM, JIT, Kanban, TQM and a host of other acronyms that we were at
levels approaching 80% of the following years revenue being forecasted to be
derived from products still on the engineering concept boards. Margins and
room for error were absolutely razor thin. The strategy was like the old
three legged race at the community picnic. The faster some tried to run the
more they tripped themselves up. It was a strategy where speeding up the
process left unprepared competitors with a fatal competitive disadvantage.
The fight for market share was intense. Though I had moved on, when the
internet arrived and supply chain management was reinvented and overlayed
onto the previous advancements, the enterprise was rapidly shuttered and
moved to the far east. It is one, of no doubt, thousands of similar stories
in America. America’s ability to innovate and adjust to that
innovation killed this American based organizational unit. The highly
skilled, intense and motivated employees innovated themselves out of a job.
THE
LESSON IS THIS
America used the rate
of innovation as a foundation for its competitive advantage. Like the
tortoise and hare however, the US can no longer maintain this rate and hence
the advantage has temporarily shifted to the previous followers who are
presently less impacted. America must once again innovate and change but now
in a manner more fitting for the realities of this new decade.
The product today is
no longer the widget that comes off a manufacturing line and is stuffed into
a box to be shipped to distribution centers for sale. The product today with
short product life cycles and hundreds of new products is Intellectual
Capital. Intellectual Capital is the knowledge of knowing how to do
something. How to design and build something – not the actual
‘doing of it’. Until America forces corporations to account for
Intellectual Property properly, the multi-nationals will continue to fully
exploit this tax loophole. Even worse, America’s innovation will
continue to be used against her. The cost of manufactured products today are
less and less in labor & production and increasingly in materials and
innovation. Capital is likewise shifting to be more intellectual versus
financial. A major overhaul of accounting standards must be driven by our
legislators or it will not be changed. It is not to the multi-nationals
advantage to allow such a debate and shift to occur.
Unfortunately our law
makers allowed this American asset to leave the US unrestricted, untaxed and
without recourse. It was America who knew how to design and build a PC. It is
fine for the product to be built where it is cheapest as part of free trade,
but only when the cost of the knowledge or Intellectual property is priced
in. Amortization of research & development must include the Intellectual
property value as well. The Intellectual Capital was an American asset, not a
corporate asset which left. Massive royalties should now be flowing to the US
taxpayer today which would offset many state and local services cuts. Instead
we are left with underfunded corporate legacy pension plans that the
government in the years to come will no doubt pick up the tab for by likely
hyperinflating the currency. Though it is too late to revisit the horrendous
US failure of public policy in the past, it is not too late to prepare for
tomorrow.
A
STARTING POINT FOR CHANGE – Gordon’s Top Ten
As I said in the
beginning the US needs a bold new “Marshall” plan to fight the
new destruction of creative destruction. Here is a starting point for public
debate:
1 – If we can
spend $165B bailing out AIG, then we can spend $100B (4 years of college @
50K/year X 500,000 students) and guarantee everyone in America a college
education to compete in the 21st century. Parents will start to spend
immediately instead of presently being almost financially paralyzed with
skyrocketing education costs.
2- Obama says we need
to be leaders in Energy. OK. Where are the programs? Where are the 50,000 new
university teaching and research positions ( 50,000 X 75K = $3.8B)? At $3.8B
this is a rounding error compared to the banks TARP program.
3- 99% of all jobs in
America are created by small business with less than 500 employees. Stop
treating them like they are last on the ‘to help’ list after the
banks, financial institutions and S&P 500 but first on the taxation list.
S&P 500 paid almost net zero taxes, reduced US hiring, yet received the
bulk of the governments bailouts. Small business is the golden goose that
every administration seems determine to cook. What has the government done
for small business other than burden them with Obamacare and the potential
removal of the Bush tax cuts (most small business are directly affected
proprietorships)? If you can’t immediately recite what the government
has done to help small business as THE US employer (versus what they have
done for the bank and financial lobby), then you understand the problem.
4- The number of
Government employees, in addition to their salaries and benefits (federal,
state & local) can best be described as out of control. According to a
new study from the Heritage Foundation, U.S. government workers earn 30 to 40
percent more money than their private sector
counterparts on average. So, in essence, the ‘servants’ make
substantially more money than the taxpayers who employ them. Isn’t the
system great? In fact, according to the study, if you add in retirement and
health care benefits, the average federal employee now earns nearly twice as
much as the average private sector employee.
5- Make Social Security
and Medicare financially sound so Americas can believe and budget that it
will be there for them. The public will spend and invest if they know they
have a nest egg that really exists. The government is fooling no one. Kids
learn that Social Security and Medicare is unfunded before their college
freshman year today.
The stark reality of
the shift from defined benefits to contributory benefits over the last decade
is just now sinking in with the US consumer. They now have no retirement like
their parents had. Retirement savings is something when added to college
costs is leaving them frightened. Worried people don't spend money and when
the economy is 70% consumer spending you have an economic crisis.
Political denial and the government attempting to paper it over with policies
of extend and pretend are misplaced and will make the inevitability even more
difficult to effectively address.
6- When did the
American people decide to fund military operations in over 130 countries
around the world? With 40.8M people on food stamps, something is seriously
out of balance here but there is no public debate thought to be required by
either party.
7- The US has no full
scale strategic growth programs being initiated by the present
administration. We have only financial stimulus or austerity programs. There
is a big difference that seems wasted on Washington.
8- Washington and the
lobbyists that control it have taken control of our government. Obama
campaigned to stop earmarks which ranged in the area of approximately 10,000
annually prior to his presidency. In his first year they increased to the
11,000 range. This is not the change he promised as more pork increasingly
flows.
9- For those that
actually read it, Obamacare is not a solution for healthcare. It is a stealth
income tax we will all soon get hit with. The Dodd-Frank Act is not a fix to
what caused the 2008 financial crisis but rather is the most dramatic shift
in centralized US government planning and control since the 1930’s.
Both these bills were over 2000 pages compared to landmark bills historically
being 25 – 45 pages. Indications are that few of our elected
representatives actually read either of these documents. They simply voted
party lines. As Sarbanes-Oxley dictates, CEOs must sign their corporate 10-Q
reports to the government and are liable for it. It is a felony not to. Every
elected official should also sign that he or she has personally read the
entire act prior to being allowed to vote on it or it likewise will be a
felony.
10- The Supreme Court
recently over-turned major elements of the Campaign Contribution Reform bill.
Washington and the media have now gone completely mute on this subject as
politicians scramble for mid-term campaign money for media expense coverage.
Maybe our elected officials should vote with the same urgency on this matter
as they are presently on giving billions of ‘candy’ away almost
daily to every financial disruption, state budget problem, unemployment
benefit problem or sign of increasing housing default and foreclosure rates
during this run up to the fall elections.
I could go on,
but I think you get the message. America is afraid to be bold! We have no
strategy, no plan, no funding and no leadership! In my days as a VP of
Engineering you were fired for just one of these shortfalls.
Maybe we the public
need to start doing some firing!
“The biggest political change in my lifetime is that
Americans no longer assume that their children will have it better than they
did. This is a huge break with the past, with assumptions and traditions that
shaped us.”
Peggy Noonan: America Is at Risk of Boiling Over
Feature Wall Street
Journal Op-Ed article - 08-07-10
For the
complete research report go to: Tipping Points
Sign
Up for the next release in the Preserve & Protect series: Commentary
Gordon T. Long
Tipping
Points
Mr. Long is a former senior group executive
with IBM & Motorola, a principle in a high tech public start-up and
founder of a private venture capital fund. He is presently involved in
private equity placements internationally along with proprietary trading
involving the development & application of Chaos Theory and Mandelbrot
Generator algorithms.
Gordon T Long is not a
registered advisor and does not give investment advice. His comments are an
expression of opinion only and should not be construed in any manner
whatsoever as recommendations to buy or sell a stock, option, future, bond,
commodity or any other financial instrument at any time. While he believes
his statements to be true, they always depend on the reliability of his own
credible sources. Of course, he recommends that you consult with a qualified
investment advisor, one licensed by appropriate regulatory agencies in your
legal jurisdiction, before making any investment decisions, and barring that,
you are encouraged to confirm the facts on your own before making important
investment commitments.
© Copyright 2010 Gordon T Long. The information herein was
obtained from sources which Mr. Long believes reliable, but he does not
guarantee its accuracy. None of the information, advertisements, website
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or sale of any securities or commodities. Please note that Mr. Long may
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