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Like generals fighting the last war with outdated perceptions, we face a new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 to the right.
This net creative destruction
chart incidentally 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?
IT'S 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 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, have 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 impacted
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 - WSJ.com ~ Feature Wall
Street Journal Op-Ed Article - 08-07-10
For the complete research
report go to: Tipping
Points
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