(What’s Left of) Our Economy: Inside the U.S. Research and Development Slump

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Bank for Intenational Settlements, Bernie Sanders, Elizabeth Warren, innovation, National Science Foundation, neo-liberalism, private sector, Project-Syndicate.org, research and development, science, stock buybacks, technology, William H. Janeway, {What's Left of) Our Economy

At the risk of sounding like an Elizabeth Warren or Bernie Sanders clone, I’ve just come across some data showing that stock buybacks by U.S. public companies have really gotten out of hand. That matters because it looks like they’ve been denying these firms major resources for performing the research and development (R&D) needed to keep creating new products, services, and processes, and maintain the U.S. economy’s global competitiveness.

I got interested in these trends due to a post at the Project-Syndicate.com website by William H. Janeway. According to this business and economics writer, for decades through the first half of the twentieth century, America’s industrial giants in particular spent significant shares of their profits on “Scientific research and development of technological applications,” and indeed virtually monopolized such activity in the United States up to the start of World War II.

Once the war broke out, and long after (including of course during the early Cold War), these efforts were powerfully supplemented by the federal government. And beginning in the 1960s (roughly), when for various reasons, the profits that powered private sector R&D began drying up, Washington’s funding actually was able to fill the gap pretty satisfactorily.

Yet starting in the early 1980s (and I’m simplifying terribly here), market-friendly neo-liberal national economic policies like regulatory reform and tax cutting revived corporate profits. But these measures also presented business with a less risky, more immediately lucrative, and therefore more appealing way to use this new windfall than figuring out how to provide new and better goods and services – buybacks of their own shares of stock, a practice that was legalized in 1982.

I’ve found data going back to 1995, and from then through 2019, reports the Bank for International Settlements (a grouping of the world’s major central banks) annual U.S. gross stock buybacks soared more than ten-fold – from $73.16 billion to $829.18 billion. Yearly net buybacks jumped even faster – from $34.41 billion to $605.22 billion.

And since then, annual gross buybacks have jumped still higher. Investment banking firm Goldman Sachs pegs the 2021 gross buyback total at $992 billion, and not surprisingly predicts that the number for this year will hit $1 trillion. The slow growth stems partly from a one percent excise tax on the largest buybacks that kicks in next year.

Private sector R&D hasn’t exactly stood still during this period. But the National Science Foundation (NSF) says it rose only four-fold, from $129.83 billion to $498.18 billion. (See the spreadsheet provided at the first link here.) Put differently, in 1995, annual gross buybacks were 56.35 percent of annual R&D outlays. In 2019, annual gross buybacks just over 60 percent higher.

The NSF believes that private sector R&D neared $532 billion in 2020. But even that nice increase wouldn’t change the ratio much.

During these decades, moreover, federally funded R&D hasn’t remotely filled the gap. It increased nearly 150 percent from 1995 to 2019, but in absolute terms, the latter total was only $62.80 billion. And in 2020, it’s estimated to have risen only to $65.69 billion.

Further, neo-liberalism (or market fundamentalism, or whatever you want to call it0 is just as much to blame for this sluggish pace as it is for Wall Street deregulation, for it resulted from the same, reflexive anti-government impulses.

I don’t mean to demonize private business or finance or free markets, or to lionize government. But clearly something’s gone very wrong with the incentive structures shaping business decisions, and just as clearly, lots of business lobbying has had lots to do with it. Ditto for inadequate federal funding. Without major changes, don’t expect the U.S. economy from escaping the dangerous trap of heavy reliance on debt-based growth any time soon.

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(What’s Left of) Our Economy: Apple Products Now Designed in China, Too

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Apple, China, design, engineering, Federal Trade Commission, globalization, Made in America, manufacturing, offshoring, research and development, technology, The New York Times, Tripp Mickle, {What's Left of) Our Economy

Although Apple has long relied on factories in China to turn out its incredibly popular electronics products, the company has clearly sought to counter charges that it’s been a world champion outsourcer that’s contributed to U.S. industrial hollowing out and general economic weakening. How? By touting its products as “Designed by Apple in California.”

And that’s mattered in more than a public relations sense because it’s been that U.S.-located design – and engineering – that’s long comprised the vast majority of the value of Apple products. Even better, it’s also long been the case that almost none of the wealth generated by iPhones and iMacs and the rest have gone to China. Those factories in the People’s Republic, owned by contract manufacturers, have largely been snapping the sophisticated parts together according to Apple’s appealing designs and sophisticated blueprints.

Now, though, according to excellent reporting by The New York Times‘ Tripp Mickle, it’s clear that Apple’s going to have at least put a big asterisk on its slogan. He’s updated trends that I identified literally decades ago in my book The Race to the Bottom and have followed since (see, e.g., here) making clear that not only is much of the Apple’s most advanced manufacturing (of parts and components) now performed in China, but so is a large and surging share of that engineering and design.

According to Mickle’s sources,

“More than ever, Apple’s Chinese employees and suppliers contributed complex work and sophisticated components for the 15th year of its marquee device, including aspects of manufacturing design, speakers and batteries, according to four people familiar with the new operations and analysts. As a result, the iPhone has gone from being a product that is designed in California and made in China to one that is a creation of both countries.”

Mickle continues: China’s “engineers and suppliers have moved up the supply chain to claim a bigger slice of the money that U.S. companies spend to create high-tech gadgets.”

As a result, just as American leaders have belatedly been awakening to the dangers of heavy reliance on China for critical goods, both because of Beijing’s burgeoning power and challenges to U.S. global technological leadership and the national security created by this stature, Apple has been boosting its dependence on the People’s Republic – and helping to enrich and empower this hostile dictatorship. 

Some of Mickle’s specifics:

>”This year, Apple has posted 50 percent more [high wage] jobs in China than it did during all of 2020, according to GlobalData, which tracks hiring trends across tech.”

>”When China closed its borders in 2020, Apple was forced to overhaul its operations and abandon its practice of flying hordes of California-based engineers to China to design the assembly process for flagship iPhones. Instead of subjecting staff to lengthy quarantines, Apple began empowering and hiring more Chinese engineers in Shenzhen and Shanghai to lead critical design elements for its best-selling product….”

>In 2007, Chinese suppliers accounted for a mere 3.6 percent of an iPhone’s value. Now this figure is more than 25 percent.

The U.S. Federal Trade Commission has just begun to enforce new regulations aimed at ensuring that products labeled “Made in America” really are produced domestically.  It’s time for Washington to require Apple to start telling the truth about its operations, too.     

(What’s Left of) Our Economy: “Joe Science” – Finally?

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Barack Obama, Biden, Bill Clinton, Congressional Research Service, defense, dual-use technologies, George W. Bush, infrastructure, National Science Foundation, research and development, science, scientists, technology, {What's Left of) Our Economy

President Biden is a champion of science – everyone knows this, right? He promises to follow it on major issues like the CCP Virus. He’s pledged to boost Washington’s funding of research and development. He’s blasted his predecessor for neglecting this responsibility. (See here for examples of the last two statements.)  And the scientific community the world over is brimming with confidence that greater respect from the White Houe and more resources are on the way.  (See, e.g., here and here.)

Judging from his remarks unveiling his big new infrastructure plans, it looks like Mr. Biden will indeed bolster the federal government’s support for science and technology. And that’s great news, because such efforts will be crucial to meeting any number of big public policy challenges and seizing equally important opportunities. Dealing with enviromental threats, beating back the China challenge, and boosting the nation’s productivity – its best hope for raising living standards on a sustainable basis – are just a few that come to mind.

And if you’re one of those who believe the Feds can’t do anything right, you need to learn some history. Washington has a formidable record both on the basic research and applied research sides. (Here’s an impressive list from America’s National Laboratories system, and it doesn’t even include major advances fostered by other agencies in medicine, agriculture, aerospace, and information technology – some of which are summarized here.)

Mr. Biden also is unmistakably right about America having fallen behind on these fronts. But what he hasn’t told you, and what his scientific backers seem to have forgotten, is that in the last roughly quarter century, federal science and technology spending in toto never stagnated as much as during the administration he served as Vice President.

The data below are calculated from the annual research and development budget requests made by U.S. Presidents going back to the Clinton years. (For the data from 1998 through 2015, see the National Science Foundation reports archived here.  For the later data years, see the annual Congressional Research Service reports here, here, here, here, here, and here.)

Since Congress has the authority to raise or lower these requests, these figures don’t measure actual federal research and development spending by year. But they do shed light on how much various Presidents sought to spend, and by extension how greatly they valued nurturing such activity, how much they believed they could convince Congress actually to appropriate – and, by implication, how hard they were willing to push to achieve these goals.

In this vein, during his second term, Bill Clinton’s overall annual federal research and development budget requests rose by a total of 15.54 percent.

During the eight years of George W. Bush’s presidency, such Executive Branch requests increased by 43.91 percent.

For the eight years of Barack Obama’s administration? These requests climbed by 6.56 percent.

And under supposed science denier Donald Trump? They were up 20.82 percent.

Some important qualifications need to be made here. The big Bush increases were driven by major new asks for defense-related R&D (think “September 11,” “Global War on Terror,” and “Iraq”). Indeed, during his administration, such spending grew from 52.47 percent of total federal research and development spending to 58.97 percent. And when you draw this distinction, the Obama (-Biden) record looks better if you value civilian research over military. Here’s how recent Presidential requests compare on that score.

Clinton civilian requests: +25.67 percent

Bush civilian requests: +24.24 percent

Obama civilian requests: +34.26 percent

Trump civilian requests: +19.07 percent

But the Obama-(Biden) record doesn’t look that much better, especially than the Trump record. After all, that 34.26 percent increase took place over eight years, not four. And the Obama-Bush comparison, and other Obama comparisons, need to take into account the ever-blurring line between defense and non-defense-related research and development, because so many new technologies can be used in both fields and spur progress in both. That is, advances in defense knowhow can and do produce spin-off effects in the civilian world, and vice versa.

It still remains to be seen how the Biden infrastructure plan translates into specific research and development budget requests. But for now at least, Americans can be grateful that the Joe Biden of 2021 seems to be much more of a science and tech enthusiast than the administration he worked for a decade ago. 

By the way, special thanks to Rafal Konapka, who first brought the recent federal research and development trends to my attention.

 

(What’s Left of) Our Economy: U.S. Manufacturing Revival Plans Still Need Trump-like Tariffs

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Buy American, carbon tariff, carbon tax, Dan Breznitz, David Adler, health security, infrastructure, Joe Biden, manufacturing, manufacturing trade deficit, research and development, supply chains, tariffs, taxes, technology, The New York Times, Trade, {What's Left of) Our Economy

I was thrilled to see today’s op-ed piece on U.S. manufacturing in The New York Times, and not just because co-author David Adler is a good friend. I was also thrilled to see it because a careful reading reenforces the essential notion that all the worthy proposals made by policy analysts and politicians lately (including apparent President-elect Joe Biden) on reviving industry will either come to naught or greatly underperform without steep, and indeed Trump-like, tariffs to shut a critical mass of imports out of the economy.

Those domestically-focused manufacturing revival measures have included more federal funding for research and developments, greater federal efforts to help smaller manufacturers in particular learn about and access research breakthroughs in academia and existing government labs, measures to help these smaller industrial firms access capital more easily, tax breaks to foster production and innovation in the United States, and more ambitious and better enforced Buy American requirement for federal purchases of manufactured products. In general, I’m strongly supportive, and have even criticized the Trump administration for giving them short shrift (even on the tax front, where the big 2017 cuts should have come with more investing and hiring strings).

From knowing David, I feel sure that he backs these intiatives, too; indeed, the article concentrates tightly on the Buy American slice of this agenda. And the piece gratifingly (but probably unknowingly) endorses an idea that I’ve made for many years, but that has gotten zero traction: requiring “all manufacturing industries to disclose how much of their sourcing and critical production takes place in the United States.” After all, how can Washington make the right manufacturing policy decisions when it relies so heavily for such crucial information from crumbs self-servingly cherry-picked by offshoring-happy companies themselves?

Yet as also suggested by David and co-author Dan Breznitz – who studies innovation policies at the University of Toronto – except for the Buy American proposals, the standard raft of manufacturing revival plans could work to  stimulate more production and supply, but pays inadequate attention to ensuring that all that supply is actually bought – which would eventually make companies think twice about producing more.

The authors place much stock in government’s ability to soak up this output, and so does Biden – who on top of making sure that more of what government currently purchases is American-made, has pledged to spend “$400 billion in his first term in additional federal purchases of products made by American workers, with transparent, targeted investments that unleash new demand for domestic goods and services and create American jobs.”

The former Vice President correctly contends that these measures will “provide a strong, stable source of demand for products made by American workers and supply chains composed of American small businesses.” The history of U.S. industrial policy also shows that early guaranteed government purchases helped new industries demonstrate the usefulness of innovative products that eventually interested the private sector and produced enormous new markets for their products on top of federal contracts. (Think “computers” and all the hardware and software used pervasively now not only in technology sectors but in virtually the entire economy.)

But U.S.-based manufacturers turned out just over $2.35 trillion worth of goods in 2019 (the last full pre-CCP Virus year). And the manufacturing trade deficit that year was $1.03 trillion. So unless it’s supposed that that 2019 level of domestic manufacturing production is remotely adequate (and clearly, the manufacturing policy reform supporters don’t), or unless they believe that government should buy much more of the output than the $400 billion Biden proposes over not one but four years (to sit in warehouses?), generating more private demand for industry’s output will be essential as well.

As indicated above, David and Dan Breznitz argue that more detailed, accurate labeling will help by enabling more consumers and private businesses to act effectively on their naturally strong preferences for Made in the USA goods – not only out of patriotism, but because of reasonable convictions that their quality and safety are superior. I remain all in favor, but the immense popularity of imports among both classes of customers (made clear by the huge and chronic manufacturing trade deficits) despite numerous news accounts over the years of shoddy, outright dangerous foreign-made products (especially from China), demonstrates that much more will need to be done to spur demand for U.S.-produced manufactures.

RealityChek regulars will not be the slightest bit surprised that I’m ruling out overseas demand as a promising net new source of customers for American domestic manufacturers. Unfortunately, the persistence of the huge manufacturing trade deficits is also evidence that most of America’s international trade partners are far too devoted to the health of their own industrial bases to permit major U.S. inroads. In fact, if anything, they’re likely to step up their own efforts to strengthen their own domestic industries by further curbing U.S. and other foreign competition. And that’s where the tariffs come in.

Not that David and Dan Bernitz, or Biden, overlook the need for U.S. market protection entirely. The former, for example, call for “Stopping predatory pricing by foreign manufacturers” – which entails slapping tariffs on these usually government-subsidized artificially cheap goods. The latter makes similar points, and has also mentioned a carbon tariff on products from countries that base their competitiveness on ignoring “their climate and environmental obligations.” (At the same time, Biden could use a similar levy to punish domestic companies that don’t measure up in his administration’s eyes climate-wise, leaving the net benefit to U.S.-based manufacturing minimal.)

Moreover, to ensure adequate domestic supplies of the healthcare goods needed to fight the next pandemic, simple stockpiling of products by government will be necessary. And since practically everything wears out over time, or becomes outmoded, lots of re-stockpiling will be necessary. Meanwhile, it should go without saying that many of the government purchases of manufactures will be used for critical national purposes – like repairing and building all kinds of traditional and technology infrastructure systems, and producing whatever new military equipment or refurbishing of old equipment the new Congress and the likely new administration wind up supporting.

But these are of course public purposes, and since the United States is still a strongly private sector-driven economy, that’s what’s inevitably going to determine the success of most manufacturing revival efforts. So unless manufacturing revivalists want government to play a veritably dominant role in production and consumption decisions, their strategy will employ tariffs – but not in a targeted, sector-specific, and reactive way, much less as an afterthought to domestic initiatives. Instead, they’ll be proactive, come in a flat-rate form, and stand high enough to encourage plenty of new market entrants that it makes sense to join established enterprises in vigorous, overwhelmingly domestic competition for America’s immense pool of customers.

Our So-Called Foreign Policy: Evidence that the Multinationals Really Did Sell the U.S. Out to China

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capital spending, chemicals, China, computers, electronics, health security, healthcare goods, information technology, investment, Lenin, manufacturing, multinational companies, national security, offshoring, offshoring lobby, Our So-Called Foreign Policy, pharmaceuticals, research and development, supply chains, tech, tech transfer, U.S-China Economic and Security Review Commission, USCC, World Trade Organization, WTO

RealityChek readers and anyone who’s familiar with my work over many years know that I’ve often lambasted U.S. multinational companies for powerfully aiding and abetting China’s rise to the status of economic great power status – and of surging threat to U.S. national security and prosperity. In fact, the dangers posed by China’s activities and goals have become so obvious that even the American political and policy establishments that on the whole actively supported the policies – and that permitted money from this corporate Offshoring Lobby to drive their decisions – are paying attention.

If you still doubt how these big U.S. corporations have sold China much of the rope with which it’s determined to hang their own companies and all of America (paraphrasing Lenin’s vivid supposed description of and prediction about the perilously shortsighted greed of capitalists), you should check out the latest report of the U.S-China Economic and Security Review Commission (USCC). As made clear by this study from an organization set up by Congress to monitor the China threat, not only have the multinationals’ investments in China figured “prominently in China’s national development ambitions.” They also “may indirectly erode the United States’ domestic industrial competitiveness and technological leadership relative to China.”

Worst of all, “as U.S. MNE (“multinational enterprise) activity in China increasingly focuses on the production of high-end technologies, the risk that U.S. firms are unwittingly enabling China to achieve its industrial policy and military development objectives rises.”

And a special bonus – these companies’ offshoring has greatly increased America’s dependence on China for supplies of crucial healthcare goods.

Here’s just a sampling of the evidence presented (and taken directly by the Commission from U.S. government reports):

> U.S. multinationals “employ more people in China than in any other country outside of the United States, primarily in the assembly of computers and electronic products.” Moreover, this employment skyrocketed by 574.6 percent from 2000 to 2017.

> “China is the fourth-largest destination for U.S. MNE research and development (R&D) expenditure and increasingly competes with advanced economies in serving as a key research hub for U.S. MNEs. The growth of U.S. MNE R&D expenditure in China is also comparatively accelerated, averaging 13.6 percent yearon-year since 2003 compared with 7.1 percent for all U.S. MNE foreign affiliates in the same period. This expenditure is highest in manufacturing, particularly in the production of computers and electronic products.”

> “U.S. MNE capital expenditure in China has focused on the creation of production sites for technology products. This development is aided by the Chinese government’s extensive policy support to develop China.”

> The multinationals’ capital spending on semiconductor manufacturing assets “has jumped 166.7 percent from $1.2 billion in 2010 (the earliest year for which complete [U.S government] data is available) to $3.2 billion in 2017, accounting for 90 percent of all U.S. MNE expenditure on computers and electronic products manufacturing assets in China.”

> “China has grown from the 20th-highest source of U.S. MNE affiliate value added in 2000 ($5.5 billion) to the fifth highest in 2017 ($71.5 billion), driven primarily by the manufacture of computers and electronic products as well as chemicals. The surge is especially notable in semiconductors and other electronic components.”

> “[P]harmaceutical manufacturing serves as the largest chemical sector in terms of value-added [a measure of manufacturing output that seeks to eliminate double-counting of output by stripping out the contribution of intermediate goods used in final products]…” And chemicals – the manufacturing category that include pharmaceuticals – has become the second largest U.S-owned industry in China measured by the value of its assets (after computers and electronic products).

Incidentally, the report’s tendency to use 2000 as a baseline year for examining trends is no accident. That’s the year before China was admitted into the World Trade Organization (WTO) – and the numbers strongly reenforce the argument that the multinationals so avidly sought this objective in order to make sure that the value of their huge planned investments in China wouldn’t be kneecapped by any unilateral U.S. tariffs on imports from China (including those from their factories). For the WTO’s combination of consensus decision-making plus the protectionist natures of most of its members’ economies created a towering obstacle to Washington acting on its own to safeguard legitimate American domestic economic interests from Chinese and other foreign predatory trade and broader economic activity.

At the same time, despite the WTO’s key role in preserving the value of the multinationals’ export-focused China investments, the USCC study underestimates how notably such investment remains geared toward exporting, including to the United States. This issue matters greatly because chances are high that this kind of investment (in China or anywhere else abroad) has replaced the multinationals’ factories and workers in the United States. By contrast, multinational investment in China (or anywhere else abroad) that’s supplying the China market almost never harms the U.S. domestic economy and in fact can help it, certainly in early stages, by providing foreign customers that add to the domestic customers of U.S.-based manufacturers.

There’s no doubt that the phenomenal growth of China’s own consumer class in recent decades has, as the China Commission report observes, generated more and more American business decisions to supply those customers from China. In other words, the days when critical masses of Chinese couldn’t possibly afford to buy the goods they made in U.S.- and other foreign-owned factories are long gone.

But the data presented by the USCC does nothing to support this claim, and the key to understanding why is the central role played by computer, electronics, and other information technology-related manufacturing in the U.S. corporate presence in China. For when the Commission (and others) report that large shares of the output of these factories are now sold to Chinese customers, they overlook the fact that many of these other customers are their fellow entities comprising links of China-centric corporate supply chains. These sales, however, don’t mean that the final customers for these products are located in China.

In other words, when a facility in China that, for example, performs final assembly activities on semiconductors sells those chips to another factory in China that sticks them into computers or cell phones or HDTV sets, the sale is regarded as one made to a Chinese customer. But that customer in turn surely sells much of its own production overseas. As the USCC documents, China’s consumer market for these goods has grown tremendously, too. But China’s continually surging share of total global production of these electronics products (also documented in the Commission report) indicates that lots of this output continues to be sold overseas.

Also overlooked by the USCC – two other disturbing apects of the multinationals’ activities in China.

First, it fails to mention that all the computer and electronics-related investment in China – which presumably includes a great deal of software-related investment – has contributed to China’s economic and military ambitions not only by transferring knowhow to Chinese partners, but by teaching huge numbers of Chinese science and technology workers how to generate their technology advances. The companies’ own (often glowing) descriptions of these training activities – which have often taken the form of dedicated training programs and academies – were revealed in this 2013 article of mine.

Second, the Commission’s report doesn’t seem to include U.S. multinationals’ growing investments not simply in high tech facilities in China that they partly or wholly own, but in Chinese-owned entities. As I’ve reported here on RealityChek, these capital flows are helping China develop and produce high tech goods with numerous critical defense-related applications, and the scale has grown so large that some elements of the U.S. national security community had been taking notice as early as 2015. And President Trump seems to be just as oblivious to these investments as globalist former President Barack Obama was.

These criticisms aside, though, the USCC has performed a major public service with this survey of the multinationals’ China activities. It should be must reading in particular for anyone who still believes that these companies – whose China operations have so greatly enriched and therefore strengthened the People’s Republic at America’s expense – deserve much influence over the U.S. China policy debate going forward.

(What’s Left of) Our Economy: The AP’s Manufactured Nonsense About Manufacturing

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AP, Associated Press, Calvin Woodward, fake news, innovation, Jobs, manufacturing, productivity, research and development, technology, Trump, {What's Left of) Our Economy

The Associated Press (AP) is a ginormous global news organization, and its reach is especially widespread here in the United States (although I couldn’t find figures breaking out its American clientele specifically). So it’s a big deal when one of its highest profile writers spreads the kind of utter claptrap about domestic U.S. manufacturing that Calvin Woodward just peddled in his new piece on President Trump’s views on the economy.

In an article posted today, Woodward portrayed Mr. Trump’s emphasis on industry (and other elements of his worldview) as nothing more than a pathetic and downright dangerous exercise in nostalgia for the “grunt work of old” that ignores how “Industry, technology and much of the culture are finding new ways of doing and living” and how “U.S. prosperity has been driven for decades by services, technology and new things….”

Some confidence in Woodward’s conclusions might be justified if he relied on manufacturing specialists or even economists to support them. But the authorities he cites are a “professor of communications” and a psychologist who “studies nostalgia from Britain’s University of Southampton.”

Not that economists have been killing it in recent decades in properly evaluating the importance of manufacturing. But if Woodward had bothered to consult one,  the odds would have been higher that he’d have encountered the idea that industry is kind of important for any country seeking to build or maintain a world-class military. Or” that it’s historically been the U.S. economy’s leader in productivity growth (although as RealityChek regulars know, it’s recently been losing its mojo on that score). Or that it boasts one of the nation’s biggest employment multipliers – meaning that the creation of each American manufacturing job generates an outsized number of jobs elsewhere in the economy compared with employment increases in most other sectors. Or that manufacturing accounts for the lion’s share of American business research and development spending. 

That last fact is especially important for Woodward and others of his ilk to know. For it makes clear that if the United States is to keep generating the “technology and new things” that of course are central to its hopes for continued (much less greater) prosperity, it has better keep its manufacturing base world class.

I’ll leave it to you to judge whether Woodward’s article qualifies as Fake News.  But there can’t be any legitimate doubt that it’s manufactured nonsense.   

(What’s Left of) Our Economy: Trade and Supply Chain Disruption Myths are Getting Disrupted by Apple

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Apple Inc., Breitbart.com, China, deadweight loss, design, engineering, global value chains, John Carney, manufacturing, marketing, Nikkei Asian Review, production, research and development, sourcing, supply chains, tariffs, Trump, {What's Left of) Our Economy

Yesterday’s report from Japan’s Nikkei Asian Review (NAR), on how the U.S.-China trade war is affecting Apple Inc.’s sourcing plans, was stunning not only for claiming that the company is studying moving up to 30 percent of the China production capacity it uses out of the People’s Republic. It also greatly undermined three of the most pervasive myths surrounding the decision by such companies to concentrate so much manufacturing in China, and the resulting impact on the American economy.

Since Apple’s production in China and elsewhere is handled almost entirely by independent contract manufacturers like Taiwan’s Foxconn, its reported decision to ask them to start estimating the costs of partly leaving China speaks volumes about why multinational companies place various links in their supply chains in the countries decided on.

The first myth? That production and sourcing decisions are based overwhelmingly on the kinds of free market forces and developments that supposedly dominate the current world trade system, and that explain its root assumption that any government interference will reduce – to every country’s detriment – trade’s ability to maximize global efficiency.

According to the NAR piece, however, a team of 30 Apple employees has begun “discussing production plans with suppliers and negotiating with governments over financial incentives they might be willing to offer to attract Apple manufacturing, as well as regulations and the local business environment.” In other words, Apple’s decisions won’t solely, or even mainly reflect the principle of comparative advantage – which holds that economic activity naturally flows and should flow to locations where it’s most efficiently conducted.

The NAR article also hints at a point that’s become crucial in today’s trade war-spurred debate – about whether trade barriers like the Trump administration’s recent tariffs create major “deadweight losses” for the world economy by forcing companies to spend precious time and resources coping with government interference, rather than on continuing to improve their products and processes. For as the NAR piece states, among the advantages China has offered manufacturers for so long have been “lighter labor rules.” That’s a euphemism for a government policy of ruthlessly repressing worker’s rights to organize freely.

NAR could have also added practices such as government-encouraged technology extortion (which forces foreign businesses to hand over their knowhow to Chinese partners in return for the ability to operate in China), value-added taxes (which fosters producing inside China by penalizing importing and rewarding exporting), an artificially depressed currency (which has effects similar to those value-added taxes), explicit requirements that goods made in China contain certain levels of Chinese content, and all manner of tariffs and subsidies that are illegal under World Trade Organization rules.

Moreover, as detailed in my 2002 book on globalization, The Race to the Bottom, foreign government distortion of trade is hardly confined to China. It’s long represented the way much manufacturing-related business has been done around the world.

In other words, the deadweight loss issue, and government interference in trade flows, is nothing new, and raised few hackles among economists until the United States under President Trump started imposing serious trade barriers of its own. (See this article by Breitbart.com‘s John Carney for an excellent discussion of the issue and the hypocrisy of Trump tariff opponents.)

The second Apple- (and broader offshoring-related-) myth debunked by the article is that the reshuffling of global supply chains already being prompted by the Trump tariffs will devastatingly disrupt worldwide manufacturing and economic fortunes. But here’s what one Apple supplier representative told NAR: “It’s really a long-term effort and might see some results two or three years from now. It’s painful and difficult, but that’s something we have to deal with.” In other words, rather than whining and/or throwing in the towel, such companies are apparently rolling up their sleeves and getting to work.

P.S. – So, reportedly, is Apple. Not that the company hasn’t whined about the Trump tariffs. But according to the NAR article, its examination of diversifying away from China – where currently more than 90 percent of its worldwide manufacturing is located – began “at the end of last year” to “expand [the aforementioned] capital expense studies team.”

Moreover, the trade war evidently wasn’t the only issue on Apple’s mind. Said “one executive with knowledge of the situation,” a “lower birthrate, higher labor costs and the risk of overly centralizing its production in one country. These adverse [China] factors are not going anywhere. With or without the final round of the $300 billion tariff, Apple is following the big trend [to diversify production].” The biggest implication – which should have always been obvious – is that because countries and their economies, societies, and demographics are constantly changing independent of government policies, no smart business would ever view its supply chains as being set in stone.

The final myth – that performing nearly all Apple manufacturing in China has enormously strengthened the U.S. economy, and that this proposition holds for much China production by U.S.-owned multinational companies.

Because Apple products sell for so much more than the cost of their materials, it’s clear that most of the value they create comes from the company’s mainly U.S.-based research and development, engineering, design, software development, and marketing operations. So its slogan “Designed by Apple in California, Assembled in China” is not only accurate but extremely important economically.

Nonetheless, the company itself has maintained that a significant number of its goods suppliers have been U.S.-owned (though not necessarily American-located). Yet the NAR article found that this number has been shrinking steadily since 2012 – and that the number of China- and Hong Kong-owned suppliers has been rising so strongly that last year they exceeded the number of their American counterparts for the first time.

In fact, as I’ve reported, the China content of most goods produced in China been increasing so significantly for so long that the notion of the People’s Republic as a simple assembler of products that add little value to the Chinese economy is becoming rapidly outmoded. Further, this development has always been a prime objective of the Chinese government, as is especially obvious from its technology extortion and local content requirements.

It’s true that these developments per se don’t affect the aforementioned “white collar” manufacturing activities vital to creating Apple products. But it’s legitimate to ask whether, without the Trump trade war, this extremely high value work would long remain mainly in the United States. After all, even in a world of instant global communications, manufacturers have found it highly advantageous to locate functions like research and development etc close to their factories – because the two broad aspects of manufacturing tend to interact with each other so continuously, and because big differences in time zones means that there’s still nothing as easy and convenient as contacting a colleague by driving a few blocks away or phoning or texting or emailing from there, much less by walking down the hall.

To listen to economists and pundits and even many beat reporters even nowadays (or especially nowadays?), the emergence of the kinds of global value chains epitomized by Apple’s operations has been as much a force of nature, or technology, as economic globalization itself has been portrayed. They’ve ignored how the Trump trade policy revolution reminds invaluably that these trends have also stemmed from human decisions that are anything but givens. The reaction of Apple, and all the other companies that have either left China or are contemplating leaving because of the President’s actual and threatened tariffs, is a welcome sign that the folks who deal with these problems in real life, and not simply in the abstract, have finally been getting this message.

(What’s Left of) Our Economy: Could Trump’s Business Tax Cuts Be Working (Kind of) as Advertised?

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capex, capital spending, dividends, Factset.com, mergers and acquisitions, research and development, Standard & Poor's 500, stock buybacks, tax cuts, taxes, Trump, Washington Post, {What's Left of) Our Economy

One of the biggest stories in economics and politics over the past year has been the tax bill championed successfully by both the Trump administration and the Republican-controlled Congress. Economically it’s widely judged to have failed in its primary stated mission: encouraging more productive investment in the U.S. economy. And because it supposedly did little more than shower cash on already profit-rich corporations that overwhelmingly put it to supposedly unproductive uses like share buybacks and dividend payments (see, e.g., here and here), the American public rightly recognized it as a giveaway to tycoons and The Rich generally, and viewed it as one big reason to vote GOP candidates out of office in the recent midterm elections.

What a surprise, then, to come across evidence that the $1.5 trillion in business tax cuts so far have done a respectable job of working as advertised.

According to the Washington Post‘s Michael Heath, new research from Standard and Poor’s shows that since the tax package was passed, the firm’s well-known group of the 500 largest publicly traded U.S. companies have performed as follows:

>Through the first three quarters of this year, they’ve boosted share buybacks – which support the value of company stock and in the process enrich executives paid largely based on the increase (or decrease) in these stocks’ value – by 11.84 percent.

>During the same period, they’ve hiked capital spending (on new plant and equipment) by 19 percent.

>Over this span, they’ve boosted research and development spending by 34 percent.

>During the first eleven months of the year, their dividend payouts have been virtually unchanged.

When the entire American business universe is examined, the picture looks somewhat different – at least through the first half of this year. According to this summary of research from Goldman Sachs:

>buybacks rose 48 percent

>capital spending rose 19 percent

>research and development spending rose 14 percent.

What’s noteworthy about these figures, though, is that they indicate that the larger, indeed multinational U.S.-based companies spent their tax windfalls more productively than smaller, largely domestically focused firms. That’s noteworthy because one of the principal objectives of the tax cuts was to persuade the multinationals to stop stashing so much of their earnings abroad and bring these monies back home to stoke growth and jobs. So it appears that, to a significant extent, that’s what they’ve done.

Of course, the real results of the effects of the tax cuts (or any other policy initiative) can only be assessed accurately not simply by comparing year-on-year rates of change in various metrics, but examining how these rates of change have differed (if at all) from those of years before the initiative went into effect. I haven’t yet located the data for most of these indicators, but the chart below combined with the Washington Post figures for capital spending for the S&P 500 makes clear that it’s been growing much faster since the cuts were passed than before.

One area the Post didn’t look at, though, can’t be neglected: mergers and acquisitions. The numbers indicate that, measured by value, such activity increased much faster between 2017 and 2018 (for the first three quarters of the year) than between 2016 and 2017 – by 33.47 percent to 1.05 percent. (My sources are the 2016-18 data published by Factset.com.  Here’s its latest report.) The absolute numbers are sizable, too – the value of these transactions rose by more than $387.5 billion from January-through-September, 2017 to the same period this year. (Note: These figures are only authorized expenditures – but reportedly there’s evidence that 85 percent wind up getting made.)

But here (as elsewhere, for that matter) is where we run into a big complication that comes up whenever a policy initiative is judged: What changes are attributable to this move, and what changes to other factors? These other factors include other policies (like interest rate movements both announced and suggested by the Federal Reserve, or regulatory or trade policy changes), or existing or evolving business decisions on deploying capital (based on corporate judgments regarding likely customer demand that stem from the overall state of the economy or particular markets, and on how these situations are considered likely to change).

But all the same, a reasonable, defensible bottom line conclusion seems to be that productive business spending since the tax cuts’ passage is rising at a faster rate than before passage, and that the tax package has played a discernible role. Moreover, some of the other plausible reasons for this acceleration also are arguably attributable to Trump administration policies – at least in part.  Faster overall economic growth and regulatory reform are two examples. Trade policy might be a third.

Moreover, I’m making these points as someone who’s argued that President Trump’s prioritization of the tax cuts and Obamacare repeal was a major first-year mistakes, at least politically. Both should have taken a backseat to infrastructure building in particular. I’ve even expressed skepticism about the cuts’ likely economic impact.

But economically, the administration and its supporters seem to have had (and still have) a pretty good story to tell about the tax cuts – which could have bolstered their political appeal. Which means that a bigger mystery than the cuts’ actual effects could be why the administration told it so ineffectively.

(What’s Left of) Our Economy: More Establishment Happy Talk About De-Industrialization

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Anne-Marie Slaughter, blue collar, Bureau of Labor Statistics, design, engineering, Madeleine Albright, manufacturing, New America, offshoring, research and development, STEM, Trade, white collar, {What's Left of) Our Economy

I’m all for looking on the sunny side of life. Making up the sunny side of life? Not so much. That’s why I find Anne-Marie Slaughter’s recent Financial Times column so disturbing. For the author – a contributing editor of the FT, the president of New America (a tech and offshoring industry-funded think tank in Washington, D.C.), and a former leading foreign policy adviser to President Obama) has just served up an exercise in economic hopium that is almost entirely fact-free, and that repeats a canard that was hopelessly out of date twenty years ago.

Slaughter’s fanciful claim? That the spread of the internet of things throughout American manufacturing is going to spur a revival of America’s hard-hit, industry-heavy midwestern Rust Belt. One main reason, according to the author:

“[T]he next phase of the digital revolution is the internet of things. The Midwest is the traditional home of makers — of cars, tractors, machines and household appliances. Companies such as Deere & Co, Carrier or Ford may have shifted manufacturing abroad, but the design, engineering and innovation is still concentrated back home. Those jobs may be less sexy than billion-dollar start-ups, but they will be stable and well paid. On Thanksgivings to come, Midwest cities seeking to grow their tech sectors should have more and more to be thankful for.”

Although the headline (which Slaughter probably isn’t responsible for) – “The internet of things helps spark a rust belt revival” – signals that the Midwestern renaissance is already well underway, the author herself is honest enough to specify in the text that the only metrics she presents show progress on this score limited to “a fraction of a percentage point.” But it would have been more honest to at least hint at all the data suggesting how pie-in-the-sky her prediction is over any foreseeable time frame.

For example, although there’s no authoritative source of information showing how many employees of manufacturing companies based in the United States (either U.S.- or foreign-owned) work in science and technology positions, numbers are available for the share of American manufacturing workers occupying both blue-collar and white-collar jobs. These aren’t definitive, because many of the white-collar jobs are administrative and management jobs having little or nothing to do with innovation, and because manufacturing companies have tried to eliminate as many as possible to maximize cost savings.

But it’s still surely revealing that, since the offshoring phase of U.S. trade policy officially began when the North American Free Trade Agreement (NAFTA) went into effect at the beginning of 1994, American manufacturing employment falling outside the “nonsupervisory and production” category is down by 956,000 – or 20.45 percent. That’s a smaller hit than taken by industry’s blue-collar workforce – which is down by 39 percent, or 3.418 million. But over the last two-plus decades, the blue-collar/white-collar job split in manufacturing has barely budged, with the former’s share down from only 72.27 percent to 70.21 percent. Does that tell you a dramatic U-Turn is anywhere on the horizon?

Moreover, the U.S. Bureau of Labor Statistics (the source of the above figures) did take a cursory look at the employment of some types of engineers in various sectors within domestic manufacturing. It found that, in May, 2015, between about 38 percent and about 55 percent of the workforces in American information technology hardware production belonged in science and technology categories. But little of this type of manufacturing is located in the rust belt.

The only data set this same study contained that looked relevant to the midwest covered the increase in the number of mechanical engineers employed in the motor vehicle parts and various industrial machinery sectors. Only in motor vehicle parts did the workforces (modestly) exceed 10,000 – and this in an industry whose payrolls approached 564,000 that month, and whose total white-collar workforce came to just over 128,000.

Although it’s true that the statistics could be missing the kind of shift Slaughter expects (and her headline writer regards as already underway), anyone familiar with the way manufacturing typically works would understand why extreme skepticism is in order. In real-life manufacturing companies, and especially factories (as opposed to those imagined by so many think tankers and academics), production on the one hand and research and development etc on the other are rarely activities that are so sharply distinctive that one can readily take place around the world from another. In fact, they are so closely related that knowledge tends to flow back and forth between production line and lab in a continuous, interactive feedback loop. And it’s not remotely good enough to exchange this information electronically. That’s why, in sector after sector of manufacturing, when the production leaves the country, the research and development and design and engineering tend to follow.

And that’s why the only useful purpose served by Slaughter’s article – and the FT‘s decision to publish it – is reminding readers that, as long as American trade and other globalization policies keep needlessly fostering the export of manufacturing, offshoring interests, their hired guns in the think tank world, and their unwitting dupes in the press will strive to portray these losses as all for the best.

As my book, The Race to the Bottom made clear, it was a phony excuse for de-industrialization back in 1997, when former Clinton Secretary of State Madeleine Albright touted the advent of high tech products “designed and begun in the United States and…manufactured in Asian countries,” and it’s no less dangerously off-base today.

Those Stubborn Facts: How U.S Manufacturing Helps the Whole Economy – Except for its Own Workers

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Employment, exports, GDP, gross domestic product, Jobs, manufacturing, productivity, research and development, Those Stubborn Facts, wages

Manufacturing share of U.S. employment: 9%

Manufacturing share of U.S. GDP: 12%

Manufacturing share of U.S. productivity growth: 35%

Manufacturing share of U.S. exports: 60%

Manufacturing share of U.S. private sector R&D spending: 70%

Manufacturing share of decline in labor share of GDP since 1990:      more than 2/3

 

(Source: “In Labor vs Capital, Manufacturing Plays an Outsize Role, Report Says,” by Harriet Torry, The Wall Street Journal, November 13, 2017, https://blogs.wsj.com/economics/2017/11/13/in-labor-vs-capital-manufacturing-plays-an-outsize-role-report-says/)