Recommending an A2E duty

If I were President of the United States, I would push for an across-the-board customs levy that would be automatically triggered with rises in the unemployment rate (let's call it the ABCDE - Across the Board Customs Duty linked to Employment - or A2E for short).

So let's say we set the target unemployment rate at 5%. At this rate of unemployment, the A2E might be zero. If unemployment rose to 6%, the A2E levy on imports might automatically rise to 5%. If unemployment rose to 7%, it might automatically rise to 10%. If unemployment rose to 10%, it might grow to 25%. The mathematical function would be clearly defined up front. But in effect it would be a balancing factor trying to keep jobs in the US.

To minimize governmental bloating, it would be truly across the board, so that the push of special interests does not see this ballooning into the complexity of the tax code! Also to give business some time to adjust, this rise in the A2E levy would be for 6-12 months out. Probably closer to 6 is better.

Thus if unemployment rises in January, it would mean that an additional A2E would be levied on all imports - from yoga mats to software - in July. Simple and far-reaching.

Socialism collapsed some years ago - its modeling of man solely as a producer turned out to be flawed. Despite highly complex planning associated with socialism, even highly skilled engineers could not buy bread in the stores. Now we see what can only be called the partial collapse of capitalism which has proved the folly of the modeling of man solely as a consumer. Through and despite highly complex free market structures, you might own an iPhone but you might not have a job.

There has to be a middle path. By recognizing that more-or-less full employment must be a fundamental part of our economic goals, the Across-the-Board Customs Duty related to Employment may be a sharp tool for achieving this balance between production-oriented socialism and free-market capitalism.

Manufacturing and the trajectory of the United States

In 1994, I took a class in Manufacturing Strategy at Stanford. One of the articles we had to discuss was something along the lines of "Is manufacturing even pertinent for the USA?" I had elected to study manufacturing for my bachelor's and my master's - and then this was a manufacturing strategy course, right? - so I of course thought that the answer was self-evident.

But when the class started, student after student began dumping on manufacturing. There must have been 50-60 people in the class, about 20 spoke, and no one thought manufacturing was worthwhile. They all talked about how the "service economy" had made manufacturing redundant. Towards the end, I raised my hand and nervously blurted something about how abundant raw material, cheaper power and good infrastructure made the US attractive for manufacturing, and at the same time the rising hordes of Indian software programmers and advertising folks and bankers (leapfrogging straight into the service economy) meant that America should not take dominance in services for granted. But it was a spindly voice against a storm. Far more representative was a small energetic American girl who made the eloquent case that keeping manufacturing in the US was just a CYA (cover your *** - I was shell-shocked!) strategy which a bold leader would simply get rid of, and if she led a company she would have none of it.

At the end of the class, Prof. Carlson revealed the opinion of Intel's Andy Grove - that manufacturing would continue to be important for the United States. But he revealed it in a mild way, almost not taking sides, and the class hemmed and hawed, and accustomed as I was to the black-or-white method of teaching in India, I left the classroom feeling quite disturbed (in part, I admit, at my total inability to influence opinion even an iota). I remember that there was a German student, Johann something, who said a few words of encouragement to me as we trooped out. We were two of the three foreigners in that class. And the third guy was Chinese, who evidently did not need to say anything.

(Don't you see we'll catch up with you if you share technology with us? - I could not help wondering. My American friends seemed too complacent.)

The next year, I was reviewing a Harvard Business School case study on Kodak for the legendary Prof. Wheelwright. In the case study, Kodak had to decide between situating a factory in Thailand and situating it in the US. Labor cost was of course much lower in Thailand. A group of HBS students had supposedly built a big Excel model and had concluded that the overall cost was lower in the USA, even though this was not a "core competence" for Kodak. The analysis had been accepted by Kodak and the case study had been taught for some time. When I looked at the model minutely, however, I saw it blithely assumed that the low labor productivity of Thai society - in very different realms such as agriculture - was being assumed for a state-of-the-art factory identical to what would otherwise come up in the US. From my Asian point of view, this was quite insulting. (Prof. Wheelwright seemed to agree this was incorrect, btw he is quite a great guy.) To my mind, this was the other side of the US arrogance on manufacturing - "we are always more effective, it's just that we think that our time is better spent on 'brains-intensive' stuff". Perhaps, given this brief context, my conclusion might seem unwarranted and prickly, but these weren't isolated incidents - this was what the younger generation of business students genuinely appeared to believe. I found it much easier to relate to the professors and older folks in the schools, they seemed to be more in sync with my own beliefs.

Fast forward maybe 10 years to Portland, Oregon. The US had started to feel software services slip away to suddenly-important companies like Infosys and Wipro. Software too was boring for the American wunderkinds. They wanted to "find themselves" or "express themselves", a luxury we had little access to or time for. Bill Kayser, a highly-skilled software colleague with a dyed-in-the-wool computer science background, was lamenting America's future. No one wanted to study software any more. What would happen to America and people's ability to earn a living?

I remember saying, "Well the rupee will appreciate against the dollar, and it will bring back balance. I also think that the US will be forced to turn back to the riches of its commodities and perhaps back to manufacturing." In retrospect, the rupee did not appreciate - but Indian salaries did. Year-on-year salary increases in software have been staggering. The delta between US and Indian salaries is now quite low for senior people, quite definitely on purchasing-power-parity terms.

And US collegiate interest in software education is picking up, at long last. You may credit "The Social Network" but I think at least part of it has to do with the fact that on-campus hiring in other areas has hit rock bottom.

The US has not returned to commodities or manufacturing in a big way, but perhaps it should. Deep and lasting unemployment is breaking the country's spirit. It is psychologically perhaps better to earn a low wage than to be unemployed, right? I was sitting alone at dinner at Munich tonight, reading the NY Times (hard copy!) when I came across this article, "Does America Need Manufacturing?" Some thoughts and experiences of the last ten years came back to me, sharpened by the immediacy of the worries about the US economy and the US people.

The USA's "service economy" of the last decade or two has been built on Chinese credit. The chickens have come home to roost. What does the US have to sell to China?

Perhaps it's time to put up a few fabs.