Andy Grove, the founder and former CEO & Chairman of Intel Corporation, wrote a short op-ed for Bloomberg News last week that takes a hard look at our serious unemployment question. Perhaps because it was published on the eve of a long holiday weekend, Grove's op-ed didn't get much discussion (Yves Smith at Naked Capitalism linked to it but that was pretty much it). That's regrettable because Grove, one of the driving forces in the tech boom of the past 30 years, covers some important ground asking some very poignant questions including one of the ones that has so troubled me over the past decade.
I am fortunate to have lived through one such example. In 1968, two well-known technologists and their investor friends anted up $3 million to start Intel Corp., making memory chips for the computer industry. From the beginning, we had to figure out how to make our chips in volume. We had to build factories; hire, train and retain employees; establish relationships with suppliers; and sort out a million other things before Intel could become a billion-dollar company. Three years later, it went public and grew to be one of the biggest technology companies in the world. By 1980, which was 10 years after our IPO, about 13,000 people worked for Intel in the U.S.
Not far from Intel’s headquarters in Santa Clara, California, other companies developed. Tandem Computers Inc. went through a similar process, then Sun Microsystems Inc., Cisco Systems Inc., Netscape Communications Corp., and on and on. Some companies died along the way or were absorbed by others, but each survivor added to the complex technological ecosystem that came to be called Silicon Valley.
As time passed, wages and health-care costs rose in the U.S., and China opened up. American companies discovered they could have their manufacturing and even their engineering done cheaper overseas. When they did so, margins improved. Management was happy, and so were stockholders. Growth continued, even more profitably. But the job machine began sputtering.
U.S. Versus China Today, manufacturing employment in the U.S. computer industry is about 166,000 -- lower than it was before the first personal computer, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer-manufacturing industry has emerged in Asia, employing about 1.5 million workers -- factory employees, engineers and managers.
The largest of these companies is Hon Hai Precision Industry Co., also known as Foxconn. The company has grown at an astounding rate, first in Taiwan and later in China. Its revenue last year was $62 billion, larger than Apple Inc., Microsoft Corp., Dell Inc. or Intel. Foxconn employs more than 800,000 people, more than the combined worldwide head count of Apple, Dell, Microsoft, Hewlett-Packard Co., Intel and Sony Corp.
10-to-1 Ratio Until a recent spate of suicides at Foxconn’s giant factory complex in Shenzhen, China, few Americans had heard of the company. But most know the products it makes: computers for Dell and HP, Nokia Oyj cell phones, Microsoft Xbox 360 consoles, Intel motherboards, and countless other familiar gadgets. Some 250,000 Foxconn employees in southern China produce Apple’s products. Apple, meanwhile, has about 25,000 employees in the U.S. -- that means for every Apple worker in the U.S. there are 10 people in China working on iMacs, iPods and iPhones. The same roughly 10-to-1 relationship holds for Dell, disk-drive maker Seagate Technology, and other U.S. tech companies.
You could say, as many do, that shipping jobs overseas is no big deal because the high-value work -- and much of the profits -- remain in the U.S. That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work -- and masses of unemployed?
It is my contention that economic inequality poses a mortal danger to democratic values and democratic societies. In the United States we have moved away from the notion of a relative egalitarian distribution of the national income and indeed championed policies that lead to increased inequality. This, in turn, is now putting pressure on our democratic governance. It is not by accident that we are seeing billionaires of the most unusual stripes run for public office, largely to defend their largesse and create what amounts to an aristocracy, or that we have a Supreme Court overturn a century of restraint on the corporate financing of political campaigns. Indeed these are the logical conclusions of a society that placed the desires of a few over the needs of the many. Avarice is triumphant, poverty evermore commonplace and American democracy under stress if not in serious jeopardy.
Yves Smith who runs the Naked Capitalism blog and Rob Parenteau who is editor of The Richebächer Letter and the head of the financial advisory firm MacroStrategy Edge have an op-ed in the New York Times that points to one of the significant developments in the global economy over the past twenty years, a switch in the behaviour of corporations which are eschewing investment in productive assets in favour of financial ones as well as passing on a greater share of profits to corporate executives and shareholders. This switch in corporate behaviour has significant implications for the global economy.
Over the past decade and a half, corporations have been saving more and investing less in their own businesses. A 2005 report from JPMorgan Research noted with concern that, since 2002, American corporations on average ran a net financial surplus of 1.7 percent of the gross domestic product — a drastic change from the previous 40 years, when they had maintained an average deficit of 1.2 percent of G.D.P. More recent studies have indicated that companies in Europe, Japan and China are also running unprecedented surpluses.
The reason for all this saving in the United States is that public companies have become obsessed with quarterly earnings. To show short-term profits, they avoid investing in future growth. To develop new products, buy new equipment or expand geographically, an enterprise has to spend money — on marketing research, product design, prototype development, legal expenses associated with patents, lining up contractors and so on.
Rather than incur such expenses, companies increasingly prefer to pay their executives exorbitant bonuses, or issue special dividends to shareholders, or engage in purely financial speculation. But this means they also short-circuit a major driver of economic growth.
Their op-ed references a 2005 report by Jan Loeys and David Mackie of JP Morgan entitled Corporates Are Driving the Global Savings Glut which found that rise in the corporate savings rate has truly been a global phenomenon cutting across all regions and including both financial and non-financial corporates. They also found that relative to the past, the financial sector has played "an unprecedented role in boosting corporate saving, as benefited from record low funding rates, and the impact that this had on interest sensitive sectors."
While we normally think of savings as a net positive, that's not the case here. What we are seeing a pilfering of corporate assets primarily for the benefit of their executives. Rather than invest in productive capacity, profits are being redistributed internally to upper echelon management and shareholders in part because taxes on retained earnings, a policy switch that dates to the Reagan era, are too low. Indeed, Smith and Parenteau find that policymakers need to create incentives for corporations to reinvest their profits in business operations. They suggest two approaches: one way to do this would be to impose an aggressive tax on retained earnings that are not reinvested within two years. Another approach would be a tax on the turnover of corporate financial investments that would raise the cost of speculating with profits, rather than putting them into the business.
After assailing the President yesterday in a post for not talking enough about the duties and responsibilities of citizenship given the increasingly lackadaisical attitude too many Americans have towards civic involvement coupled with the open hostility that the right has towards government, the President today delivered a commencement address at Hampton University in which he addressed such concerns.
Like his address at the University of Michigan in Ann Arbor a week ago, this is Obama at his finest. It's more the pity that few seem to be paying attention because the Michigan address was perhaps Obama's best speech yet which is saying something since the one thing Obama excels at is giving great speeches. But no one seems to care. Cut through all the noise of the Tea Party, pull back the insidious hate therein as well and much of their core philosophy is a "leave us alone" mantra. It's the exaltation of Grover Norquist's most misbegotten creed. It's a worldview that in essence cries out "leave me alone so I can sin." It underpins everything on the right from their aversion to taxation to their contempt for a proper regulatory environment. Theirs is a view that puts the narrow interests of a few over the general good. They call it freedom couching it in terms of individualism but it is really a feudal tyranny reborn. It empowers the strong at the expense of the weak and in such a society, democracy is marked for extinction. And it is not hyperbole to suggest that we in the United States are on that path. We are well on the way to becoming a less egalitarian society and unequal societies are inherently undemocratic.
It is perhaps the saddest of commentary that so far the only news agency covering this address is Agence France-Presse. And if you want to see the ignorant delusional right's take on this try Pajamas Media which typically for the ignorant right takes a pebble of truth and turns it into a boulder of lies.
The Hampton address, as prepared for delivery, is below the fold. It's well worth the read.
Appearing on ABC's This Week, California Governor Arnold Schwarzenegger called out members of his own party for their hypocrisy on the American Recovery and Reinvestment Act. In hard hit California, the Republican Governor noted that the fiscal stimulus was responsible for saving or creating 150,000 jobs. Of the $330 billion available under ARRA nationwide for state aid, California received approximately $31 billion that helped offset California's budget deficit keeping vital public services functioning.
As of year-end 2009, California’s unemployment rate was 12.4 percent with the number of unemployed in California hitting 2,254,000.
The Federal Reserve, the Central Bank of the United States, has raised its discount rate by a quarter of a percentage point, to 0.75 percent from 0.50 percent, effective tomorrow Friday, February 19, 2010. The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility - the discount window. From the Federal Reserve's press release:
The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.
Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.
The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19.