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Yes We Can (Manufacture in a Global Economy)

I am beginning to think that I am an idiot. Every time I start looking into a manufacturing issue, I find that the numbers don’t always agree with what I thought. In this case, the disconnect in my thinking has to do with the proportion between goods and services in our nation’s exports.

I keep hearing that services accounts for over two thirds of our domestic economy. Add to this the constant assertion that our nation’s manufacturing is deteriorating, I was under the impression that services account for a significant percentage of our exports. With this information in hand I was not prepared for what I found concerning our nation’s exports. It turn out that in 2007, approximately 70 percent of our nation’s total exports are from goods.

I don’t know what I expected, but it wasn’t 70% of our exports being from goods. Part of my problem is with what exactly is meant by goods verse services? Are goods limited to only tangible items such as a hammer, computer, or automobile? Does it include less tangible things like software or digital music? Is there a difference in how buying a CD is treated verse downing loading a song from iTunes?

What confuses me more is that IBM considers itself a services company. I would agree that services are a part of the company, but I still would not have considered IBM to be a services company. In a way this classification answers some of the above questions. The amount of hardware IBM sells is small when compared to the software systems and consulting work they do. If one defines the hardware as goods and the software systems and consulting as services then IBM is a services company. The problem is that this definition of services would increase the expectation for a higher percentage of exports being from services, not decrease it.

Don’t get me wrong, I am not complaining that so much of our exports are goods. It is just that the news keeps telling us about how bad manufacturing is being hit and how we need to move to an innovation economy. I was beginning to think that our nation would crumble if we did not have almost 100% of our children go to college with most of them being scientists and engineers.

We might need more scientists and engineers, but the country will not collapse. As some economists say, the fundamentals are strong. It is interesting that if you look at Q1 2008, roughly 62% of our trade deficit was due to oil imports. With 70% of the exports being goods, that makes the trade deficit seem to be more like an energy independence issue as opposed to a systemic problem with manufacturing.

In the end, the numbers actually were more inline with what I thought then the expectations set by the media. The loss of manufacturing in America is not a “fait accomplish”, i.e. a done deal. I am just afraid that with the way the media portrays the state of manufacturing it will become a self fulfilling prophecy.

Protectionism? Maybe, but so what.

What is the purpose of the US economic stimulus package? The answer is relatively simple, to stimulate the US economy. So why would anyone question whether there is a provision in the stimulus to buy American? I support free trade and am not a fan of most protectionism, but that is not really the point since this has nothing to do with trade policy or general spending. Without focusing the stimulus on domestic industries, I am afraid that two things will happen; the stimulus will not be sufficient enough to stimulate the domestic economy due to stimulus dollars going elsewhere, and the US will be paying for failed stimulus to other nations.

The stimulus package needs to focus every dollar it can to the domestic economy. As Paul Krugman points out in his The Conscience of a Liberal post; “if macro policy isn’t coordinated internationally — and it isn’t — we’ll tend to end up with too little fiscal stimulus, everywhere.” This is why President Obama wanted to coordinate stimulus with the G20 nations.

I have always said that I do not mind paying taxes. I was fortunate enough to be born into a middleclass family in one of the greatest countries on earth. Paying taxes is just the cost of having the privilege of living here, as it is in any country. Taxes are not for raising money to stimulate the economies of other countries, that is the job of their governments. I think it is fine when it is for humanitarian purposes or to support national interests, but not as part of a domestic stimulus package and especially when we need to get our economy going first.

In short, our government needs to focus on improving our economy and making sure the stimulus is as effective as possible for the domestic economy. Improving the US economy will provide more long term benefit to the world economy then the lost, to external countries, stimulus would provide.

Twitter This

Just a quick note to let you know I have setup an account on Twitter, ProudlyMadeInUS.   I would have used ProudlyMadeInAmerica, but the name was to long.

Rick Wagoner – A Different Kind of Fall Guy

Was Rick Wagoner the fall guy for the trouble automobile industry? Maybe he was, but I do not really care about that type of fall guy. Rick Wagoner was the fall guy for GM. A quick look at the General Motors page on Wikipedia (http://en.wikipedia.org/wiki/General_Motors_Corporation) shows why. From 2001 to 2008 the approximate level of domestic sales decreased by 40%. Even if you take out 2008, which is a bad year for everyone, you see a decrease in sales of approximately 20%. As President and CEO of GM at that time, Rick Wagoner is the fall guy.

What disturbs me is that in 2007, the year after Wagoner lead GM to a huge 8.7% decrease in sales and a year where they lost an additional 6.3% of domestic sales, Rick Wagoner made $14,415,000 in compensation. That translates into $3.73 for every domestic unit sold.

I once attended a management seminar in New York City. The keynote speak spoke about decision making. One of the main points was that businesses need to continually make good decisions. Making a good decision only allows you to stay in the game so you can make the next decision. Making one bad decision could lead to ruin. If a bad decision was made, quick action is needed to minimize the impact.

The decision to focus on high margin SUVs while giving up market share in other vehicle categories is one of those bad decisions. Most analysts were critical of GM for their short sightedness, but it fell on deaf ears.

The problem with GM is not that we can not manufacture automobiles domestically. The problem is that, like all companies, we need run our businesses better. What is better? I am not sure, but it starts with having people who see the bigger, long term picture.

I do not blame Rick Wagoner for being a subpar business leader. Maybe he knew exactly what he was doing. Mr. Wagoner, as CEO of GM, had eight years where he made more money then 95% of Americans will make in their lifetime. Mr. Wagoner was incented to think short term.

Do I support the government strong arming Rick Wagoner to resign? I will give an ambiguous answer of No and Yes. The No is because I do not think that government should be involved in business at that level. In fact, I am not the biggest fan of the bailout of the auto industry. The Yes is because the bailout had to be done. We need to keep as many manufacturing jobs here as possible and the bailout will help. To do that we need to make sure GM is run better then it has been. Once the bailout was decided on, the Obama administration had to decide whether or not Rick Wagoner was the right person to lead GM back to profitability. The administration came to the conclusion that Wagoner was not the right person to do it.

The Innovation Myth

There are a plethora of articles that discuss the innovation economy. The articles usually come to the conclusion that the US economy can flourish as an innovation economy. That is as long as we improve our education and keep our capital markets open. I have skepticism about the merits of the innovation economy.

To try to address my skepticism I need to find an innovative product that was invented in America, but mostly manufactured elsewhere. Such a product would give us a good measure of the merits of an innovation economy. A quick read of my “Follow the Money” post provides the perfect product, the iPod.

If you did not read that post, the iPod is a product where most of the intellectual property was developed in the US, but most of the manufacturing was done elsewhere. I would also add that the iPod is a good example since it is neither to complex nor too simple. In short, the iPod is a pretty good product to use in deciding if innovation only is enough to power the domestic economy.

If we use the iPod, the merit of the innovation economy does not match the hype. A final point of the “Follow the Money” post was that the iPod was actually a net negative on the economy. Due to the size of the US market, so many more iPods are sold here then in other markets combined. This translates into more dollars leaving the US economy then coming in due to foreign iPod sales.

Does this mean that education and capital markets are not important? In fact, it is quite the contrary. The iPod’s drain on the economy would have been much worse if it was invented somewhere else. That is why the iPod is a vastly superior choice then a Japanese or Korean MP3 player. So I guess the articles are right, education and capital are the cornerstones of the innovation economy, but what they leave out is that we are still in a losing battle.

The problem is that the innovation economy is just not sustainable. The problem is exacerbated by the fact that more of the high level design work is moving offshore. The more of the product development, support, marketing, etc that is done offshore the worse it is for the domestic economy.

The good news is that it is not a fata compli just yet. There is still enough of a manufacturing base in America to overcome the problem. Keep in mind that if only one of the major components of the iPod was manufactured in America, it would turn the iPod into a net positive. That is why it is so critical that we all make informed decisions on our buying.