Three Strikes Against the New Economy

Three Strikes Against the New Economy

The euphoric cast on America's so-called new economy has been subjected to   remarkably little reality checking

There are major holes in the case for postindustrialism

Postindustrialism-this term covers a bewildering variety of businesses whose only obvious shared characteristic is what they are not: they are not manufacturing

Broadly defined, virtually all service industries might be considered part of the postindustrial economy

Some statisticians have recently started to classify computer software as a manufacturing industry

The task is to weigh the economic merits of postindustrial activities against those of what might be called hard industries

Hard industries-intended to denote capital-intensive, technically sophisticated forms of manufacturing

Postindustrialists overlook that assembly is only the final, and generally by far the least sophisticated, step in the making of modern consumer goods.

The more important steps are making the sophisticated components and materials as well as the manufacture of the production machines that make the world's components and materials

In the 1950's the United States led the economy due to higher levels of manufacturing. Now the United States has lost much of its manufacturing to other nations with carefully honed national strategies to boost their manufacturing prowess

Japan is one example of how a nation can climb the ladder of manufacturing sophistication.

Three drawbacks of postindustrialism- an unbalanced mix of jobs, slow income growth, poor export prospects.

Strike One Against the New Economy: a bad job mix.

Most of the jobs in the New Economy require considerably higher then average intelligence if one was to get a high paying job: financial engineering, legal services, computer software, Web site building, healthcare, broadcasting, database management, consulting, scientific research, or telecommunications- typically peoples whose IQs rank in the top twenty percent on IQ tests.

As estimated by the postindustrial economic commentator Michael Rothschild, up to twenty percent of the American workforce will be marginalized by the move to an information-based economy.

Marginalized-selling goods at a price that just equals the additional cost of producing the last unit supplied.

Strike Two Against the New Economy: slow income growth.

That the drift in the United States into postindustrialism results in weak income growth is one of the most serious, albeit one of the least recognized, drawbacks of the new economy.

The ultimate authority on this is OECD in figures, a yearbook published by the Paris-based Organization for Economic Cooperation and Development.

It shows that, with a per capita income at last count of just $27,821 a year, the United States trailed no fewer then eight other nations. These include Japan, Denmark, Sweden, Germany, and Austria, all of which devote a larger share of their labor force to manufacturing then the United States.

Most telling of all is the performance of Switzerland, a manufacturing-oriented economy whose per capita income of $41,411 is the highest of any OECD nation.

With almost no exceptions, manufacturing oriented economies have outpaced the United States in income growth

Between 1980-1996, the United States boosted its per capita income at current prices- that is, before adjustment for inflation- by a total of 134 percent. This growth may seem impressive, however it was bested by no less then twelve OECD nations. In order of growth income these were South Korea, Japan, Portugal, Ireland Luxemburg, Austria, Italy, Spain, Denmark, New Zealand, Germany, and Switzerland.

Q: Given the strength of the statistical evidence to the contrary, why did the postindustrialists ever consider the information economy a superior formula for income growth in the first place?

A: They have been blindsided by a subtle fallacy. This fallacy is clearly apparent in the views of John Naisbitt, author of Megatrends, and one of the earliest cheerleaders for postindustrialism.

The high wages paid in typical postindustrial businesses, such as software, merely reflect the fact that such businesses generally recruit exceptionally intelligent and capable workers, in essence workers who could expect to earn superior wages in almost any field they chose to enter.

Nevertheless, many postindustrialists cling doggedly to their faith in the New Economy's superior income performance.

South Korea-in sixteen years to 1996, its cumulative income growth was a stunning 564 percent. By comparison with this performance, the subsequent strains suffered by the nation have been mere speed bumps. In fact, it is likely when all figures are available, we will find that South Korea remains far and away the league leader in income growth for the entire period between 1980-1998.

Japan-the strains suffered in 1997 and 1998 were nowhere near so serious as to wipe out the superiority of its record in the previous sixteen years.

Strike Three Against the New Economy: a death of exports.

Postindustrialism weakens a nations prowess in overseas trade.

Virtually all postindustrial activities are handicapped in export markets by fundamental cultural differences (Due largely to language).

Many kinds of information are inherently local in appeal and therefore generate minimal exports. Information on traffic conditions in Vermont, for instance, is likely to be of little value in Virginia, let alone in Vietnam. Similarly, a database on Nebraskan car insurance rates has little value in North Carolina, let alone in the Netherlands or Nepal.

Culture is also a barrier to exports in many other highly paid information based professions.

In non-English speaking markets, such as Japan or Germany, British advertising firms must rely almost entirely on locally recruited professionals to serve clients in those countries.

Another key impediment to trade in postindustrial services is regulation in foreign markets, which is generally a much bigger problem for exporters of services then for exporters of manufactured goods.

As if America's poor prospects for exports were not bad enough, there is another problem with the trade side of postindustrialism- rising imports.

The Creativity Argument- all conventional wisdom to the contrary, there is little evidence that simply by dint of their nationality that Americans are more creative then other people- and certainly there is no reason to hope, as the postindustrialists do, that a purported edge in creativity will render the United States invulnerable to foreign competition in the postindustrial era.

Certainly the inconvertible facts of the industry give the lie to the idea that Americans have a special lock on software writing skills. Many other nations, including the world's poorest, have demonstrated that they have what it takes to compete in the industry.

The Know How to enter the software business is amazingly easy for developing nations to acquire, which opens up the possibility that American software workers will increasingly be undercut by low wageworkers abroad.

The conclusion, therefore, is that, from the point of view of the American balance of payments, the shift to postindustrialism is double trouble. First, it weakens the nations import strength. Second, it exposes the United States to the prospect of rapidly increasing imports. That said, many Americans find it easy to overlook the fact that postindustrial businesses do not do much for the balance of payments. After all, the huge U.S. current account deficits do not currently effect the quality of life within the nation-at least not in the short run. But in the long run, trade matters-and matters fundamentally. A nation that allows its trade position to deteriorate too far for too long cannot expect to remain the world's leading economy indefinitely.

                    In Praise of Hard Industries

As Bennet Harrison of New York’s New School pointed out, all conventional wisdom to the contrary, unskilled workers “barely off the farm” can be readily trained to operate computer controlled presses and similarly sophisticated production machinery. In Harrison’s terms, today’s high tech production machinery is not “skill demanding” but “skill enabling”.

“If wages of poorly educated workers are failing, we need to look for explanations other then technology. After all, the same technologies have penetrated factories and offices in Europe and Asia, yet nowhere outside of the United States have low end wages fallen so far and so fast.”- Bennet Harrison

High-tech manufacturing is necessarily very capital intensive. To the postindustrialists, this seems like a major disadvantage. This is an incorrect view.
In general the more capital that is invested in a factory, the higher its labor productivity is likely to be. Superior productivity = royal road to high wages

Ultimate example of high capital intensity is the components side of the electronics industry.

The investment per job in some Japanese component factories can reach over one million- or more then 100 times the rate of capital intensity in some parts of the world software industry.

Wage component of costs is very small. Motorola’s locating in Germany is one example. Though Germany’s worker’s get higher wages; wages was only three percent of the company’s total expected cost. Benefits of locating in Germany:
-World-beating manufacturing infrastructure
-superb utilities
-reliable delivery services
-honest regulators
-pleasant residential environment
-better educated workers

Global photographic film market dominated by Eastman Kodak, Fuji Photo film, and Agfa-Gevaert. Kodak’s dominance is being challenged by Fuji Photo, a Tokyo based company whose wage rate is considerably higher then American levels.

As recorded in the 1998 edition of Japan: An International Comparison, a publication of the Japan Institute for Social and Economic Affairs, the average hourly wage was $21.01 in Japan, $14.79 in Germany, and just $12.37 in the United States.

Trusting the Market: the tyranny of a treacherous ideology.

The postindustrialist’s case for the New Economy is a tale of misinformation and choplogic.

Postindustrialists place a child like faith in the efficacy of free markets. They assure that since postindustrialism has emerged first in the avowedly free market economy of the United States, it is a self-evident good thing.

The basic error in the laissez-faire model is that it greatly overemphasizes the interests of capital over those of labor.

The characteristic side of postindustrial society- large profits for a tiny elite and low wages for the broad mass of the workforce.

The most obvious washy in which America’s competitors systematically preempt manufacturing opportunities is via subsidies.

Aerospace is a notable case in point. The spectacular growth of Europe’s Airbus consortium, for instance, has been driven in large measures by subsidies.

One thing is certain; Europe is unrepentant about using subsidies to build its aerospace industries. In its own eyes, Europe has merely been emulating the United States, which, in an earlier era, established a large head in aerospace with an unabashed program of direct and indirect government supports.

Manufacturing companies in many advanced economies also enjoy the advantage of much greater access to outside capital as do their American counterparts. This reflects a fundamental macroeconomic fact: most advanced manufacturing nations now boast considerably higher savings rates then the United States.

The tendency for high-saving nations to invest in their own manufacturing industries is generally bolstered by government policies.

Another factor that has contributed to the relative decline of manufacturing in the United States is an unbalance in the flow of trade secrets and other proprietary know-how.

Other nations suck all the information and know-how that they can out of the United States while revealing little or no information on leading edge manufacturing technologies.

All the evidence suggests that a well-organized nation can be highly persuasive in inducing American corporations to transfer their most advanced production technologies within their borders. Its trump card is typically access to its markets.

The really troubling aspect of this pattern for the American national interest is that in time the production technologies concerned may be entirely lost to the American economy.

Q: Why don’t American executives fight harder against the pressure to transfer their production technologies abroad?

A: they assure themselves that they are not losing a technology merely because it is migrating to one of their foreign subsidies.

The whole trend of wages has been that in the 1950’s advanced technologies were only employed in the U.S. which meant higher wages. By the 1980’s Japan and Germany had caught up in the technology race and their wages have kept rising and have been ahead ever since.

The worst part of it is that the free-market dogma has tended to obscure from Americans how far the United States has been falling behind its principal competitors in recent years, most notably Japan.

The first eight years of the 90’s Japan’s current account surpluses totaled 750 billion. That was more then two and a half times the total of 279 billion it recorded in the first eight years of the 1980’s.

Remember that:
1.) Japan runs a large surplus in almost every tradable manufactured product
2.) Japanese manufacturers pay some of the highest wages in the world
3.) Nations with lower wage costs, like the Unites States, are rapidly increasing their trade deficits with Japan in high tech goods, it is surely obvious that the Japanese economy is one of the strongest in the world, particularly when judged by the yardsticks that matter to Japanese policy makers.

Crucial point: the American economy, faithful to the dictates of laissez-faire economics, is generally run to boost the short term welfare of the American consumer, the Japanese economy is run to boost Japan’s long term ability to project economic power abroad.

Japan in the 1990’s has been growing its net foreign assets faster then any nation since the United States in the golden years of expansion in the 1950’s.

  A Journey to the Source of the Electronic Nile

Electronics exemplifies the message of Fingleton's book

Electronics industry- literally the prime mover of world prosperity. Electronics industry supplies a rapidly growing of ever more powerful and reliable components for virtually every kind of manufactured product.

Electronics have cut the cost of appliances and improved their reliability.
Examples: Videocassettes, televisions, air conditioning systems, refrigerators, vacuum cleaners, dishwashers, and stoves.

Electronics have drastically improved the performance of cars in the last thirty years. Electronic fuel injection- cut fuel use in half. Microchip-controlled airbags, smoother riding, effective braking. Nearly one-fifth of the cost of a car goes towards electronic components.

It is common knowledge that AT&T, Microsoft, and Intel have hastened the  information age. Few, however, are aware of the important contribution made by the Japanese camera maker Nikon. Even fewer have any inkling of what goes on at Nikon's glassworks in the remote Tokyo suburb of Sagamihara.

The Sagamihara glassworks is the repository of the highly secret, world beating techniques that have propelled Nikon to a dominant position in the manufacture of key production equipment semiconductors.

semiconductor- any of various solid crystalline substances, such as germanium or silicon, having electrical conductivity greater then insulators but less then good conductors.

This plant leads the world in making glass with uniquely powerful optical qualities that are vital in the production of semiconductors. Thanks to this glass, Nikon has come from nowhere in less then two decades to become the world's dominant manufacturer in so-called steppers.

Steppers play an important role in world manufacturing in the late twentieth century as blast furnaces did in the nineteenth. They are lithographic machines that perform the crucial function of printing circuit patterns on silicon wafers.

Lithographic-a printing process in which the image is rendered on a flat surface and treated to retain designs while the nonimage areas are treated to repel designs.

The printing is done by focusing an image of the circuit pattern onto a photosensitive material coated on each wafer. The image is formed by shining a light through a "mask"- a stencil-like metal replica of the circuit pattern- and is progressively reduced through a series of huge lenses. It is then reproduced on the silicon wafers.

Because the resolution power of each new generation of steppers is greater then the last, the semiconductor industry can print even finer lines on each new generation of chips. And of course, the finer a chip's lines, the greater its information- processing capacity.

Much of the stepper industry's growth in sales revenues comes from price hikes as each succeeding generation of machines offers greater performance.

As of 1998, a state-of -the-art stepper cost more then five million. This represented a five-fold increase over Nikon's first steppers in the early 1980's. Moreover, a next generation stepper, due to go to volume production in 2000, is expected to cost more then $8 million.

For the Japanese economy, the most striking benefit has been soaring exports. Nikon exports more then fifty percent of its steppers. Moreover, even those Nikon steppers that are installed in Japanese semiconductor plants contribute strongly, if indirectly, to Japans exports because they are engaged mainly in making semiconductors for export.

Nikon pay levels are well among the best in Japan. As of 1997 its workers earned on average Y-404, 900 a month. That was about $3, 300 at the 1997 exchange rate. Workers received large biannual bonuses that brought their total income to around $55, 000 a year. Nikon's pay levels were comparable to those in Japan's world beating automobile industry.

The stepper industry's need for highly precise mechanics stems in part from the ultra demanding level of accuracy required in positioning silicon wafers for the lithography process. If a wafer's position is off by much more then .1 microns- little more then one -thousandth of a hair's breadth- the resulting chips may prove fatally flawed.

Microchips are three-dimensional devices. Like the floors in a tall building, layers of circuits are imposed one on top of another. If each succeeding layer is not precisely aligned over the one below, the circuit connections between the layers will not line up. The mechanical challenge is greatly compounded by the fact that steppers print the same tiny pattern repeatedly on each wafer.

A final benefit of Nikon's base in Japan was a plentiful supply of long-term capital. Nikon could count on its Mitsubishi connections to ensure that it had privileged access to the torrent of patient capital available from the Mitsubishi groups various banks and insurance companies.

Nikon's main rival, Canon, had already established an important beach-head in copiers and used this advantage to achieve leadership in the emerging laser printing business (Canon supplies the key enabling components in laser printers to companies like Hewlett-Packard).

Silicon: one thousand times more valuable than steel.

Probably the stepper industry's nearest rival as a fundamental enabler of the electronic revolution is the silicon industry, which is also much overlooked in public discussions of the electronic age.

The truth is that only a handful of sophisticated companies are capable of making silicon to the standards required in the semiconductor industry. And just the top three of these companies- Tokyo-based Shin-Etsu Chemical, St. Louis-based MEMC Electronic Materials, and Munich-based Wacker-Chemie- account for over half the world market.

But there is a big difference between raw silicon found in nature and the highly refined silicon used in the semiconductor industry. In fact, the semiconductor-grade silicon is produced in only tiny volumes, and in the epitaxial form used for high performance computer chips, it costs more then $80 an ounce. That is the equivalent of nearly $2.9 million per metric ton- or nearly one thousand times the price of steel.

The silicon production process begins with quartz sand, which is reduced and refined to produce a material known as polysilicon. This looks like irregularly shaped gray rocks but boasts an almost incredible level of purity- just one foreign atom per one billion.

The polysilicon is then melted in combination with minute amounts of "dopant" elements such as boron and phosphorus and converted into cylindrical ingots of monocrystalline silicon. The dopant elements are special impurities that determine the precise electrical properties of the final silicon wafer.

Ingot- a mass of metal cast in a shape for convenient storage or shipment.

As with most manufacturing industries, the silicon business has been highly successful in creating excellent jobs for normal blue-collar workers. In fact, more then 80% of Wacker's silicon workers are mere high-school graduates.

The silicon industry is also notably knowledge intensive. The crystal growing process in particular in highly complex, and by dint of trial and error over the years the main producers have accumulated a huge stock of proprietary know-how.

The incumbents in the industry also enjoy a huge edge in productivity over would be entrants by dint of a large reserve of trade secrets.

The level of proprietary knowledge required is constantly rising as the industry moves rapidly to ever more sophisticated and varied products. Much of the variation comes from the "doping" process, which cab produce many different grades tailored to the precise needs of individual semiconductor makers. As reported by Barnaby Feder, MEMC, an affiliate of the German conglomerate Veba, now makes more then a thousand different types of wafers, each with its own exacting specifications for silicon purity, electrical properties, thickness, surface coatings, and many other characteristics.

Given the level of capital and knowledge needed, virtually all the key processes in the semiconductor-grade silicon industry are conducted by high-wage workers in First World factories.

Another key reason for locating in an advanced nation is that the silicon business requires notably high-quality labor.

Semiconductors: an advance on mushroom farming.

When American semiconductor makers were under strong competitive pressure from fast expanding Japanese rivals in the mid-1980s, a furious policy debate raged in Washington. For many in the Reagan administration, the appropriate response seemed clear: do nothing. Their position was famously encapsulated

In a remark attributed to the top Reagan Administration Economic Advisor Michael Boskin: " Computer chips, wood chips, potato chips. What the difference? They're all chips."

Reaganites believed that the choice of which goods the United States should or should not produce was best left to the unfettered free market. If American companies found quicker, easier profits in making potato chips or wood chips then computer chips, then this is where the nation's best prospects for prosperity lay.

There were several flaws in this argument, of which the most obvious was that if the American economy was to remain one of the world's strongest, the United States needed not only profitable corporations but good jobs.

The fact that the profit downturn the American semiconductor makers had suffered stemmed from no fundamental slowdown in the industry's phenomenal growth rate but rather from short-term oversupply problems created by the aggressive expansion of notably far sighted Japanese semiconductor companies.

In just ten years to 1996, worldwide sales of microchips multiplied five fold to total $132 billion.

Higashi Hiroshima- a medium sized Japanese town. One of the world's largest and most advanced semiconductor fabrication plants. Measuring 400 meters long and about thirty meters high, this plant is located in a semirural setting on the outskirts of town.

The plant is operated by NEC, which ranks as the world's second largest semiconductor maker after Santa Clara-based Intel Corporation. For our purposes, NEC is a more interesting company to look at then Intel because it has based its success almost entirely on world leading manufacturing skills, Whereas Intel's growth has come from a so called market lock-in - its virtual monopoly in making chips for Wintel-standard companies.

In the summer of 1997, NEC had just finished building a new extension full of state-of-the-art manufacturing technology. The extension, code named A2, was expected to lead the world in mass producing chips with lines as thin as .25 microns- one quarter of one millionth of a meter.

This was an important advance on the semiconductor industry's previous mass production best .28 microns, and it paved the way for NEC to pioneer the production of massively powerful 256 megabit memories.

Perhaps the most important thing about A2 is its price tag- a cool $630 million. It is a good example of the pattern for Japanese companies to make their largest investments at home- a pattern reflected in the fact that though NEC operates more semiconductor factories abroad then in Japan, fully two-thirds of all the investment capital it pours into its worldwide semiconductor business each year goes to domestic operations.

Clearly the Higashi Hiroshima plant is a classic example of manufacturing's ability to create superb First World jobs. Moreover, in common with other manufacturing operations, the plant has created an excellent range of jobs: nearly 80% of NEC's workers are mere high school graduates, a considerably higher proportion then in the Japanese workforce as a whole.

For a fifty-year-old worker, wages plus bonuses came to well over $60,000 a year.

The evidence of the 1990's is that the job prospects are better in semiconductors then in mushrooms - not to mention wood chips or potato chips.

Let There Be Lasers: light as an all- purpose tool.

Next to computer chips, the most important enabling components of the electronic revolution are undoubtedly lasers and other high-tech light-emitting devices.

Laser technology has created a host of manufacturing opportunities for high-tech companies in many advance nations. In Germany, for instance, manufacturers are particularly strong in laser-based cutting devices, which in various forms are now widely used everywhere from shipyards to hospital operating theatres.

 The Germans are also leaders in laser-based welding devices, which, like the cutting devices, harness the ability of gas-based lasers to concentrate energy in a very focused way. The ability is a major advantage in dealing with metals that boast both high conductivity and a high melting point. Aluminum for example, was notoriously difficult to weld effectively until lasers came along.

The Japanese are key players in several of the most important areas of the laser business. They are strong in cutting devices, for instance. They are also leaders in laser based precision instruments. Tokyo based Komatsu, for instance, is now challenging Cymer in making lasers for the stepper industry.

Perhaps the most ultimate success story of the Japanese laser industry is Sony Corporation. Sony's specialty is laser diodes, a product category it entirely dominated worldwide.

Laser diodes are tiny devices that are most familiar as the key enabling components in compact disk players, CD-ROMS, and digital videodisc players. They are also crucial in laser printers. They are key enabling components in the telecommunication industry, where they are used to send pulses of light through optical fiber networks.

Sony got its start in the industry as recently as the early 1980s and has been on a path of breakneck growth ever since. On the strength of an estimated threefold increase in its factory workforce, it has expanded its monthly output from less then 300,000 units in 1982, to 14 million units in 1998.

It has been powered in part by Sony's success in maximizing its yield- the proportion of flaw free units in its total production.

Sony's yield achievement alone accounts for a nearly five-fold boost in labor productivity. On top of this, the company has achieved other major productivity improvements thanks, for instance, to massive investments in robot driven automation systems.

Along the way the company has implemented a major qualitative improvement in its products by both shrinking its size and boosting its performance.

The results can be seen in consumer markets around the world. Sony's success in honing its laser diode production know-helps explain why CD players are now everywhere-
not only in the first and second worlds but increasingly even in the third world. They are evidently far more numerous then the record players that they superseded. Since CD players were first sold in 1982, they have achieved total cumulative sales of a phenomenal 550 million units- one for every ten residents on the planet.

One major breakthrough lately has been in the manufacture of blue lasers. These had hitherto been unavailable only in huge gas-based versions that cost about $50,000 each. Now Nichia Chemical Industries of Anan, Japan, has developed tiny blue laser diodes based on the semiconducting material gallium nitride that are expected eventually to be mass produced for less then $2 dollars a piece.

If blue lasers become widely available, they will enable the information industry to pack four to five times as much information onto CD platters. This is just the beginning of the possibilities of blue lasers. Engineers believe that down the road blue lasers may play a crucial role in a host of applications, in everything from color fax machines and copiers to ultra-high-capacity optical fiber networks.

From: Fingleton, Eammon, In Praise of Hard Industries: Why Manufacturing, Not the Information Economy is the Key to Future Prosperity.
Houghton Mifflin Company: New York, 1999