Fixing The US Economic And Unemployment Problems – Redesign Some Treaties

This post was first publushed in our old blog, Nkpuhe. We have brought it here to enable our readers enjoy our  contributions in some old issues as they developed and then evaluate how our insights have stood with time.

Nkpuhe has blogged on many occasions that America is undergoing a very transformative phase that can define if it will remain a superpower in the next few decades. In the two sections of our Boom and Bursts of Empires as well as our Global Economic Outlook, we have made it clear that we love America because when it wins, Africa is better off.

This makes it more necessary for us to comment on major issues we have seen in America. Our propensities to pass comments on US many times have to do with the fact that our programs in Africa cannot succeed without the support of Americans. For instance, in the last few years, the charity donations of US to Africa have gone down as Iraq and Afghanistan wars diverted their attentions.

While US fight in the foreign soils, there is a new kind of war that is brooding in this great country. That is unemployment. It is becoming very troublesome that graduates of prestigious universities like Stanford, Harvard and Hopkins could be without jobs. Just pity the lower ranked schools since your school ranking makes all the difference in US.

So what has gone wrong? Many of the economists have destroyed America along with some of the agencies. These institutions have continued their assaults on the benefits of service industry and creating higher wage salaries in America while promoting shifting lower wages to overseas like China and Vietnam. They maintain that as US outsources, the US is better off because through outsourcing the US will create higher wage jobs in America. There is also the theory that without outsourcing, American companies can actually have to lay off more of US workers. So, outsourcing keeps US jobs.

These are all wrongs.  The reality is that US consulting companies will work the numbers to make their businesses look good. If they say that outsourcing kills jobs, it will be a very toxic political problem to them. From Accenture to BCG, we have a league of world class firms that focus on advising to shift US jobs overseas. And they project a flawed notion that US could live on outsourcing because jobs are protected through it and it also gives higher wage. Nonsense; they are wrong.

The simple truth is that they are not honest to American people. Outsourcing and the unprecedented migration of US companies to services while abandoning manufacturing is what will bring the end of American empire. Nkpuhe predicts that unless the US changes course, it will soon cease to lead the world. US military power is its economic power. Any day it losses the latter, the military might will matter less.

Whether Obama likes it or not, the unemployment problem in America can be managed but the long-term trajectory of the US shows a nation where unemployment will remain in double digits. They could pass some tax credits to companies to hire, but those are just cosmetics that will not solve the main problem. There is nothing that shows that US can get back to 6% unemployment rate in the next ten years with the ways things are going. I am first an engineer than other fields and I focus on root cause.

People tend to forget history that in 1932, jobless veterans demonstrated in White House and had to be dispersed by soldiers.  It could happen again in the next ten years.

Many US economic professors have  not helped out by being blindfolded on this notion of knowledge economy that they fail to see that what matters in the world is not really how much high wage jobs that are created by outsourcing, but how many have jobs. I prefer an America where 100 people have a job that pays each $50,000 than one where 10 people have one that pays each $500,000 and the other 90 unemployed. If all what outsourcing does is to help to create higher wages in America by taking the low wage jobs out of US, what happens to those that need those low wage jobs in US?

The last I checked, there are still technical and community colleges in America. What future do we have for them if all the jobs they are trained are sent to China? Sure, governments will be best advised to close those schools and ask them to go to universities since outsourcing makes those trainings unnecessary.

America through outsourcing has lost its vitality and brutal pragmatism in manufacturing and factory business. We have become a nation where it is no cooler to work in factories. We have engineers on tie in Silicon Valley designing for factory guys in China. That is a problem. The problem as Nkpuhe has blogged is that as we lose that technical excellence that comes from actually working in factory, we lose the ability to innovate. The next generation of American engineers will have a very big disadvantage compared to Chinese since they will have few factories to learn, improve and advance.

Technical excellence matters and by having all the factories in China, US had given control of that and its incremental innovation to China. It will never come back. The day IBM went into services was a bad day in America; but it is already happening. Apple hires few thousand engineers to design its products, but Chinese Foxconn (Hon Hai Precision Industry) hires 800,000 to make those designs products for Apple, HP, Dell, etc.  The engineers that work in Foxconn understand the factory business more than Apple and they will be the firm that will innovate on this process. Foxconn revenue in 2009 tops each of Apple, Dell, HP, Intel, Microsoft, Oracle and any US tech company at $62b. And it hires more than any US tech firm though the US indirectly creates those jobs.

It has already been documented that for everyone engineer in top US tech firm, there are ten workers in China. So why do people complain about unemployment in America? US firms are still creating jobs, but they are not in America. Yes, Apple is creating jobs in any generation of iPhone, but alas, it is in China. The same applies to Dell, HP, Intel, and so on.

Nkpuhe thinks that US firms are still creating jobs that can move unemployment to 6%, but that can happen if those jobs are kept in America. As an ex-banker, some of the government policies do not make sense when you see what they do to help unemployment. They are fighting a wrong battle by thinking they can give tax credits for firms to hire without knowing that for any one head put by the big tech firms, ten jobs are created in Asia. The problem would have been to manage that ratio by providing incentives for US to build factories in this country.

Without factories and manufacturing, despite all the service industries, they will not be any America. Forget the Bain, Accenture, BCG and the host of all those consulting firms, we know what they do. They just want clients to make money. As Detroit was phased out, so is Silicon Valley in coming decades if government fails to understand the importance of having factory jobs in US.

China provides the means to make shareholders happy through higher profit margins, but that may not serve all Americans. The computer manufacturing jobs in US are anemic at less than 166,000; lower than the number in 1975. Today, Asia has excess of 1.5m workers employed in that category.

America needs a way to create American jobs. This will mean reducing the 10:1 ratio for each US job created to Chinese 10 jobs. Closing that gap is important. US government needs to understand that manufacturing is very important. Also it has to recognize that by allowing Chinese to rule on factory jobs, only the Chinese will create the next factory innovation and that must worry the US.  As US firms create jobs, governments must help its agencies and many of the economists to understand that US cannot live on service alone.  It needs the blue collar workers and knowledge economy does not mean few good jobs while the masses are unemployed.

US have lost the solar industry it invented to China. Senator John Kerry discussed this painful reality few weeks ago in Charlie Rose show. It was all regrets, but in his statement, there seems to be no immediate action.  US hire less than 10% of the global workforce for the industry it created. China is doing both the scaling in solar and the innovation. Some of the most dominant solar firms are Chinese firms and they lead in this sector. Sure, it could be argued that Chinese firms enjoy state capitalism; but what is government for?  If Asian governments helped their firms to control 98% of global lithium ion market, it shows governments that can still make good selections as Robert Atkinson blogged in Huffington Post recently.

The next experience upon experience and innovation cycle will be done there. And the jobs will stay there. In our earlier blog, we maintained that losing that technical excellence will hurt the US.

As it seems to become Chinese century, the US can still fight through sound policies for this century. Government must not listen to consulting firms and all those institutions that maintain that creating good jobs and shipping low wage ones is good for America. No, it is not. Jobs are jobs and there are categories for all Americans because not all of us attend MIT, Princeton and Caltech. Some of us went to Community and Technical and factory jobs are where our future employment lies.

Government must pursue job-centric economy program where it recognizes that service will not build future America. As IBM abandons manufacturing to saving the planet, we must find ways to help firms to build factories and develop our manufacturing bases. As governments give incentives both at federal and state levels, it must understand two categories of firms: service and manufacturing. The scale of the latter is higher for jobs. So, if the government can get them to keep the plans in America, we can reduce this unemployment beast in America. How? If one Apple engineer creates ten jobs in China; if Apple keeps all the 11 jobs in America, governments must give them credits that will top what the service industry gets.

But government is clueless. It will bail out the wrong companies. And those that will power America are left out of the plan. Why not? We have lawyers running America and that is the price we pay. But they must understand the role of engineers in the economy. While lawyers make millions and engineers make nothing, the latter makes America and it is time governments make them have influence to change this nation.

Scaling is vital and government must make sure that it does not build startups that arise and their first contributions will be to outsource to China. Nkpuhe feels so many pains when it sees US agencies fund startups only for them to emerge with strategy to deny Americans jobs through outsourcing strategy. And the same firm will complain that sales are down without understanding that fewer workers mean fewer purchasing powers in the economy.

But good enough, what China has done to US workers, nations like Vietnam will certainly do the same to Chinese workers as the latter’s wages increase. Bloomberg Businessweek reports May 23, 2010 that many Chinese factories are cutting workers or relocating their facilities to areas where they can get cheaper labor. And in the midst of these issues are tight budgets of $100/month wage for workers fueled indirectly by western firms to satisfy western customers and shareholders.

So finally, to create jobs in America, efforts must be made to educate Americans and American shareholders. The irony is that Americas are those that displace themselves from work by insisting on low cost Chinese products. If they are ready to pay premium for US products, the pressure to outsource will not be there. The same goes for shareholders; by demanding astronomical margins, they force firms to outsource to meet those. Until everyone understands that it is not just the government that has a duty to provide jobs, American job outlook will not look promising.