Monthly Archives: September 2012

Made in America

President Obama once asked the late Steve Jobs why the iPhone wasn’t made in America.  The answer was a terse, “those jobs aren’t coming back.”  This week, as unrest simmered in Foxconn city, we wondered how much profit Apple was making from oppressed Chinese workers.

Not much, it turns out.  Technology experts reckon each iPhone has only about four hours of labor content, for an estimated $60 cost savings versus American labor.  Multiply that by millions of iPhones, and it’s a lot of money, but still a fraction of the total cost.

The real reason those jobs aren’t coming back was explored in January, by the New York Times.  This is a sobering article, and anyone with ideas about “saving the middle class” should read it.  The short version is that China enjoys huge advantages in terms of infrastructure, scale, education, and logistics.  No approach to industrial policy in America makes sense unless it can address these advantages and, since they were once American advantages, how we lost them.

“Chinese schools graduate roughly 600,000 engineers a year, versus about 70,000 in the United States.”

Not as sober is the reply from Alexander Cockburn.  He is too eager to believe that greedy Mr. Jobs sold out his fellow Americans for an extra penny of EPS, and he disregards the fact that Apple must sell into a global market, against global competitors – or maybe he just didn’t read the article.  Finally, The Atlantic takes up the challenge and offers some practical ideas.

America needs an industrial policy, but this is a tricky area, and our results haven’t been good.  We need enough government support to offset that of our competitors – think Boeing versus EADS, or GM versus Toyota – but not so much that it interferes with market mechanisms.  Government support also invites special pleading, if not flat-out corruption – think Solyndra.

The Atlantic observes that, while the right dislikes government “picking winners and losers” at the federal level, they accept industrial policy at the state level.  This is actually not inconsistent, if you look at results.  Governors are good at it, and Washington is not.  Maybe that’s the answer.  One wonders if state funding might have kept the iPhone glass business in New York.

America also needs educational reform.  China has an advantage in skilled labor, midlevel engineers, and industrial engineers.  These are not the sexy jobs American kids go to college for, any more than they want to assemble iPhones – or pick strawberries, for that matter.  So, there is a disconnect between wanting the factories in America, and actually staffing them.

One criticism of vocational streaming is that, like generals preparing for the previous war, it can produce an army of obsolete graduates.  On the other hand, America has never seen a glut of computer programmers.  Silicon Valley perennially begs CIS for more Indian kids to have H1-B visas.  Here, a combination of vouchers, incentives – and a culture shift – might do the trick.

American trade negotiators could also press China, under threat of tariffs, to improve conditions for Chinese workers.  We would have the moral high ground, helping them to become more comfortable and less competitive.  Unfortunately, we would have only our American consumer market as leverage – in Apple’s case, less than half their sales.

Jobs’ blunt assessment may be the final word.  The supply chain, the infrastructure, a growing consumer base, and even the supply of minerals favors China and the Pacific region.  This is a process that started thirty years ago, with competition from Japan.  Even if we could reverse it, we would need another thirty years to rebuild.

The best scenario for America would be the emergence of a new and unforeseen industry.  Al Gore, and now President Obama, thought it might be “green energy,” but this has proved not to be a game changer, in terms of global competition or employment.  By definition, an “unforeseen industry”  is not amenable to central planning.

We have a culture that encourages risk, forgives failure, and celebrates success.

Google, Facebook, and Amazon are made in America because we have first-rate universities and a system of free enterprise that favors innovation.  We have a thriving venture capital industry, light regulation, low barriers to entry, and pragmatic bankruptcy laws.  We have a culture that encourages risk, forgives failure, and celebrates success.  This is our “comparative advantage.”  If we have no other industrial policy, we should at least cultivate this one.

See also:  On Protectionism


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He Said, She Said

President Obama says he’s for gay rights.  Governor Romney says 47% of Americans pay no taxes.  On Sunday, we watched Sen. Dick Durbin (D-IL) present his ideas on the election, using nothing but remarks from the candidates.  “Romney said this, about what Obama said, so then Obama fired back.”  Jeremiah thought he was watching a spat between his nieces.

Voters may be surprised to learn that both candidates have records!  Obama has, in fact, been President for almost four years.  Romney was Governor of Massachusetts, and he has also submitted his experience as a businessman and an Olympic organizer.  The value assigned to public – or private – remarks by either man should be just about zero.

If you want to know how President Obama will serve 2012-2016, his service 2008-2012 is a pretty good guide.  Likewise, there are plenty of resources for how Governor Romney has performed.  Traditionally, the challenger has some leeway to say what he would do differently – but not the incumbent.  Deeds, not words.

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Troubled Youth

Here is a photo of some kids blowing off steam in Cairo.  This is not to minimize the fact that some of these kids will go on to kill American personnel and destroy American assets.  The kids, though, are just frustrated – and brainwashed.  Jeremiah blames their leaders.

Arab kids, from Gibraltar to the Gulf, have no education and no prospects.  To keep the peace, governments promote indoctrination over algebra – ironically, an Arab invention – and an authoritarian version of Islam.  Of course, some do escape.  Those from wealthy families will become doctors and engineers, but – they are, so to speak, the “one percent.”

“They weaken the capacity to hold opposing viewpoints and to think outside the box. Their societal role focuses on the reproduction of control in Arab societies”

With no jobs, no skills, no future – oh, and no sex – these kids have a lot of pent-up energy.  So, after Friday prayers, they go downtown and burn the American flag.  It is easy to persuade them that Arabs are poor because Americans are rich.  This is the ever-popular zero sum fallacy.  It’s also easy to persuade faithful Muslims that Americans are decadent.  We drink, we fornicate, and we blaspheme.

What we did not do, though, is rob these Arab kids of their future.  Their leaders did that, but – what are they going to say?  You kids are cannon fodder because we couldn’t be bothered to build an economy?  Because the sheiks spent our oil money on yachts and palaces for themselves?  Probably not.

It’s easy to deconstruct  the propaganda that’s been fed to Arab kids in Tahrir square.  Now, what about American kids in Zuccotti Park?

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Trillion Dollar Avalanche

Shown below is a simple diagram of monetary stimulus.  Easy money is supposed to reduce unemployment, through the agency of the Phillips curve and assorted other processes that aren’t working.  Jeremiah has his own idea what’s blocking that second link, but for now let’s talk about the first one.

In the latest Fed action, Chairman Bernanke vows to “print money” until employment improves.  If you read the fine print, the Fed has a 2% inflation target.  This link is also blocked.  Over the past four years, the Fed has created an unprecedented $2 trillion of new money.  Now, they plan to add a steady drip of $40 billion per month, until inflation starts to rise.

This plan assumes that inflation will start to rise, gradually, and then the Fed will stop easing and check inflation by raising the interest rate.  Let’s hope they’re right, because this plan sounds an awful lot like pouring sand onto a sandpile.

The sandpile dynamic intrigues mathematicians because, while the sand is poured at a steady rate, the slopes of the pile will shear off and collapse abruptly.  Likewise, when the $2 trillion finally begins to circulate, it could all go at once – creating a dramatic spike in inflation or, to put it another way, a plunge in the dollar’s value.  The total money supply, M2, is roughly $10 trillion.

This is a very tricky situation for the Fed.  Everyone has been predicting that QE would cause rampant inflation, and yet we haven’t even gotten the 2%.  When it does go, it’s likely to be sudden.  On the other hand, recessions have been caused by central banks hitting the brakes too soon.

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The One-Percent Fallacy

Mark Twain said, “there are lies, damned lies, and statistics.”  Those with training in statistics are alert to its many deceptions – as are the spin doctors.  The populist rage against the top 1% income bracket is an especially dangerous fallacy.   It gives the impression that the 1% are a specific group of people hogging all the income.  In fact, any survey will have a top 1%, and a top 10%, and a bottom 10%.  You will find different people in these categories every time you run the survey.

Our favorite economist, Dr. Thomas Sowell, calls this the “enduring class” fallacy.  In fact, someone in the top 1% this year probably wasn’t there last year – and probably won’t last two years.  This churn among all income levels is called social mobility, and it’s what makes America the “land of opportunity.”

The enduring class fallacy dovetails with the zero-sum fallacy, which Dr. Sowell has debunked elsewhere:

“There is a lot of anger and it’s for a very good reason,” Wolff said. “If all of the income gain goes to the top, there’s not much left to go to the rest of the people.”

Unbelievably, the fellow quoted above is an economist.  This idea is just ridiculous.  No one has actually believed it since, maybe, Mao – and it’s likely the Marxists only use it for recruiting.  It seems appropriate to cite an iconic Democrat in rebuttal:

As they say on my own Cape Cod, a rising tide lifts all the boats.  And a partnership, by definition, serves both partners, without domination or unfair advantage.

It was lovely to hear that, with “pahtnership,” in the original Boston accent.  In fairness, social mobility in America is not what it used to be.  The OECD found that Scandinavia now has better mobility, and so did the Institute for Labor.  Both studies found that it is hard for Americans to climb out of the bottom quintile, due to poor public education.  That’s what we should be protesting.

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Centrist Manifesto

We, the swing voters in the middle of the political spectrum, in order to encourage moderation among those on our left and right, hereby define our position.

Role of Government

We do not wish to elect a monarch, whether this is the President, the Chief Justice, or the Speaker of the House.  We would like our system of checks and balances to operate exactly as specified in the Constitution, which we still regard to be the best constitution in human history.  Elected officials who abuse the system must be replaced.

Because the Supreme Court is the ultimate arbiter of the Constitution, we expect Congress and the President to appoint judges who respect the Constitution in letter and in spirit, over and above the ideologies of the day.  Elected officials who look like packing the Court with ideologues must be replaced.

We believe in a strong national defense and an active foreign policy, not because we wish to impose our values on the world, but because active engagement is the best defense.  We believe that our foreign policy should consistently be based on our values, not the interests or the personalities of the day.  We expect our officials to defend our values firmly in all circumstances.  Elected officials who are unclear about our values, or unwilling to defend them, must be replaced.

Funding the Government

We believe in balanced budgets.  Congress has the duty to submit a balanced budget, timely, each and every fiscal year.  Congress should also maintain an audited five-year budget, updated annually, and make provision for retiring our national debt.  We do not excuse deficit spending unless there is a true emergency, such as war.  Elected officials who have difficulty with budgets must be replaced.

As consumers of public services, we would like to be frugal.  We observe that the States are more efficient than the Federal government, and private enterprise is more efficient than either.  Even where the government may fund the service, as with education, we do not require the government to deliver the service.  Government at all levels should conserve tax revenues by outsourcing to private enterprise wherever possible.

We believe in equality of opportunity, not equality of outcomes.  We accept that, in a free society, some citizens will achieve more than others.  We reject the desire to equalize outcomes, not because we are uncharitable, but because any government with such power is the enemy of liberty.

We do not wish to promote any public good, however good it may be, using the tax system.  This only complicates the tax system and invites corruption.  We support root and branch reform of the tax system.

We believe in sound money.  This should be the only responsibility delegated to the Central Bank.  All other fiscal policy, such as stimulating employment, is the responsibility and duty of Congress and should not be delegated.  Elected officials who delegate their duties to other officials are simply not doing the work.  They must be replaced.

We would like the States to enjoy more rights and more tax receipts.  States should not depend on the Federal government for grants and reimbursements of money which originated with the States’ own citizens.  We are willing to fund the Federal government only for those services which the States cannot provide, such as defense.

Each of us may someday need the social safety net, and we are always ready with help for those who honestly need it.  We are willing to fund public assistance programs, administered by the States.  We do not trust a Federal government that turns simple charity into a vast and costly administration.

We observe that the Federal government has a propensity to expand in scope, scale, and cost, and we wish to check this propensity.  We consider that an unchecked Federal government is the enemy of liberty.

Regulating Trade

We believe in free trade, but we also demand fair treatment.  If foreign producers can supply goods more cheaply, through some natural advantage, then we are happy to have the cheaper goods.  If the advantage is merely that they observe lower standards than our domestic producers, then we consider it to be unfair.  We do not require our officials to protect domestic producers, but we do expect them to uphold our standards.

We believe in the system of free enterprise.  Companies should be free to complete among themselves without interference or favoritism.  The role of government in commerce is only to uphold certain standards, and to ensure a level playing field.

We support the right of workers to form trade unions as they see fit, and negotiate collectively with business owners.  In this, the rights of the individual worker are paramount, to join or not, without prejudice.  Just as the government should not take sides between businesses, the government should not take sides between business and labor.

As consumers of public services, we do not support the right of workers to negotiate collectively with government.  Our government is not a business, and we do not expect our elected officials to deal with trade unions.

Civil Rights

Our principal value is liberty, broadly construed, and including both personal rights and property rights.  Liberty means that citizens may exert their energies in any manner they choose, so long as this does not impose a burden on other citizens.

We do not accept that our rights are granted by the government.  Our rights are ours by nature, and we cede only such rights as are needed for the government to perform the duties we assign to it.

Justice is operation of ensuring that one citizen’s exercise of rights does not interfere with another.  We believe that this operation should produce very few restrictions on our rights.  Liberty includes the right to try and to fail, and to activities that others may deem unwise, so long as the consequences fall only on ourselves.

We enjoy freedom of religion, but we would also like freedom from religion.  We do not care to know the religious background of our elected officials.  We would like to know that they have some kind of moral compass, but policy issues should be settled on the basis of what is best for America, in terms of positive outcomes for America, and with reference to American values.  Elected officials who hold religious bias above sound policy must be replaced.


We would like our government to do certain things, as described here, and no more.  We would like a smaller Federal government, and more rights for the States.  We do not see government as having a central role in our lives.  We accept responsibility for ourselves and our destiny.  This responsibility is not a burden.  It is liberty, our birthright.

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Throw Money!

The price performance of American schools came up, in a discussion with MathBabe on the Chicago teachers’ strike.  It is hard to find clean, international statistics on this.  Below, we have comparative educational spending from the OECD and science test results from TIMSS.

For countries common to both studies, we can do a scatter plot (below).  The first thing you notice is that spending is not correlated with results.  The Asian countries spend in the middle of the pack, and achieve the best results.  America outspends everybody, and achieves mediocre results.

So, what’s the solution?  If you are in business, you have heard the expression, “throw money.”  It means that a manager lacks the skill to fix a problem, as in, “he was just throwing money at it, so we fired him.”

Jeremiah, and The Economist, believes the solution is to privatize the schools using a voucher system.  Economists agree this would lower costs and improve results.  So do parents, judging by their enthusiasm for charter schools.  It seems likely that many teachers would support reform, too.  Good teachers would do well in a competitive system.  Sadly, they are outnumbered.

See also:  Waiting for Superman

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