Sunday, December 14, 2008

My Dad Was a Steel Company Executive

It's not quite the first line of a Bruce Springsteen song, but thinking about this yesterday it provided some perspecive. The biggest steel company in the world today is Mittal-Arcelor, which may be headquartered in Luxembourg but the majority of whose management board is Indian. My dad is no doubt rolling over in his grave that such a thing could happen. I'm sure he thought it was bad enough when Nippon Steel formed in the early 1980s, but India?

Of course India. We should not only be prepared for the possibility, but expect that the emerging economies will continue to take over the old-economy brick and mortar Frick and Carnegie industries, as happened in the 1980s with Japan Incorporated in many fields, including steel.

Back here in the States, my father's generation over-reacted: they had seen decades of U.S. dominance in every industry, and saw Japan - the first example of Zakaria's "rise of the rest" - as a signal of American decline. The irony is that of course these lieutenants of capitalism did not have the background to appreciate that what to them was just good patriotism was actually in direct conflict with the principles of free trade. If something can be made just as well somewhere else for cheaper, even after transportation costs, then it will be made there. As the rest of the world industrializes, we should expect this cycle to continue, that mature industries - industries which don't depend strongly on continuing innovation for their growth - will continue to be taken over by the developing world. My personal favorite example is the transfer of electronics manufacturing in the last ten years out of Japan and into China. My Japanese father-in-law has been to China twice, both times to inspect new plants for Mitsubishi.

The danger for my generation is that we've grown accustomed to this cycle, and we're under-reacting when there are industries and growth-drivers that we should genuinely be worrying about. Offshoring call centers does hurt American workers in the short-term but is in the long-run not a wealth creator; R&D is. This is why Americans should pay more attention to, among other things, stem cell milestones being met in Korea and the U.K. and Japan, but not here. The ultimate source of economic growth is innovation, and in high-tech, industries where labor produces most of the value, like my own, biotechnology. This innovation tends to occur in geographic clusters of horizontally integrated companies centered around universities. (Visit the Schumpeter Club for more discussion.) This is why, for example, Detroit continues to be a poster-child for urban decay, because it's never gotten over being a one-industry town, but Pittsburgh has been reinventing itself as a biomedical and high tech center - thanks to Pitt and Carnegie Mellon.

You might be asking yourself that if we're under-reacting, how should we react? Can we ask China and India nicely to stop outcompeting mature American industries on the basis of their low production costs? Obviously not - but we can focus on those sectors where we can and do outcompete the rest of the world, and those sectors are the innovation-dependent new ones, and those depend on our best-in-the-world university system. Even leaving aside for the moment the current crisis in Detroit, it is difficult to imagine a future in which the U.S. continues to compete with China and India and the rest in the auto industry, once the semi-skilled workforces there come online and bring their quality standards up to snuff. High tech, pharmaceuticals, medical and financial services will continue to be the source of growth, and that's exactly why we have to protect those industries and improve the educational system that catalyzes them. While the dislocations from the auto industry's decline are no fun for our economy or the workers involved, it's not a battle we can fight forever, nor is it one we should be devoting our resources to. A statistic from Zakaria's Post-American World that I never tire of quoting: in 1907, Britain produced four times as many bicycles as the U.S. The U.S. produced twelve times as many cars. It's even possible that the profit from the auto industry at that point was lower than from bicycles in absolute terms to both economies, but I think the point is clear. We should be America, not Britain.

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