The Andy Grove essay

Many of you have sent me this, and requested comment, thanks for the pointer.  Read the essay, here are a few remarks for perspective:

1. The current results on trade, wages, and jobs do not support his basic claims.  Those results are not definitive, and might be wrong, but so far they're better than anything Grove serves up.  And his entire argument depends on the assertion that trade is a major factor hurting the U.S. job market.

2. Only he who first shows he understands comparative advantage has license to partially reject it.

3. There is so much talk about scale, scale, scale.  The big exporting success these days is Germany, which has less "scale" than does the United States.  What is the evidence that lack of scale is the problem, rather than a symptom, even assuming it is a generalizable symptom?  I don't see it.

4. He doesn't once mention that we might get useful ideas from China and other countries, or that their prosperity is good for America.

5. I would like him to state how Asians enter into his social welfare function.

6. He calls for a tax on Chinese imports; at best, given the logic of his argument, this would imply a tax only on the increasing returns industries, not a general tax.  He doesn't seem to realize this. 

7. Is he assuming that the whole world works like his sector — semiconductors — does?

8. An innovation shortfall may well be a serious problem today, as every reader of Michael Mandel should know.  But what are Grove's solutions?  The government tries to pick winners, on a massive scale with public funds, and we start a big trade war against China?  The evidence for these proposals is one citation to Robert Wade.  Sorry, I'm not convinced.  I heard that in the 1980s except China was Japan.  We ignored that advice in the 80s and in the 90s the job market was fine.  Grove is writing from a time warp in which these debates never happened or never were settled or never something — I don't know what.

9. And now for something completely different: Analects of Boettke.


Do we enter in the Chinese SWF?

Please state the all useful ideas we get from China and other countries (besides utilizing their cheap labor). And please explain our advantage on our end in your model of comparative advantage as the dynamics of today are being played out. Most of the benefits I see being reaped are by the CEO/ownership class.

Those Chinese and Indian foreigners pay a heck lot more for their positions in graduate schools. No federal or state subsidies for them.

German exports are not based on scale?

Lets see, the major exports are cars and machinery. Germany has some 70% worldmarket share for luxury cars, not matter if its a limo or a sports car. The car industry is all about scale. VW does best because they scale best right now. Machinery: Lots of smaller companies with similar world market shares that couldnt exist in isolation.

Totally agree with your analysis. From a US industry that got defense subsidies to start it off.

Back in the '80s, the domestic chip manufacturers made the same complaint about the Japanese, arguing that if only we had some protection, if only US wages were lower, if only our cost of capital were lower, yadada, They lobbied for, and got, two things: 1) a government subsidized research venture (Semantech); and 2) chip duties (and negotiations by the USG with Japan to encourage their manufacturers to raise prices and compete elsewhere, like in Asia).

What happened. Intel and others raised their domestic prices. Intel and others moved closer to the assembly customers even though transport cost is a small component if exports from the US.

What hurts American business more than anything is their bloated bureaucracy, and high executive comp levels.

These industries are highly automated, and labor manufacturing costs are a very small part of their cost structure.

Grove is asking for the protections and subsidies he got before.

"Those Chinese and Indian foreigners pay a heck lot more for their positions in graduate schools. No federal or state subsidies for them."

Not entirely sure about that. I'd like to see the full accounting. I suspect one of us doesn't understand how technical grad programs finance their students. I think that tuition is usually waived (especially if on a grant) and a stipend is paid. Also, many foreign students are funded by their governments.

It's not hypocrisy if Grove thinks that he has to respond to the incentives placed before him.

And since Tyler added the other link to that research on trade and wages, I don't think it was made clear in the comments that it referred to AVERAGE wages. That is, raise the top-end (outsourcers) and lower the bottom end (layoffs) and the average stays the same.

Yesterday I was wondering if the recession is in part just a step change in the pace of this process. You don't have to draw a conclusion on protectionism to recognize that we might be in a beggar-thy-neighbor situation. There are positive externalities to employment. In grad school, for example, the main benefit is to work with the high-tech equipment (and the people who know how to use it). You can say that having foreigners do this at a lower cost is no problem, but then why do we want to overpay to employ people during recessions?

"What hurts American business more than anything is their bloated bureaucracy, and high executive comp levels." But that's why SCALE matters; scale is what is used to justify those preposterous levels of CEO pay and perks.

Re: #7, apparently he does. No mention of the U.S. automobile industry, and how unions, pensions, and healthcare costs (as well as mediocre products) made it vulnerable to foreign competition.
Nor does he mention high U.S. corporate taxes.

Joe and Mike - I asked my questions sincerely and only limited in terms of today's dynamics (as related to industrial base and labor force). Yes I am aware that the US is not the center of the universe and we have gained technologically through time from everyone. Why do you assume that Im a jingoist American who watches Fox? Im an immigrant who most definitely does not.

There are serious issues of fair play when we are dealing with a country (or countries) that engage in massive economic intervention while devaluing their currency. We do not live in a perfect world where comparative advantage just magically happens, especially when you're dealing with players who do not exactly engage in fair play. Also I would add to Grove's essay the ugly but often ignored sidenote of soft human rights violations (ungodly labor conditions). Instead of looking for enemies and kooks where there are none maybe you can start answering sincere questions.

@Holly Martins:

"human rights violations" is another red herring. Yes, working conditions are bad. Let's use your argument (as I understand it): Chinese companies exploit labor --> low labor costs--> competitive advantage to Chinese vs US companies.

Now, assume you got rid of the Chinese labor exploitation. Production shifts to US. Now how is the Chinese worker that got laid off better off?

Isn't your reasoning circular? Human rights violations are a moral issue, yes. But to this economic problem I think that's a total tangent.

Rahul - no, my point is larger than that although I understand your argument. We have a very long history in our country of developing labor and environmental policies to protect people from the worst excesses of business. Why is it OK to allow foreign workers to labor under conditions that we outlawed long ago? Do you not consider them equals to Americans? Why do we not hold foreign businesses to the same environmental standards? Have you ever heard of the Foreign Corrupt Practices Act? Its OK to outlaw bribes to foreign bureaucrats but not labor laws we would find completely unpalatable?

That being said - I understand your view. I just don't agree with it. In the end I think if you forced their feet to the fire countries would comply. They love money you know.

And yes, it is a tangent - the other issues Grove raises are far more central to the argument but I still think they are important. They are relevant in the sense that I think macro arguments dealing with pure comparative advantage ring hollow. Morality always plays a large role wether we like it or not.

I think Grove realizes a lot more than TC implies.

For example, one can rationally believe in both comparative advantage and the benefits of a tax on imports: global efficiency is not the end-all metric of platonic goodness (well, some might argue that a poor person with a broken arm should just commit suicide, but we tend to look out for ourselves and our local communities to some extent.) So, if CA is disruptive to some, why not tax it to some extent like any other negative externality?


"In your previous post you are so concerned about the "human rights" of the Chinese workers. But this same compassion towards them disappears the moment they are getting the nice blue collar jobs from the US (assuming that was true in the first place) What's with this selective paternalism towards the Chinese people? "

#1 - not SELECTIVE paternalism at all - although Im seeing now you would use any argument to rationalizing exploiting t hem. Good for you.

#2 - My point is that we are already in a sort of trade war so lets just acknowledge it and use our policies to favor our labor force much in the way that China does for its people (the policies China uses is long and varied. I wont insult your intelligence by listing them all here).

#3 - #2 above is my MAIN point but while we are ignoring that a side issue is the exploitation of Chinese workers.

#4 - your point seems to be, well they will be paid some money so they will be exploited a little bit less. OK. Some people feel that way.

The crucial - and unanswered - question is: what is the cause of the phenomenon illustrated by Chart 'A'?
Until we know that we are only talking about the symptoms not the disease.

>>>There is a direct correlation/difference between the rules for those workers and the workers they would be hiring here. How are we directly responsible for leprosy/disease etc?<<< Not sure. But that does sound like the often discussed moral dilemma . Are action and inaction equally culpable? Your call.

"It's difficult to resolve Grove's position with the actions of his own firm. How many of Intel's products are made in the USA? Zero? Their flagship products are made in Malaysia and Indonesia, last I checked."

This is simply false.
Per the Intel Annual report. 63% of Intel chips are fabricated in the US, this despite selling less than 20% in the US. Of the 80,000 workers 55% are employed domestically. When I left the company in 2000 there were 86,000 employees a bit over 60% domestically, yet manufacturing was barely over half domestically. In fact Intel outsourced R&D before manufacturing, expanding R&D facilities to Russia and China in the mid 90s, whereas the first Fab in China won't open until 2011/2012. This seems counter-intuitive until you look at the capital requirements. Intel's recent Oregon fab 32 cost $3 billion (roughly 1/2 for equipment from companies like Applied Material) and employes 1,000 people. At a capital cost of $3 million per worker it doesn't matter that much if you pay them $10K/year or 10K/month it is still small compared to the cost of capital. The capital requirement for R&D jobs is much smaller and wages much higher.

Now I couldn't find the employment breakdown of manufacturing vs non-manufacturing jobs at Intel but I'm virtually certain that Intel like most companies manages to produce more widget/chips per person each year. So my biggest problem with Groves proposal is I wonder about the wisdom of going after job segment which is declining on a world wide bases. The country that lost the most manufacturing jobs this last decade was China. Now some of this jobs migrated to Vietnam and other lower wage countries,but much of these jobs were lost to robots and automation and they aren't coming back to any country ever.

Tyler writes "I heard that in the 1980s except China was Japan. We ignored that advice in the 80s and in the 90s the job market was fine. Grove is writing from a time warp in which these debates never happened or never were settled or never something -- I don't know what."

I am not sure I'd agree the job market was fine the 80s were the start of the bleeding of manufacturing jobs and wee didn't completely ignore it. Sematech which was a actually a rare government policy that worked pretty well.

By the mid 80s, the Japanese had surpassed the US as the world largest chip makers, and US were losing market share and money. Sematech and joint government consortium focused on manufacturing helped turn this trend around. Back in 1987 the top 3 chips companies in the world were Japanese as were 5 of the top 10 companies Last year in a far bigger industry (Intel's revenue roughly equal worldwide revenue in 1987) 4 of the top 10 companies were US companies.

Intel's crown jewels are their microprocessors. Microprocessors quietly account for most of their revenue (74%) and nearly all their profis (90+%). As seen in the following table, their microprocessors are all manufactured on the best tech (the smallest process technology).

Manufacturing and Assembly and Test

As of December 26, 2009, 64% of our wafer fabrication, including microprocessors and chipsets, was conducted within the U.S. at our facilities in Arizona, Oregon, New Mexico, and Massachusetts. The remaining 36% of our wafer fabrication was conducted outside the U.S. at our facilities in Ireland and Israel.

As of December 26, 2009, we primarily manufactured our products in wafer fabrication facilities at the following locations:

Products Wafer Size Process Technology Locations
Microprocessors 300mm 32nm Oregon
Microprocessors 300mm 45nm Israel, New Mexico, Arizona
Chipsets and microprocessors 300mm 65nm Arizona, Ireland
Chipsets and other products 300mm 90nm Ireland
Chipsets and other products 200mm 130nm and above Massachusetts, Oregon, Ireland

In addition to our current facilities, we are building a 300mm wafer fabrication facility in China that is expected to begin production on chipsets using our 65nm process technology in late 2010 or early 2011.

It's telling that all their highest tech investment has been in the US, and their first investment in manufacturing in China will be already fairly outdated equipment, by the expected completion date.

"Andrew, this is the latest example of U.S. industrial policy"

So much for Obama's promise to stop giving tax breaks to companies that move jobs out of the country.

I noticed the story about Obama and solar and thought it was kind of ironic in light of the Grove essay. Like tossing seeds on fallow ground.

My issue is pretty limited and specific. Not only do we pay for a lot of the worlds R&D that they can copy. Now, we are even using foreign student labor so they capture the on-the-job-training as supported by taxpayer funded grants. If the consolation is that we will keep the brain jobs, we'd better start understanding the issue right there.

Bill - if a market based on corruption is sure to fail, then how did markets survive in 18th century Britain, when Adam Smith wrote his famous book based on observations of them? By all accounts British society wasn't squeaky-clean at that time.

On your point that the "rent obtained by the corrupting party can be used in competition with non-corrupt entities, leading to the survival of the corrupt at the expense of the non-corrupt", I think this agrees with my original reply, that the Foreign Corrupt Practices Act could arguably have the effect of driving out investors from non-corrupt countries in favour of investors from corrupt countries.

On your other points, I have re-read my comment and I don't understand where you are coming from:
1. I am not aware that I made an assumption that transactions made with the assistance of corruption are for fair value. Could you be a bit more specific about this? If I did unintentionally make such an assumption I'd like to know where I did so, in the hope of avoiding such a mistake again.
2. I can't see any point where I said that "people" are willingingly subsidising sales, indeed to the contrary I said that it does raise some serious moral questions that a dictatorship would want to give away its citzens' money to Americans. Your comment here merely states more specifically what I was thinking about. I didn't go into more depth because I was exploring the question from an American view point, for which the same argument for economic benefits would apply if China was a scrupulously democratic country whose citizens had freely voted to subsidise their exports and thus transfer wealth to Americans. Although I presume that the emotional discomfort of the beneficiaries of such a policy would be less (yet another reason to favour democracy).

Jacques -
You say: Losing US factory jobs in exchange to retrain to be a health care Nursing Assistant, Cosmetologist, or goofy theme park employee is not only bad for the displaced employee, but for everyone.

Um, how? Factory jobs are typically more dangerous than the rest on your list.

As job losses mount, it becomes Death by a thousand cuts for our economy at large.

Thus explaining how come the US was destroyed by the invention of the motorcar, laying off all those buggy-makers; the invention of the telephone, destroying the careers of the office messenger boy; the invention of the tractor, laying off hordes of farm workers. Also please note that the productivity of the US grain fields caused the loss of numerous agricultural jobs in European countries, as did the productivity of Henry Ford. It's amazing that the rich countries have any jobs left for the Chinese to take. Hmmm, maybe what happens is that as less labour is needed to produce some goods, people find work producing other goods?

The bottom line here is that China (etc.) are "dumping" their cheap labor on the international market. The Free Trade doctrine, which has spread across the globe to most democratized countries, is an open invitation for exploitation of our own open markets.

If dumping cheap labour on the international market exploits those countries with open markets, then the US is a massive exploiter. Take Henry Ford - by creating cheap automobiles he gave millions of people around the world access to 20 hp engines, as the average human can sustain about 0.3 hp, this means that everyone who bought a 20 hp engine got access to the basic pushing power of over 60 people, a decent number of slaves back in Ancient Roman times. And of course cars have gotten far stronger since then. Or take all those productive mid-West US farmers, massively reducing the amount of human labour necessary to grow a kilo of flour.

Or take the US itself, taking in millions of immigrants during the 19th century, and yet becoming richer and richer all the time.

If providing cheap labour is exploitation, then you are welcome to come around to my place and do my housework, in return for 50p an hour (well below the market rate here).

The comparative advantage that China (etc.) have are their extremely low value for human life and human rights. They suffer Environmental toxins as controlled by the EPA; lack of worker safety as enforced by OSHA; fair labor laws as enforced by the US Department of Labor... the list goes on and on.

I don't think this is the case of extremely low value, the problem for the Chinese is that food and basic medical care take priority over removing low-level environmental toxins, improving worker safety, etc.

The state of the US dollar being a reserve currency means that lots of central banks around the world hold US dollar-denominated investments, which means that some parties in the USA, most noticeably the government, can borrow money more cheaply than otherwise. Same situation as if the Chinese exporters decided to keep their money in the USA rather than exchange it for yuan (or euros or whatever currency they want). Am I missing something?

Mister Grove doesn't speak to the mistakes our leaders have been making that have led to our macro-economic mess.

They've been borrowing massive amounts of money and keeping interest rates much lower than normal. They've strived to keep the consumer consuming, rather than keep the producers producing.

When you borrow money, you are really borrowing the labor of others. And when everybody in the richest nation in human history is borrowing, we are borrowing a lot of labor from other countries.

Imports of goods and immigration of workers skyrocketed because of our borrowing. And many jobs moved elsewhere.

But we did get good at building houses. And buying and selling them to each other. But that was unsustainable.

One day, we'll stop borrowing so much and begin paying the money back. We'll pay more for imports and our own labor will cost the world less.

We'll be working hard for much less, perhaps doing it well into old age. We may have no choice.

You Wrote:hens adore and love me (perhaps because I can meet them at their intellectual level)


"Those Chinese and Indian foreigners pay a heck lot more for their positions in graduate schools. No federal or state subsidies for them."

In physics, they get the exact same deal as domestic students. Same stipend, tuition fully paid. When I was a grad student (about 8 years ago), the students would send home money to their parents. About 50% of physics grad students are foreign, at least during that time, were foreign.

@Jacques: "#5 Is a non-sequiter [sic]."

Wow. To me #5 is the crucial point.

BWT I wonder if replacing the minimum wage with an hourly wage subsidy would make Andy Grove happy. Perhaps along with allowing more immigration from China.

Andy Grove is right on. In fact, China, by hoarding US cash and refusing to spend it, has been pursuing a policy which is destructive of US industry, and has cost the US millions of jobs.

Unbalanced trade has depressed US price levels and deprived US industry of the revenue it needs to maintain itself. It is also causing contracted demand and deflation.


Holly Martins - so let me see, you don't have the time or inclination to refute my arguments, but you do have the time and inclination to write a comment saying that you don't. In other words, you can't refute my arguments but want to pretend that you have.

On the topic of Tim Duy, he doesn't explain how I am wrong. Tim Duy asserts that "while free trade produces net positive effects, that process can certainly be upset by the deliberate manipulation of currency values", but he does not provide any argument to support this. Saying something does not make it true.

Hi Rahul,

Once you argue in favor of giving Chinese nationals the right to vote in American elections, then I'll accept the absurd contention that you're happy to see their quality of life increase as a genuine one, and not just some feigned talking point.

If labor and environmental standards would decrease the amount of the "competitive advantage" that they would still, in all likelihood, maintain - even if to a lesser degree, then so be it.

And if China ends up being less antagonistic to democratic cultural values as a result, so be it. Perhaps that is what really bothers you, though.

America didn't create 1 billion Chinese mouths to feed, and there is nothing wrong with prioritizing domestic concerns over what happens abroad. That's what Beijing is doing. It's just doing it at the expense of norms that are much more important to the world in the long run than this company's profit return or that.

And as a side benefit, it also helps marginalize the views of Americans and others who would love to export Beijing's abusive standards for labor and the environment abroad as, you know, the "more competitive" standard.

Comments for this post are closed