Diagnosing the American decline: a guest post

In the wake of my recent blog post on the new Oakland Bay Bridge being made in China, a lively debate has erupted. I found the best comments to be those of Vikram Dalal of Iowa State University. I am passing them along here.

By Vikram Dalal
Professor of electrical and computer engineering, Iowa State University

The real problems are:

1. The destruction of American industrial infrastructure. As former Intel chief Andy Grove says, it is absolutely critical that we continue to manufacture "commodity" industrial items, like bridges and rivets and bearings and computer chips and tires and steel and aluminum and commodity chemicals. Once we lose that, we lose the workforce. It takes many, many years to build up an industrial workforce, but only 10 years to destroy it. When younger people see jobs being lost in manufacturing, they turn away from it, with the result that the workforce dies off. That is exactly what is happening today — industries cannot find enough well-trained young people.

2. The second problem is that as the industrial workforce (the people who make things that we can export) is reduced and laid off, they (and their children) go into "service" businesses, particularly health care. But health care is a giant monopoly — the doctors have an iron grip on it. There is no competition there. What it means is that the only way more jobs are created in "meaningful" health care — jobs like technologist or lab tech (as opposed to those in bedpan health care) — is by doctors prescribing more MRIs, CAT scans, PET scans, and so on. That increases medical costs, especially because Medicare requires no second opinion. You walk in and before you know it, the doctor has prescribed 10 tests, because no one is checking; and he, and the hospital, make more money from more tests. So increasing health-care employment is not a winning strategy from a national economic viewpoint.

3. So now we have all these unemployed factory workers — at least 4 million of them, thanks to China (8 million factory jobs have gone to China). What that means is that the income tax returns to states have dropped, exasperated by the collapse of the housing bubble. So the states cut back on the most productive government activity, education and community colleges and state universities. What that in turn means is that more R&D gets done in China, and more industries move there, because that is where the workers will be. The United States is going into a death spiral. I have the attendance record of the recent Materials Research Society conference in San Francisco. It is probably 60 to 70 percent Chinese. Americans were rather scarce. Most of these Chinese students are going back. What does it tell you? China is going all-out to capture the technology leadership. The country is offering terrific opportunities to the best Chinese students to go back, and the students are taking them up. We spend money to educate them, and they go back to China.

4. The Chinese are now not only demanding that factories move there in high-tech industries (for instance, Evergreen Solar, which closed down a plant in Massachusetts that was making solar cells and relocated to China), but that R&D also move there. I know this firsthand because I work with a company in Massachusetts that has developed great solar cell technology but cannot get capital here to expand. The Chinese offered us $30+ million to move to China, but we had to move the R&D there too, including us. We told them to go to hell.

5. I just came back from the Institute of Electrical and Electronics Engineers solar cell conference, an annual meeting that brings in lots of venture capitalists and industrialists. They all said the same thing: It’s impossible to raise capital in the United States, and you cannot compete against China because land is free, water is free, electricity is sold far below production cost, there are no environmental restrictions, capital is freely available, and they can (and do) copy anyone’s technology. How is this free trade? Subsidies have to be factored in when calculating cost. And if RMB were freely convertible, wouldn’t the cost of doing business in China be 30 to 40 percent higher?

6. The only way to get out of this spiral is to recognize that to stay competitive, we must educate, we must retain and rebuild our industrial infrastructure, we must lead in R&D, because nothing less than our economic and national security well-being is at stake. Once the industrial infrastructure is gone, and with it the R&D infrastructure, we are back to being an agrarian country. I am not exaggerating. Guess who has this figured out? Hedge funds. They are buying up farmland in Iowa. Over the last five or so years, the price of Iowa farmland has tripled to $11,000 to $12,000 per acre, from about $4,000. Many of my farm friends are worth millions on their land.

7. Turning to national security, once manufacturing goes to China, how do we make F-35 fighter jets? How do we make nuclear subs? How do we make tanks? Should we buy those also from China?

Economists do not take into account the dynamic nature of this unfair trade relationship or the downside multiplier effects which lead to a spiraling collapse. They do not understand the problem of how long it takes to build an infrastructure. We are on our way to becoming like Britain. Does anyone buy anything made in Britain (except pharmaceuticals, where they still have a presence)? Would Britain survive without the huge influx of Arab money which props up spending and housing in London?