The Case of the Disappearing Industrial Crown Jewels... Cracked.

And more from this week...

Greg Ip had a really important column in the Wall Street Journal on Monday, and it is your one thing to read this week: Crises at Boeing and Intel Are a National Emergency

On one hand, all credit to Greg for tackling this crucial topic. I talk and write frequently about the disasters that are Boeing and Intel, once America’s industrial crown jewels. American Compass has done in-depth case studies on both (see America’s Microchip Slip and How Airbus Took Flight). So I’m delighted to see feature coverage in the Journal, seeking to connect the dots between these specific failures and America’s broader economic challenges.

On the other hand, in its specifics, the piece has an Inspector Clouseau quality in its baffling failure to connect the most obvious dots, even as it lands eventually at the right conclusion. So as a service to you, dear readers, I’ve endeavored here to review the case and fill in some of the blanks in the investigation.

Greg frames the fundamental problem as:

The U.S. is in a geopolitical contest with China defined not just by military power but economic and technological prowess. Leaders from both U.S. political parties say they are on the case, pushing for tariffs and subsidies.

Whatever their merits, these measures don’t address the fundamental problem that Boeing and Intel represent. The U.S. still designs the world’s most innovative products, but is losing the knack for making them.

This disconnect between design and production is indeed the heart of the problem. It is also precisely the issue that the aforementioned tariffs and subsidies do address. The premise in either case is to make investment in domestic production relatively more attractive, in turn creating both the demand and a source of supply for other things that can then be made domestically. As we’ll see, Greg gets around to acknowledging all this later on—for instance, Boeing failed in part because it outsourced production… production that would have made much more economic sense to keep in-house or close to home if it were subsidized, or if imports were tariffed. Intel failed in part because of an exodus of engineering talent or, more precisely, the collapse of the domestic engineering pipeline as cutting-edge fab work moved to countries that were aggressively subsidizing it themselves.

One can argue that tariffs and subsidies won’t work in the sense that they won’t succeed in altering investment incentives. I disagree, but it’s an interesting and important argument. What you can’t say is that tariffs and subsidies don’t address our loss of manufacturing expertise—the loss occurred because other countries were using these tools and we were not, it will be reversed if and only if we counter those distortions and restore the incentives to invest in making things here. That’s where the knack comes from and, to quote Don Draper, that’s what the money is for. Back to Greg:

At the end of 1999, four of the 10 most valuable U.S. companies were manufacturers. Today, none are. The lone rising star: Tesla, which ranked 11^th.

Just a quick observation: Tesla doesn’t really belong on the list, or won’t for long. It now does most of its manufacturing in China (thanks to, you guessed it, tariffs and subsidies!). China worked so hard to lure Tesla over because it could then induce technology transfer to Chinese firms, which are now eating Tesla’s lunch. In fact, Elon Musk is already begging American policymakers for protection from Chinese producers, which he calls “the most competitive car companies in the world,” predicting “if there are not trade barriers established, they will pretty much demolish most other car companies in the world.” I tell this story in detail in my recent essay, The Electric Slide.

Intel and Boeing were once the gold standard in manufacturing groundbreaking products to demanding specifications with consistently high quality. Not any longer.

Neither fell prey to cheap foreign competition, but to their own mistakes. Their culture evolved to prioritize financial performance over engineering excellence, which also brought down another manufacturing icon, General Electric.

I’m delighted to see focus in the Journal on the problem of financialization and forthright acknowledgment that the effort “to prioritize financial performance” does not in fact lead to better financial performance. That’s absolutely part of the story, but it’s not the whole story. “Falling prey to cheap foreign competition” is one potential danger of globalization, but hardly the only one, as these case studies make clear.

Intel passed on making the chips for Apple’s first iPhone, thinking it wouldn’t be profitable enough. It was late to adopt the latest technology for etching the tiniest circuits, and it missed the boom in artificial intelligence.

This is not the story of what happened to Intel. It is an accurate description of opportunities missed, as far as that goes, but it lacks explanatory power. Passing on the iPhone was obviously a massive mistake. But why didn’t it adopt the latest technology? Why did it miss out on artificial intelligence? The answer comes from none other than Andy Grove, Intel’s legendary engineer-turned-CEO from its days as the world’s leading technology company. I quote Grove on this point constantly, but it’s worth doing here again. In 2010, long after he retired, with Intel in the early stages of decline, he described what globalization was doing to Silicon Valley:

“Silicon Valley is a community with a strong tradition of engineering, and engineers are a peculiar breed. They are eager to solve whatever problems they encounter. If profit margins are the problem, we go to work on margins, with exquisite focus. Each company, ruggedly individualistic, does its best to expand efficiently and improve its own profitability. However, our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home. Without scaling, we don't just lose jobs — we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate.”

This is precisely what Intel was doing. At a 2004 Hoover Institution event titled “What, U.S. Worry? Is the United States Losing Its Competitive Edge?”, Grove’s successor, Craig Barrett, gloated that “capitalism has won and economy trumps all going forward. … We are the biggest high-tech venture capital company in the world. Half of our investments on a runway, going forward are in Asia.” Grove was prescient as to the consequences.

And no, it didn’t help that, in what is one of the world’s most capital-intensive industries, Taiwan and South Korea were committing virtually unlimited resources toward subsidizing investments by TSMC and Samsung to establish them as the leading chipmakers.

Boeing thought it would be cheaper and faster to add more efficient engines to its bestselling 737 with the help of software rather than completely redesign or replace the plane. That contributed to two fatal crashes. Outsourcing of its supply chain and an exodus of experienced machinists during the pandemic contributed to quality problems and delays. … While Elon Musk’s SpaceX has outclassed Boeing when it comes to space transport, there are no homegrown alternative suppliers of large commercial airliners. Without Boeing, that business would go to Airbus and, eventually, China’s state-owned Comac, which is now delivering its own competitor to the 737 and Airbus’ A320, the C919. 

As noted above, and finally articulated by Greg here, outsourcing the supply chain is a huge part of the Boeing story. This is not hindsight; the consequences were predicted as it was happening. All the way back in 2005, writing in The American Conservative, Eamonn Fingleton warned:

“The key to the new Boeing is a Faustian bargain with Japan. In a rerun of earlier American industrial implosions, Boeing has come to rely more and more on Japanese contractors for its most advanced engineering and manufacturing. Heavily subsidized by the Tokyo government, Boeing’s Japanese partners are delighted to lowball their contract prices and spend heavily on the sort of advanced research and development that in happier times Boeing would have eagerly—indeed jealously—reserved for itself. … In effect, Boeing is burning the family heirlooms to keep the house warm.”

If that metaphor sounds familiar, it’s because it echoes the one Warren Buffett had used two years earlier to describe America’s trade-deficit-fueled economic model in the new millennium: “We have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.” There is no separating the failure of an Intel or a Boeing from the forces unleashed by globalization and the folly of American economic policy that disclaimed any concern for where things were made or whether we made anything in America at all.

The loss of either company would have industrywide repercussions. Each supports a multilayered ecosystem of designers, workers, managers and suppliers. Once that ecosystem moves offshore, it is almost impossible to bring back.

So, two things here. First, I think we need a law—maybe just a Dear Colleague letter from the Council of Economic Advisers would suffice—requiring any economist reciting free trade dogma to get “once that ecosystem moves offshore, it is almost impossible to bring back” tattooed on his chest. This is the crux of the matter, and the proof that a robust industrial base has enormous spillover effects and positive externalities that multinational corporations will ignore but a nation must protect.

What’s endlessly insulting to the millions of Americans who have seen their communities decimated by our economic policy is that while industry is leaving, economists shrug and say it doesn’t matter. But ask whether it can be brought back, and they’ll chuckle that “once that ecosystem moves offshore, it is almost impossible to bring back.” That’s why you don’t let it leave! Which brings us to…

Second, as foreshadowed, Greg has come around to the reason that tariffs and subsidies do address “losing the knack for making” innovative products. That “knack” is embedded in the “multilayered ecosystem of designers, workers, managers and suppliers” that companies like Intel ignored or outright pushed offshore, the track greased by the tariffs and subsidies used by foreign countries to attract investment. The only way to reverse that process is to reverse the incentives. Note also the problem for the many tariff opponents who think they are making an especially sophisticated case when they warn against raising the cost of “intermediate inputs.” This is just doubling down on the Boeing and Intel matter, which has been a disaster. A healthy industrial base is one that makes intermediate inputs, too.

The goal of manufacturing strategy shouldn’t be just producing jobs but great, world-beating products. Washington can help by encouraging the world’s best manufacturers to put down roots in the U.S. That forces American companies to raise their game and nurtures the workforce and supplier network that serves all companies. The Chips Act, by encouraging TSMC and Samsung to build or expand fabs in the U.S., indirectly helps U.S.-based Intel, GlobalFoundries and Micron (all of which have received subsidies).

Yes, thank you! This is a crucially important point, and one that the free traders always get backward for no logical reason that I can discern. Protecting the domestic market, we are told, is unwise because it will insulate domestic producers from competition, they will become fat and lazy and uncompetitive, and both industry and consumers will suffer. But why should that be the case? The U.S. market of 330 million consumers and more than 25% of global GDP seems plenty large to foster robust competition among existing domestic players, new potential entrants, and foreign firms that might set up shop on U.S. soil. How little faith do you have to have in democratic capitalism to say, “no, sorry, this isn’t going to work unless we’ve got competition with Chinese state-owned enterprises mixed in”?

Greg concludes with one of my favorite examples:

In the early 1980s, with domestic automakers reeling from Japanese imports, President Reagan negotiated export restraints on automakers such as Toyota who went on to set up assembly plants in the U.S. The benefits went beyond the workers they hired and the consumers they served; Detroit was forced to adopt Toyota’s lean manufacturing and continuous improvement system.

Reagan didn’t use a tariff or a subsidy or a local content requirement, he went blunter: an outright quota that prevented any increase in imports from Japan. Detroit’s Big 3 were facing challenges similar in many ways to what Boeing and Intel face today. Reagan’s measures did “address the fundamental problem.” Not coincidentally, American Compass has written an excellent case study of this experience too: The Quota That Remade the Auto Industry

It’s incredibly encouraging that the national economic conversation is increasingly engaging with these problems and talking in these terms. But it’s all too common to see the problem forthrightly observed and the implications skirted, lest one be accused by some economist of not “understanding” free trade. Better to rip the band-aid off and state the conclusion directly as well: The blinkered, Econ 101 model of trade is the one incapable of understanding what has been going on here, its policy prescriptions are what set us on this disastrous course, and the sooner we acknowledge that the sooner we can focus on the kinds of previously disfavored policies that will be necessary to turn things around.

THIS WEEK AT AMERICAN COMPASS

On the State of Neighboring: The Institute for Family Studies’ Amber Lapp recounts a recent conversation with a new neighbor that illuminates the consequences of our fraying social fabric.

Ya Gotta Have Relationships to Make Relationships: The Social Capital Campaign’s Chris Bullivant wants investment in a particular type of social capital: cross-class exposure.

Turning Down the Electoral Temperature: American Compass’s Drew Holden contrasts contemporary political anxiety with the days when Americans didn’t care so much who won.

And, on the American Compass Podcast this week, UVA’s Sam Pressler joined me to discuss “the adult transition,” the role our society has assigned to colleges in facilitating it, and what that means for anyone not in college who is left to navigate the transition to adulthood alone.

WHAT ELSE SHOULD YOU BE READING?

Re: Nobel Gas… in the Financial Times, Princeton historian Brendan Greeley eviscerates The Nobel for Econsplaining

The awarding of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel to Daron Acemoglu, Simon Johnson and James Robinson for work that doesn’t even vaguely resemble science—and isn’t even economics, for that matter—has attracted a good deal of well-deserved scorn. But this is the best serving. As Greeley explains, “They won for taking on the question of divergence — why some countries have enjoyed enduring prosperity since the early modern period, while others have languished. What made the difference, they argued, were institutions, habits of law and society.”

This would be extraordinarily unimpressive even if entirely correct—we’re giving Nobel Prizes for “countries with strong institutions are more prosperous”? But as Greeley details, it doesn’t work as economics. “Economists are really good with numbers. … Some things, however, don’t seem to respond in obvious ways to numbers, or sometimes the numbers are constrained by things that are hard to measure. It’s helpful to think of these things as institutions, the habits of mind and the state that shape markets. Acemoglu, Johnson and Robinson are right to see the importance of institutions, and they were right to drag the rest of their profession in their direction. The problem is that institutions are exactly the parts of markets that are inherently resistant to discovery through numbers.”

Also, what a great correction at the end: “Sorry, for some inexplicable reason we wrote Williams in the subhead rather than Robinson, and on second mention Why Nations Fail was called How Nations Fail. We’ll blame Mondays.”

Re: Pick-It Lines… the New York Times’s Farah Stockman thinks We Don’t Yet Understand What Warehouse Work Is Doing to Communities

The status of warehouse work fascinates me. As an abstract story we tell ourselves about the economy, it should have tremendous potential: serving consumers through online orders shipped from centralized depots is often much more efficient than the old model of retail associates stocking shelves and ringing up merchandise in malls. There’s a real productivity gain here and the opportunity to bring more capital to bear. And whereas retail tends to be concentrated in high-cost, high-density locations, logistics tends to be located where living is also much more affordable. There’s a world in which this could be a labor-market transformation that provides a huge win for workers.

Obviously, that hasn’t happened. The work is atomized and miserable, mostly outsourced to staffing agencies, and generally viewed as temporary. But why? There’s no law of economics that says it should come out this way versus a better way. It is all contingent on… something. I come back to Carl Benedikt Frey’s The Technology Trap and, in particular, the emphasis he places on child labor as a factor that made the industrial revolution’s early years so miserable. Only after the regulation of that practice, fought tooth and nail by the “capitalists,” did investment and growth surge and gains extend widely. What’s the analogy for today’s labor market?

Re: Present Post Priors… in First Things, Nathan Pinkoski articulates Actually Existing Postliberalism

For all the fashionable talk of postliberalism on the Right, efforts have run aground repeatedly on the reality that no one can explain how a plausible alternative might look or how to get from here to there. Like Obamacare, critiquing liberalism is easy, replacing it… not so much. Pinkoski does an impressive job marshalling examples from a wide range of domains to make the case that liberalism has already been superseded by something else entirely, a “society in which governmental power, cultural power, and economic power are coordinated to buttress regime security and punish the impure,” imposed by the very post–Cold War neoliberals generally considered liberalism’s primary defenders.

Re: Who is the 55%?… at AEI, Ruy Teixeira and Yuval Levin ask Can Either Party Build a Majority Coalition?

This is a fascinating report from two of the sharpest analysts of American politics and of both the pathologies and potential of conservatism. It also serves as a nice complement to Monday’s discussion of potential governing majorities and Democracy Journal’s attempt at defining them. Here is a similar effort from the other side of the political spectrum.

Enjoy the weekend!