Outsourcing Companies And Foreign Countries Target More American Service Industries, Especially U.S. Law Firms

More countries are successfully emulating India's fast growing outsourcing business sector and are targeting a broader array of services for growth, according to Duke University's Offshoring Research Network and PricewaterhouseCoopers. Foreign governments are providing incentives for new companies to start selling services to firms located in high-cost regions including the United States, according to a survey of 500 global outsourcing companies.

The number of outsourcing firms is growing fast in Latin America, Eastern Europe and Asia. "New entrants from these emerging regions can be expected to intensify competition among providers, especially for commoditized contract centers, business process outsourcing and IT services," says the study.

Governments throughout the world, and especially China, have put in place policies and financial incentives to attract and nurture outsourcing firms. These policies are now "impacting the market," says the Duke University-PricewaterhouseCoopers study. "Growing competition among countries, cities and providers has transformed the outsourcing industry into a global race for market share. India's success and pride as ‘the world's back office' has motivated other developing countries with a significantly underutilized university-educated population to replicate what India has done."

China is especially active in promoting its outsourcing industry. "It has mounted a vigorous challenge to India's software development outsourcing industry," says the study. "More and more U.S. and European companies are outsourcing software and IT services directly to Chinese service providers."

China has designated 20 cities as "outsourcing hubs to attract more international investment and has provided them with tax breaks, labor hour systems and employment subsidies," according to PricewaterhouseCoopers and Duke. China has created an outsourcing "demonstration" city -- Hefei -- which has already attracted numerous multinational companies to shift work there, including IBM, General Electric, Exxon Mobil, Motorola and Mitsubishi Heavy Industries.

The Philippine government has declared outsourcing a priority industry and has implemented policies -- formation of economic zones and income-tax holidays -- to boost foreign investment, according to the study entitled "Is the Global Outsourcing Industry In For a No-Holds-Barred Competition?"

Many low-labor-cost countries are bypassing the "commodity" outsourcing services such as call centers. They have pools of highly trained professionals who can provide services in design, innovation, knowledge processes, finance and accounting, marketing and sales, human resource management and procurement.

Legal services offshoring (LSO) is the next big thing, due to high margins and economic pressures on law firms. There have been "profound changes in companies' perceptions of the legal industry, once regarded as a sensitive and privileged activity that needed to be kept in-house," says the study. "The attractive economic benefit of LSO may explain the high number of service providers entering the market and of companies exploring opportunities to outsource their most routine legal activities over the past few years." In India, the legal process outsourcing industry has grown by 40 percent per year, and there are now 110 service providers concentrating in that specialty area.

Eastern European companies are also quickly emerging in the outsourcing industry, especially in software development, due to their proximity to Western Europe and the technology and R&D focus of their educational systems.

Demand for offshore outsourcing of services is being driven by the economic downturn. Until recently, companies were outsourcing functions because they could not find qualified workers. The primary reason now for outsourcing is cost savings. "A strong interest in cost reduction shows up in service provider selection decisions: 52 percent of service providers indicate low cost of service delivery is one of the five most important selection criteria," says the Duke-PWC study. "To ensure the realization of expected cost savings, a majority of companies include expected savings as part of the explicit contract terms."

Outsourcing companies continue to experience rapid growth "in spite of the difficult economic environment," says the study. "A large number of providers indicate their aggressive plans to initiate new software development and IT services in the next 18 to 36 months. In addition, the number of service providers planning to offer new finance and accounting, human resources and innovation services has more than doubled relative to the 2007-2008 survey responses."

The American outsourcing companies -- Accenture, HP and IBM -- have started growing their operations in places other than India, says the study, authored by Charles Aird (charles.aird@us.pwc.com) and Derek Sappenfield (Derek.sappenfield@us.pwc.com) of PricewaterhouseCoopers.

U.S. Military Warned Again About 'Eradication' Of American Industry: 'Key Government Decision Makers Are Not Getting The Message'

The U.S. military risks not being able to field an army if Congress does not start addressing the loss of the American industrial base by reforming tax laws to encourage domestic production. "The defense of our country is in perilous state," according to Col. Michael Cole, deputy chief of staff at the Joint Enabling Command of the U.S. Joint Forces Command. "The message of the few who are aware of the problem is not reaching the key government decision makers."

Strategies currently in place to deal with an industrial base that is increasingly unable to supply the military with manufactured parts and electronic components are not working, argues Cole. The Diminishing Manufacturing Sources and Material Shortages (DMSMS) program does not address the bigger issues involved with the "eradication" of the U.S. industrial base. The loss of U.S. industrial capability "is no ordinary budget problem that can be solved by an infusion of money, even if there was money to spare," according to Cole in a paper on the subject. "The unfortunate aspects of DMSMS are that no U.S. agency is responsible for managing industrial policy as it relates to national defense, and the loss of the industrial base is a self-inflicted wound created ultimately by corporate tax laws that encourage offshore manufacturing."

The U.S. manufacturing sector has been in trouble for years, but the recession made things even worse, Cole notes. An inevitable decline in the defense budget does not bode well for DOD's ability to support the industries that are involved in the production of weapons system. Moreover, as program managers confront reduced budgets, they are becoming more motivated to buy cheap components made overseas. "If there was ever a crisis situation with China it is likely our shipments from China would cease," says Cole. "A country devoid of its industrial base with plenty of soldiers left to fight can hardly wage a long-term war. Knowing that Congress is aware of the DMSMS problem and has formed a commission [the U.S.-China Economic and Security Review Commission] to study it does mean that there is hope for a solution."

Currently, the DOD "solution" is to issue regulations requiring program managers to use a "Shared Data Warehouse" on parts and supplies "so that other programs may benefit from the solution," Cole notes. The second strategy is for program managers to perform so-called "resolution cost tradeoff studies when evaluating solutions for non-available parts" as contained in DMSMS Guidebook.

These programs have "proven ineffective," says Cole. "The simple fact that the U.S. does not have an empowered agency to manage DMSMS and it is cheaper to manufacture offshore are the issues Congress must address."

Cole recommends that DOD create a new "National Security Resources Board," an idea promoted by Joe Muckerman, former director of DOD's Office of Emergency Planning and Mobilization. Such a board would be responsible for assuring there is a strategy to deal with rebuilding American industry so that it is capable of producing the weapons systems that are needed.

Secondly, the U.S. tax structure is working against the sustainment of an industrial base upon which the military depends. The corporate tax rate of 35 percent is "embedded in the cost of each item in each weapon system sold in the United States," Cole notes. Combined with the additional corporate taxes in 24 of 50 states, the U.S. corporate tax rate is the highest in the world, giving U.S. industry little reason to stick around. Furthermore, other nations collect value added taxes and rebate them on exported goods to the United States, leading to yet another disadvantage for American-based producers and another incentive for U.S. production to ship out.

Cole says there have been plenty of studies on the "fair tax," which would require the imposition of a revenue neutral national sales tax on products at the final point of sale, while eliminating corporate and individual income taxes.

"With the abolition of cumulative corporate income taxes imposed on goods produced in the United States, American manufacturers would finally have the level playing field necessary to preserve the industrial base," says Cole. Combined with creating a border-adjustable tax system, the United States might be in the position of rebuilding its industrial base. "The fair tax is by far the most comprehensive plan and a strategic answer to the DMSMS problem," according to Cole. A fair tax proposal had 72 co-sponsors in the House of Representatives in 2007, and four sponsors in the Senate.

"One day, Congress will be forced to grapple with the effects of DMSMS and the eradication of the industrial base," says Cole. "The best course of action is to act now to avoid dealing with the inability to acquire and sustain U.S. weapons systems during a national emergency. Tax reform through the fair tax and the National Security Resources Board oversight of the industrial base are DMSMS solutions whose time has come."

Cole can be reached via e-mail at michael.j.cole2@us.army.mil.

China's Auto Industry Surpasses America's By More Than Three Million Vehicles

China's automobile market grew by 45 percent in 2009, "the highest growth rate ever," says Wilbur Ross, chairman of WL Ross & Co., and owner of International Auto Components Group (IAC). Chinese auto sales surged to 13.6 million units, "consolidating China's top position in the global automobile market," according to China Daily. Total sales in the U.S. last year were 10.4 million, down from 13.2 million vehicles in 2008.

Adds Ross: "The way things are going, China will increase its lead over the U.S. with the long-term competitive implications that will result. As Chinese companies become larger, more technologically advanced and more profitable, they will compete in the U.S. and other world markets."

The Chinese government helped the industry by providing VAT reductions on small displacement cars, instituting a cash for clunkers program, and giving 10 percent subsidies to farmers buying new vehicles along with cash payments. The Chinese government recently announced a new cash-for-clunkers program that raises last year's incentive from 3,000 to 6,000 yuan to 5,000 to 18,000 yuan.

Sales of minivans in China increased by 80 percent in 2009, to almost two million units. There were 221 new passenger vehicle models introduced in China last year, and there will be another 100 new introductions this year. Industry volume is expected to grow to more than 15 million units in 2010, according to Ross.

"In contrast, our government mounted a feeble 700,000 unit cash-for-clunkers program last year, administered it poorly and now has discontinued it," Ross told the Automotive World Congress in Detroit on January 13. "Instead of complaining about China's currency policies, which we cannot control, our government would better level the automotive playing field if they extended and enlarged cash for clunkers, simultaneously improving the environment. The contrast is stark: China has a sensible and well-implemented industry development strategy, but the U.S. does not. In view of our government's rescue of GM and Chrysler, it is puzzling why they have not followed through to create a powerful industry dynamic."

In China, sales of light vehicles have skyrocketed, from about 500,000 per month in July 2008, to 900,000 vehicles per month by August 2009, and finishing the year at more than one-million new vehicle sales per month. There is the potential for China to have a fleet of 500 million vehicles in the "foreseeable" future, said Dave Breen, U.S. automotive leader at PricewaterhouseCoopers.

Meanwhile, the U.S. market isn't going anywhere. The average annual demand could rise to between 13.5 million to 14.2 million units, given the natural growth in the number of young drivers, says Ross. "Seventeen million units will not recur soon. That occurred at the peak of consumer's excessive leveraging which pulled demand from future years, contributing to the subsequent 40 percent decline [in 2009]."

Last year, 60 suppliers went bankrupt in the United States, and another 200 shut down. "Five years ago, who would have thought that Delphi, Lear and Visteon would be simultaneously bankrupt," says Ross. "More capacity elimination is needed and we believe that more suppliers will fail in 2010 and others will be distressed sellers."

Smaller American suppliers will be hard pressed to stay in business, as foreign automakers such as Beijing Automotive, Geely, Tata and Sberbank start to globalize their production. As this happens, "the competitive position of smaller, local entities will become more difficult," says Ross. "Given the consolidated customer base, a fragmented supplier universe never was logical. Now as OEs [original equipment companies] globalize, logic demands suppliers with symmetrical maps. Larger-scale facilitates supplier-financed R&D, making them better partners for OEs…In addition, Tier One suppliers will continue to integrate backward and eliminate former subcontractors."

Ross says IAC has brought in-house many previously purchased parts and raw materials production. The company has renegotiated union contracts, "cut non-union wages and benefits and put management on four days pay for five days work and trimmed supervisory ranks. Despite these hardships, morale is good because we have been awarded a couple of hundred million dollars of business from failed competitors." The company has opened new facilities in Japan, China and India.

The global automobile industry has the capacity to produce 94 million cars per year "some 30 million more than we can typically sell," said Sergio Marchionne, CEO of Chrysler Group LLC. That excess capacity is equal to 120 assembly plants "and countless supplier facilities," added Rodney O'Neal, CEO of Delphi.

The once mighty Delphi is a fraction of its former self, O'Neal noted. Since it declared Chapter 11 bankruptcy four years ago, the company's revenues have declined by half. The company has laid off 84,000 employees. It went from 27 business units to 10 and it has reduced specific product lines from 119 to 38.

About one-third of global automobile assembly capacity resides in Europe, where the industry remains virtually the only sector that has yet to rationalize production, says Chrysler's Marchionne. Europe utilized 75 percent of its capacity last year, a number that may shrink to 65 percent this year. "The reason, simply put, is that European manufacturers simply do not close plants," says Marchionne. "The reason for that is they simply do not have to. In fact, they're often paid not to. The last time a German plant shut down, World War II had yet to begin.

India is another fast growing market. Sales in India reached 2 million units last year, a growth rate of 17.5 percent. Revenues totaled $34 billion, and are projected to quadruple to $145 billion by 2016, according to Pawan Goenka, president of the Society of Indian Automobile Makers.

Commerce Secretary: Patent Office Is In For A Top-To-Bottom Overhaul

Problems with the U.S. Patent Office are hurting American competitiveness, says Department of Commerce Secretary Gary Locke. "I think it is absolutely scandalous and completely unacceptable how long it takes for patents to be issued or for a decision to be made on patent applications," Locke told a recent meeting of the President's Council of Advisors on Science and Technology (PCAST).

It takes about three years before a Patent Office examiner looks at a patent application and then another year to review the application. "Patent pending doesn't mean that much," said Locke, whose agency oversees the Patent Office. It's hard for individuals or companies to attract financing to commercialize a new technology if there is a patent pending, he said. "It's like trying to borrow money to remodel your house. It's like the title is pending. How do you get a loan to remodel your home with a pending title?"

Patent Office finances are also becoming an issue. "In some ways, the current finances of the Patent Office are a Ponzi scheme," said Locke. "We are collecting money from patent applications today, using it to pay patent examiners who are doing work on applications that were submitted three or four years ago. The problem is with this current economic downturn patent applications have dropped dramatically. It means the fees coming into the office are much lower, which means we don't have the money to hang onto staff or replace the staff to examine the work that was brought in three or four years ago."

Congress has capped the amount of money the Patent Office can spend, said Locke. If the economy turns around and patent applications start increasing again, "we won't have the excess funds to hire replacement staff as people retire or to bring on extra people to get rid of the backlog and reduce the waiting time," Locke said. "Congress has indicated that they want to solve that problem," but nothing has happened.

Furthermore, the current system of evaluating patents "does not make sense," Locke added. The PTO's new director, David Kappos, formerly vice president and assistant general counsel for intellectual property at IBM, is looking at overhauling the entire operation. He is "re-examining everything we do and starting from scratch instead of just tinkering around the margins and around the edges," said Locke.

Kappos is looking at a decentralized hiring system, allowing patent examiners to telecommute and hiring examiners from the West Coast and from around the country, not just in the Washington, D.C., area. "If we are an agency of innovation, why aren't we using the tools and latest technology to help us process the work much faster?" Locke asked.

Kappos is also reconsidering how patent examiners are evaluated. Currently, they are rated on the number of patents they process, not on the quality of the patents they issue. "Even the employees chafe at some of the measurements that are used," said Locke.

Elsewhere on the Commerce Department's innovation agenda, Locke said that the Technology Innovation Program (TIP) at the National Institute of Standards and Technology has "fallen on tough budget times over the last several years, but we are seeking to revitalize and expand that program as part of the way to encourage new business and accelerate the movement to manufacturing. We very much believe that NIST and those programs have a place to help in the commercialization of great ideas."

Pent-Up Demand For Metrology R&D -- 1,300 Grant Applications For 27 Awards

There is a massive pent-up demand for funding among researchers involved in the area of metrology. The National Institute of Standards and Technology issued a request for proposals last May 26 for institutions and companies seeking funding for measuring science and engineering. The agency received 1,300 proposals. It had money enough to award 27 grants. Three-hundred NIST researchers culled through the grant requests.

The chance of winning an award was 2 percent.

Among the winners were large companies like IBM, General Electric and General Motors, along with numerous universities.

"These projects will bolster U.S. scientific and technological infrastructure, increasing our nation's ability to innovate, compete and solve scientific and technological problems," said NIST director Patrick Gallagher.

Winners will receive between $400,000 and $1.5 million. Money was made available under the $787-billion Stimulus bill.

For a list of winners and a description of each of the projects, go to http://www.nist.gov/public_affairs/releases/measurementgrants2010.html.

Council On Competitiveness To Study U.S. Manufacturing Competitiveness

The Council on Competitiveness is waking up to the faded competitive position of American industry. Nine years after the initial collapse of the U.S. manufacturing sector during the 2001 recession, the Washington, D.C.-based think tank says it is "launching a manufacturing competitiveness initiative to define a fresh approach to growth and job creation in this vital sector." The effort is being headed by James Quickly, CEO of Deloitte Touche Tohmatsu, and Susan Hockfield, president of MIT.

"America lacks a strategy for manufacturing competitiveness," said council president Deborah Wince-Smith in testimony before the House Science Committee. "We need policies that make America a really attractive place to invest."

The council's "major initiative" in manufacturing intends to "redefine" manufacturing not as "product fabrication" but as a "value creation system," said Wince-Smith.

As part of the initiative, the council will develop a document with "sector assessment and competitiveness priorities." It will conduct a survey of manufacturing CEOs to determine where the U.S. stands versus other countries. It will hold "competitive-edge policy roundtables" to build "action agendas on key manufacturing drivers from diverse input from around the country." It will conduct a survey of overseas manufacturing executives to determine best practices used to attract manufacturing investment. It will benchmark successful policy approaches used by foreign countries to attract manufacturing. And it will draft policy roadmaps for manufacturing competitiveness.

It wasn't long ago that the council believed U.S. manufacturing wasn't important to American prosperity. At the November 2006 release of its "Competitiveness Index: Where America Stands," report author Michael Porter of Harvard said that services "are where the high value is today, not in manufacturing. Manufacturing stuff per se is relatively low value. That is why it is being done in China or Thailand. We have to stop this notion [of believing] that manufacturing is essential. It's a real problem because it distorts our thinking. It reflects a simplistic view of the international economy and how companies compete in their overall value chain."

Porter argued that exporting was no longer an essential national priority because large multinational companies had set up production offshore and were serving those markets from their new foreign factories. As such, he said, "the old model where we exported stuff -- and that is how we engaged in the international economy -- has been shattered irrevocably." Porter added that the U.S. trade deficit of $800 billion was "not epic" and was nothing to fear since "many other economies in the world run trade balances at this percent of GDP."

Council President Wince-Smith argued at the time that it was a "myth" that American manufacturing was not competitive. "The United States remains the largest manufacturer in the world," she wrote in a letter to Manufacturing & Technology News in March 2007. "Manufacturing in America is still strong -- it is manufacturing employment that has declined dramatically." Manufacturing workers were not losing their jobs because of offshore outsourcing of production, she added. They were losing their jobs because of "dramatic increases in productivity [that] enabled companies to produce more with fewer workers."

In its 2009 annual report, the Council on Competitiveness describes some of its accomplishments over the past year, among them was a "ground breaking partnership" with the Brazilian group "Movimento Brasil Competitivo" and the Brazilian Agency for Industrial Development. It also launched the Global Council on Competitiveness that brings together leaders from 20 competitiveness organizations from around the world to exchange views.

Other accomplishments include holding a "State of Innovation Summit"; two "dialogues," one on global technology leadership and another on "technology frontiers." It conducted a survey of chief technology officers, which found that 85 percent of the respondents "believed that the United States is the global leader in research and development-based innovation today," but that "fully 65 percent believed this will not be the case in five years if current trends continue." It also kicked off a research project on how the country can deal with workers aged 55 and older. "This project is part of the Aging Workers Initiative, sponsored by the U.S. Department of Labor's Employment and Training Administration," says the council. It is also planning to release a study funded by the Economic Development Administration that "will evaluate the feasibility of creating a center for regional leadership development linking universities, experts and practitioners."

The Economic State Of The Union 2010: What Replaces The Debt-Driven Economy?

 The last two difficult years could be a mild warning for the future as the internal, cost-cutting logic of lifeboat ethics and the economic race to the bottom accelerate hardship while governance disintegrates further and the concentration of private wealth and power soars.

Over the past decade of concentrating wealth and power, the United States lost 1.5 million private-sector jobs; incomes, private investment and industrial production all fell; and "average" real net worth per capita plunged by about 10 percent.

While Wall Street partied with record bonuses and taxpayer bailouts, for almost everyone else it was a lost decade unprecedented since the 1930s.

More ominous still is the fact that to achieve even these awful results households and the federal government each were forced to more than double all previous debt in history, adding almost $14 trillion in new debt.

That is, since 1999 households and the federal government, through new mortgages, credit-card debt, school and medical debt, tax cuts and war spending borrowed three dollars (net) for every one dollar of expanded Gross Domestic Product. Since 1980, debt has grown more than twice as much as GDP. The United States borrowed its entire past generation of sluggish growth...twice.

It was, indeed, an economic miracle that debt could soar so high for so long.

The "bubble" jobs and asset values now are gone, but the debts and their unprecedented leverage remain and are worsening rapidly. The ratio of household and federal debt to GDP peaked at 139 percent just after WW-II and fell thereafter to 79 percent in 1981. Since then, as attacks on governance intensified, debt rocketed to 131 percent of GDP in 1999, 171 percent in September 2008 and over 185 percent today.

Today, Americans face a severely hollowed-out economy, a monumental and growing mountain of personal and public debt, and an angry, fearful culture debating creationism, betting the kids' tuition on Powerball and praying that guns, drones and nukes provide security.

For the past generation of accelerating globalization the financial sector's lock on policymakers has reversed previous surpluses and forced the United States to import and borrow massively (paying them hefty fees) rather than to produce and earn. Over this time, the full U.S. current account trade deficits totaled -$7.8 trillion. That is, the United States produced -$7.8 trillion less than it spent since 1981, borrowing and selling off assets to China and other foreign interests to pay for it.

Constant false media "reporting" notwithstanding, only trade deficits -- NOT federal budget deficits, no matter how large -- require offsetting foreign borrowing. (China, too, has government deficits.)

Worsening sharply each decade, U.S. trade losses totaled -$5.8 trillion over just the past 10 years -- far more than total GDP growth. The U.S. manufacturing sector lost almost one-in-three of its jobs, the worst decade in history, as manufacturers' production declined over the decade for the first time since the 1930s. Every manufacturing industry slashed jobs, with durable manufacturing losing 34.4 percent of its jobs.

Over the past decade, the auto industry suffered -$2.1 trillion of imports and -$1.2 trillion of net imports and production shortfalls. Of course, even this understates the effects of imports as the industry made substantial wage and benefit concessions, received aid and tax concessions from state and federal programs and cut corners on health, safety, environmental and other regulatory costs trying to compete with imports. That was even before bankruptcy filings and the massive taxpayer bailouts. The once mighty U.S. industry lost over 50 percent of its jobs in the decade.

The Obama administration's recent "Manufacturing Framework" does not have a single mention of the word "import," and "trade deficit" is mentioned only vaguely with no actual figures either of its size or composition.

China is now the world's leading auto producer. With the help of all the major global automakers pouring their best expertise, including R&D, into minority joint-ventures with China's state-owned giants, China is setting the standards for next-generation alternative energy vehicles. Now majority owned by American taxpayers, General Motors is still closing productive capacity in the United States -- giving-up U.S. exports —  as it opens new plants and R&D centers in China to help the exports of its majority Chinese partners.

Every industry is different but all face the same mindless U.S. "free" global trade policies and all are on the same path to China and elsewhere. Textile/apparel manufacturers lost 63 percent of their jobs over the past decade. U.S.-based producers of computer equipment lost 49 percent of their jobs; telecom equipment makers lost 46 percent; semiconductor producers lost 43 percent of their jobs.

China now has the world's largest and most profitable banks, insurance companies, telecom and Internet providers. It has lured all the world's leading financial and tech firms to produce in China, usually with Chinese partners that are quickly becoming serious competitors. Google is only the latest prominent firm to find it cannot compete alone against both a western-nourished Chinese rival and Chinese authorities determined to build "independent" innovation and capacity.

For the first time on record, the United States became a global net importer of Advanced Technology Products in 2002 and these high-tech deficits have offset all net earnings on "intellectual property" royalties and fees -- including franchise fees for Starbucks, McDonalds, etc. —  for the past seven years. That is, since 2003 the U.S. global balance on technology goods AND services trade has been virtually zero, offsetting no part of U.S. losses for autos and other manufactured goods, oil and gas or anything else.

China alone has a technology goods and services surplus with the United States of about $70 billion per year and it is worsening rapidly. The $2.4-trillion war chest of foreign currencies created by China's trade surpluses and other activities already generates six times as much for China's politically powerful U.S. investments -- currently mostly low-yielding U.S. Treasury bonds -- as all earnings of U.S.-incorporated companies and investors in China.

The broad, once incomparable and dynamic U.S. supply chain of manufactured goods and services has been hollowed out and continues to shift quickly to China and elsewhere. It is this vital supply chain decline, rather than concerns about any single product or group of products -- for which substitutes may or may not be readily available -- that is the most urgent challenge to U.S. economic and military security.

While the United States lost 1.5-million private-sector jobs over the past decade, the healthcare and education bureaucracies added 4.5 million jobs, and bars and restaurants added another 1.4 million. That is, but for these generally low-paying, low productivity industries that remain almost entirely protected from imports or offshore outsourcing, the U.S. lost almost 7.5 million jobs over the decade. The only higher-wage industry that added jobs was professional and technical services, which added 1.2 million jobs, mostly related to the unsustainable burst of federal deficit spending on foreign wars and homeland security.

The facts are clear: for 30 years U.S. jobs that are lost to imports do not move automatically to higher wage, more productive employment. In fact they generally don't get re-employed at all except through massive new borrowing by households and government. Even with unprecedented borrowing most re-employment moves down sharply to far less productive, lower wage employment that do not face imports and cannot export. Most U.S. economic destruction is not "creative" but simply and mindlessly destructive. Poorly regulated global commerce now undermines productivity and requires soaring debt to maintain much less to improve U.S. living standards.

After a lost decade and a generation built on soaring debt, large majorities of citizens are again -- or still -- demanding fundamental change beyond the failed race-to-the-bottom scam of tax cuts and deregulation. Dozens of competing small groups are again drafting economic strategies to rebuild U.S. productive capacity, stop soaring debt and sustain our remarkable living standard. None, however, comes remotely close to addressing the monumental scale of the crisis and none has the political muscle to stand up to the hirelings in the professions and in politics.

President Obama recently claimed that the wealthy and powerful Wall Street and China crowd "just doesn't get it." But as China adds almost $40 billion each month to its massive reserves and taxpayer bailed-out Goldman Sachs alone hands out $16.2 billion in "constrained" annual bonuses -- with the political power money entails -- why change? 

Perhaps it is the President who really doesn't "get it." Or perhaps, like virtually every Wall Street-connected multimillionaire member of his senior staff, every Congressional Republican and most Democrats, he does "get it" but will not -- or most troubling, cannot -- change the disastrous U.S. policy direction.

-- Charles W. McMillion, president and chief economist for MBG Information Services, is a former Contributing Editor of the Harvard Business Review. He helped create the bipartisan U.S. Congressional Competitiveness Caucus a generation ago.

International Trade Commission Finds That Small Companies Don't Export Much

Small- and medium-sized enterprises (SMEs) account for 50 percent of the U.S. gross domestic product and 64 percent of all new jobs created between 1992 and 2009, but they don't export very much. In 2004, exports by SMEs accounted for only 3.8 percent of their contribution to GDP, compared to 11.5 percent of the GDP contribution from exports made by large-firms, according to the International Trade Commission.

Most of these small companies do not export directly to foreign markets, and manufactured exports account for only 11 percent of total SME exports. Less than 2 percent of all U.S. firms exported directly in 2002.

Nevertheless, SMEs export a lot of goods, accounting for approximately 30 percent of total merchandise exports. Between 1997 and 2007, the value of SMEs' exports doubled, from $153 billion to $307 billion. The increase "is attributable both to an approximately 80 percent increase in the export value per firm and to an approximately 30 percent increase in the number of exporting firms (an increase of nearly 60,000 firms from 190,000 in 1997)," says the ITC in a study on the subject. "By contrast, the number of large exporting firms remained relatively unchanged (increasing by 75 firms or 1.1 percent), whereas export value per firm increased 48.1 percent during this period. Therefore, while SMEs contributed 31.5 percent to the overall export value growth, they accounted for nearly 100 percent of the growth in the number of exporting firms."

SMEs do not have the financial and human resources "to act on opportunities abroad," the ITC found. "[S]uch factors as limited personnel, the inability to meet quality standards, lack of financial backing and insufficient knowledge of foreign markets may be important constraints affecting SME exporters."

Most SMEs are not export oriented. According to a survey done by the National Federation of Independent Business in 2008, exporting products and services "was ranked as the least important problem out of 75 facing small business owners and had remained unchanged since 1986," says the 91-page ITC study, "Small- and Medium-Sized Enterprises: Overview of Participation in U.S. Exports," located at http://www.usitc.gov/ publications/332/pub4125.pdf.

U.S. Venture Capital Industry Has Stopped Funding New Companies

The venture capital industry has not been good for investors over the past decade. "A week ago, the 10-year returns on venture capital became negative," says Ed Penhoet, director of Alta Partners in San Francisco, Calif. There are a number of reasons for the poor financial returns for investors. There has been a lack of really good ideas and the cost of commercialization has increased significantly.

"The venture capital world is shrinking as we speak and, in general, venture capitalists are investing in less and less risky projects and investing more and more in late stage" company funding, says Penhoet. The VC community has even started investing in public companies "rather than doing venture in the way it was traditionally done. The belief that venture capital will be there to catch all of this technology and invest in it and make it a commercial reality is probably under serious question at the present time."

The federal government should consider stepping into this void, says Penhoet. "We may have to have some sort of innovation policy which requires direct" funding to companies to commercialize new technologies, especially for those in the clean energy area. "This reliance on the venture capital business to essentially provide the wherewithal for the country to move innovation through to the marketplace may be misplaced in this current environment," says Penhoet.

A Review Of President Obama's New 'Framework For Revitalizing American Manufacturing'

Although there is much to agree with in the President Obama's recently released manufacturing policy "Framework" and it is great to see this subject receive such a high priority, it does not go nearly far enough. It is a good start, but only that. If somehow the United States finds a way to do all of the things mentioned in the Framework, the country will still fall far short of its goal of restoring U.S. manufacturing. It is important to recognize that revitalizing American industry is going to be a very tough problem to solve -- tougher than healthcare. The country must set high expectations in this area and put solutions in place consistent with lofty goals, otherwise the effort will fail.

On the plus side, the Framework report does a good job explaining the importance of manufacturing and the need for new policy. It recognizes that government has a critical role to play and that the private sector will not solve this problem on its own. It acknowledges that the country must create a business environment that stimulates investment by the private sector in research and development and in manufacturing. It calls on Congress to make the R&D tax credit permanent. It highlights the important role of education and training, productivity improvements, the need for the Manufacturing Extension Partnership program and the importance of improved credit regulation and credit availability. It also focuses on the role of government in opening global markets and enforcing U.S. trade laws.

But in many ways President Obama's Framework falls short. There is much more to do.

For example, it is a mistake in policy development to assume that "we are unlikely to be able, nor should we aspire, to compete for all manufacturing jobs worldwide," as is stated in the document. There is an undertone in the report that U.S. manufacturing's future is in high-tech, niche areas. This is a false assumption. If this premise is accepted, then it will become a self-fulfilling prophecy. In order to support reasonable levels of employment and adequate defense capabilities for the country, all forms of manufacturing need to be revitalized and there needs to be a committed belief that this is possible to do. It is a lofty goal and adopting it will be critical to meaningful success.

The report makes no mention of the significant incentives needed to encourage investment in U.S. manufacturing. One of the most important for any manufacturing company is taxes. The corporate income tax system must be restructured so that investment is encouraged in manufacturing. In addition, a globally competitive border adjustable tax system that encourages exports over imports should be implemented. Without either of these measures, the United States will not succeed in rebuilding its industrial base. There must be an understanding that such a tax structure will significantly increase GDP and reduce trade deficits, and be revenue neutral at worst.

Another item missing from the Obama administration's agenda is the need for manufacturers have for a stable and globally competitive supply of energy. It is important that fixed, forward-price contracts for energy supplies be available to manufacturers so they can calculate accurate return on large capital investments in manufacturing. Creative solutions to the energy problem need to be found. The United States should consider new business models that involve partnerships between the private sector and government in order to meet these objectives, or even nationalize the energy generation and distribution industries if need be. The capital investments required to provide a clean, stable energy supply to the country are most likely too large and risky for the private sector to handle on its own. In order to significantly affect manufacturing jobs, the scope of this initiative needs to encompass all significant forms of energy generation, not just alternative energy generating technologies. Solving this problem would be a win-win for the U.S. economy, manufacturing jobs and the environment.

In addition, the government must change the manner in which new environmental regulations are created and imposed on manufacturers. They must be based on good science, be predictable, be globally competitive and represent a reasonable balance between costs and benefits. If the government wishes to set standards that place U.S. manufacturers at a significant competitive disadvantage globally, then it must find a way to offset the increased costs of compliance. "Regulatory certainty," a term used in the Framework, is a plus, but not if it places the U.S. manufacturing base at a significant global disadvantage.

The government must clarify its position on picking winners and losers. There are significant inconsistencies regarding this subject in the Framework. On the one hand, the report says that the government "has a poor track record in picking winners and losers." But then it recommends doing exactly that in a number of cases, such as nanomanufacturing, biotechnology to make "green" chemicals and advanced robotics. The U.S. free enterprise system's global advantage is that it can pick winners and losers. The government has a critical role to play as a financial partner in selected cases, but the system the government should endorse and fund is one that minimizes the government's input in how the subjects for investment are chosen. Examples of successful partnerships between government, universities and private sector -- wherein projects are selected primarily by the private sector -- are numerous. The government needs to expand funding for these programs, especially the Technology Innovation Program run by the National Institute of Standards and Technology. It is also important that the government understand the different roles played by universities and the private sector in conducting and then commercializing R&D. The primary role most often pursued by universities is basic research where government funding is of critical importance. The private sector's primary role is commercializing R&D. Although there are numerous partnerships that exist between universities and the private sector, it is a mistake to assume that universities should have the primary responsibility for creating manufacturing jobs related to new technology development and thereby receive most of the government funding allocated for this purpose. Government funding must be available to stimulate investment by the private sector in R&D per se, and its commercialization. It is great to see that the Framework recognizes the critical link between manufacturing and technology development, but carefully defining the government's role in this process is of critical importance to its effectiveness in restoring the U.S. manufacturing base.

Finally, government spending related to manufacturing should focus on creating long-term GDP growth, not short-term job creation. This will be money well spent since it will not increase government debt as a percentage of GDP, if properly done.

— Jack Shilling is former President of Allegheny Ludlum and Chief Technology Officer of its parent company, Allegheny Technologies, as well as chairman of the Specialty Steel Industry of North America -- jack.shilling@comcast.net. The Framework can be downloaded from http://www.whitehouse.gov/ sites/default/files/ microsites/20091216-maunfacturing-framework.pdf.

New Reports

Re-Balancing U.S. Trade and Capital Accounts: An Analysis of Warren Buffett’s Import Certification Plan says the so-called “Buffet Plan” as written into proposed legislation (S-3899) would steadily eliminate the U.S. trade deficit. Buffet proposed to give import certificates to exporters in exchange for each dollar’s worth of goods produced in the United States and sold abroad. “Warren Buffet’s plan for eliminating the U.S. trade deficit is as timely today as it was when first published six years ago,” according to report author Robert Scott.
If the plan were implemented “it would have large benefits for U.S. manufacturing industries and it would support a substantial expansion in exports and import-competing industries as well as employment in these highly productive sectors of the economy.” The United States, it adds, “would be entirely justified to implement the Buffet plan” under international law that states countries have the right to correct fundamental trade imbalances. “It is time to seriously consider such bold solutions to our longstanding trade problems,” says the study. “The trade deficit is a lurking time bomb which could explode into another financial crisis, derailing the recovery for perhaps a generation....It is time to seriously consider such bold solutions to our longstanding trade imbalances.” The study is located at http://www.epi.org/publications/entry/wp286/.

2009 Report To Congress of the U.S.-China Economic and Security Review Commission finds that China has ignored international calls to reform its industrial policies and continues to generate huge trade imbalances. “Beijing’s industrial policy was a contributing factor that led to the global financial crisis that affected the economies of rich and poor nations alike,” says the report. China continues to “encourage foreign manufacturing to relocate to China and uses strict capital controls to keep the value of the RMB artificially low….China continues to use trade-distorting measures in violation of its WTO commitments.”
China is shifting its emphasis away from the production of low-tech goods in favor of high-technology products. “China has consistently used a 17 percent value added tax as an instrument of industrial policy,” says the study. “China selectively rebates the VAT when a domestic manufacturer exports but imposes it on imports. The United States, on the other hand, does not use the VAT and is not allowed by WTO rules to rebate income taxes on exports. China’s VAT policy therefore places U.S. exports at a distinct disadvantage.” The 367-page report is located at www.uscc.gov.

The Unseen Cost: Industrial Base Consequences of Defense Strategy Choices from the Aerospace Industries Association finds that the Defense Department needs to start studying the health of the U.S. industrial base. The “Quadrennial Defense Review” takes for granted that the U.S. industrial base will be healthy enough to provide it with the latest technologies and systems required for military success. “This belief is no longer valid,” says the study. “A significant gap has developed between DOD’s view of industry as an always-ready supplier of military capabilities and how industry actually makes decisions on what capabilities to offer. And that gap is widening.” DOD does not realize that what it believes can be achieved may not be possible. With the military buying fewer systems, industrial companies are abandoning the defense industry due to their obligation “to increase efficiency and maximize shareholder value, which often drives industry to eliminate unprofitable assets,” says the study located at www.aia-aerospace.org/industry_information/reports_white_papers/.

Recovery Act Investments in Broadband: Leveraging Federal Dollars To Create Jobs and Connect America from the White House National Economic Council describes how $7.4 billion in Recovery Act funding will be used to connect rural areas to the Internet. The investment will “foster a digitally literate workforce that can compete in the new knowledge-based economy,” says the Council. The investment will also create tens of thousands of jobs by providing money to companies to hire workers to lay fiber in the ground or build towers for aerial connections. “Before and during construction, workers are also needed for engineering, design and planning aspects of middle-mile and last-mile infrastructure,” says the study. “Broadband service providers also create jobs indirectly through the purchase of equipment for broadband connections, such as networking equipment and construction machinery.” The report is located at http://www.whitehouse.gov/sites/default/files/20091217-recovery-act-investments-broadband.pdf.

The Impact of the Financial Crisis on Information and Communications Technology (ICT) from the OECD finds that employment in ICT manufacturing fell by almost 7 percent globally in the second quarter of 2009. “The analysis of longer-term trends suggests that the ICT sector is becoming somewhat less employment-intensive,” says the 36-page study located at http://www.oecd.org/dataoecd/47/22/43969700.pdf.

Highlights of Baby Boomer Characteristics is the first Census Bureau survey conducted of the Baby Boom generation in 13 years. It describes dozens of economic and social attributes of the population and compares them to adults in younger and older age groups. It is located at http://www.census.gov/population /www/socdemo/age/2006%20Baby%20Boomers.pdf.

Employer Costs for Employee Compensation finds that state and local governments spent an average of $39.83 per hour worked for total employee compensation in September 2009. That was far more than what workers in the private sector earned. Total compensation costs for private-industry workers averaged $27.49 per hour. For public-sector workers, wages and salaries averaged $26.23 per hour while benefits averaged $13.60 per hour. For private-sector workers, wages and salaries averaged $19.45 per hour while benefits average $8.05 per hour. The 23-page Bureau of Labor Statistics report is located at http://www.bls.gov/news.release/pdf/ecec.pdf.

The Economic Impact of Manufacturing In South Carolina finds that manufacturing remains the largest industrial cluster in the state, accounting for 21 percent of gross state product. The state’s 5,200 manufacturing companies represented only 4 percent of all the business establishments in the state, but they paid 20 percent of all wages and represent more than 15 percent of all jobs. Manufacturing jobs pay a lot more than most other jobs in the state. The 21-page report is located at http://myscma.com/associations/4797/files/ManufRept_FINAL.pdf.

The Impacts of the American Clean Energy and Security Act of 2009 on U.S. Agriculture says “when considered in conjunction with commodity price increases and revenues from offsets and biofuels production, the impact on net farm income is positive.” The 80-page report from the U.S. Department of Agriculture’s chief economist is located at http://www.usda.gov/oce/newsroom/archives/releases/2009files/ImpactsofHR%202454.pdf.

Acid Rain Program 2008 Progress Report finds that emissions of sulfur dioxide have declined by 52 percent between 1990 and 2008, to 7.6 million tons. This is below the statutory annual emission cap of 8.95 million tons set for compliance by 2010. “Sensitive water bodies in the east are showing signs of recovery from acidification,” says the report, located at http://www.epa.gov/airmarkets/progress/arp08.html.

Low-Carbon Jobs in an Interconnected World says “low carbon industries” have the potential to create tens of millions of high quality jobs, but that strong government support for these industries “will be necessary to realize” these gains. The report is from the Global Climate Network, which includes the Center for American Progress along with eight think tanks from around the world. The 52-page report is located at http://www.americanprogress.org/issues/2009/12/pdf/gcn_jobs.pdf.

The National Lakes Assessment finds that 56 percent of all the lakes in the United States are in “good” ecological shape, but the remainder are fair or poor. The Environmental Protection Agency study “marked the first time EPA and its partners used a nationally consistent approach to survey the ecological and water quality of lakes,” says the EPA. The survey is the first step in evaluating “the success of efforts to protect, preserve and restore the quality of our nation’s lakes,” added Peter Silva, assistant administrator for EPA’s Office of Water. Nitrogen and phosphorous are found at high levels in 20 percent of lakes, causing algae blooms, weed growth, reduced water clarity, and having an adverse impact on aquatic life, drinking water and recreation. EPA is conducing a similar assessment of rivers and streams. The lake survey is located at http://www.epa.gov/lakessurvey/.

Climate Change 2009 Science Compendium says there is a good chance the Earth’s temperature will increase by almost 7 degrees F. by the end of the century. The 76-page report from the United Nations Environment Program is located at http://www.unep.org/compendium2009/PDF/compendium2009.pdf.

2008 Findings of the Worst Forms of Child Labor says there are more than 200 million children in the world working illegally. “Almost 60 percent of these children are engaged in hazardous forms of child labor that could harm their safety, health and moral development,” says the 448-page report from the U.S. Department of Labor located at http://www.dol.gov/ilab/programs/ocft/PDF/2008OCFTreport.pdf.

List of Goods Produced by Child Labor or Forced Labor, a report required by the Trafficking Victims Protection Reauthorization Acts of 2005 and 2008, describes 122 goods from 58 countries that are being produced by forced labor or child labor in violation of international standards. The 195-page report from the U.S. Department of Labor is located at http://www.dol.gov /ilab/programs/ocft/PDF/2009TVPRA.pdf.

Brain Freeze: The Downturn’s Impact on R&D -- And What We Can Do About It finds that U.S. investment in R&D is facing its steepest falloff in 30 years. Without the huge investment made with the government’s economic recovery bill passed in February 2009, R&D spending would have declined by 7.4 percent in 2009. The Democratic Leadership Council report is located at http://www.dlc.org/documents/DLC_BrainFreeze.pdf.

Geography of a Recession is an interactive map of the United States describing the growth of unemployment. It is located at http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html.

Science & Technology Indicators: U.S. Becomes High-Tech Slouch

The United States is not much of a global player in the exportation of technology products, according to the National Science Foundation. “The U.S. share of high-technology exports declined from 21 percent in 1995 to 14 percent in 2008,” says the agency’s “2010 Science and Engineering Indicators” study. China’s global share of high-technology goods exports more than tripled during that period, from 6 percent to 20 percent, “making it the single largest exporting country for high tech products,” the National Science Foundation notes.

The U.S. trade deficit in high tech goods has almost quadruped since 2000, when it was $32 billion, to $120 billion by 2008. Meantime, China’s trade surplus in high-tech products increased by a factor of 10, from less than $13 billion in 2001 to $130 billion in 2008. The nine big Asian economies saw their surplus increase from $50 billion to more than $220 billion over that period, “an increase entirely due to an expansion of its surplus in information technology goods.”

The NSF report makes no comment about the economic repercussions of such trends. It is located at http://www.nsf.gov/statistics/seind10/.