GE's Immelt Thinks for Himself: U.S. Not Shifting to a Service Economy 39 comments
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In his annual letter, General Electric CEO Jeffrey Immelt told his shareholders that he no longer believes the myth that the United States economy is shifting from manufacturing to service. Here is the key paragraph from what he wrote:
I have also learned something about my country. I run a global company, but I am a citizen of the U.S. I believe that a popular, thirty-year notion that the U.S. can evolve from being a technology and manufacturing leader to a service leader is just wrong. In the end, this philosophy transformed the financial services industry from one that supported commerce to a complex trading market that operated outside the economy. Real engineering was traded for financial engineering. In the end, our businesses, our government, and many local leaders lost sight of what makes a nation great: a passion for innovation.
Immelt is no longer the victim of one of the rationalizations given by American economists in order to justify not doing anything to balance trade. The ink was not even dry on Catherine L. Mann's 1999 book, Is the U.S. Trade Deficit Sustainable?, which argued that our trade surplus in services would compensate for our growing trade deficit in goods, when America's trade surplus in services began to shrink as a percentage of our GDP.
Jeffrey Immelt apparently believed this rationalization when he made his disastrous foray into the financial services business. He didn't realize that the financial boom was not sustainable. It was the result of our financial industry being middlemen for the foreign loans pushed on the United States by mercantilist governments in order to keep the dollar strong, so that they could take market share from American producers in world markets.
Jeffrey Immelt is only the most recent of our business leaders to think for himself on this issue. He was preceded by Warren Buffett, Talahassee businessman Devoe L. Moore, Milwaukee businessman John Torinus, Buffalo businessman Jack Davis, Texas businessman Dick Alexander, and former Chrysler CEO Lee Iacocca.
Our business leaders can no longer afford to let ivory tower economists let foreign mercantilist governments steal our remaining industries. It's time that they joined together to demand balanced trade.
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This article has 39 comments:
The myth he rejects is that creative finance can *successfully* supplant manufacturing industries, a realization that is long overdue.
It's up to business leaders like Immelt and others to return corporate emphasis from the financing industry to actually making things.
-- R
polar ice has already diminished at a shocking rate. the swamping of US coastal cities will be a catastrophe the likes of which we have never experienced.
Here are some of the other reasons why U.S. manufacturing has trouble competing:
1. Inadequate funding of U.S. innovation (basic research)over the past 8 years;
2. Neglect of U.S. science and math education;
3. $1 trillion plus spent on the Iraq War that could have gone to funding the above 2 items;
4. U.S. immigration policy which is leading to a "brain drain",particularly of those people we have educated in the best universities in the world at taxpayers expense;
and
5. U.S. addiction to foreign oil which has led to an outflow of U.S. wealth to many countries that hate us (and even support terrorism) and,until a decline in oil prioes over the past 6 months, significantly increased production and transportation costs for U.S. manufacturers.
Atlasman and others can complain about a prospective carbon tax and card-check laws. However, U.S. manufacturers are already paying for CO2 emissions in their healthcare costs. The attack on the card-check law by the U.S. Chamber of Commerce is bogus because the proposed legislation does not prohibit the secret ballot.
By the way, Americans ahould not allow the current "cheap" oil to lull them back into a sense of complacency as the oil lady in the American Petroleum Institute's TV ads seeks to do. We all have a lot ot worry about, including U.S. manufacturers. Here are a few troubling developments: reported Chinese stockpiling of oil and efforts to gain control of foreign petroleum resources; China and India's increased demand for energy in the future; and the advent of peak global oil production.
Pick up the Statistical Abstract of the US, and you will see that the US is a service-based economy, and it has been for the past several decades.
We can't all sell each other insurance and flip hamburgers.
On Mar 13 08:39 AM jaume ribe, spain wrote:
> In my opinion it is good the US be a prosperous services' economy,
> but, who thinks it is refraining forom still being the first manufacturing
> economy in the world ? Hope so for many years (unfortunately I'm
> submitted to the ECB)
> 1. Inadequate funding of U.S. innovation (basic research)over the past 8 years;
I would have taken this seriously if you had not thrown in the "past 8 years". Can't you Bush haters leave it alone. this article is about manufacturing, not innovation so I will leave this deabte to another article. Needless to say I believe innovation is fine (PS - I worked for AT&T Bell Labs and know something about innovation)
> 2. Neglect of U.S. science and math education;
Actually I agree with you here. It really has nothing to do with manufacturing, but feel free to grind away with you ax on this subject.
> 3. $1 trillion plus spent on the Iraq War that could have gone to funding the above 2 items;
Actually, this money would have been better put to use not borrowed from the Chinese in the first place or given back to the tax payers. You really have an ax to grind.
>
> 4. U.S. immigration policy which is leading to a "brain drain",particularly of those people we have educated in the best universities in the world at taxpayers expense;
Agree with you but has nothing to do with US mfg issues. There are plenty of talented people that can operate US factories, just not a good business case to justify their use.
> 5. U.S. addiction to foreign oil which has led to an outflow of U.S. wealth to many countries that hate us (and even support terrorism)
> and,until a decline in oil prioes over the past 6 months, significantly
> increased production and transportation costs for U.S. manufacturers.
Actually, this cuts both ways. For some industries higher transportation costs improves their economics by making it more expensive for competing stuff to be shipped from across the globe.
> Atlasman and others can complain about a prospective carbon tax and
> card-check laws. However, U.S. manufacturers are already paying
> for CO2 emissions in their healthcare costs. The attack on the card-check
> law by the U.S. Chamber of Commerce is bogus because the proposed
> legislation does not prohibit the secret ballot.
>
> By the way, Americans ahould not allow the current "cheap" oil to
> lull them back into a sense of complacency as the oil lady in the
> American Petroleum Institute's TV ads seeks to do. We all have a
> lot ot worry about, including U.S. manufacturers. Here are a few
> troubling developments: reported Chinese stockpiling of oil and efforts
> to gain control of foreign petroleum resources; China and India's
> increased demand for energy in the future; and the advent of peak
> global oil production.
I do not disagree with some of your issues, but they really have nothing to do with the problems of US mfg. Perhaps you should spend some time studying finance, or better yet work for a manufacturer and you will better understand the real issues. I only complain because I actually do care and want full employment and even want to contribute to full employment by hiring people, but not if it is unprofitable. That is how capitalism works. If you do not like it, study socialism.
I am glad that you agree with many of my points. In fact, many experts, several of them who run manufacturing firms like Intel, are on the same page. Not to mention the Council on Competitiveness.
because of cheap labor, no taxes.Thats why thest foriegn countries are money rich today
and no jobs in America.and half of America is on welfare they don't work and the ones that do has to support them .It not the goverment money its the working peoples money. We are in trouble until we give our companies a tax break a reason to Come back and stay here.And get healthy people off of welfare and let them contribute to the taxes. So the working people will have money.
So it's about time the US just got its act together and made health care insurance (not necessarily delivery) a public good. This would increase the economy of scale and merge the dilemma of Hippocratic services and public policy with proper accounting and budgeting. What a boost in confidence to battered American businesses and households at a time when everyone is craving security.
1) Americans will have the math and science background to continue leading innovation.
2) Americans will be educated enough to not vote for the morons who wind up in Washington year after year.
3) Americans will commit few violent crimes.
4) America will produce visionary leaders rather than followers.
"The company has six assembly and test sites worldwide and is building a seventh, all of them outside the U.S. Assembly and test sites outside the United States are located in Shanghai, China; Chengdu, China; San Jose, Costa Rica; Kulim, Malaysia; Penang, Malaysia; and Cavite, Philippines. An assembly and testing site in Ho Chi Minh City, Vietnam, is under construction."
Now do you honestly think more funding for the US education system, bad as it is with its unionize work force, is the root cause of Intel outsourcing 100% of their assembly and test factories? Or perhaps do you think it is due to all of the direct and indirect costs associated with operating them within the US. Focus on relieving the financial burden of operating a factory in the US and you will solve this problem. I bet if you work hard enough, you can come up with a rationale for why it is Bush's fault.
On Mar 13 10:12 AM Tim Miles wrote:
> Atlasman:
>
> I am glad that you agree with many of my points. In fact, many experts,
> several of them who run manufacturing firms like Intel, are on the
> same page. Not to mention the Council on Competitiveness.
>
30% of our population is incapable of "higher learning" or advanced math and science. Decades of rewarding procreation has created scores of bad genes in our society. I know it is not PC, but reality is reality.
10-20% of the rest of us don't WANT to, Throwing money at education & requirements won't change that.
The family supporting, mega-consumer, creating jobs that were off shored are straight from the above two groups. People in those groups were some of the world's best CUSTOMERS. Now they are broke and the credit that was freely gifted has been taken away.
Education? What a joke. Every dime spent on education ends up in union benefits and pay. So much so that in states like Michigan, teachers are routinely making over $50 an hour worked in pay, PLUS the best benefits and pensions. Yeah, give them more money.
Two things, and two things only will elevate our economy and make many of the Utopian wet dreams happen.
1. Good paying jobs for the ignorant and/or lazy masses. If we don't find work to sustain them, they all will feel just fine sucking the government (my) tit and not producing anything. Again, not PC, but true. And you all know it
2. Restore common sense to the credit market and stop banks from punishing customers that PAY THEIR BILLS.
Ever since the 2005 bankruptcy/financial laws passed by fools in DC, credit has been halted and rates and payments increased to unsustainable levels. Mandatory minimum increase cost us $50 BILLION a MONTH out of income immediately upon taking effect in 2007.
Banks are taking PERFORMING notes away from paying commercial customers, forcing otherwise sustainable businesses into bankruptcy and closure--the window company in Chicago was NOT a unique case.
Everything and anything else is BS window dressing to keep us shut up while the pillaging continues.
On Mar 13 01:18 PM Aristophanes wrote:
> A major reason why American companies have competition issues is
> the intractable health care problem. The administrative drain on
> a company's bottom line is staggering. Get that yoke off the back
> of private employers and efficiencies will increase significantly,
> especially in manufacturing. Why is a medium-sized manufacturer burdened
> with the process of being sophisticated shoppers for health care.
> It's not their business.
>
> So it's about time the US just got its act together and made health
> care insurance (not necessarily delivery) a public good. This would
> increase the economy of scale and merge the dilemma of Hippocratic
> services and public policy with proper accounting and budgeting.
> What a boost in confidence to battered American businesses and households
> at a time when everyone is craving security.
I wouldnt put much stock in Immelts words. They will keep him around until a better time arrives to change the CEO in the next 12 months. As a shareholder following his remarks over the past year, I think I would be inclined to disregard anything he has to say.
With regard to Manufacturing in the US we need to make an effort to build manufacturing but it wont be easy. Some issues
1) In the US talented people dont want to work in manufacturing.
2) We dont have a work ethic in the US. As an example huge quantities of employees fail to show up for work on a regular basis. Many when they show up are more interested in complaining. Believe me when I tell you that an up front look isnt a pretty sight
3) US Labor laws threaten long term productivity. Huge portions of the US workforce are currently on Leave of Absence (ie 15 - 25% in many cases). That was before the new expanded FMLA rules that recently took effect. It has a huge effect.
4) US Secondary Education is a failure but it is something that can be overcome.
As an example if a manufacturing facility was opened in India it could be staffed by College Graduates who would be motivated to excel. That is exactly what happened with many call center jobs. In the US talented college grads would not consider working in a call center even in this economy.
I am bullish on US business and US workers who have a college degree or specialized training. However we have some challenges to overcome.
Nobody is pointing out one unique aspect of American tax policy: US citizens are taxed based on global income, while everyone else in the world taxes based on source of income. An American goes abroad, and the American pays US taxes on income earned abroad. Japanese, Chinese, German, British, French, etc. all get a massive tax reduction by going abroad and bringing trade back home.
Eliminating the citizenship-based taxation in favor of source-based taxation - like everyone else in the world - would encourage companies to properly allocate costs and income, to cease hiring "anyone but an American" for a foreign posting (Americans cost more if you try to equalize taxes). Eliminating citizenship-based taxation also empowers small/midsized US companies working abroad (consultants) - the sort of folks who are generally the main drivers of big-ticket sales in most of the world.
By the way, health care issues also count (everyone's "global insurance" omits the US, because insuring in the States costs 2-3x what it does for the rest of the world), but ultimately, US exports suffer because few US people are out of the US making exports happen.
On Mar 13 02:29 PM TeresaE wrote:
> My god, liberal thinking colors our world. Here are a few facts.
>
>
> 30% of our population is incapable of "higher learning" or advanced
> math and science. Decades of rewarding procreation has created scores
> of bad genes in our society. I know it is not PC, but reality is
> reality.
>
Thought provoking post. I didn't read Immelt's speech but I have a few ideas about the shift from manufacturing to services. Just a little over a century ago most manufacturing was still craft intensive which meant many people involved in the production of goods. Goods were very dear as their labor content was very high.
For the past century, as industrial processes were automated through countless millions of process innovations worker productivity soared and the labor content of goods fell. Goods became less dear. And the simple manufacture of goods became even less dear. Returns from manufacturing fell. This fall in returns led to industry consolidation and the drive for economies of scale. The end result has been falling manufacturing employment and rising service employment.
Most service employment flows directly from the goods producing sector. From accounting, financial management, marketing, retailing, wholesaling, advertising all of these sub specialties speed the flow of goods to consumers. Each service specialty has seen a relentless onslaught of process innovation and increase in worker productivity. Employment has risen here largely because of population growth and new household formation. Where pure service employment (non-goods producing related) has exploded has been healthcare but since it is largely a monopoly, employment can increase and worker productivity can fall without affecting profitability. For example the dispensing of self-administered drugs for inpatient hospital stays routinely carries a cost equivalent to the rate of compensation of a neurosurgeon.
Simple manufacturing cannot add many jobs because production innovations do not allow it to occur. But why do we import so many goods? Paul Krugman solved part of the riddle of trade between developed nations that might exchange similar goods. I know I eat belgian cookies made in Belgium. And I am sure there is a Belgian with a taste for oreos made here. We could simply exchange recipes but marketing and product placement make it more profitable for this cross country trade. Other explanations are higher efficiencies of one company selling in another country of similar makeup and another resting strictly on consumer brand preference in yet another country. In such a free trade environment with many competing factors imbalances are sure to arise.
I would be very sceptical of any notion that manufacturing employment can be increased through some crash program of encouraging math, science and engineering enrollment. We certainly import this talent on H1B visas today and manufacturing employment continues to shrink.
Just a side note China's manufacturing sector is shedding workers as process innovations invade the factory floor.
Should we be concerned with our trade deficit in goods? I don't think so. If the deficit were to be paid in other currencies other than the US dollar our deficit would evaporate in a blinding flash. It is simply the willingness of our trading partners to accept US dollars that perpetuates the deficit. It is now so large and they are so dependent on it to sop up their excess capacity that it is their problem and not ours.
As to relative exchange rates I think you'll find that during sustained dollar strength US manufacturers locate plants overseas and during sustained dollar weakness there is more plant expansion domestically.
Best, Steve
Maybe we are waking up. There is no free trade out there. It is all managed and we have not managed well.
I was especially impressed with the suggestion by Bhensley: "One thing that the United States government could do to defend intellectual property rights of American companies ... we could slap an appropriate import tax on goods that are produced in the China, Taiwan, India, and Koreas of the world and then share that money with the American companies (Mocrosoft and Merck as example) to deter the piracy occurring now."
Of course, we know that, instead, President Obama will likely continue Clinton and Bush's policy of permitting or even instigating lawsuits in American courts that destroy our Microsofts and Mercks.
Several readers challenged my premise that U.S. manufacturing is in decline. But the statistics are indisputable:
1. <i>Agriculture and Manufacturing</i>... When we mechanized agricuture, we didn't turn into a net importer of agricultural goods.
2. <i>Employment and Level of Technology</i>. Many of our trading partners, including Canada and Japan, have similar levels of technology in their manufacturing operations, but have not been experiencing our rapid decline in manufacturing employment.
3. <i>Fixed Investment</i>. Net investment in American manufacturing has been near zero in recent years. We aren't building new modern factories.
Several readers suggested that there is a strong role of American education in our decline. The question is: "Did our decline in manufacturing employment opportunities cause fewer Americans to choose engineering carieers or did the decline in our educational system cause the decline in our manufacturing?"
America continues to have the best engineering universities in the world and American youth continue to demonstrate an excellent work ethic on athletic fields. It is clear that the decline in manufacturing employment opportunities is responsible for the decline in education, not vice-versa.
Senator McCain lost the third presidential debate when he said that he would send unemployed manufacturing workers to community college to learn new trades while Senator Obama said that he would deal with Chinese unfair trade practices. Since the election, Obama has adopted McCain's education-only strategy, as suggested by his ivory tower economic advisor, Lawrence Summers.
It is pointless to blame President Bush. He was only carrying on Clinton's strategy, just as Obama is carrying on Bush's strategy. America's strategy since Clinton has being made in America's ivory towers by economists who are free-trade ideologues.
Actually, both camps are probably right wrt to US manufacturing. I saw a chart a couple months ago showing manufacting steadily increasing in dollar terms over the last decade. However, anybody with a heart beat has seen manufacturing leave the country over the last two decades. In my home state the textile and furniture industry has all but left decimating the local economy. I personally have been involved with high-tech assembly factories leaving since the 90s. That is how I knew about Intel's situation. This apparent disconnect is due to manufacturing getting more and more concentrated in fewer companies and industries. Boeing skews the data the most.
Some people rationalize this by saying US doesnt want these lost manufacturing jobs. US only wants extremely high-tech manufacturing. This is absolutely not the case. If you knew the people that worked on the line you would be heart broken by this change. These people made a reasonable middle class living making $12-25/hour in assembly plants and are now making $7-10/hr in Walmart.
The good news is that these jobs can be brought back if the economics improved. The bad news is the politics of these changes would never happen. First, labor costs would have to be brought down which means no unions. Second, taxes for hiring workers would have to be reduced. I have never understood why business owners have to pay taxes to hire people. Lastly regulatory and other hidden taxes would have to be reduced so no more Sarbanes Oxley. There are other feel-good laws that do more harm than good but I will leave that fight out of this thread.
This problem can be solved, but not by the liberal policies being pushed by Obama and crew. More taxes, carbon taxes, and higher union costs only take a bad situation and make it worse. This is purely a business issue. Education has nothing to do with it. We have the people who have the desire. Unfortunetly no matter how hard you try, the business case just does not work.
seekingalpha.com/artic...
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On Mar 14 11:56 AM Howard Richman wrote:
> Boeing is currently being targeted by China. If we don't start balancing
> trade soon, we'll lose their commercial aircraft manufacturing business
> soon. See my commentary:
>
> seekingalpha.com/artic...
On Mar 14 08:20 AM Howard Richman wrote:
>
> 2. <i>Employment and Level of Technology</i>. Many of our trading
> partners, including Canada and Japan, have similar levels of technology
> in their manufacturing operations, but have not been experiencing
> our rapid decline in manufacturing employment.
Howard, Canada and Japan have experienced a decline in manufacturing employment. Since 1991 Japan's manufacturing employment as a percentage of the labor force has fallen from 24% to 17% and Canada's has fallen from 16% to 11% and the US has fallen from 19% to 11%. Total manufacturing employment has also fallen in absolute terms in all three countries. The same story is true in Europe. The data are indisputable all industrial nations are shedding manufacturing jobs. China and India will soon follow our lead as services begin to dominate their economies.
Sources: CANSIM, Canada; BLS, US; E-Stat, Japan
The question comes back to my original point that the value of manufacturing is in decline worldwide. It is easier to transform raw materials and labor into goods than at anytime in our history. Labor inputs will continue to fall and labor productivity will continue to soar. The robotics and information technology industry will continue to transform manufacturing into an information intensive sector. Services will dominate. Immelt is living in a fanatsy world.
I hope you will respond to this note. And debate this point fairly. Then we can proceed to labor force issues like training and education.
I am not disputing that manufacturing employment has been declining worldwide due to greater efficiency. I am pointing out that the U.S. manufacturing is in decline relative to other countries with a similar level of technology, such as Japan and China.
The statistics that you site make my point. Go back to 1965, and the U.S. decline is even more evident. In 1965, the United States had a larger percentage of its civilian workforce employed in manufacturing than Japan (27.0% compared to 24.8%). Canada had a lower perentage than both.
I think the problem we're dealing with is not just the decline in our manufacturing employment. That would probably happen in any case as productivity rose just as employment in agriculture declined as farm productivity rose. There were some very unpleasant dislocations then as well but we don't obsess about our lack of good paying jobs in agriculture.
The problem that threatens our economy is not what we import and export, it's that there is such an imbalance between the two. This imbalance is going to correct itself sometime. We either come up with ways to control the correction or we wait for the earthquake that will cause it to correct in ways that could be very unpleasant.
I almost laughed when I read that the Chinese premier was worried about all the US treasuries they own and was hoping President Obama made sure we maintained our creditworthiness. Granted, we can destroy our currency all on our own, but one sure way to destroy it is for China to continue to suck dollars out of our economy year after year until it collapses. If he seriously wants us to maintain our creditworthiness, he would make sure our trade was balanced. Otherwise they will end up with trillions of useless pieces of paper while we have all these keen electronics, clothes and toys.
One way to control the correction I found interesting is Warren Buffet's idea of import certificates(IC's) whereby anyone who wants to import something has to buy IC's from someone who's exported the same value of goods or services. Obviously you wouldn't have a strict 1-to-1 on all imports and exports but maybe you could apply it in exteme cases like China, Japan, India when the imbalance gets above a certain level. It's been said that these wouldn't be disallowed under our trade agreements. Some have complained that it would lead to higher prices for consumers but any imbalance that goes on for too long will extract a much higher price indirectly. They also allow for flexibility in our trade, ie., if we're really bad in one area we can make up for it by exporting more in another area or industry. I'd be interested in hearing others' considered opinions about IC's.
If you click on Buffett in my article, you'll find a link to his original Import Certificates commentary. If you click on Dick Alexander's name, you'll find that he also endorsed Buffett's plan. My father, son, and I do so also in our writing at tradeandtaxes.blogspot...
Howard
On Mar 15 01:50 AM Howard Richman wrote:
> Steven H.,
>
> I am not disputing that manufacturing employment has been declining
> worldwide due to greater efficiency. I am pointing out that the U.S.
> manufacturing is in decline relative to other countries with a similar
> level of technology, such as Japan and China.
But their decline is almost as great as ours and they are export oriented.
>
> The statistics that you site make my point. Go back to 1965, and
Well, that's convenient as a start date. Japan was just taking off as a net exporter having rebuilt and trained a generation of engineers and business people. Of course their manufacturing employment would surge.
> the U.S. decline is even more evident. In 1965, the United States
> had a larger percentage of its civilian workforce employed in manufacturing
> than Japan (27.0% compared to 24.8%). Canada had a lower perentage
> than both.
>
The US after 1965 would soon be mired in a state of obsolete manufacturing from steel making to automobiles. It wouldn't turn around until the mid 1980s. New factories required fewer workers but industrial output surged. From the mid 1980s to 2001 manufacturing employment remained constant at about 17 million while falling as a percent of the workforce but output grew by almost 100%. I would say that is a healthy manufacturing sector.
Output has continued to grow since 2001 while manufacturing employment has fallen at a slightly steeper rate. Is this a bad thing? No! It is the continuing transition to a service economy hastened by globalization. Now have American managers made mistakes in their chase of global markets, undoubtedly but American labor has made horrendous errors. Just witness the UAW as it circles the drain. But American consumers have won from lower prices. That allows more disposable income available for other consumption. Wealth has increased from trade as measured by increases in consumer welfare.
If the dollar weakens after global financial markets have stabilized then there should be an increase in manufacturing here.
Foreign Direct Investment in 2007 was $237 billion. In the first 3 quarters of 2008 that investment was $250 billion That is investment in plant and equipment. That is investment in future production here.