Thursday, April 20, 2006

 

Can Saving Jobs Be a Bad Thing? Old vs. New Economic Thinking

On April 19, 2006, Michigan announced its jobless rate rose again to 6.8%. At the same time, Utah’s jobless rate fell to 3.4%, close to an historic low. Why does Michigan’s jobless rate continue to climb while Utah’s continues to fall? Many, even among the experts, point to problems such as the single business tax and restrictive labor laws in Michigan as roadblocks to growth. But it’s not these “old economy” laws per se that are the problem. True enough, badly designed taxes and strict labor laws create perverse incentives that restrict growth, but the real problem is that Michiganians are mired in “old economy” thinking, second-stage economy thinking, to be exact.

The world economy has witnessed several critical economic transitions. The first was from agriculture to industry in the late 19th and early 20th century. The second moved from raw materials processing to final goods manufacturing, which took place in this country beginning in the early 1920s and continuing through the late 1980s. Michigan led the world into this second-stage upgrading phase. Breakthroughs in manufacturing processes, technological progress, facilities and infrastructure, and organizational management created the standard for the rest of the world to follow.

And follow they did. As early as the late 1970s Japan had begun to improve on U.S. manufacturing processes. By 1990 most Americans were afraid Japan would simply buy all of our assets. The common thought was that Japan had succeeded economically where they had failed militarily a few decades before.

But then a strange thing happened. Japan began to lose its manufacturing leadership to upstart countries like Korea, Thailand, Singapore, Malaysia, and Indonesia. More surprising, less than a decade later, these countries began to lose their manufacturing edge to China and India.

But not everyone stood around, wrung their hands, and wailed about saving jobs. In Singapore, the government recognized that wage rates had climbed far beyond those in the new manufacturing powerhouses of China and India. To compete head to head, Singapore would have to artificially restrict its wages, a move certain to create severe political problems. The answer? Move out of labor-intensive manufacturing. Begin the process, as quickly as possible, to third-stage industrial upgrading, a stage dependent on knowledge creation, science, technology, and innovation. To create the appropriate incentives, the Singapore government taxed low skill labor. Think about it. The government penalized businesses for every low-skill worker and job they hung on to. Compare that to Michigan. Governor Granholm argues that we’re “a community putting our foot down and saying we won’t lose any more [low-skill] manufacturing jobs to Mexico or China.” As a result, instead of penalizing low-skill firms, we give them incentives to stay: $43.9 million to be exact—a great example of being mired in “old economy” thinking.

What would “new economy,” third-stage thinking look like? Here the buzzwords include research parks, venture capital, one-stop business setup shops, technopreneurship and retention of knowledge workers. But isn’t everyone thinking about these things? The good and bad news is that these things are interrelated. One leads to the other. So where to start? In our federalist, highly politicized economy, the answer is probably not at the state level. Taking a cue from Singapore, Michigan should instead take its 13 “smart zones” and attach them, each with a specific industrial mandate (alternative fuels, homeland security, advanced automotive, etc.) and geographical boundary (a la research park), to one of the state’s universities. A public-private partnership should then be created as a local one-stop business creation shop to facilitate business entrepreneurship and relocation to the specific geographical site. Such a shop would also function to facilitate investment, especially zero-stage seed financing. This one-stop shop must have complete autonomy within its geographical area, including tax and labor considerations and incentives, unencumbered by city, county, or state oversight.

At the same time, a public-private R&D and innovation center could be formed between the university and private firms. The center would be the connection point for university-owned and created science and technology. Faculty and students would be assigned to the center from across the university and across disciplines, including business, science, politics, and technology. Students could be assigned early in their academic careers so that by later years and into graduate school they would provide value to member firms. Firms would become members by buying shares or interests in the center. Such interests would entitle firms to jointly created intellectual property and licensing rights, access to students (including the inside track on hiring the best and brightest upon graduation), and an ability to shape new academic research agendas. Such a configuration would keep smart students in Michigan, encourage investment, drive entrepreneurship, and facilitate the transfer and assimilation of newly created knowledge.

This is just one of many possibilities and it admittedly does not address all of our problems. But whatever we choose to do, the first step in figuring out how to transition from second-stage to third-stage industrial upgrading will be to think more about creating future possibilities than saving past triumphs.


This page is powered by Blogger. Isn't yours?