Over 70 years ago in the middle of the Great Depression, my grandfather - a quite successful businessman in hard times - packed the family in a car, drove to Florida, and bought some farm land. Being very clever with his hands and no stranger to hard work, he knew if worse came to worse he could survive off the fat of the land. The exile didn’t last long before he was back in business again, but the point had been brought home, what it takes to survive.

In 2008 if I said I was heading to Florida to buy farm land, you’d look at me like I was crazy. And I pretty well would be. His was a 1930’s strategy for survival, a very good one, but not a strategy that has aged well. There would be no place to sell the extra produce for much money to pay for staples such as gas, additional groceries, toilet paper, insurance, taxes, et al. That world is quite gone.

I thought of that today when I ran across Obama’s new weekly speech, that we were going to start a program rebuilding highways and bridges, schools, and of course invest in new energy. (“New energy” is for example what we’ve been calling solar power for the last 35 years. It’s a kind of outdated term somewhate related to “New Wave” and “New Age”, two other dinosaurs from the 70’s). I have a hat tip I learned from the Japanese before I turn serious - how about we cover 1/3 of the US with concrete over the next 4 years? It would be roughly equivalent to what the Japanese tried to do in the 1990’s, would use up incredible amounts of energy in the process, would no doubt put quite a few people to work in menial tasks, and would be completely ineffective in spurring growth in a modern economy.

Our we could call China.

Let’s make it clear. China is not my big friend. The Chinese for all their ingenuity have shown some pretty decisive lack of integrity in business practices, government actions, and other ways. But the deal is, we took a decisive act over the last 15 years, which was to engage China as our primary manufacturing partner. And boy have they been good at it.

But does anyone remember our part of the deal? It was to 1) supply the money, 2) sign the contract, 3) market the goods, and 4) take most of the profit. Yes, it’s funny because my first posting at TPM was actually on the advantage of outsourcing that somehow got sidetracked. But just wanted to say, for the most part the Chinese are shit at marketing. Sure, maybe somehow they’ll catch up, but I don’t expect it to be soon. But boy are they good at manufacturing. Except…

If we let all those manufacturing plants close without a word, there’ll be not only unrest in China, but hell getting the factories set up running again. And don’t think we can take this business back in to do ourselves. We don’t even have the people, much less the right infrastructure at this point. Did I mention software houses in India? Same thing. These countries have given us great value on the dollar, especially as the dollar has been run into the ground - and now we’re going to revive our economy through building roads and fixing up schools?

Take a look at say the top 31 US companies - 10 are in software/hardware/telecom, 6 are (or were) banks and insurance, 5 are in pharmaceuticals, 4 are gas & oil, and then there are the usual suspects like Walmart, Procter & Gamble, etc. Much of what these companies do is virtual - services, software, risk acceptance, network routing. Even Walmart is known for turning a stodgy shelf-trade business into a fleet spry & efficient logistics organization - i.e. plannign and scheduling. And then there’s high-tech pharma, moving molecules around to make the next billion dollars.

So why exactly are we talking about construction? Our fixation on property and physical assets got us into this mess, it won’t get us out, and construction is hugely manpower and energy intensive for any gain to be derived - i.e. very low margin compared to a computer program that you write once and sell 50 million times. We excel in marketing, value-added ideas and services, customer service and the legal and political environment typically to support fair and efficient trade. Keep our eye on the ball.

We need to be ramping up our part of the equation, not some make-jobs hype. We need to be working together with China and India on how to make their production more efficient and affordable (yes, we own much of the important part), work with Europe to make sure their strong market can take our exports, work with our own country to improve execution, lower time for turnaround, improve our marketing proposition to consumers, keep up demand. In short, we’re the world managers for a huge global service and manufacturing economy, and we need to keep focused on that relationship. There is no local anymore, there is no driving down to Florida to escape it all. Stick where you are and work out the pieces. And for a guy who rose to power via internet-based marketing, on-the-ground activism and exploiting niche markets and opportunities, I’m rather amazed Obama’s heading this direction.

Of course we need new energy sources, but this is not the kind of research to bet on for turning around a global economy in the short term. Something like universal health care could actually save companies money and improve efficiency in the short run, but the transition to it will be rather tricky. But building more Bridges to Somewhere is not the crux of our problem. Note that we lost Fannie Mae and AIG, not Schlumberger and Bechtel (and we gave Halliburton/Kelloge Brown & Root more than enough business to last us through the decade).

So if we’re assuming change that makes a difference on a world scale, let’s assume it on the world stage.

Here are some items I wrote a few years ago regarding offshoring. While there are some mistakes there, the basic premises still hold. We gain a lot from our trading relationships. We just need to manage them well.

Offshoring Summaries

Gaining Through Trade

• Lower input costs - American companies gain from the typically good prices of the offshore exchange, and turn these lower costs into increased sales and/or profits. By selling a $1 Indian-made service for $4 instead of a $2 US-made one, I increase my returns by one-half. It frees up the other half ($1) to be used as I see fit - for stockholders, lower customer costs, R&D, diversified assets, and increased salaries. A Barbie may cost $20, but China keeps only 35 cents (Barboza, 2006).
• Lower consumer prices - if I pass lower costs from India on to the consumer, the consumer receives $1 in lower prices per purchase - equivalent to perhaps $1.50 in higher wages when considering taxes (federal, state, sales, social security, medicare).
• Companies are consumers too - if I pass on IT offshoring savings to WalMart, part of this appears in savings at the cash register, but the public may not appreciate this as offshoring benefits. These savings may pass to hundreds of non-IT companies served by one provider such as IBM. Most transactions are B2B, and for a non-IT business like a hospital or bank, lower IT costs mean better prices and better service.
• Saved time - lower costs means saving not just on the cost of the goods, but less time spent working to pay for the good. Ignoring taxes, if I work 40 weeks to pay expenses, and my costs decrease by half, I only have to work 20 weeks without giving up anything. Taking into account income taxes, I may fall into a lower percentage tax bracket.
• More options - lower expenses produce more options, such that “savings” may appear in choosing more enjoyable work over higher paying jobs, and for products, lower costs may mean more styles or colors, longer opening hours or other options that please the consumer.
• More interesting IT jobs - IT savings can be funneled into new on-shore jobs, both IT and non-IT. Even as IBM announced job shift to India, it announced it was hiring 5000 more stateside analysts (Lindsey, 2004). More interesting IT work tends to pay more and Bureau of Labor Statistics shows the percentage of high-paying IT jobs increasing even as the number of IT jobs increases
• Greater investment returns - if savings from Indian offshoring are passed on to investors, they reach much of the population, though small investors receive smaller returns. If these are retirement investments, such as the popular 401(K), they are not taxed. Half of American households and one of three Americans own stocks and mutual funds (ICI, 2005).
• Better use of Information Technology - lower IT costs means that SAP and IBM can scale down expensive solutions for SME’s (Small-to-Medium Enterprises), speeding up the adoption of better IT practices such as Supply Chain Management and Enterprise Resource Planning that make companies more efficient and competitive (Lohr, 2006). US hospitals plan on increasing their annual IT expenditures between 25-33% annually to better implement barcodes/RFID, electronic records, computerized orders, telemedicine, et al. (Hospital Materials Management, 2006).
• New markets - India and others will purchase more US products as their living standards improve, though this is not a primary goal in most off-shoring, and its contributions may be more modest than some would expect. For 2003-2005, US exports to India went from $5 billion to $8 billion, while imports went from $13 billion to $19 billion. (Shrinivasan, 2005).
• MNEs - Multinational Enterprises are twice as good at bringing offshore revenue stateside as non-MNEs (Dunning, 1997).
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Factors Pointing to Continued Domestic ICT Growth

• Job Statistics - even during the post-2000 recession and slow recovery, the number of IT jobs continued to grow, if slowly, while average salaries kept rising (BLS, 2005a; BLS, 2005b; Vegso, 2005b)
• Job Projections - 5 of the top 12 fastest growing professions in the US Bureau of Labor Statistics’ 10-year estimates are in IT, with these jobs being among the highest paid. IT jobs should increase by 1 million, or 33% over the decade starting in 2004 (Hecker, 2005).
• Retirement: 800,000 of 3 million US ICT employees are over 55, while 400,000 are over 60 - many replacements will be needed over the next decade (NSF, 2006)
• Security - as ICT usage grows, network and computer security problems and requirements increase, many of which cannot be handled remotely.
• Sarbanes-Oxley - increased financial reporting requirements will force adoption of more IT systems for data gathering and handling.
• Microsoft Vista - the long-awaited next version of Windows affecting 95% of computers will be out around the end of 2006, and already the work has started to transition operating systems and application software over a several year period.
• Medical growth - on top of impending Baby Boomer retirement, the medical field is implementing digital records, RFID intelligent labels, computerized orders, telemedicine and sharing information. Hospitals surveyed plan to increase IT spending 25-33% near-term (Hospital Materials Management, 2006). Sixteen of the 30 fastest growing jobs are health related (Hecker, 2005)
• Military, homeland defense, anti-terrorism and intelligence work - most areas involving sensitive data will not be offshored, and these budgets continue to grow
• Mobile phones and home media - new fields require new applications, and most small startups develop their solutions with onshore programmers.
• SME’s - small and medium enterprises have been slower in adopting ICT improvements, so lower costs mean more ICT use and increased onshore IT jobs.
• Acronyms - be they AJAX, SOA, CRM, ERP, even if not completely successful, they generate a significant amount of effort and onshore jobs in trying to make them work.
• Increased offshore management and integration - offshoring is not simply “ship & forget”. On-shore ICT management will continue to grow, reconciling off-shore efforts with on-shore activities.
• Global communications - offshoring, voice over Internet, faster mobile phone data networks and other capabilities require continued expansion of domestic communications capabilities.
• On-line education - multimedia instruction, improved archiving and retrieval of documents, telecommuting and collaboration software are some of the requirements of the growing remote-learning and on-line industries.
• Backend Systems - many people think of shrink-wrap software when they think of programming, but more code goes into letting businesses talk to each other, much of it handled onshore with business-specific knowledge.
• Niches - many small programming tasks are uneconomical to offshore, and many require specific local information not found overseas.
• Garages - successful companies like HP, Apple, and Google started in garages, proving good ideas and hard work can succeed in IT without resources and infrastructure, while the US continues to innovate in IT.
• Software is not Manufacturing - software often requires little investment and little hardware, not factories. Software doesn’t wear out, but constantly requires innovation - new versions, ports to new machines and related utilities - so jobs are gained maintaining old systems while designing the next.
• Programming is not Manufacturing - if US Steel lays off, foundry workers leave town. If Oracle lays off, people start companies, go to work next door and telecommute. Programmers can shift to unrelated programming areas with relative ease.
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Update: I should have titled this “We’re All Marxists Now” or perhaps more accurately, “We’re All 1930’s Keynesians Now”. I’m reminded of all of Ataturk’s dam building projects, the huge Kruschev block houses - just pour concrete. Mao had The Great Push Forward where every peasant was making his/her own pig iron in the back yard (millions died in the ensuing famine). Pol Pot had “return to Year Zero” - everyone back to the rice paddies - full employment, manual labor at its finest. Yes, we can race towards the bottom of the pyramid, every American manning a shake machine or a maquiladora worker or out busting our backs on a road crew.

Think for one about currency velocity - how money turns over. Money for construction is slow money, and let’s just say if this is the only level of jobs we’re capable of growing, we should be ashamed.

Now take an example of Amazon.com. 16,000 workers, estimated revenue for the year $17 billion, profit of roughly $500 million - almost $30K profit per worker - much of it on growing exports. How efficient is it to push growth on a company like Amazon vs. pouring concrete? How easy is it to export our concrete business? How easy is it to increase productivity of an Amazon employee vs. a concrete pourer? Note that Amazon has introduced the Kindel for portable reading - what kind of increased efficiency effect will that have on the rest of our & the world’s economy? Compare that to whatever minimal multiplicative effects from construction? Certainly we need physical infrastructure, but let’s not worship it like the throwback days of early civil engineering, building the Hoover Dam and Empire State Building.

Economics has changed as much as the world has changed. Catch up.