How important is manufacturing to US tech industry?

What can be done about the dismal tech employment picture in the US? Writing in the Washington Post, Robert J. Samuelson says that rising corporate profits should be a good omen for increased hiring, but in fact that’s not happening, with the US having recovered 11% of the 8.4 million payroll employment jobs lost between late 2007 and late 2009.

Samuelson, addressing employment in general and not just in the tech industry, suggests several reasons for this trend: stock-option-based compensation for executives makes them hesitant to take on new costs, labor unions have become weaker, productivity per worker has increased, and US workers face off-shore competition. He adds that although paring expenses and hoarding cash might appeal to individual firms, the consequence of most companies adopting such measures is detrimental to the economy. Samuelson doesn’t offer any recommendations.

Indeed, there are reasons to suspect that an improving economy won’t bring back all American jobs that have been lost. A year ago, I cited a prediction that we will see an increase in the number of people without marketable skills in the emerging economy.

Thomas L. Friedman in the New York Times recommends we get such people marketable skills through improved education and put their newly acquired talents to work in job-creating startups. But Andy Grove takes exception: “Friedman is wrong,” he writes in Bloomberg Businessweek. “Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production.” During that process, he writes, “companies scale up,” working out design details, learning how to make things affordably, building factories, and hiring thousands of people. Scaling, he says, is “necessary to make innovation matter,” but unfortunately it’s no longer happening in the US. Today, he says, the US computer industry employs about 166,000 manufacturing workers (lower than in 1975), compared with 1.5 million employed in the computer manufacturing industry in Asia.

Grove cites a personal experience with failure to scale. He recounts that when Intel was in the memory business, the company hesitated to add manufacturing capacity, allowing Japanese competitors into the US market and beginning Intel’s decline in the memory-chip business. Grove said Intel learned from that mistake when it came time to manufacture Pentiums: “I still remember how afraid I was as I asked the Intel directors for authorization to spend billions of dollars for factories to produce a product that did not exist at the time for a market we could not size. Fortunately, they gave their OK even as they gulped. The bet paid off.”

Grove says the US undervalues manufacturing, being willing to outsource it as long as “knowledge work” remains in the US. He writes that outsourcing breaks “the chain of experience that is so important to technological evolution…abandoning today’s ‘commodity’ manufacturing can lock you out of tomorrow’s emerging industry.” He cites batteries as a case in point.

Grove notes that ruggedly individualistic American companies will work to improve its profitability, but, like Samuelson, he adds that what’s good for an individual company may not be good for the overall economy. He says that many Asian countries “seem to understand that job creation must be the No. 1 objective of state economic policy,” and he suggests a pretty drastic modification to our free-market system in the form of an effort “to rebuild our industrial commons.” Here’s one suggestion he posits: “Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars-fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the US and make these sums available to companies that will scale their American operations.”

What do you think? Can the US tech industry continue to innovate without a strong manufacturing base? Can it create jobs without a manufacturing base? Should it government policy to promote the growth of manufacturing in the US?