Obama's Competitiveness Council: Good for Business, Bad for Workers
Friday, President Obama announced the creation of the President's Council on Jobs and Competitiveness (PCOJC). It's well known that Obama has been researching Ronald Reagan since his midterm shellacking, and Reagan set up such a council in 1983 -- dubbed the President's Commission on Industrial Competitiveness.
As Obama prepares the part of his State of the Union speech dealing with American competitiveness, it's useful to look at that history. During the Reagan Era, Japan was the feared economic competitor; 28 years later, it's China.
Why did Obama create the PCOJC? As he said in his speech in Schenectady, N.Y. on Jan. 21, "My number one priority is to ensure we are doing everything we can to get the American people back to work. As we enter a new phase in our recovery, I have asked the new council to focus its work on finding new ways to encourage the private sector to hire and invest in American competitiveness."
American Competitiveness Versus American Jobs
But the PCOJC has confused objectives. How so? The goal of creating jobs is at odds with that of investing in American competitiveness. To me, the latter means a U.S. company can win new customers in markets around the world. But in many industries, hiring American workers would put an American company at a huge competitive disadvantage -- largely because U.S. wages for specific skills are often much higher than they are in other countries.
In fact, if we measure competitiveness by profits and cash balances, domestic companies have never been stronger. That's because they've earned record profits of $1.66 trillion in 2010 and held cash balances near a record $2 trillion. Unfortunately, that competitiveness has come out of the hides of the country's workers -- nearly 15 million of whom are out of work.
Of course, this doesn't mean record levels of profitability will continue. That's partly because U.S. companies are targeting the $400 billion Chinese market and they're not winning as many bids as they'd like. But in that regard, General Electric (GE), whose CEO Jeff Immelt is heading the PCOJC, is an excellent example of how these confused objectives translate into better results for companies than for American workers.
Simply put, American companies are achieving competitiveness by firing American workers and hiring foreign ones. According to its most recent Securities and Exchange Commission filing as reported by the Huffington Post, GE has eliminated 34,000 U.S. jobs while adding 25,000 overseas. It now employs 36,000 more people overseas than here. GE's overseas sales as percent of its total are rising -- from 50% in 2007 to 54% in 2009. And according to this filing, GE plans to invest outside the U.S. "indefinitely."
None of this has helped GE stock, which has lost 50% of its $39.66 value since Sept. 6, 2001, when Immelt took over as CEO. But as I wrote last week on DailyFinance, that external investment not only threatens GE's U.S. customers but also America's military position relative to China. Through a joint venture with a Chinese state-owned company, GE could create a Chinese competitor to another of its customers, Boeing (BA), and provide aircraft-control electronics that GE supplies for Boeing's 787 to the Chinese military.
Nevertheless, from a political standpoint, picking Immelt is shrewd. In a Sept. 22, 2010, DailyFinance column, I urged Obama to pick Immelt to take over from Larry Summers at the Council of Economic Advisers because this appointment would help the president overcome Big Business' antipathy toward his administration. Naming Immelt to head the PCOJC is an even better choice politically because Immelt will be able to serve Obama while staying on as GE CEO -- which remains an influential post.
Is China 2010's Japan?
When Reagan created his Council on Industrial Competitiveness in 1983, there was widespread fear that Japan was going to take over the global economy. Michael Porter, my former boss at Monitor Co., a consulting firm and Harvard Business School professor, was the intellectual ballast behind that commission. He suggested then that America needed to fix problems with high cost and low quality relative to Japan, and to do a better job of getting innovation out of the research lab and into the market, according to The Chief Executive.
It's interesting to note how the economic relationship between the U.S. and Japan evolved after Reagan's 1983 commission. Japan continued to soar throughout the rest of the 1980s and then imploded because banks lent money to investors who used shares in the rising Japanese stock market as collateral to buy real estate. The peak of that phenomenon was 1989 when Mitsubishi Estate Co. bought a $2 billion stake in Manhattan's Rockefeller Center -- an investment it wound up writing off in 1995. Japan's bubble then burst, and 21 years later, China surpassed Japan as the world's second-largest economy.
In sum, although Reagan's competitiveness council made some useful-sounding recommendations, it had no real economic impact on U.S. companies. Fortunately for the U.S., Japan's competitive threat lost intensity when the country shot itself in the foot economically by its real estate borrowing binge.
But the U.S. auto industry persisted in its high costs and low quality relative to Japan, and continued to lose market share. And U.S. semiconductor companies, such as Intel (INTC), switched from memory chips -- where it couldn't compete, to central processing units (CPUs), where it excelled. Intel's then-CEO Andy Grove didn't need Reagan or Porter to make that decision.
Too Dependent on China?
Similarly, the new PCOJC isn't likely to create American jobs. By putting GE's CEO at the helm, Obama is subtly rewarding Immelt's strategy of shifting jobs overseas and investing its cash hoard -- following a $100 billion U.S. bailout of its GE Capital unit -- elsewhere. Fortunately for Obama, however, this move may help defang the outspokenly anti-Obama U.S. Chamber of Commerce, which praised Immelt's appointment and is anticipating more deficit-boosting business tax breaks.
In July 2007, when GE Chief Financial Officer Keith Sherin asked me how I thought GE could boost its stock price, I suggested that it needed to focus on its infrastructure businesses -- such as energy, locomotives and jet engines -- and get rid of the rest. That's because those businesses were targeting large, fast-growing markets like China and India, where GE had a competitive advantage.
My concern in 2007 was what would happen if GE focused heavily on China and then, like Japan over the last 20 years, China collapsed under a load of debt. As China takes steps to slow down its economy to tame inflation and pop its own real estate bubble, putting Immelt in charge of the PCOJC makes me wonder whether we are getting too dependent on China in the quest for more American jobs and competitiveness.