Andy Grove's Take on Our Unemployment Woes Is Smart -- and Leads Right to Industrial Policy

We have to give Andy Grove credit for taking Silicon Valley to task over its inability to scale up innovation in the U.S. despite its tremendous ability to engineer innovation at home. But let's not take literally his suggestion that the U.S. should, if necessary, "fight to win" a trade war. Instead, let's take Grove's argument as a starting point for sensible industrial policy.

The former Intel CEO criticizes the mythology of the startup -- and NYT columnist Tom Friedman -- by pointing what grizzled veterans of the industry know intuitively, but tend not to talk up:

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. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter ... The scaling process is no longer happening in the U.S. And as long as that's the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.

Countries less inclined to worship startups have this discussion regularly. I spent quite a bit of time in Dresden, the heart of Germany's chipmaking industry. There, local officials are fighting the downsizing of semiconductor manufacturing -- over the objections of some engineer-entrepreneurs who worship Silicon Valley (and call their region "Silicon Saxony" after the name of the state where Dresden lies). The ones that are not politicians looking for votes have a principled reason: the presence of manufacturing is a vital link to the end users of the products the engineers design. In other words, business logic, rather than nostalgia for an industrial era, speaks for having your plant next to your research lab.

Perhaps that helps explain what Univesity of Oregon economist Tim Duy highlights in his extensive and illuminating blog entry on Grove's essay. Duy points out that manufacturing employment has not simply receded in importance as the American economy became a service-oriented one. It has declined in absolute terms ever since the 1980s.

Business leaders who read Grove's piece will start to shift uncomfortably in their chairs when they read his prescriptions for "an extra tax on the product of offshored labor" whose proceeds would go into a "Scaling Bank of the U.S." for companies that agree to expand domestic operations. If that causes a trade war, then "treat it like other wars -- fight to win," Grove writes. All this sounds great on paper, but I shudder to think of how you could even begin to make these policies reality.

Rather than interpreting Grove's call as a demand for a trade war -- a sort of economic version of George W. Bush's "bring 'em on" -- let's take his thoughtful essay as a starting point for what can be done to revive manufacturing in this country. It would start with tougher policies aimed at forcing China to let its currency appreciate -- which could include, yes, tariffs. It could continue with reversing the tax code's perverse incentives for incorporating overseas. Don't forget sensible regulation of the financial services industry -- the bubble-gone-bust helped drive capital into useless endeavors involving MBS and CDOs rather than useful investments.

Above all, don't push Andy Grove into this corner in American policy debates reserved for wackos who sound like they want to revive Smoot-Hawley. You know, the folks who get called "protectionist" if they refused to endorse the freest of free-trade agendas. Grove has a Nixon-goes-to-China kind of credibility here, except that instead of going to China, he wants manufacturers to come back to the U.S.

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