Interview with Dr. Alice Rivlin (Part I): On Apple’s Profits, Economies of Agglomeration, and the Future of the American Workforce

GPPReview Online’s Rob Wood recently sat down with Dr. Alice Rivlin, founding Director of the Congressional Budget Office, former Director of the White House Office of Management and Budget, former Vice Chair of the Federal Reserve Board, and current Co-Director of the Greater Washington Research Program at the Brookings Institution. We discussed Apple, agglomeration, federal investment, and what the future has in store for the American worker.

Georgetown Public Policy Review: Recently, Apple announced their earnings for the first quarter of the 2012 fiscal year, touting record revenues and profits. Some press coverage around this announcement has centered on the fact the majority of Apple’s employees work overseas. An article in the New York Times stated, “It isn’t just that workers are cheaper abroad. Rather, Apple’s executives believe the vast scale of overseas factories as well as the flexibility, diligence and industrial skills of foreign workers have so outpaced their American counterparts that ‘Made in the U.S.A.’ is no longer a viable option for most Apple products.” Do you view the shifting of industrial labor to developing countries as a natural part of the global economy’s evolution, or is this a result of failed policies here in the U.S.?

Alice Rivlin: Well, it’s complicated. It’s mostly a question of the natural forces of advanced economies. We had, over the years, a great shift out of agriculture and into manufacturing, and more recently we’ve had a huge shift in all developed economies out of manufacturing and into services. The United States has actually maintained its lead in very high-end innovation, and in some high-end manufacturing. The question is, could we have done anything to change these natural forces? And I am not sure that we could have.

But right now, what is the prospect? Are we going to be losing more and more manufacturing jobs? Probably not. We have reached a point where we’re actually gaining manufacturing jobs. Manufacturing seems to be making a modest comeback, and I’m not especially gloomy about the future of manufacturing jobs in the United States. That’s for a couple of reasons. First, another natural process is that when jobs move to a country with a lower standard of living, it takes a little while, but eventually the costs there begin to rise, because workers there begin to organize, to ask for higher wages and better working conditions. For many years, Japan was on the forefront of manufacturing jobs – in part because they were very good at it, especially in automobiles and similar kinds of industries – but also because their wages were lower. Their wages are no longer lower, and they’re no longer really on the forefront of industrial change. So, it’s likely that a similar kind of thing will happen in China and other developing countries gradually.

What should we do now? We should certainly be fostering all kinds of innovation and job creation in the United States at good wages. Whether that is in manufacturing or in services doesn’t matter as long as these are viable businesses that are paying good wages. I’m not one of those who thinks that there’s something magical about making stuff, as opposed to making services or ideas.

An entirely separate question has to do with the value of the Chinese currency. And there, I think you can make a very good case that the Chinese have worked very hard to keep their currency value low so that we have an incentive to buy from them, and that we should discourage them from doing that in any reasonable way.

GPPR: I’d like to go back to what you said about manufacturing making a modest comeback. Is that a regional comeback, isolated in certain parts of the country? For example, you see a lot of foreign auto manufacturers opening plants in the South. Where is the comeback taking place, and what are the policies that have driven that?

AR: The automobile manufacturers moving to the United States is not a new story – that’s been going on for 20 years, and that was to be close to markets. We are a very big market for automobiles, and the Germans, Japanese and Koreans opened plants here some years ago, and other industries that go with the automotive industry have done that as well. Michelin tires are made in South Carolina, for example. That was basically “get close to your markets.” Of course, that’s part of a reason for U.S. manufacturers, as in Apple, locating in China. That’s a big market.

GPPR: Sticking to this theme, Paul Krugman has done work on “economies of agglomeration,” where manufacturing “clusters” occur. There are manufacturing clusters in countries like China, but is it too late for the U.S. to encourage agglomeration in manufacturing?

AR: We have lots of agglomeration, and we’ve had it for years. It’s really quite an interesting phenomenon. Why did the car manufacturers cluster around Detroit? That was agglomeration of two generations ago, and it was partly a raw materials issue, with respect to steel – the steel industry was already there – but a lot of those things are sort of the contagion of innovation. We’ve seen it much more recently in Silicon Valley, which is certainly an agglomeration phenomenon. The early pioneers in electronics started out there, and they attracted other like-minded people and they interacted with each other, and the pattern in the computer industry has been that a company is the current new thing, it’s successful, and then there are spin-offs from that company. People take their own expertise – you don’t need much capital – and at some point a new entrepreneur says to his colleagues, “Let’s go start our own company.” Many of those have been successful, and of course many of those have not – even Steve Jobs had some failures. But, agglomeration is definitely a pattern in industry, and now it’s much more a phenomenon of the contagion of ideas than it is of the location of raw materials, which is what used to produce it.

GPPR: Could we, then, draw the conclusion that to continue encouraging agglomeration here in the U.S., that education policy is a very important part of that?

AR: Education policy is certainly important. Almost every metropolitan area is trying to build on its strengths and become the next new agglomeration. For a while, everyone wanted to be Silicon Valley, and only a few were successful: Austin, Texas is an example of a successful imitation of Silicon Valley, and their strength was also, as in Silicon Valley, a very strong university. The University of Texas tried to be to Austin what Stanford was to the Silicon Valley, and with some success – it’s certainly become a high-tech center. Boston is another. But many metropolitan areas are now trying to see, “Well what else can we do – what are we good at, and how do we maximize that strength and attract other people who want to do the same thing?” And, almost always, a successful strategy involves a highly-educated workforce, at least in the technological sense – one or two universities that are into innovation, and being a good place to live. Young entrepreneurs and their employees generally want to be in a place that’s fun. One of the salvations of central cities recently has been this group of young people trying to make things happen, and they like to be where there’s music and good restaurants and other young people like them. For the older industrial cities, especially those in unfavorable climates like upstate New York, it’s been harder.

GPPR: So encouraging agglomeration through public policy may be better suited for city-level or state-level policy? Is there a role for the federal government?

AR: Well, it’s got to be public-private cooperation, too. You need the universities, you need some venture capital, as well as the state and local authorities to try make it happen.

Now, what can the federal government do? The federal government funds an awful lot of basic research, so in many ways the federal funding of the National Institutes of Heath, NASA, and all of the other federal scientific organizations are key to keeping our lead in high-tech industry.

GPPR: On the topic of federal investment, what’s your take on Solyndra? Is it an important role for the federal government to play, to promote an industry that may not have enough private sector support to thrive at this point in time?

AR: I think there is potential in non-polluting, non-carbon energy, and in the jobs that are created in that area – that’s really important. Some of it takes federal encouragement. But no federal encouragement is going to work until the price of green energy gets comparable to fossil fuels. The best way to accomplish that is to raise the price of fossil fuels. That’s why I favor a carbon tax or cap-and-trade. The most important place where the federal government can intervene, I think, is in making fossil fuels more expensive to the user – not without concern for the jobs lost, but gradually raise the price of carbon fuels, so that other alternatives stand a chance.

GPPR: In terms of regulation, what role is uncertainty about forthcoming regulations playing in preventing companies from hiring – in the financial sector, in industries that are affected by environmental regulations, etc.?

AR: Very little. The basic reason why companies aren’t hiring more people and expanding their operations right now is inadequate demand. I don’t think there’s any doubt about that. Regulatory uncertainty hasn’t increased particularly – it may have in the financial services sector, for very good reasons, but the financial services sector is doing alright right now.

GPPR: If we can bring unemployment down and get our economy back on track in the U.S., to what extent should we care about what happens in Europe with their debt crises, and what happens in the Chinese economy? In other words, if the U.S. economy is strong, how concerned should we be about what’s going on elsewhere?

AR: It would be hard for us to have a prosperous economy if the rest of the world is not prospering. It’s not a zero-sum game. We do better when the Europeans do better; we do better when the Chinese do better. You often hear the political rhetoric sound like it’s a win-lose situation – you hear it a lot and it’s ridiculous. People say, “The Chinese are going to beat us.” Well, it’s not clear what that means – and I’m much less worried about that than perhaps most people – but the best thing that could happen to the United States is prosperity in the rest of the world, including the developing world. Their rising standard of living will create a more level playing field, but it will also provide a lot more customers for us.

The second part of the interview will be published on GPPReview Online on Wednesday, April, 11, 2012.

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