Ralph Gomory gave a talk today at the New America Foundation, a think tank who also gets it with online media!

As I listen to President Obama's speech acknowledging structural problems with the U.S. economy, yet do not see policies that will actually do what is needed and never mentions manufacturing or trade, one person I find quite insightful is mathematician Ralph Gomory.

Ralph Gomory - Does America Need Manufacturing?

Frankly, there is no way to really know what Gomory is talking about without understanding the theory of comparative advantage and how it relates to economies of scale. So ya just gotta take his word on it that he knows what he's talking about. I highly recommend his & economist Baumol's book, Global Trade and Conflicting National Interests (Lionel Robbins Lectures), to get a good grasp on the theory itself.

Did you watch the entire talk? If you didn't, stop reading and hit that play button baby. Those who watched, read on.

Some points I want to highlight from this talk:

Comparative Advantage

Now this is one place where the ability to read equations really comes in handy. I will not go through the proofs here, but in their book, clearly Ricardo's theory does show one should not abandon manufacturing due to scale of demand.

So, what is Scale of Demand? Well, taking a stab at it as a layperson, if one country say can make better and more cheaply super duper high flutin' whirly birds and another country has a comparative advantage in corn flakes, since the amount of trade in corn flakes is in the billions whereas the super duper whirly bird makes about 3 sales a year.....uh, that whirly bird country shouldn't be giving up making corn flakes anytime soon because they will go broke. In other words, just whirly birds ain't gonna equal the previous national output.

The problem is a lot of economics cats do not understand economies of scale, and joyfully demand when specialization is realized, that nation should abandon other entire manufacturing sectors. They miss the tipping point in trade, overall output, national GDP, due to the above and recommend we all walk off the economic cliff following some free trade pied piper bad math tune.

An example is this much touted green economy, which is tilting at windmills literally. A green economy simply cannot replace in volume the lost contributions to GDP as well as income traditional manufacturing contributes. Beyond a Don Quixote adventure, the touting of green jobs is a good example of the misapplication of comparative advantage and don't forget a public relations balm so America will forget their job was just offshore outsourced. (so are green jobs btw).

Many readers as well as writers on EP have top tier education, hence can completely relate to Gomory's comments on the blow off answer on why jobs are offshore outsourced is that somehow Americans need more education and training. Most of us are perfectly aware existing world class training does not translate into financial security in today's global labor arbitrage world. It is completely insulting to claim Americans lack education and skills to those of us who indeed have them and are cast aside due to some desire to bump up quarterly profits or offshore outsource a corporate division.

70% of R&D is in manufacturing and the idea of trading manufacturing for services industry is not credible again due to above. The biggest sector in services is tourism. Now how is that workin' out for Jamaica as a leader for economic growth?

Another myth Gomory dispels is the sound byte R&D will replace manufacturing. Most valued added in R&D is after the innovation and one cannot disconnect R&D from manufacturing. In other words, let's say Helen sits in her garage for 10 years and invents a really cool way to store data in clothing buttons. Awesome! Revolutionary! (The Borg? I digress) but....that innovation breakthrough by Helen ain't where the money is. After billions in retooling of button factories, new machines and paying off major fashion hounds to show off the new buttons which store data, make corporate mega deals to get existing technology to interface with the shiny clothing close devices....and finally there is a demand for billions for remote body storage of all your itunes in cool little clothing buttons ....this is when the money rolls in...$$$$.

But, as one can see, it ain't rolling into the United States if all of those buttons are being manufacturing in China.

Another point, which hopefully EP writers will tackle soon, is just how skewed and murky traditional data points, such as productivity, job creation, GDP and so forth have become due to global supply chains and globalization. Where did the product get made? Why in MexiforniaBanglaRomanialand!

I also appeciate the distinction of productivity increases caused by technology, which boosts national GDP, whereas false productivity by labor arbitrage, actually offshore outsources GDP right along with the jobs.

If you have read this far, you might enjoy this interview aricle on Gomory: Fresh Take On Trade:

First, Gomory says, there is a “fundamental divergence” in the interests of multinational companies, which benefit from the comparative advantages of other countries, and the interests of their home nation.

“What a company wants is profits, and what a country wants is more GDP,” Gomory said in a recent discussion in his New York office. “With the coming of globalization, a company can be very profitable by building its plants abroad, importing into the United States and using cheap labor. At that point, they are no longer adding to the U.S. GDP; they’re adding GDP to some other part of the world. The goals of the country and the goals of the company are no longer linked.”

Now who among us can argue this isn't true, yet we are continually bombarded by the main stream media and corporate press kits that somehow the interests of IBM are the interests of America.

Equally important is Gomory’s second major point. “Globalization should not be confused with free trade,” he says. “Free trade is not globalization, and globalization is
not free trade. People try to use the known virtues of free trade and say that they apply to globalization, but that’s a misunderstanding of what economic theory has to offer. Free trade occurs when you trade in finished goods, not when you give away things needed to enhance productivity.”

The rest of the article references the Horizon Project, a set of policy recommendations that really deserve public support....if you want to have a prayer's chance of changing economic direction.

One of the concepts is to give incentives to corporations to create manufacturing here as well as jobs. I think a national strategy on trade, manufacturing, economics is long over due but I add this caveat.

IBM in particular, but many corporations are just as guilty, do receive state, local and federal subsidies on the promise to create jobs. Yet, these corporations continue to offshore outsource jobs, do not create jobs in the localities where they promised they would....yet their contracts are not revoked and they are not penalized even for breach of contract.

One minor point, maybe Gomory is getting through to Intel CEOs. Recently they shut down a China FAB and invested in 32nm United States ones. G.E. also recently announced outsourcing isn't all it's cracked up to be. (although the fundamental investment numbers are still huge, at least 10 to 1, in offshore outsourcing manufacturing by both of these corporations).