Guo for President in 2020

Author Gary Moreau

Taiwanese electronics giant Hon Hai Precision Industry Co., Ltd., commonly known as Foxconn, the manufacturer of all things Apple, recently announced that it would invest $10 billion to build a new manufacturing plant in Wisconsin. And, of course, President Trump, who at least saw fit to campaign in the state during his run for the presidency, immediately took credit. (In case you’re wondering, the plant will be built in Paul Ryan’s district. Imagine that.)

Wage costs in the US have long been blamed for the loss of manufacturing jobs here but that’s been a bit of a ruse all along. Corporations, with strong support from their friends in Washington, have long used that argument to cripple union organizing, push average wages down, and transfer retirement and health care costs back onto their employees.

As a former corporate executive and board member I assure you that companies don’t invest on the basis of labor costs. They invest on the basis of total cost. Those may be heavily influenced by labor costs, depending on the product or service, but not always. The cost of energy, capital, and transportation are often significant, particularly if the company is servicing the US market with a big, bulky product of modest value, and thus expensive to ship.

I, of course, was not privy to any of the discussions involved in Foxconn’s ultimate decision. I can say with the utmost confidence, however, that the company and its founder and chairman, Terry Guo, known as Guo Tai-ming in China, did not make it to please President Trump. At best, Mr. Guo knew that Trump would bring the company a lot of free publicity and that he would, without much prompting, twist the arms of American politicians in a position to offer lucrative tax incentives.

Here’s what legendary Kirkus Reviews has to say about the author’s new book: “More than a guidebook for managers, this is a manifesto for an intellectually deeper – and happier – world of business.” Kirkus Reviews (starred review)

And that they did. According to Wisconsin Governor Scott Walker the company was offered $3 billion in tax relief and other subsidies to seal the deal. That works out to about $1,000,000 for each of the 3,000 people that the factory will eventually employ, by its own estimates. (President Trump and Governor Walker will be quick to point out the investment will create 22,000 jobs indirectly through the multiplier effect, as economists refer to it. Fair enough. That’s still $136,000 per job.)

The relevant question, moreover, is not how much the politicians are spending per job, but how many good jobs could be created with a comparable investment in something else? And even if government spending is not a zero-sum game, as supply siders will argue, the pool of public incentives is not unlimited and is severely constrained in the short term. As a practical matter, that $3 billion is gone for now. It’s not available for things, dare I say it, like health care.

The idea that Foxconn is investing $10 billion, moreover, is more than a little misleading. Neither Terry Guo nor Foxconn is going to write a check for that much money. Most of that money will likely come from the US credit and equity markets. Foxconn will have to agree to pay back the money in some way, of course, but it’s a largely meaningless obligation, as we learned when Lehman Bros and AIG walked away from their role in the 2008 mortgage crisis thanks to the largess of US politicians spending taxpayer money.

Ten billion bucks is a lot of money. If amortized over twenty-five years, just paying it back works out to more than $3,000,000 per employee, or more than $130,000 per year per employee. Much of that investment, moreover, will likely go into robotics and other production and processing equipment. Some of those machines may be produced in the US but I suspect that Germany, Japan, and China itself will be the biggest beneficiaries. I have seen no media report that there was any domestic content restriction built into the deal by Trump or Walker.

If this were China, of course, the government investment would be considered in light of security, environmental, and other social considerations. Glass screens, I suspect President Xi Jinping would argue, don’t really serve any real military or environmental purpose. And while I enjoy my flat-screen tv as much as the next American, televisions aren’t quite as central to our way of life as, say, education is.

Even if you supported Trump’s decision to withdraw from the Paris Climate Agreement, moreover, this can’t be a particularly good deal for the American environment. Glass takes a lot of energy, most of which will undoubtedly come from fossil fuel. And the impact on the air, water, and soil, while it might be less in Wisconsin than many developing countries, won’t be zero.

One of the big attractions of manufacturing in the US is the low cost of energy. Natural gas is cheaper in the US that it is in any country on the planet, other than Kuwait, and, according to Boston Consulting Group, electricity costs in the US are 30% to 50% lower than elsewhere. That’s a good thing, of course, but if the utilities run out of sufficient capacity to provide electricity or the grids to support its transmission, we all know who will foot the bill for expansion. (Consumers in the US generally, by the way, pay a higher rate for electricity than companies do. In China it’s the other way around—industrial users pay more.)

The real irony of all of this, however, is the simple fact that of all the major industrialized nations in the world, the US is the only one that does not have a definitive national industrial policy. It has none. Nada. Zip. We have a lot of regulations, for sure, but they are a grab bag of onerous rules designed, more than anything else, to benefit the very industries they are intended to regulate.

Available in paper and electronic formats.

The proponents of US industrial non-policy argue that government policy conflicts with the invisible hand of free market capitalism that they attribute American greatness to. It’s a weak argument, however. Innovation and a remarkable work ethic put the US economy on the map, and both were driven, in large part, by immigration and education, the latter of which we can thank the Puritans for, truth be known.

The real cost of the industrial policy vacuum in the US, however, is that it allows politicians like Trump to make deals that serve their personal agenda but don’t serve the collective good on a planned and consistent, long-term basis. He gets the applause, but it is the people of Wisconsin who will be living with the plant, and the investment they made to get it there, a decade from now.

In fairness, the US does, in the end, actually have a national industrial policy of sorts. The US Tax Code is the single most powerful government force for social and economic engineering on the planet. The problem with it, and with the powerful permanent Washington bureaucracy that really runs the country, is that it is not democratic, not transparent, and makes no attempt to promote the common good. It is both designed and managed by the moneyed and political elite (a descriptive redundancy if ever there was one) for their own benefit.

My overriding disappointment in this whole affair, however, is not that Foxconn is investing here, that Wisconsin got the nod, or that Trump took a bow he really didn’t deserve. It is that Terry Guo is constitutionally ineligible to run for the US presidency in 2020. He is clearly the best dealmaker of the bunch.

Contact: You may reach the author at gary@gmoreau.com

Header Photo Credit: csfotoimages