The US in the times of the iPhone: a country with high profits but low prosperity

American suburbs, just a few months away from the presidential elections, present an unsettling spectacle of once luxurious towns that now have entire blocks full of closed stores, blocked streets, and a single mall for an entire territory. And, as if that weren’t enough, half of the inhabitants are unemployed, with many of them weighing more than three hundred kilos because restaurants serve up the diabolical formula of all you can eat buffets. This is literally America’s “belly.” A rather apocalyptic scenario that Andrew Grove, a tech giant from Silicon Valley– who participated in the creation of Intel and lead it until 2004– helps us to decipher thanks to an essay written for Bloomberg in 2010. In order for Silicon Valley to fully exploit its innovations’ competitive advantages, Grove explains, it delocalized production to Asia because it was cheaper; therefore, it intentionally affected employment dynamics in the US, and the price has been very high not only in terms of job losses but also in expertise.

And these are obviously some of the hot button issues in the US presidential campaign. In fact, omitting the last century’s great industrial vocation, 7 million jobs have disappeared in the last fifteen years. Simultaneously, during the same time, the middle class has declined because those who worked at Ford or Caterpillar earning up to forty dollars an hour now work at McDonald’s, UPS, or Uber earning eight dollars an hour, sinking lower into poverty. Inevitably, Americans have begun to ask questions. Why are we inventing iPhones if we have them produced and assembled in China from components coming from all over the world?

The answer lies in the logic Grove describes. The reason Apple prefers to produce in China is not only because it’s cheaper, but also because only in China can it concentrate 150,000 workers in the same location, of which 30,000 are engineers.

Educated Americans ask themselves an even more tragic question: will we be able to maintain our technological superiority without keeping the production of the most sensitive elements in house?

Aside from the supply chain tied to defense, the answer is no. In the long term, even research and development divisions will be forced to move next to the factories because innovation– which is born from the interface between what people dream to do and what can be done in reality– is impossible10,000 km away from industry. Even more if there are “intellectual property” issues. Therefore, US multinationals that maintain control over innovation and production will not do it in America, but in the Silicon Valleys of the future between Israel and China and anywhere else where the phase of productivity occurs.

Why did this happen? According to Andrew Grove, this is because Silicon Valley placed too much faith in the ability of start-ups to create jobs while recent history has taught us that the phase of mass production brings employment. A great effort to generate a US production base has never been a priority for Silicon Valley, or for the past few administrations. An oversight, Grove says, that resulted from the erroneous conviction that the free market was the best out of all economic systems.

A conviction that pairs with rather diffuse idea that exported labor is not a problem as long as corporate profits remain in the US. The problem, however, arrives when there’s an exodus of profits overseas to havens that facilitate tax evasion.

And what was the result? We’re now faced with a nation of high profits but low prosperity. “All of us in business,” write Grove, “have the responsibility of sustaining American industrial activities on which we depend and society, whose adaptability and stability, we may have taken for granted. Silicon Valley, and a large part of American companies, still need to understand this principle.”

Therefore, it’s almost a foregone conclusion that the US will lose its primacy as the home of technology due to the growing budget problems that will force the government to cut research spending (healthcare, military, and space). And the low industrial vocation and the shrinking budget will converge with other factors like tax rates that refuse to increase, the low number of engineering graduates (there are 80,000 in the US compared to 2-3 million in China), and the 15,000 foreign professors that enter the country annually: dynamics that are more than sufficient to stop American growth. The situation should be reversed, but such a change runs counter to political logic. In fact, the US has had a president and congressional majority of opposing political affiliations 70% of the time, with inevitable consequences on governance. In the meantime, if this course is not changed, the “all you can eat” logic will be reserved for multinationals while the middle class becomes increasingly poor.


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