by Mitt Romney
While our diplomacy and leadership can influence the world, we cannot control the world. What we can control is the size and sophistication of our military power and its deterrent effect, which in turn determines whether we remain free, safe, and prosperous.
One of President Reagan’s first and most important actions was to secure two double-digit increases in the defense budget. For this, he was widely criticized by those who thought his actions were provocative. But history proved Reagan right and his critics wrong. The funds were used to recapitalize America’s military, using the information-age technology that American ingenuity had brought to the marketplace. It was that modern military that pressured the Soviets into a corner and paved the way for unprecedented years of global peace, prosperity, and progress for democracy.
The same opportunity is available to us today. America has the capability to protect against the full spectrum of threats that confront us. The question is whether America’s leaders have the clarity of vision to stand for a renewal of the defensive power necessary to protect the cause of freedom in the twenty-first century.
No Apology: The Case For American Greatness
5
A Free and ProductiveEconomy
Americans can only be as secure over the long term as our economy is strong. An inferior economy cannot indefinitely support a superior defense. Mathematically, the scale of our military can be no larger than the product of our total economy—the GDP—and the percentage of that economy that is spent on defense. And the size of our economy is a function of the number of people in the workforce and the productivity of that workforce.
As virtually every American discovered beginning in fall of 2008, a strong economy is also the foundation of our citizens’ prosperity: Americans have experienced the impact of a weakened economy. But beyond the lows of recession and the highs of expansion, the sustained wealth of our families and communities is also driven by workforce productivity.
Productivity is so central a concept, so crucial an ingredient to national well-being, that a focus on productivity should be a constant in the media and in the minds of citizens. And the importance of productivity transcends ideology. Whether you are interested in spending more on benefits or you want to add to defense, achieving your objective depends on the nation’s productivity.
Given its significance, productivity doesn’t get much attention. In fact, many people with whom I speak aren’t quite sure what it means. I once asked a class of college students to define workforce productivity, and their best guess was that it was a measure of how hard and fast people work. Americans are in fact hard and skilled workers, but the work ethic in some other countries is also quite impressive.
Several years ago, I toured a factory in southeast China that manufactures small appliances like hand mixers, bread makers, and toasters. The plant employed about 20,000 people—mostly young women between the ages of eighteen and twenty-four. A tall barbed-wire fence surrounded the facility and guard towers anchored each corner; factory officials claimed that the security was needed to keep people from coming in—large numbers wanted very badly to work there. The women worked ten-hour shifts, six days a week, and they lived in dormitories on the company campus.
Never before had I seen people working with such concentration, speed, and efficiency. As we toured the assembly lines, not one person glanced up at us as we passed. No radios offered potential distractions, and not once did I see a pair of workers sharing even a few quick words—everyone was intently focused on their work. When I asked the plant manager what was the reject rate for finished products, he didn’t immediately understand what I was asking—because there are no rejects at his factory: Every single appliance is in working order when its assembly is complete. The manager explained that every bread maker, for example, is individually tested and actually bakes a loaf of bread before it leaves the factory—there are 0 percent defects.
When my American colleagues toured a competitor’s small-appliance plant in the United States, they described it as operating at a much less frenetic pace. If productivity were solely a measure of how fast and hard people work, and if these plant tours were at all representative, you’d have to conclude that Chinese workers are highly productive, perhaps even more productive than our own. But, in fact, the American workforce is more productive—much more productive.
The reason is because workforce productivity is a measure of the value of the goods and services produced by a worker, not just how fast or intently someone works. For facilities like these small-appliance plants, workforce productivity is the total value of the appliances produced divided by the number of workforce hours. And despite the fact that the Chinese workers were dedicated and hardworking, the Americans were more productive. Why? One reason may have been because the American workers were more skilled or experienced. Another was that the American plant was more automated. In China, I observed women actually hand-winding copper wire to make small electric motors—something that’s done by machine in America.
On a national scale, workforce productivity is the value of all the goods and services produced in the nation, divided by the number of people in the national workforce. The average income or wealth of our workers is the same figure. If this seems confusing, perhaps it’s best to think of it this way: If American workers produce twice as much stuff every year as workers in another country, on average our workers will earn about twice as much as well. There is only one way to raise the income of the average person, and that is to increase national productivity—the value of the goods or services we collectively produce.
We devote a great deal of thought and emotional energy to the question of how best to divide the income pie at both a company and a national level—how much to pay and tax the CEO, the stockholders, and the factory workers—but we should also be very interested in how these decisions have an impact on our national productivity. Over the long term, national productivity will determine how much money the average citizen can make and whether the nation is able adequately to provide for the national defense. Again, the only way that America’s wealth will grow and our personal incomes and standards of living can be raised is by increasing national productivity.
While almost everyone agrees that growing overall productivity is a good thing, some don’t like to see productivity rise when the changes required affect them personally. To illustrate, imagine a tiny imaginary nation where a hundred workers raise the food and a hundred others build the houses. One day someone discovers how to make a plow and harness it to a draft animal. From then on, only fifty workers are required to produce the same amount of food. Is this a good development or a bad one? Fifty people are suddenly out of work—and they certainly aren’t enthusiastic about the improved productivity. If there’s a meeting of all the workers, you can count on fifty votes against the plow.
But what’s certain is that someone will discover new things for those fifty unemployed workers to produce: tools, clothing, entertainment, or perhaps a chair in which individuals can rest comfortably at the end of a hard day’s work. Some of those new jobs will pay less than the old job of farming. Some will pay more. Some of the displaced workers will thus be better off and some worse off. On average, the people in the society will become better off; in fact, much better off. The nation’s overall productivity rises a great deal because more is being produced per person; per capita GDP increases, as does average personal wealth, all because someone invented the plow and because someone else created new goods or services that employed the displaced workers. This is the principle upon which individual and national wealth are built.
The Innovation That Propels Productivity
Raising the productivity of a nation and the prosperity of its citizens depends on two types of innovation—one that improves existing goods and services and another that invents new ones. The former may result in reduced employment; the latter generally adds employment. It’s a two-part system: improve the old, invent the new.
In the e
ffort to make existing products better and to make them more efficiently, innovation in the use of capital has long been a major source of productivity growth. When I was a boy, I remember touring a Rambler auto factory with my father and watching as components were lowered by hand-operated cranes, fit into place, then fastened, or welded. The assembly plant looked like a human beehive—skilled men and women worked shoulder to shoulder to build every car. But when I visited a modern automotive plant a number of years later, I found that a great deal of what had previously done by hand was now performed by robots. Capital innovation had led to fewer workers, better product quality, and greater productivity.
The steel industry has seen just as dramatic a transformation. In the 1980s, it took ten man-hours to produce a ton of steel; today it takes about an hour. The president of the United Steelworkers of America says that when you go into a modern mill, it’s as high tech as NASA . . . our members are able to bring their brains to work.
A similar kind of change has taken place in hospitals. Nursing stations today resemble a NASA control center: Computers monitor dozens of patients at a time, and signal when, where, and why a nurse’s attention is needed. The initial investment in capital to upgrade a hospital is large, but the result is that fewer nurses are needed to simply look in on patients. And because patients are constantly monitored, they receive better care. In hospitals, auto plants, steel factories, and hundreds of other settings, innovation through technology, purchased with capital, has increased productivity.
Innovation can also enhance the value of the product itself. Alfred Sloan introduced automobiles with annual style changes and in a greater array of colors than Henry Ford’s he can have it in any color he wants, so long as it’s black. Sloan thereby made cars more valuable to the consumer. When Intel discovered how to put more computing power on smaller and smaller chips, it made them more valuable and raised the company’s productivity. Flat-screen TVs invented by the Japanese in the 1980s were perceived as having greater value and commanded higher prices; the TV manufacturers consequently enjoyed a boost in productivity. (A huge surge in productivity awaits the manufacturer who simplifies television remotes!)
Innovation may also improve the way in which labor is organized and utilized. When I was a teenager, we cruised Ted’s Drive-In on Woodward Avenue near Pontiac, Michigan. Particularly on weekends, the cars circled, waiting for a slot to open where you could pull in and place your order. Ted’s hamburgers were hand-shaped, cooked on a griddle, and delivered by carhops. But then McDonald’s arrived with machine-made hamburgers and French fries that were frozen and trucked in from out-of-state factories. Fewer workers were required to prepare the food, and no one was needed to serve it to us. Ted’s is gone. The Golden Arches are recognized around the world.
In the auto world, Toyota innovated what we now call quality manufacturing—placing such consistent attention to each detail at every step of the manufacturing process that flaws and rejects virtually disappeared. In doing so, they not only improved the value of their products, they also reduced the number of workers needed to rework defective cars. Productivity soared.
Many people find it hard to imagine how labor organization and management can have such an enormous impact on the cost of making or doing something. When I was serving as the governor of Massachusetts, for example, I suggested that we look into the possible benefits of hiring a private company to manage our state prisons. But almost uniformly, I was met with a very negative reaction. People invariably presumed that if we did, the state’s costs would rise because a private company would have to make a profit. It was hard to convince people that the private companies that manage prisons have learned how to safely do so with fewer workers than state-operated prisons—and that the money they save through productivity innovations more than makes up for what they earn in profit. In fact, it’s the profit motive that led them to find ways to improve their productivity. The tax dollars we would save could either be returned to the people who paid them or be spent on additional government priorities. Either way, productivity would increase.
Organized labor made sure that private sector productivity would never disrupt government jobs in Massachusetts prisons, or anywhere else in our state government for that matter. In response to former governor Bill Weld’s initiatives to open up state functions to competition from private enterprise, the legislature passed an act that effectively ended the practice.
It has been my experience that almost always government is far less productive than enterprises in the private sector. That’s why private companies build roads for governments and make equipment for the military. It’s also part of the reason why FedEx and UPS can make a profit shipping and delivering packages while the U.S. Postal Service loses money, even with its inherent competitive advantages. Local, state, and federal governments could save a great deal by hiring private contractors to provide a wide range of goods and services in which better organization and management of the workforce is a major source of productivity improvement.
In addition to innovating by creatively applying capital and by organizing workers effectively, productivity enhancements also come from new designs, new materials, new technologies, new sources of capital, streamlined process flow, better worker training, improved supply chains, and many other sources. There is simply no end to the ways in which innovators have improved products and services, thereby growing productivity and improving our standard of living. It is the inevitable, inexorable course of a consumer-driven, free-market economy.
For innovation to make a difference, it takes more than a good idea. It takes a good idea that is actually adopted and implemented. For years, IBM dominated the computer industry. Their strategy was based in part on building the fastest and most powerful computers—that way, they could best meet the large and growing processing needs of America’s biggest companies. But then companies like Digital Equipment Company (DEC) had the idea that for many companies and in numerous applications, a fast but smaller minicomputer was a better match, a better idea. For whatever reason, IBM just couldn’t adopt that way of thinking, so it began to lose its grip on the market. Then Wang came along, with its idea to create even smaller computers that met only the needs of an individual workstation. But neither IBM nor DEC embraced Wang’s innovation. Dell and Apple soon pioneered microcomputers and laptops, but like IBM and DEC before it, Wang didn’t jump on the new idea. Wang and DEC went out of business. IBM staged a comeback, reinventing itself by embracing the kinds of new ideas and technologies it had eschewed during its decline.
Again, good ideas alone don’t automatically lead to innovation. First, there’s the idea, but there must also be the conditions that lead it to be adopted and exploited. As Clayton Christensen, a Harvard Business School professor and one of the nation’s leading scholars on innovation, has shown in his book, The Innovator’s Dilemma, those conditions didn’t exist at IBM, DEC, and Wang.
The same principle holds true when it comes to inventing an entirely new enterprise—an entrepreneur must have a good idea, but the conditions that will allow him or her to use that idea to build that new business must also be present. One of the most influential entrepreneurs of all time was Christopher Columbus. His good idea was to sail west to reach the Orient, but the conditions for implementation of his idea in Italy, his home country, weren’t favorable, so he had to get financing from Spain instead. Similarly, although the Chinese developed the printing press, political conditions in China prevented their innovation from becoming truly revolutionary; it fell to the Europeans to rediscover and popularize the printing press several centuries later. Hero developed a steam engine in Rome in the year AD 50, but the technology would not power machines until the Industrial Revolution more than one and a half millennia later. It is certain that valuable ideas arise in the minds of people all over the world, but that many of them simply lie fallow because conditions for their implementation aren’t favorable.
Innovation and Creative Destruction
> The key to increasing national prosperity is to promote good ideas and create the conditions that can lead them to be fully exploited—in existing businesses as well as new ones. Government is generally not the source of new ideas, although innovations from NASA and the military have provided frequent exceptions. Nor is government where innovation is commercially developed. But government policies do, in fact, have a major impact on the implementation of innovative ideas. The degree to which a nation makes itself productive, and thus how prosperous its citizens become, is determined in large measure by whether government adopts policies that stimulate innovation or that stifle it.
The government policy that has the greatest effect on innovation is simply whether or not the government will allow it. It’s sad but true: Government can and often does purposefully prevent innovation and the resulting improvement in productivity. Recall my hypothetical example of a society in which half the farming jobs were lost due to innovation in the use of a plow? Some nations accept and encourage such creative destruction, recognizing that in the long run it leads to greater productivity and wealth for its citizens. But other nations succumb to the objections of those in danger of becoming unemployed and prevent innovation that may reduce short-term employment.
Two centuries ago, more than three-quarters of our workforce actually did labor on farms. Over the succeeding decades, innovations like irrigation, fertilizer, and tractors were welcomed, and eventually large farming corporations were allowed to prosper, despite protests from family farmers and the often heart-wrenching dislocations that accompanied consolidation of farmlands. The result was the disappearance of millions of agricultural jobs and the large-scale migration of Americans from rural regions to our cities. Once there, they provided the labor that powered America’s new industrial age. And at the same time, because farming innovation and productivity were allowed to flourish, America became the leader in agriculture education, research, and industry. Innovations from these sources have enabled us to produce sufficient food to feed not only our growing population but other parts of the world as well.