by Mitt Romney
The first serious blow to the U.S. car industry that I remember—back in the days when my father and his team at American Motors made Nashes and Hudsons—was landed by the German automaker Volkswagen. Its innovative, low-priced, and high-quality Beetle was first imported in 1949. But by the early 1960s, it had captured public attention as well as market share. American Motors responded by promoting its own compact car, the Rambler, but the Big Three took their time, continuing to bank on gas-guzzling dinosaurs, as my dad and later millions of Americans called them.
Then in the 1970s, the Japanese invaded the American auto market, offering better-quality cars at lower cost than their American competitors. The domestics eventually adopted labor-organization and inventory practices that had been pioneered by companies like Toyota, and that helped. Nevertheless, the Japanese—and later the Korean—automakers enjoyed a substantial cost advantage over their U.S. competitors. Discussions I have had over the years with consultants and executives who have worked for the automakers estimated that disadvantage to be about 2,000 per vehicle, despite the cost of shipping cars from foreign locations to ports in California. Japanese, Korean, and German carmakers then took advantage of the market gains they had achieved to build assembly factories in the United States—bringing attractive jobs to thousands of U.S. workers and partially blunting the anti-foreign-car backlash. Even then, these transplant vehicles continued to enjoy a sizable cost advantage.
Foreign automakers don’t generally pass their cost advantage on to their customers in the form of lower prices. Instead, they use it to add better features and put higher quality into their vehicles, keeping their prices competitive with domestic vehicles. The result is a perception that Detroit just can’t make cars that Americans want to buy. Yet imagine the challenge the Big Three face in attempting to build a car as good as their competitors’ when those foreign makers get to spend an extra 2,000 on their models. I believe U.S. engineers and designers have done a heroic job trying to compensate for the cost penalty. The Ford Mustang and Fusion and the Chevrolet Malibu and Silverado are examples of their ingenuity. And in my mind, there is nothing that has come out of Japan that can compare with the look and throaty growl of my 2005 red Mustang convertible.
What are the sources of the cost disadvantage? Among the many, the foremost is that the United Auto Workers has negotiated, and management has agreed to accept, very expensive pension and health benefits for its retirees. Next, UAW wage rates and work rules result in significantly higher costs per vehicle in a UAW plant. And third, the federal government’s failure to adopt a predictable energy policy and its ad hoc imposition of fuel economy standards made it more difficult for domestic automakers to plan for market needs and legal standards. Simultaneously, it gave a distinct advantage to foreign companies that had engineered and developed fuel-efficient automobiles for their home markets, which had never embraced America’s love for big cars and the open road.
As long as the American manufacturers suffer a severe productivity disadvantage, they will continue to lose market share. If the cost disadvantage were allowed to persist, Detroit would eventually go out of business—and that would be a terrible shame, a human tragedy, and an avoidable outcome. There is no inherent reason why America can’t build competitive automobiles. There is every reason why we ought to be able to reclaim our leadership in the national and international automotive market. If we were to remove excessive retiree burdens, eliminate costly work rules and wage penalties, allow investment in new productive technologies, and adopt at last a predictable energy policy, the American automobile industry would vigorously rebound and many of thousands of jobs would be preserved and, over time, more thousands would be added.
I opposed Washington’s bailout for the industry in 2008 because it enabled GM and Chrysler to avoid the restructuring and productivity improvements essential for their success. The managed bankruptcy that I proposed ultimately occurred, but only after tens of billions of taxpayer money had been wasted, and only after sweetheart deals and paybacks for favored interest groups had been engineered with the public’s money. The question now is whether or not the administration’s heavy hand has protected political and UAW interests in such a way that the industry’s burdens persist. There are encouraging reports that General Motors’s average hourly labor rate was reduced by 30 percent and that retiree burdens have been shed. If so, the company will have a second chance, according to the Wall Street Journal’s former Detroit bureau chief, Paul Ingrassia. If, on the other hand, burdens have been permitted to remain, we will watch further loss of market share, further layoffs, and further subsidies. A CEO of an automotive industry corporation told me that in spite of what is said in public, the government is calling the shots on every major decision at GM, including which plants to expand and which to close. Management by politicians is a losing proposition. As a son of Detroit, I find the decline of the industry and of the great state of Michigan painful to watch. If the bitter but necessary medicine of restructuring has been taken, and if Washington politicians are removed from the management of the companies, there will be a turnaround. If not, we will watch the final chapter of the American automotive industry unfold.
There may be extremely rare occasions when government properly should protect a domestic industry from foreign competition. These would be in only very selective circumstances and then only temporarily. If foreign firms are engaged in predatory or monopolistic practices, our antitrust provisions should penalize them. When a country has artificially held down the value of its currency so that its products have a sizable cost advantage when they enter the American market, we must act to persuade that nation to allow its currency to adjust to market rates. Government should also act to stem dangerous foreign environmental policies and to block products produced by child labor or in inhumane conditions. In some cases, an industry may request short-term—very short-term—breathing room so that it can adjust to a new competitive threat. Such requests should be granted only when it’s clear that the affected American industry can and will act decisively to regain a truly competitive position. But for every request for protection or subsidy that is warranted, a hundred or more others are not. The Bush administration’s decision to protect the U.S. steel industry is a case in point—I agree with those who have concluded that it did more harm than good. President Obama’s action to defend American tire companies from foreign competition may make good politics by repaying unions for their support of his campaign, but it is decidedly bad for the nation and our workers. Protectionism stifles productivity.
Encouraging trade does not mean entering into agreements that disadvantage the United States or being soft with trading partners who ignore our agreements. For years, Japan effectively prevented American products from entering their market despite our trade agreements. Others like South Korea keep out our agricultural products under the pretext of health concerns. And the World Trade Organization litigation process has been singularly unreceptive to American interests. None of this is reason to embrace protectionism, but it is reason for tough bargaining and strict implementation.
There is nothing so sought after by companies and unions as protection from competition, and yet there are few things so beneficial for an economy and its citizens as competition. It is rational for special interests to seek special treatment—and they do. The largest companies inevitably want antitrust laws relaxed so they can breathe easier and grow their market share even further. Companies facing tough competition from abroad crave tariffs, quotas, or restrictive product requirements so they can lessen their risks and avoid the cost and pain of restructuring and innovation. Companies that see their competitors invent productivity improvements want those innovations blocked by legislation.
Innovation means change. Change that makes a genuine difference means greater productivity. Improving productivity often results in the loss of jobs en route to the creation of new, better, and more sustainable jobs—a difficult process nationally and an often devastating
one for individuals. Po litical, business, and union leaders who deny or minimize this fact of economic life do the country and its businesses and employees no favors.
Where Innovation Comes From
Increasing productivity begins with innovation and innovation begins with good ideas. More often than not, good ideas come from educated minds. America’s post–World War II commitment to public higher education directly contributed to the burst of productivity that rocketed our economy beyond every other. But in important respects, other nations have made as great or greater a commitment to higher education than we have, particularly in engineering, computer science, and information. Fifteen years ago, China and India awarded about half as many master’s degrees in these fields as did the United States. Today, they graduate more than two times the number of students in these fields as we do. The Chinese accomplishment in Ph.D.s during this time period is even more impressive. While our annual number of degrees has hovered around 7,000 to 8,000, theirs has risen from 1,784 to 12,130—50 percent greater than ours.
This is a stunning reversal of global preeminence in the priority attached to the highest level of educational attainment. Not surprisingly, China, Japan, and Taiwan claim a growing share of the world’s patents. Beyond the long-term consequences of this quickening eclipse, the short-term implications are devastating. Microsoft’s founder Bill Gates, for example, told author Thomas Friedman that within a few years of its opening in 1998, the company’s research facility in Beijing was already more productive than any of its other three research centers in India, England, and the United States.
A nation’s collective priority for higher learning also impacts the type of innovation a country pursues. Germany’s education prowess in engineering translates into innovative product engineering. England’s success in chemical industry innovation is likely the product of its distinctive excellence in chemical-related advanced education. America’s most advanced learners, by contrast, increasingly choose to specialize in the liberal arts. If the trend continues, we may produce innovations in writing, entertainment, and finance but be less likely to generate the newest innovation in such fields as chemical engineering and computer science. Not surprisingly, those who study something in depth are the most likely to make discoveries about it.
Education is more than a factor in generating productivity-enhancing ideas. It also figures into our ability to successfully implement those ideas in the marketplace. The use of computers, electronics, and statistical analysis have become commonplace for workers across the globe, even in blue-collar occupations. But America’s decline in elementary and secondary education—where we now rank well below other developed nations—puts our workers and our businesses at a distinct disadvantage when it comes to the skill sets our youngest blue- or gray-collar workers possess. Michael Porter reports that Japanese managers at U.S. manufacturing plants complain that American college graduates are often confounded by techniques that Japanese high-school graduates readily comprehend. American companies increasingly have to devote substantial resources to the most basic kinds of training, often simply to bring their American workers up to global standards.
The lead America enjoyed in all levels of education fifty years ago, and which powered our industries to world leadership, has vanished. If we do not make dramatic improvements in our educational system, it will be almost impossible for our lead in innovation and productivity to be sustained. We owe every American child a chance at a great education, and not just because of the inherent, God-given value of that child, but also because our entire society depends upon the collective output of our citizenry. The world’s developing nations long ago recognized the necessity of broad-based educational excellence. They learned it from us. Tragically, we have allowed politics to weaken the schools that powered our generation’s economic success.
As important as education is to innovation, we are fortunate that other factors, such as culture, also play a vital role. These are factors less susceptible to the ill-effects of special interest politics, and thus our advantages in these areas are more resilient. One example: Americans aren’t afraid to fail. There’s no loss of face if it occurs, as there is in Japan and Germany. The innovative and entrepreneurial spirit in America compensates, at least to some degree, for the present failures of our public educational system.
It seems as if virtually everyone in America dreams of starting a business. More Americans are engaged in entrepreneurialism per capita than in any other country—it’s an advantage we must strive to preserve. Over 12 percent of us are entrepreneurs of some sort; the British come in second, but only at about half that rate. When I asked the dean of the Harvard Business School whether the majority of his recent graduates sought banking, consulting, or industry as their field of choice, he replied, None of the above. It seems that about 90 percent of our students want to start their own company!
Most entrepreneurs I’ve met didn’t find their niches straight out of college or business school. The majority of them came from jobs from which they saw a need and had a bright idea about how to meet it. America’s industries and domestic markets are, in fact, breeding grounds for innovation. A young Eldon Roth held a blue-collar job in a cold-storage plant where beef was frozen soon after it was butchered. His idea: Instead of slowly freezing the meat in walk-in freezers, why not place the beef on conveyors and pass it between two supercold drums, instantly freezing it to lock in flavor? Eldon now owns a very large jet. Far more important than that, he has created hundreds of jobs.
No one likes to lose a job; no one likes having their back to the wall. But if necessity is the mother of invention, it may be that there are occasions when the risk inherent in our free enterprise system leads to innovation. When Todd Pederson injured his shoulder, he couldn’t continue drywalling to pay for college, so he started doing door-to-door selling of security systems. High-school graduate Jimmy John borrowed 25,000 from his father, promising to pay it back with interest after a year. If he could not, he agreed to enlist in the army. Both men are now extraordinary success stories, Todd as the founder of APX, a 9,000-employee security company, and Jimmy with his nationwide chain of Jimmy John’s Gourmet Sandwiches. America has tens of thousands of others like Todd and Jimmy.
Since American innovation comes from people who are educated, experienced, and motivated, we should eagerly welcome individuals from other countries who possess those qualities. But our current immigration policies do not. In order for some foreign students to come to America to earn a degree in physics, for example, they will not only have to endure necessary—but unnecessarily long—Homeland Security screenings. They may also have to agree to leave the United States when their degree has been awarded. That just doesn’t make sense. If a young woman from India or Sri Lanka or Argentina earns a degree from an institution like MIT, Cal Tech, or dozens of other fine American universities, we should staple a green card to her diploma and encourage her to stay. We want her to use her talents to innovate and create new technologies and new jobs here in America, not to take her skills elsewhere. Duke University reported in USA Today that there is a new reality in reverse immigration among highly educated and skilled individuals: What was a trickle has become a flood.
We follow the same deeply counterproductive course when we strictly limit the number of visas we award to scientists, technicians, and other foreigners with advanced degrees and valuable skills. If we want to continue to lead the world in innovation, we need the most intelligent, educated, and accomplished individuals we can find or develop. What we now do instead is strictly limit how long and how many highly skilled foreign applicants can be admitted and how long they can stay, even those that have specifically been requested by an American employer. At the same time, millions of people without these skills enter the country illegally. Our immigration practices are literally upside down. The best and the brightest wait in line to come here, then are forced to return home after we educate them with the very skills we desperately need, but those
with only little education and skill enter by the hundreds of thousands and are permitted to stay. No wonder the immigration system is a source of such controversy and frustration. Our borders are effectively unguarded, a failure that has not only economic but national security implications as well. At the same time, legal immigrants who want to live within the rules, and who have the most to contribute to the economy, are forced to deal with a system that is difficult if not impossible to navigate. The Economist magazine calls ours a policy of national self-sabotage. Immigration is an important source of innovation and productivity; in addition to the focus on illegal immigration, we should also concentrate on expanding legal immigration for students and individuals with advanced education and critically important skills.
Funding Research and Innovation
Education, culture, and motivation play key roles in spurring innovation, but spending on innovation also makes a difference. Federal investment in science and basic research, typically carried out in universities and research institutions, has led to numerous innovations and commercial successes—from lasers to MP3 players, and from the Internet to MRI scanners. Most national research spending is concentrated in health, defense, and space technologies, and, not surprisingly, the United States leads the world in all three sectors. Numerous by-products from work in these fields have made it into the commercial economy.
Government funding for basic science and research in universities and research laboratories has been declining for years. It needs to grow instead, particularly in engineering and the physical sciences. Research in energy, materials science, nanotechnology, and transportation are vital to the economy and to our nation’s competitiveness. Government should not, however, attempt to pick winning ideas or technologies in which it would invest funds for development and commercialization. Ted Williams famously said that the hardest thing to do in sport is to hit a baseball, and in my experience, the hardest thing to do in business is to hit a home run with a new business. Some of our best and brightest people start up new businesses, finance them, and bring them into the marketplace. Then the realities of that marketplace sort out those that have potential for growth and sustainability and those that do not. Attempting to substitute government for the roles carried out by entrepreneurs, angel investors, and venture capitalists while also bypassing the unforgiving test of the free market is a very bad idea indeed. It would inevitably lead to investments that had no real potential in the market. Then, as their commercial failure became apparent, politicians would subsidize their mistakes with even more investment, hoping to hide their errors. Ultimately, we would be devoting huge resources to ideas that don’t improve productivity, wages, or national economic vitality.