A Look at Worldwide High-Performance Computing and Its Economic Implications for the U.S.*

### The U.S.: Rugged Individualism and Trade-War Losses

In contrast, American industry has rejected a close working relationship with the government and insists on that truly American concept of rugged individualism. Whereas this arrangement has at times resulted in extraordinarily rapid growth of the American high-technology industries, it has also resulted in an uncoordinated industrial environment in which poor decisions have been made.

Economic policy decisions must be made with respect to certain economic relationships, which can be easily illustrated formally. Four variables are required for this somewhat oversimplified example:

q = quantity of output;

p = price of products;

w = wages per hour; and

i = number of hours worked.

If five computers are sold (q = 5) for \$1000 each (p = \$1000), total revenue will be \$5000 (qp = \$5000). If the wage rate of the work force is \$10 per hour (w = \$10) and the input of work hours is 500 (i = 500), the cost to produce the machines is also \$5000 (iw = \$5000), and no profit is realized:

426

More generally,

If we now divide both sides of this relationship by ip , we get

and canceling, we get

This ratio, in a nutshell, illustrates what is needed to break even. On the right-hand side of the equation are two factors expressed in dollars—w , the hourly wage and p , the price of the computers—whereas on the left is the ratio of q , machines produced, to i , input hours. The ratio of q / i is the rate of output per unit of input and represents what economists call the (average) production function of the process. It is a relationship determined by the technology. If the technology is the same in two countries, this ratio will be (roughly) the same for those countries. A country with lower hourly wages, w (e.g., \$5), will be able to charge a lower price, p (e.g., \$500) for its product and still break even. That is, with the same plant and equipment (or production function) on the left-hand side of the equation and low wage rates on the right-hand side, low prices will be possible for the products from the low-wage countries. If, however, wages are very high (say \$20), then the ratio of w / p will require that p , the product price, also be high (in our example, \$2000).

International competition is as simple as that. It is neither "good" nor "bad," it is simply inexorable. The simple relationship demonstrates why so many jobs are being lost by the U.S. to developing countries. Their low wages make it possible for them to produce products from relatively stable technologies more cheaply and thus charge lower prices than can we in the U.S.

There are solutions to this problem, but the U.S. has generally failed to implement them. For example, it may be possible to improve U.S. plants and equipment (and/or its management) so that employees are more productive and thereby achieve greater output (q ) per unit of input (i ). This would justify

427

a higher wage (w ) in relation to a given unit price (p ) for the output. This has been a major tenet of Japanese strategy for decades. Another solution involves producing a higher-quality product for which consumers will be willing to pay more, thus justifying the higher wages paid to the work force, since a higher p can justify a higher w .

Because the U.S. has as its long-term objective to maintain or increase its relative standard of living, then one or both of these strategies are required. Even then, a way must be found to inhibit the rate of diffusion to low-wage economies of an innovative, highly productive production process and/or of product quality innovations. Only in these ways can higher wages—and thus a reasonable standard of living—be sustained in our economy over the long haul. The implications of these facts are pretty clear; they are very much a part of our day-to-day experience.

A reasonable economic development strategy for the U.S. must be in the context of these major forces influencing outcomes worldwide. The major forces aren't definitive of final outcomes, but they do establish the limits within which policies, plans, and strategies can be successful.

The need to respond to the low prices offered by other countries has been recognized in this country for many years. The solutions attempted have largely been ineffectual quick fixes, in essence trying to catch up without catching up rather than facing up to the imperatives of improving product quality and productivity in general.

### Law 2— You Don't Catch up without Catching Up

Our response to the present challenge has, to date, included a miscellany of wishful thinking, "concession bargaining," and manipulating monetary factors. Concession bargaining sought to cut the wages of U.S. workers producing high-technology goods—and thus their standard of living—so that the U.S. could match the prices that low-wage countries are offering. When "concession wages" didn't work, the U.S. then decided to find another financial gimmick that would permit us to lower the price of our goods in world markets.

The U.S. decided to cut the exchange rate in half. At the bottom, the dollar was worth 120 yen, while before it had been worth 240 yen and more. In effect, this introduces a factor (in this case 1/2) between the world price before the change and the world price after, while leaving the U.S. domestic equation unchanged. Given that we have over a \$5 trillion economy today, cutting our exchange rate with the world in half amounts to giving away \$2.5 trillion in the relative value of our economy. The \$30

428

billion improvement in the balance of trade due to the lower world price of our goods yielded a return on our investment of only a little over one cent on each dollar of value lost. This is not an intelligent way to run an economy.

A Look at Worldwide High-Performance Computing and Its Economic Implications for the U.S.*