Guest columnist Alan Hurwitz: Strengthening the business infrastructure

President Joe Biden is proposing a major and much needed infrastructure program for our great if aging country. Pro-business Republicans ...

President Joe Biden is proposing a major and much needed infrastructure program for our great if aging country. Pro-business Republicans should join Democrats in embracing this opportunity to support American enterprises and workers. The program will provide even more benefits than the current debate suggests.

Back when Robert Reich was secretary of labor (under Bill Clinton), he was fond of telling a story (perhaps even true) of a capitalist friend (he did have them) who was planning to open a large new factory, but hadn’t yet decided on a location from all the possibilities across the globe.

In deciding on a country for his new facility, the friend was considering three options: low-wage Mexico, higher-wage United States, or highest-wage Germany. He was of course taking the cost of labor into account, but realized there were also other factors.

An important one was the productivity and resulting marginal return of labor in these different sites. There was the rub. After much careful consideration Secretary Reich’s friend decided to locate his bright new factory in the land of Riesling and Sauerbraten, and not out of World War II nostalgia for sure.

Even given the much higher labor cost in Germany, it still made business sense for his friend to locate there, biting the bullet, and paying the higher wages. Why? The decision seemed to violate all the guiding principles that make low-wage countries prime locations for manufacturing facilities. It may be surprising, but it turned out that the anticipated higher productivity of German labor would more than offset its much higher cost.

Assuming this was genuinely the case — probable since the friend was a smart businessman — how could this be? Was it the hard-driving German culture? Perhaps a very business-friendly government? Or maybe the high nutritional value of the many types of wurst in the German diet. As trues as these may have been, according to Secretary Reich, it was primarily none of these.

When the friend ran his numbers, he found that the German workers produced much more value per hour of work, even more than the difference in the considerably higher German wages. That is, the marginal productivity of the German work force more than made up for then difference in wages. The wage rate counted, but only compared with its added value.

What factors contributed to this difference? One possible answer was the higher productivity of individual workers, perhaps from being healthier, stronger, more motivated, harder working, or better educated. Perhaps there were cultural factors.

It turned out there were also “macro” factors affecting this marginal productivity, going far beyond the individual, many which governments can influence: availability of raw materials, equipment and technology, maintenance, communication — now including internet access, living conditions for staff, transportation — think roads, bridges, airports, etc. Also physical, legal, and intellectual security, and a regulation-friendly environment. Also, there is public training, especially important in times of changing technology. I refer to this combination as “business infrastructure.”

The private sector seems not able (or perhaps willing) to provide this investment — too expensive for one company, no practical structure for sharing the expense among enterprises, the short run time frames of many businesses — even though it will provide direct and substantial return, especially over the long run.

So governments have a special role to play in creating aspects of this business infrastructure that can’t or won’t be developed by the private sector: roads, bridges, airports, internet access, health care, training, etc., many of which are included in the proposed plan. By providing or encouraging these elements governments can strengthen the business infrastructure, increase the value-added of workers, and make their areas more attractive to investors — the sacredness of rugged individualism notwithstanding.

Benefits resulting from these interventions might include additional job creating foreign investment in the U.S., or perhaps more American businesses remaining stateside despite lower wages elsewhere. Consider Professor Reich’s friend who chose Germany despite its much higher wage rates.

With this in mind, it is clear that President Biden’s infrastructure proposal represents important business investments, rather than, as some would have you believe, only social welfare handouts for the “takers.” I hope the Congress, including Republican business promoters, will agree.

Alan Hurwitz is a consultant in Organization Development with business, non-profits, and government in the United States. and internationally, and sometimes a columnist for this and other publications.

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Newsrust - US Top News: Guest columnist Alan Hurwitz: Strengthening the business infrastructure
Guest columnist Alan Hurwitz: Strengthening the business infrastructure
Newsrust - US Top News
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