Moore's Law, the doubling of computing power every couple of years, may give way to the greater laws of physics at some point, but for the moment it is an economic metric to be reckoned with.
If we slide the scale back a little more than 12 or so Moore's Law cycles, we find the IBM Corporation at the pinnacle of international business domination, hegemonic leaders of the world's fastest growing industry. At this point on the scale, even IBM watching is a major industry and bookstore shelves are crammed with best selling business tomes lauding the unassailability of the IBM Way. Signs hung on the walls of IBM executives smugly mock the outside world with the company motto: "Think Ahead"
One problem the company faces however is a limited market. Big Blue's big iron is so expensive to lease and maintain that only large corporations, governments and institutions can afford one of their own.
For everybody else, there is "time sharing" on somebody else's mainframe or the outsourcing of specific tasks like accounting and payroll. In the niche left under big iron, companies like Digital Equipment Corp and others supply mid-sized companies and, in some cases, corporate departments, with so called "mini-computers". Mini's and mainframes have the same characteristics: users sit at "dumb non-graphic terminals" logged into central computer servers stored behind closed doors in sterile, specially acclimatized areas tended by white-frocked technicians from the DP (or Data Processing) department.
Back then all access and processing activity on the system was controlled by a DP department regularly serviced by crisply white-shirted, blue-suited, teams of IBM reps and technicians. It was generally a relationship more cozy than strained though everybody recognized, if push came to shove, that the supplier was boss; for instance, should a department in an enterprise want to bring in a mini-system for a particular application, say engineering or word processing (Wang), IBM could usually expect the DP department head to follow IBM's marching orders.
One tactic the company brought to a fine art came to be called FUD; If IBM announced it would be launching a competing engineering application; DP would lead the fight to resist the purchase of the rival machines. Often, Departments, through their own budgets, would have to go around DP to get their own cluster of mini-based workstations. And this could sometimes leave them flying solo, without DP support. In corporate DP pop culture it was oft repeated: "no one ever got fired for buying an IBM"
But there was also emerging a tiny cottage industry in the mid to late 1970's reserved for hobbyists and other genres of nerds working in kitchens, dens and garages. They had perhaps graduated from kits bought at Radio Shack to manufactured monitor-less computers from companies --a keyboard and an attachment to cassette reader-- like Texas Instruments, Commodore, and Atari. By this time also, a start-up out of a small town on the peninsula south of San Francisco had begun shipping the Apple 1.
Around 1980, viewing even this flea speck of a market as a potential opportunity, a small team inside of Big Blue working under the code-name "Acorn" was given the go-ahead to come up with its own version of a "personal computer". The launch of such a machine, we now know, signaled the real starting line for the second computer revolution.
The first IBM PC ran on a 4.77 MHz Intel 8088 microprocessor. The PC came equipped with 16 kilobytes of memory, expandable to 256k. The PC came with one or two 160k floppy disk drives and an optional color monitor. The price tag started at $1,565, which would be nearly $4,000 today. What really made the IBM PC different from previous IBM computers was that it was the first one built from off the shelf parts (called open architecture) and marketed by outside distributors (Sears & Roebucks and Computerland). The Intel chip was chosen because IBM had already obtained the rights to manufacture the Intel chips
That's right, it all started in 1981 with two floppy disks, 16KB of RAM and a 4.77Mhz processor! The PC also came with the programming language BASIC, produced by the same tiny company that supplied IBM with the DOS operating system for the system. But IBM was not the only major company to want to enter into the fledgling small business oriented, desktop personal computer market: the IBM PC was very quickly followed by rivals from DEC and others. There were also ready-made application companies ready to jump into the fray with word processing, spreadsheet and DBMS's. For example, Xerox, which was at the height of its innovative powers in those days, was one of several companies that offered a dedicated word processing system. What they were to find out is that PC-DOS users could easily buy or pirate a word processor called WordStar.
But priced at the equivalent of today's $4- or $5-thousand, when you count in the printer and color ASCII monitor, it's not surprising that the first purchasers of the personal computer were hardly the same hobbyists who bought Ataris. Before not too long, IBM had come out with an upgraded PC it called the XT, with a 5MB hard drive and the real race was off and running. Now it was possible for small businesses to think about installing an accounting or merchandise-tracking package.
What quickly emerged much to the chagrin of players like DEC, HP, Xerox and other rivals with their own proprietary or rival DOS operating systems was the deadly mantra "IBM compatible". Since the IBM PC, to achieve speed-to-market, offered something truly revolutionary: an "open architecture" --a concept that no doubt brought shudders to the mainframe side of the business-- a number of "100% IBM compatible" imitators, like Compaq Computer, began to emerge. Having licensed DOS, done some significant reengineering and built on the Intel 8088 architecture, these companies could claim to be 100% IBM compatible. And so a new standard was born and even though IBM began to face serious competition in the personal computer space from a more agile and innovative Apple Computer, that borrowed heavily from work done at Xerox's expense, IBM could rest comfortably on its reputation in the business world and a growing number of equally creative suppliers in the open computing space for software and hardware products that were, of course, 100% IBM compatible.
What really got the IBM-standard going, however, was the introduction of a product called Lotus 123. Lotus 123 was supposed to combine all three of the major applications, a database or DBMS, spreadsheet and word processor, in one package. Along the way, it greatly improved on a math-driven application, the spreadsheet that was being successfully sold by a company called VisiCalc. Lotus 123 was the first of what we now know of as "killer apps", application software that spawns industries. Lotus 123 had a very primitive but original graphing capability. It could make bar charts and pie charts, for example even though a standard ASCII monitor could not display graphics. But the PC came with expansion slots with open, published, specifications. Soon companies were selling hardware that fit into one of these slots and that could convert a monitor into a graphic display. With an adaptor, PC users could now see their pie charts in color on their IBM-compatible graphic displays.
If the word processor liberated writers from the tyranny of carbon paper and the labor intensity of edits, 123 more significantly made variable but repetitive calculations a thing of the past for bean counters of all stripes. What was creating the first tectonic shockwaves was the growing recognition inside major corporations that Lotus 123, with its graphical capabilities, was far better than any software that IBM offered on its humongously expensive mainframes. Much to the displeasure of the DP department and IBM's mainframe salespeople, IBM PC's were being smuggled in droves through the backdoor into the country's leading institutions.
Around the same time, a tragic airplane accident occurred in which the top level of the Entry Systems Division founding PC team at IBM was lost. For many of the mainframers, this was probably seen as something less than a business setback, since it was already clear that the puny "toy" PC was causing disruptions in mainframe sales. Big iron budgets were being "cannibalized" by a new class of more powerful desktop workstation computers. Something IBM planners had clearly not foreseen.
The next and truly fatal blow to the IBM standard was dealt, of course, by Microsoft, when Bill Gates and company managed to sabotage IBM's plans to establish its next generation OS2 operating system software in place of Microsoft's MS-DOS. Parallel to its efforts to build OS2 for IBM, MSFT hastily built its own Windows operating system. At the same time it developed its new line of Office software for MS-Windows that could closely rival Lotus's and Word Perfect's market leading offerings. The makers of Lotus and Word Perfect, following IBM's marching orders, were busy retooling their products for an OS2 launch.
All Microsoft had to do was drag its feet with OS2 while bringing Word and Excel for Windows to market. In one mere tick of the cycle, Microsoft, of course, had emerged the winner; Word Perfect, Lotus, Ashton Tate and others would fall by the wayside and slowly the IBM-compatible mantra would pass to MSFT and Intel. In one of the greatest coups in business history, MSFT had wrested control of the IBM standard from Big Blue, though it would still take many years for the phrase IBM compatible to die out.
For IBM, the crisis was catastrophic, by this time, it was no longer even the largest seller of PC's. That mantle had been taken over by Compaq. But IBM was not yet ready to throw in the towel in the business they had invented. They still had an enormous business customer base and unrivaled technological resources. Rebounding they regenerated their PC business by way of an impressive, sleek, new line of notebook computers called the ThinkPad.
The Cycle Hits Home
With the sale this week of its PC business including the IBM brand name to the Chinese, analysts might argue that IBM has strengthened its corporate competitiveness and gained an important Chinese partner for the expansion of its integration business in the world's largest country and fastest growing economy. After all, the main business of the company had long ago been reinvented not as a manufacturing party but as a service company providing high priced consulting and integration services to other global entities.
Not insignificantly, as a major systems integrator IBM has also become an important proponent of the Linux operating system. Linux is an open source (meaning, the source code, regulated by a non-profit organization, can be licensed at no cost) product that has benefited from a truly impressive, international volunteer collaboration. Not coincidentally, Linux and the open source movement now pose the first significant threat to Microsoft's entrenched, pre-eminent position.
As for the 10,000 or so US-based employees in the IBM PC division who now work for Lenovo (IBM owns an 18,5% stake in the merged Beijing headquartered company), the message has to be pretty clear: most of your jobs are fairly safe for a while as the Chinese get their arms around the advanced technology and design aspects that have made the Notepad line of notebooks so successful among business users. But it might not be a bad time to dust off that resume or think about the early retirement program while it still exists.
What the Chinese get for their $1.8 billion, besides a going business and an incredible brand name, is access into yet another layer of leading edge technology and know-how.
It may be just a coincidence that practically on the same day that the IBM /Lenovo deal was announced, a study was released showing that US high school students ranked near the bottom in math and science skills when compared with their peers living in the other 20 or so highly industrialized countries.
For as many cycles as Moore's Law has been in effect, the braindrain has worked in the US' favor. Now, a falling dollar, a worldwide Internet communication system that reconfigures the importance of borders and time-zones and shrinking tech opportunities in the US will only exacerbate the situation as comparable pay scales rise in more stable currencies. The reaction to Bin Laden has also served to choke off the supply of thousands of eager Asians who come to study and remain to work in the country.
Nearly 3 quarters of the world's population lives in Asia. It's said that a billion Chinese (half the population) have not yet made a telephone call. But the base Asian population figures are so great that a still truly impoverished country like India with half the population of China can have more people in its middle class than the US. If the relative success of Asian-American students in the US is any indication, we can expect to see these countries turning out relatively massive numbers of high-tech trained graduates.
In Moore's Law time, changes occur rapidly. Certainly, there will be pauses and even setbacks as economic conditions contract and expand but, all told, it might be a good time to check on the real significance of being 100% Chinese compatible and, thinking ahead, always in Moore's Law time, how long even that yet unestablished standard might last.
Here are some data points that we've all become familiar with lately. We, the US and to some degree the rest of the developed world, no longer make many of the things we consume. In the US, the containers come into Long Beach and other West Coast ports cram packed and leave on the return trip empty. In dollars this adds up to a deficit of nearly 700 billion this year,alone. This is the highest current accounts deficit in our history by any measure.
Meanwhile, in the halls of government there is an entrenched belief that the country can spend more money than it collects in taxes.... much more money (about a half a trillion dollars annually at the present pace). The party that has been elected knows that it owes its success partially to its ability to give people tax cuts in place of a robust economy. To get re-elected, it has pledged to make permanent the tax cuts it has put into place and to not raise other taxes. It also has hardly taken up lip service when it comes to reducing spending.
It is, perforce, deeply committed to an open-ended colonial war in Iraq that will further drain treasure and, by almost all accounts, only gets bleaker as the months tick by.*
Today's dismal employment news (115,000 new jobs) only further emphasizes the persistence of the problem; after all, the tax cuts, the massive deficit spending, the orgy of pork barrel spending, were all justified as stimulants needed to get us out of the tech bust recession and the subsequent 911 damage. The deficits, it was argued, were temporarily necessary to get things started. As the economy kicked back to recovery the government would see increased revenues and things, according to the script, would come back into balance. These predictions, of course, have dropped into that same dead-zone of promises forgotten that entombs pledges like WMD and cheap Iraqi oil, etc.
The only new government economic policy that we hear coming out of Washington besides more of the same, is the sustained push for a major shift in how Social Security is going to be funded. There are, of course, solid reasons why Social Security and Medicare need to be looked at. All of which have to do with the Baby Boomers. Starting in about 6 years, these Boomers will begin collecting what they have been paying into for the length of their employment years. Since there is no lockbox, and, in fact, the system is pretty much pay-as-you-go, over time more people will be depending on the payroll taxes of fewer workers. It can be expected that the growing bulge of Boomers will live longer and consume more health care benefits as the decades go by.
Bush and the Republican Congress will almost surely act on Social Security and beyond extending the tax cuts already enacted they may even come up with a plan for more tax relief for corporations and high income individuals. For Social Security reform, Bush is proposing a plan that would allow younger workers to opt out of payroll taxes for government controlled savings accounts. These accounts would allow workers to invest their money in stocks, bonds and other savings vehicles at theoretically higher rates leading ultimately to payouts that are higher than those received by SSA recipients. At the same time, Bush has said, the commitments to workers presently in the system will be kept unchanged so the government will have to step in to make up for the resulting shortfall.
In other words, in a pay-as-you-go system dependant on the contributions of younger workers, a percentage of contributions will be diverted to the new SSA savings accounts. The immediate cost to the government will result in trillions of dollars in additional, immediate debt that will be added onto the already crushing federal deficit.
The word circulating around Washington is that the Administration will find an accounting fix (think Enron) that will keep the reform cost off the government books. In other words, the Congress won't even have to vote, this time to vastly stretch the legal debt ceiling it put into place in the 90's.
Never ones to face up to the consequences of their actions, the Administration has latched onto an easy fix: devalue the dollar and hope it takes a while for anybody to notice. Let's see what that does.
For a good starting point, we should point out that if the US were, say Argentina, or Japan, or Australia and we ran up the kind of growing internal and external debt structures the US is now taking in stride, we'd be standing, hat in hand in front of the IMF awaiting a stern lecture, imposed austerity, and finally a massive bail-out the likes of which the world has never seen. But, we're not the above countries, we are the US of A and as such we have been granted --some would say by the grace of God, a special place in the world economic order.
By virtue of the strength of our economy after World War II and the insufficiency of precious metals to meet the demands of postwar world economic growth, the US dollar was given a special role. Central banks in countries around the world, which once were required to hold a certain amount of gold or silver in their coffers to back up the money they printed, were allowed by international agreement to hold dollars instead. The effect of this on exporting countries was that it allowed them to use the fruits of their foreign trade, paid in dollars, to back up their own internal economies.
In the 1970's Nixon cut the dollar off of any remaining precious metal anchors. Since Nixon, the dollar has floated freely up and down against other floating currencies as the economic tides turned. But always, the US enjoyed one perk --or you might say, responsibility-- that no other country had: We could, in essence, always spend dollars abroad with the sure knowledge that only a percentage would be returned for collection (call it a built in discount). In other words, every dollar that is stowed away in some central bank like that of Japan, China, Saudi Arabia, France, etc. is money that we, as a nation, spent and never have had to pay back.
Over the years this has resulted in a multi-trillion dollar gift from peoples all around the world to the people of the US. Of course, it's a not a gift that hardly anybody (those pesky Europeans, no strangers to imperialism, might be an exception), likes to talk about.
What's kept this intrinsically unfair system in balance for so long has been the American economic engine effect. You can see it most plainly exhibited today by China and the rest of Southeast Asia. In the last 10 to 15 years, first tentatively and now in a Godzilla-like snowball, US manufacturing has been shifted from this country and its traditional suppliers over to South Asia.
This coincides with the consumer dominance of Wal-Marts, which as a company has most benefited from the trend. Wal-Marts is to consumer marketing what Microsoft is to the desktop. They control so much business in this consumer-based society that they can tell even great companies what price they are willing to pay for a particular article. As a result, as Wal-Mart, with its low prices, has gained consumer market share, their suppliers have become ever more dependant on Wal-Mart shelf space. In order to sell to Wal-Mart, companies have had to close down factories in the US and move them to places with lower labor costs. It is now routine for Chinese bidders to be the major participants in plant closing auctions. Machines that once hummed in assembly lines in Columbus, Ohio where workers made $15 an hour plus, are being shipped to plants located outside of Shanghai where laborers are lucky to make a buck an hour.
As a result dollars flow through Wal-Marts out to China where they are used to finance Chinese internal growth. The Chinese have conveniently pegged their currency, the renminbi to the dollar. In other words, as the value of the dollar against other currencies goes down, the RMB follows.
The Chinese, like the Japanese and Saudis before them, have learned to live with these great surpluses of dollars. Rather than overheat their own internal economies --or kill the golden goose by looking to profit through stronger currencies-- they find it simpler to funnel the dollars back into the US in the shape of financial investments. In other words, they buy things like US Treasury Bills. This buying of US notes has kept US interest rates from rising and low interest rates have kept Americans spending right through a slowdown.
If you look at the present situation that way, it doesn't appear that threatening, at least in an immediate sense. The Chinese government can't disappoint its public by opting out of dollars and thereby causing an abrupt shock on its best customers, the Japanese have become entirely dependant on their export surpluses and the Saudis, well they're in this for the long term. Or so we hope.
Here's the problem....and when you think about it, it gets pretty scary. Ultimately, the entire dollar pyramid is built upon the appetite of the American consumer for ever more things, ever bigger cars and houses.... ever more gizmos. Judging from the size of the SUV's and trucks you see in the mall parking lots, there's nothing to worry about when it comes to this appetite.
It's the wherewithal, obviously, that's got us going. As decent American manufacturing and service jobs move East to Asia new jobs have to spring up in their place. So far, that just hasn't happened. The US should add 150,000 jobs a month just to keep up with the entrance of new laborers into the economy. In the last 4 years you can count on one hand the number of months that has happened. Worse, the new jobs that are created tend to be lower paying than the jobs that are going away.
The Pollyannas will reply, of course that we Americans are resourceful, we always reinvent ourselves, and you cannot underestimate the creative, economic vitality enclosed within our borders.
That was certainly true --not, of course, without pain-- in the 1970's as manufacturing jobs shifted out the rusting Northeast and Midwest to the non-union South. Then, the children of Waterbury and Pittsburgh moved west to California and on top of defense industry already in place there, built Silicon Valley and Redmond. The engine of innovation and technology ticked away for America. The brightest and most ambitious from around the world moved to our West Coast and the gold rush was on. It was a glorious moment and for all its excesses and stupidities, it created this great communication system that has completely changed the equation of how information is owned, traded, given and used.
But when you scrape the veneer off the pollyanna view, what you get is a kind of faith. That faith, like all faiths rests on assumptions rather than proofs. One quite prevalent assumption is that the American capitalist system just works better than the other ones. In this comparison, we hear that the Europeans, with their over-regulation and humane social systems, their extended vacations, etc. just don't get dynamicism. In this view, big muscle America, perforce, will just have to keep chugging along while these other guys just fall further behind.
Another truly myopic assumption, is mainly historical in nature. It goes that because the US economy was so successful in the 20th century it will continue to be so in the 21st. Of course, we know only too well that great dominant countries, like great industrial complexes, come and go.
There is also the chauvinistic assumption that Americans somehow have a monopoly on a combination or organizational, technical and creative know-how and skills that is somehow lacking among the rest of world's peoples. These folks, of course, forget the Great Depression of the 1930's and the war that pulled us out of that while leaving the rest of the industrialized world in shambles. It was a moment when the smart and ambitious were drawn to our shores.
Many of those achievers have now returned to their own countries with the idea and know-how they picked up here.
And so, as the great consumer economy awaits its next structural stimulus, American shoppers continue to run up debt on their credit cards. And if there is one place that American ingenuity can be seen to be leading the world, it is in the creation of consumer debt. Families now routinely make big and small purchasing decisions not based on the cost of an item but on what it will add to their monthly payments. Over the last few years, many of these people who routinely are trapped into paying interest rates above 20%, have been able to double or triple dip their plastic max outs by refinancing their homes. What that means is that they have been able to extend out payments against their homes and repay plastic debt. Mortgage granters have been happy to loan up to 100% of home value to get more customers. The new mortgage payments, of course, are unlocked and thus dependent on interest rates not being yanked up.
And this may, in our mindseye, be the very point where the timbers begin to shiver: For the last four years the entire country has been on a borrowing binge with very few short-term consequences. The government, as we pointed out at the outset, merrily borrows and prints more dollars and the consuming public, the very sinew of the new world economy, has been able to extend out their debt on the basis of low interest rates that have been kept that way through the loss-leading purchases of US treasury debt by foreign governments. But now the houses have been mortgaged beyond their equity, cards are once again maxed out and the government is staring at the red ink.
Ergo, the next short-term painless step in this comedy: the dollar devaluation. A cheaper dollar means that goods coming from outside the dollar-zone are now more costly. In former times, US manufacturers would benefit from such a moment and find their own products more competitive at home and abroad. Foreign made goods would be priced out of the market, US imports would fall, exports would increase and over time the pendulum would swing back the other way. But, of course, as we noted, the US manufacturer has gone the way of the Dodo Bird.
As the dollar is allowed to fall, the US economy gets a further bit of a breather. First off, US-based multinationals see bulges in their balance sheets as Euro-denominated profits are artificially magnified. This makes their results look better and perhaps lures investors into the stock market.
It takes some time for the prices of raw materials on which dollar zone countries are reliant to climb to the point that not even Wal-Marts can hold down the prices of finished goods. Individual investors not tied to policy considerations also view the imbalance as a moment to profit or hedge and they move out of US dollars into the euros, pounds sterling, and yen that are being pushed up. Eventually, interest rates in the US go up to attract capital looking for the best deal and those very consumers on whose shoulders this enormous pyramid is built start falling behind on their payments.
That's when we get into uncharted waters. Will another crutch be found to be put into place, something new? or will the Chinese and others simply look for another basket to put some of their eggs in, the Eurozone for instance?
Perhaps another Silicon Valley is growing up in a business and education friendly state. Perhaps there is already a poorly understood new economy growing in place where high margin intellectual property emanates from the US and low margin implementation is carried out in cheap labor lands abroad?
These are, indeed, interesting times. Just keep in mind, all roller coasters have bottoms.
* Anyone who believes that things will get better in Iraq once a rump election at the end of January installs a Shiite dominated government is popping too many happy pills. Nearly two years into the occupation, the US Embassy announced today that it will no longer allow employees to travel the 10 mile road out of Baghdad to get to the airport, all government employees will be shuttled by helicopter. The desperately undermanned military force is now tied down guarding the streets of Faluja and Mosul.