Are federal fiscal deficits accelerating deindustrialisation in the United States? For four decades, employment in U.S. manufacturing as a share of the labour force has fallen further and faster than in other industrial countries. In the mid-1960s, manufacturing output was 27 per cent of gross national product and manufacturing's share of employment was 24 percent. By 2003, these numbers had fallen to about 13.8 percent and 10.5 percent respectively. Employment in manufacturing remains weak, with an absolute decline of 18,000 jobs in September shown in the Labor Department's payroll survey.

At the same time, the orgy of tax-cutting, with big revenue losses, continues unabated. On October 6, House and Senate negotiators approved an expansive tax bill that showers businesses and farmers with about $145bn in rate cuts and new loopholes -- on top of what were already unprecedented fiscal deficits. These are principally financed by foreign central banks, which hold more than half the outstanding stock of US Treasury bonds. Moreover, meagre saving by American households is forcing US companies also to borrow heavily abroad.

The upshot is a current account deficit of more than $600 billion a year. America's cumulative net foreign indebtedness is about 30 percent of gross domestic product and rising fast. How will this affect manufacturing? The transfer of foreign savings to the US is embodied more in goods than in services. Outsourcing to India aside, most services are not so easily traded internationally. Thus when U.S. spending rises above output (income), the net absorption of foreign goods -- largely raw materials and manufactures -- increases. True, in this year and last the high price of oil has also boosted the current account deficit. However, since the early 1980s, the trade deficit in manufactures alone has been about as big as the current account deficit -- that is, as big as America's saving shortfall (for more detail, see http://siepr.stanford.edu).

If U.S. households' and companies' spending on manufactures is more or less independent of whether the goods are produced at home or abroad, domestic production shrinks by the amount of the trade deficit in manufactures. The consequent job loss depends on labor productivity in manufacturing, which rises strongly through time. If the trade deficit in manufactures is added back to domestic production to get "adjusted manufactured output", and labor productivity (output per person) in manufacturing stays constant, we get projected manufacturing employment. In 2003, actual manufacturing employment was just 10.5 percent of the US labor force, but it would have been 13.9 percent without a trade deficit in manufactures: the difference is 4.7m lost jobs.

In the 1980s, employment in manufacturing began to shrink substantially because of the then large current account deficit attributed to the then large fiscal deficit: Ronald Reagan's infamous twin deficits. With fiscal consolidation under Bill Clinton, the savings gap narrowed but was not closed because personal saving weakened. Now under George W. Bush, the fiscal deficit has exploded while private saving is still weak. The result is heavy borrowing from foreigners and all-time highs in the current account deficit. The main component remains the trade deficit in manufactures, intensifying the shrinkage in manufacturing jobs.

Is there cause for concern? Note that I do not suggest that the trend in overall employment has decreased, but only that its composition has tilted away from tradable goods -- largely manufactures. In the long run, growth in service employment will largely offset the decline in manufacturing. However, the rate of technical change in manufacturing is higher than in other sectors. It is hard to imagine the US sustaining its technological leadership with no manufacturing sector at all.

More uncomfortably, more Congressmen, pundits and voters feel justified in claiming that foreigners use unfair trade practices to steal U.S. jobs, particularly in manufacturing, and hence in urging protectionism. The irony is that, if imports were somehow greatly reduced, this would prevent the transfer of foreign saving to the United States and lead to a credit crunch, with a possibly even greater loss of US jobs.

The answer is not tariffs, exchange rate changes or subsidies to manufacturing that further increase the fiscal deficit. The proper way of reducing protectionist pressure and relieving anxiety about U.S. manufacturing is for the government to consolidate its finances and move deliberately towards running surpluses -- in short, to eliminate the U.S. economy's saving deficiency.

Dear members of the Korean Studies community,

I trust that all of you have had a great summer and are now ready for the beginning of a new academic year. I welcome all of you back to campus and to another exciting year for the Korean Studies Program (KSP) at Stanford University.

First of all, I welcome the new members to our program this year. Philip Yun and John Feffer are our inaugural Pantech Fellows and will conduct research related to Korea, both North and South. Both Philip and John have distinguished careers and will be great assets to all of us at KSP. Philip has held high-level positions at the State Department and worked closely with former Secretary of Defense, Dr. William Perry, in addition to practicing law in both Korea and the U.S. John is an accomplished writer and editor, and his most recent publication is North Korea/South Korea: U.S. Policy at a Time of Crisis. I would also like to welcome Jasmin Ha, who will serve as our new Program Coordinator and assistant to me. She worked previously at The Korea Society in New York City and brings to us both her experience and vision for Korean studies at Stanford. Soyoung Kwon, a North Korean expert, will also be staying at APARC as a Shorenstein Fellow for the coming year.

Hong Kal and Chiho Sawada, post-doctoral research fellows, will remain with us for another year. Hong has accepted a tenure-track assistant professorship at York University, but will not start her appointment until the 2005-06 year. Rakhi Patel, our student assistant, will continue to work part-time to assist Jasmin and myself.

We will resume our popular luncheon seminars on October 15 with a presentation by Eric Larson of the Rand Corporation on his project on South Korean attitudes towards the United States. There will also be numerous other exciting events and programs on Korea-related issues throughout the coming year. Please visit our website for more detailed and continuously updated information.

KSP is also now home to the Journal of Korean Studies for which Chiho and I serve as associate editor and co-editor, respectively, of the journal. In addition, we have been engaged in a number of exciting projects. I have just finished my overdue book on Korean ethnic nationalism and am currently working with Kyu Sup Hahn, a doctoral student in Communications, on a project on U.S. media coverage of Korea and South Korean media coverage of the U.S. from 1992-2004. We will also continue on-going projects such as "Globalization in Korea" and "Historical Injustice, Reconciliation, and Cooperation." I appreciate the assistance of the many students and researchers who have been working with me on these projects over the years.

This year we will do an international search to fill the William Perry Chair in contemporary Korea. This is an extremely important appointment for the Korean Studies Program at Stanford, and you will have the opportunity to meet candidates throughout the year.

Thanks again for your continued support of the Korean Studies Program at Stanford. I look forward to seeing you at the various KSP events and programs throughout the year.

Cordially,

Gi-Wook Shin,

Director

After an intensive selection process, the Korean Studies Program (KSP) at the Asia-Pacific Research Center (APARC), Stanford Institute for International Studies at Stanford University has selected the first class of its Pantech Fellowships for Mid-Career Professionals. Philip W. Yun and John Feffer will be in residence during the 2004-2005 academic year and collaborate with the faculty and fellows at KSP and APARC. The fellowship was made possible by generous gift from Pantech Group.

Philip Yun received his law degree from Columbia University and was a Fulbright Scholar at the Yonsei University Graduate School of International Studies. Yun has had a remarkable career working both in the private and the public sector. While holding high-level positions at the U.S. Department of State, Yun worked closely with the Secretary of Defense, Dr. William Perry, to develop broad expertise on international negotiations, strategic planning and problem solving. He has practiced law both in Korea and in the U.S., worked in private equity investment, and provided comments and opinions for the media on North Korean issues. While in residence, he will work on developing an outline of a comprehensive roadmap that will lead to a secure and prosperous Northeast Asia that would include North Korea.

John Feffer is an accomplished writer and editor who has written on numerous topics such as the politics of food, Asia, Eastern Europe, Russia, foreign policy, economics, and nationalism. As a frequent traveler to North Korea (and to South Korea), he has a rare knowledge of and balanced perspective toward North Korea. His most recent publication is "North Korea/South Korea: U.S. Policy at a Time of Crisis". He is a former associate editor of World Policy Journal and has worked for the American Friends Service Committee, most recently as an international affairs representative in East Asia. He serves on the advisory committees of the think tank Foreign Policy in Focus and the Alliance of Scholars Concerned about Korea. While in residence, he will concentrate on examining food policy on the Korean peninsula.

KSP and APARC look forward to their joining us in the fall.

San Francisco -- Offshoring is just one of many global forces impacting job creation and destruction in the Bay Area and cannot be viewed in isolation from the key trends enabling it, such as globalization, technology-driven improvements in productivity and business disintermediation. Efforts to prevent offshoring will not be successful and are likely to come at considerable economic cost, according to a new study released today.

Sponsored by Joint Venture: Silicon Valley Network, the Bay Area Economic Forum and the Stanford Project on Regions of Innovation and Entrepreneurship (SPRIE), with research and project support from global management consulting firm A.T. Kearney, the study analyzed global trends, regional capabilities and the Bay Area job market.

Findings from the study, the first regionally focused on the Bay Area, were based on 120 interviews, analysis of 9,000 job listings and other primary and secondary research.

The Bay Area already has more experience with globalization and offshoring than other parts of the U.S., the study reports. Bay Area manufacturers earn almost 60 percent of their revenues in overseas markets. Analysis done as part of the study revealed 94 percent of companies in the semiconductor and semiconductor equipment manufacturing and software clusters - two driving sectors in the Bay Area in terms of employment and payroll contribution - are already using offshore resources.

This does not mean all jobs are going offshore. The study also found one-in-four job postings for large companies in those sectors during April 2004 was for positions in the Bay Area.

"The research makes clear that global trends will force continued creation and destruction of jobs in the Bay Area. These trends can't be reversed. Policies and investment should be directed toward helping the region strengthen its core capabilities to compete effectively on a national and global basis" said Sean Randolph, President & CEO of the Bay Area Economic Forum.

The study calls for policymakers to maintain strong support for basic research, invest in education to ensure a competitive local workforce and to address vulnerabilities in the regional business environment including housing, transportation and business regulations that hinder local job creation. Business leaders need to support transition programs and consider investment in local employee development to meet their future job needs.

The study found the Bay Area is losing ground to other regions in the U.S. and overseas in three competitive capabilities: mass production, back-office (transactional) operations and product and process enhancement. The competitive erosion in the latter is new. It appears that the Bay Area is rapidly losing out to other regions in occupations associated with engineering focused on cost reduction, fine-tuning processes and expanding product features. These engineering jobs, along with manufacturing and administration-related occupations, are expected to decline as the skills required for those functions are sourced more cost effectively in other regions of the United States and abroad.

The study also identified five competitive capabilities that investors and business leaders believe are key strengths of the Bay Area. In addition to three capabilities traditionally linked to the region (entrepreneurship/new business creation, research in advanced technologies and bringing new concepts to market), the analysis pointed to two other competitive capabilities not always in the spotlight:

• Cross-disciplinary research - coordinating and integrating advanced learning across industries and scientific disciplines.
• Global integrated management - managing and coordinating globally distributed business functions and networks.

Jobs aligned with these five regional strengths, such as high-level research, strategic marketing and global business and headquarter management activities, are expected to experience solid growth.

"The findings confirm that the region should continue to attract talent and foster innovation, start-up activity and job creation, as technology companies are launched and commercialized," said Russell Hancock, President and CEO of Joint Venture: Silicon Valley Network.

The Bay Area's strengths make the region a leader in job creation in early stages of the business lifecycle, but its weaknesses lead to job growth outside the region in the later stages. As a result, the study says, the Bay Area will continue to incubate and develop new businesses, a process that has historically been the core growth engine for the local job market.

"Companies founded in the Bay Area will typically maintain the majority of their workforce in the region until their first products or services gain market traction and key business processes stabilize," said John Ciacchella, Vice President with A.T. Kearney. "However, as these companies expand and mature, many of the new jobs that stay local will focus on management of expanding business operations that are outsourced, offshored and distributed to other regions."

The Bay Area also is well positioned in the industries likely to spawn new technology

start-ups, according to the study's job market analysis and interviews. Beyond its leading role in information technology, the Bay Area has the highest concentration of biotechnology firms in the country and more nanotechnology firms than all countries except Germany.

"How jobs in a region are affected by global trends depends on the competitiveness of the region's capabilities," said Marguerite Gong Hancock, Associate Director of SPRIE. "Despite a rise in the capabilities of other entrepreneurial regions globally, the Bay Area continues to lead in many of the capabilities considered most necessary for innovation and new business creation"

The study findings will be presented at a public event on Thursday, July 15, at Stanford University, where a panel of business and community leaders will discuss the report's findings and implications and take questions from the audience. The panel will be moderated by Paul Laudicina, managing director of A.T. Kearney's Global Business Policy Council, and includes:

• Edward Barnholt (Chairman, President & CEO, Agilent Technologies)
• William T. Coleman (Founder, Chairman & CEO, Cassatt Corporation, and Vice Chairman, Silicon Valley Manufacturing Group)
• Anula K. Jayasuriya (Venture Partner, ATP Capital LP)
• William F. Miller (Professor Emeritus, Stanford Graduate School of Business)
• The Honorable Joe Nation, California State Assembly

BAY AREA ECONOMIC FORUM
Bay Area Economic Forum (www.bayeconfor.org) is a public-private partnership of senior business, government, university, labor and community leaders, develops and implements projects that: support the vitality and competitiveness of the regional economy, and enhance the quality of life of the regions residents. Sponsored by the Bay Area Council a business organization of more than 250 CEOs and major employers, and the Association of Bay Area Governments, representing the region's 101 cities and nine counties, the Bay Area Economic Forum provides a shared platform for leaders to act on key issues affecting the regional economy.

JOINT VENTURE: SILICON VALLEY NETWORK
Joint Venture: Silicon Valley Network (www.jointventure.org) is a nonprofit organization that provides analysis and action on issues affecting the economy and quality of life in Silicon Valley. The organization brings together new and established leaders from business, labor, government, education, non-profits, and the broader community to build a sustainable region that is poised for competition in the global economy.

STANFORD PROJECT ON REGIONS OF INNOVATION AND ENTREPRENEURSHIP
The Stanford Project on Regions of Innovation and Entrepreneurship (http://sprie.stanford.edu), or SPRIE, is dedicated to the understanding and practice of the nexus of innovation and entrepreneurship in the leading regions around the world. Current research focuses on Silicon Valley and high technology regions in 6 countries in Asia: People's Republic of China, Taiwan, Japan, Korea, Singapore and India. SPRIE fulfills its mission through interdisciplinary and international collaborative research, seminars and conferences, publications and briefings for industry and government leaders.