Macroeconomics plays a critical role in operation of any business as prevailing economic conditions affect individual businesses as well. Entrepreneurs and others business people must take these factors into consideration as part of their market analysis.
As one example, the reduction or increase in demand for products affects decisions to expand or scale down their rate of production. Macroeconomics is intertwined with business because business is affected by the factors that constitute macroeconomics. Macroeconomics deals with issues relating to factors that affect the economy, including areas like the rate of unemployment, inflation, business cycles and Gross Domestic Product (GDP).
In this blog, I will explain the role of macroeconomic cycles and how it relates to business models prevalent in semiconductor industry. The semiconductor industry in United States has undergone transformation from a few integrated device manufacturers (IDMs) to several fabless companies. The fabless-foundry business model has led to transformation of US semiconductor industry.
However, the fabless-foundry business model violated common sense macroeconomic parameters, and the macroeconomic losses to US economy began to outweigh the microeconomic benefits from the approach. The US semiconductor industry began offshoring labor-intensive manufacturing operations in the 1960s, followed in the 1970s and 1980s by increased offshoring of complex operations, including wafer fabrication and some research and development (R&D) and design work. Although offshoring of labor-intensive semiconductor jobs from US to Japan had started way back in 1960s, the macroeconomic losses then were minimal due to prevalent free market capitalism in US.
When Federal Election Campaign Act (FECA) was passed in 1971, the resulting political corruption through unlimited contributions of "soft money" transformed free market capitalism to crony capitalism. The budget deficits started to soar when huge tax cuts were passed under president Ronald Reagan's presidency. The graph below shows that since the FECA was passed in 1971, the monetary policy started to change due to political corruption so that real wages of employees started to trail employee productivity.
This monetary policy resulted into increasing gap between wages and productivity. The tax cuts passed by President Reagan resulted in growing disparity in United States. The graph below shows a comparison between the great depression and great recession since 2007 as a result of growing economic disparity, showing clear evidence that a great depression has actually started in United States in 2008. The disparity started to grow in 1980 and when the economic disparity reached close to what it was just before 1929 great depression, stock markets crashed in 2008.