Posted By Clyde Prestowitz
Monday, January 9, 2012 - 3:29 PM
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The Obama administration released two major strategy plans last week. The fact that they are both fatally flawed and that you only know about one of them tells you that the American Dream really is rapidly becoming a nightmare.
The one you know about is, of course, the defense budget and armed forces structure plan that the president presented in a speech at the Pentagon and that has subsequently been widely reported and blogged and commented upon. The one you are almost certainly unaware of but that is arguably more important to America's future is the Commerce Department report to the Congress on "The Competitiveness and Innovative Capacity of the United States." Maybe the awkwardness of that title scared all the analysts and commentators away. I don't know, but for whatever reason there has been virtually no mention of it in the media. Yet, obviously there can be no sustainable Defense Department or budget if the United States loses its competitive and innovative capacity -- something it is presently doing at a rapid rate.
Indeed, one piece of good news about the report is that instead of the usual obligatory blah blah about U.S. economic virtuosity and Americans' being able to compete with anyone in the world, it actually admits we have some problems. But having done so, it then proceeds with all the orthodox blah blah in its analysis of the problems and its prescriptions for their solution. Thus it begins by explaining that America became the richest major country ever known because its government invested in R&D and infrastructure, protected intellectual property, promoted public education, and got out of the way of private business. Not a mention is made of the high tariffs behind which American industry overtook British and German industry in the 19th and early 20th centuries. Nor is there any word about the U.S. industrial policies that largely created the American aircraft, shipping, computer, electronics, telecommunications, semiconductor, chemical, railroad, agricultural, and many other industries.
Consequently, the prescriptions for curing the current decline disease are all standard blah blah motherhood and the flag kind of things. More education, more and better infrastructure investment, more investment in basic R&D and in diffusing technology throughout the entire production base, more favorable corporate tax structures and rates, more export promotion, and better protection of intellectual property.
Don't get me wrong. I'm not against any of this stuff. It's all useful stuff and we should do it. But even if we do all of it, the U.S. economic/industrial/technological decline won't be arrested because the problem analysis automatically excludes consideration of the key measures necessary for an American production renaissance. At the moment, four great incentives are continuing to pull the production and provision of tradable goods and services out of the United States. These are foreign currency manipulation that overvalues the dollar, subsidization by many foreign governments of the offshoring of U.S. production capacity, the "buy national" policies and attitudes of many governments that force U.S. companies (and the corporations of other countries) to produce in a particular country if they want to sell there, and the subsidization of and risk reduction for capital investment by state-owned or indigenous private companies in designated "strategic" or "pillar" industries by a number of foreign governments. As long as the report doesn't even mention these elements, let alone address them, there is no hope for a shift in the downward arching American economic, industrial, and technological trajectory.
But wait. It gets worse. At first glance you might take some comfort in the president's speech on defense spending at the Pentagon. It did call for a reduction of U.S. forces in Europe and about $500 billion in cuts over the next 10 years. These are certainly steps in the right direction of correcting the massive misallocation of resources caused by bloated U.S. national security spending (about $1.5 trillion annually including all national security-related expenditures) that is far more than twice the spending of the rest of the world combined and that constitutes about half of the total annual federal budget. Unfortunately, they are very small steps, and unfortunately they are offset by the mistaken so called "pivot to the Asia-Pacific."
Why is the "pivot" a mistake? Because it presumes a threat where none exists but where the presumption could become a self-fulfilling prophecy and where others could deal with any threats should they arise in the future. Because it entails further expenditures far beyond what is necessary for effective defense of the United States and its interests. And because it reduces U.S. productive power, competitiveness, and long-term U.S. living standards by providing a kind of subsidy for the offshoring of U.S.-based production capacity.
Ask yourself. What exactly are the threats to the United States and its allies in the Asia-Pacific area? The stock answers are China and North Korea, and sometimes the vague term "instability" is mentioned. OK, China's economy is growing rapidly, but Washington's official line is that that's good and we want more of it so that China can be another engine of global growth. Indeed, we encourage U.S. corporations to invest and produce in China by not countering China's currency manipulation or its aggressive investment packages that induce the offshoring of U.S. investment or China's bureaucratic pressure on corporations to produce in China as a condition of selling in China and by maintaining a corporate tax structure that is very disadvantageous versus China's. Of course, China's military is also modernizing and re-equipping, but that is only to be expected from a rapidly developing country. If Washington thinks China's growth is a good thing, it can hardly cry foul when that growth leads to military modernization. Furthermore, America's deployments and constant patrols around China's shores are a continuing provocation.
Imagine the U.S. reaction if Chinese fleets patrolled the waters of the U.S. West Coast and if its military aircraft regularly flew near our bases in San Diego, Hawaii, and elsewhere for the express purpose of tripping our warning systems. Do you think Washington would be modernizing our defense forces? Of course it would be. But the main point here is that nothing China is doing calls for a sudden emphasis on a stronger U.S. Pacific presence. Remember, we already have half of our aircraft carriers and other large forces there.
Of course, North Korea is a problem, but it is not going to invade the United States, and the South Korean and existing U.S. forces in Korea are more than sufficient to halt any attack that might take place on the Korean Peninsula. Moreover, Japan has substantial forces that also can be brought into play against Korea if need be.
As for instability, there are, of course, tensions among some of the Asian countries, including among some of our allies like Japan and Korea. But these tensions pose no direct threat to the United States or to its interests. If we ask ourselves what those interests are, the answer is mostly that we buy from and sell (a lot less) to Asia. Well, the Asians certainly are not going to stop selling to us just because they have a few misunderstandings among themselves. Nor are they going to stop buying from us. If we look at Europe, we see that the Europeans have massive disagreements among themselves, but it doesn't stop them from trading with us, nor do we feel compelled to somehow quash the intra-European disagreements. Indeed, in the new structure just announced, the United States will be moving troops out of Europe. That is very sensible. But it seems that some of those forces may be redeployed to the Asia-Pacific region. Why? Do we trust Asians less than Europeans? Is there an element of racism involved here?
I don't get it. But what I do get is that one of the great comparative economic advantages of the United States is its stabile, open system governed by a rule of law in which power is transferred regularly with the consent of those losing power. There are very few places in the world where this is the case. This makes investment in America very attractive even in the face of unfavorable taxes and regulatory practices. By attempting to guarantee this kind of stability in Asia and to smother all intra-Asian tensions and disagreements with its security blanket, Washington is compensating for Asian investment disincentives and is providing a kind of insurance policy for corporations that move their production and R&D offshore. In short, Americans are being taxed to provide the military muscle that will ensure extension of the same kind of investment-friendly stability that prevails in the United States to the Asia-Pacific region so that their jobs can be safely outsourced to less expensive Asian workers.
That's not a pivot to Asia. It's a pivot away from the American Dream.
JIM WATSON/AFP/Getty Images
Compliments Mr Prestowitz.
I entirely agree with your excellent article.
Maybe this pivot away is a part of the US long term strategy, however strange this may sound.
Best regards from transatlantic observer.
It All Makes Much Sense (1 of 2)
(1 of 2) But Mr. Prestowitz, it all makes a lot of sense to Washington. Asia is where the growth and the wealth creation is, and TPP paths the way to strategic dominance, so that America's comparative advantage can shine.
Vieing for natural resources is so Middle Ages and cold weapon-esque! Enslavement is a given, but use of force is secondary, or even tertiary. Today, what is important is done electronically and by contract.
America, with bipartisan support, chose ultra highly leveraged FINANCIAL ENGINEERING as a post-industrial era "industrial policy", and in the last 15 years has staked the policy with the full faith and credit of the nation, and the best minds the country can offer. Bloomberg reported the size of the derivatives casino reaching US$700 TRILLION (50 times the American GDP) by June 2011. When you consider that the American banking sector has only $16 Trillion in total balance sheet assets, gambling at this level of $700 Trillion (about 44 TIMES assets) is RECKLESS. And yet Washington acts as if the irresponsibility is a good thing. This festering financial cancer is affecting not only America, but the entire world.
The world's economic malady since 2008 was basically caused by an American decision about 15 years ago, to enable massive OTC derivatives trading, as the nation's industrial policy in a post industrial world. The policy is imposed on the rest of the world through FREE TRADE, which eventually led to the 2008 debacle.
Today, American banking is synonymous with "trading", mostly in unregulated OTC derivatives. I believe it was reported that B of A made 90% of its profits in 2010 on trading; the number of SBA loans made also dropped by about 90% from previous levels. American banks don't bank (lend) anymore, they trade. They are not really banks anymore, but malignant forms of their former selves.
On its face, as a grand national strategy, derivatives look brilliant: not constrained by natural resources, not limited by labor, “new products” galore come forth from the "ingenuity" of the new-fangled breed of financial engineers, and growth looks unlimited, basically constrained only by the salesmen’s ability to sell.
The "minor detail" is that unlike most other business endeavors, derivatives do not produce anything. $700 Trillion in derivatives did not produce a shirt, a tire, or even a single hamburger. It is purely redistributive - one side wins, and the other loses, with the croupier (banker) taking a cut as intermediary. Derivatives, in other words, is PURE GAMBLING.
Or is it rigged gambling? The "contracts" are typically crafted by the best Wall Street prospectus writers, and not even the salesmen can really explain them. The suspicion is unavoidable that if they are truthfully explained, nobody would buy them. The products are typiclaly sold on the age old "confidence" basis - "Hey, this is a sophisticated business instrument coming from one of the world's largest financial institutions, what can possibly go wrong? Just trust me." It is also a VERY profitable export. Foreign central bankers and major insurance houses, sick and tired of 2.5% returns on Treasuries, are prime customers (victims).
There is no sign of abatement, even after the 2008 debacle. With the American mutual funds industry now (year end 2011) pushing for massive adoption of derivatives, and the Commodities Commission promulgating regulations to allow the small guys to join the fun, the derivatives casino is going to be US$1.5 QUADRILLION in no time. That would be 100 times the size of the American GDP, and more than the entire world's total GDP!! That is sheer MADNESS.
What is scary is that many in Washington believe that there is method (and good) in that madness.
(cont's)
It All Makes Much Sense (2 of 2)
(2 of 2) 2008 complicated things a bit. The world witnessed how even 100 year old financial houses can go belly up overnight. Lehman Bros. had $60 Billion of derivatives on its books, lost 3% or $2 Billion, which wiped out its equity. WHAT is the significance of that? 3% of $700 Trillion is $21 Trillion, which is more than the TOTAL equity of ALL American financial companies. AND you would never know when it would hit, or even which bank it might hit. MF Global is just the latest example - total wipeout with very little prior warning.
You think that would stabilize the world economy?
2008 complicated things, as I said. Both Germany and China ordered their banks to stop massive gambling in derivatives. Both of their economies recovered. America bet the farm, and counted on EXPANDING the scope of the casino, betting heavily that (a) in the name of FREE TRADE or other trade arrangements (such as TPP), other countries will be forced to open their markets to this contagion, and (b) the American banks would always win HUGE against foreigners, as they did in the decade before.
The $7.77 TRILLION in subsidies (in the form of no cost or very low cost loans) to the American banking industry also complicated things (Bloomberg reported the practice after 2 years of FOIA requests). Now the foreigners are going to point to that as an violation of WTO rules, and refuse to allow the American banks to come in and maraud.
As an aside, against that backdrop, disputes over merchandise trade (a billion here, a few hundred millions there) are rather irrelevant. The real economic "battleground" in this 21st century is going to be over industrial policies in a post industrial world - mostly over the financial industry. It is absolutely necessary to discuss and compare risks in various nations' banking and financial systems, to identify systemic risks and frauds that could infect the whole world.
Note what Premier Wen, Jia Bao said during the National Financial Work Conference in Beijing, Jan. 7, 2012:
"We should especially note that the global financial crisis has not yet ended. We should strengthen our awareness of risks and responsibilities in order to push financial work to new levels," he said. Wen voiced his support for the development of financial innovation, but stressed that this should not avert supervision or escape the real economy. "Risk-aversion should be the lifeline of our financial work," he said. China will further open up its financial sector to the outside world in an "independent, gradual, safe and win-win" way to ensure the country's economic and financial security, Wen said."
A bit obscure, perhaps. But translated, it confirms that Beijing is going to continue to join Germany and refuse to let Chinese banks gamble in derivatives, and will continue the policy of making banks lend money to the real economy.
The lines are drawn. Washington (mind you this has bipartisan support) is desperate to shift focus to Asia, because that is where the growth and the wealth is going to be generated. Note that TPP, as a trade pact, actually contains very unusual terms such as doing away with national controls over capital flows – making it so much easier for financial looting.
In 2010 I believe the total reported “banking” profits for American entities was US$1.4 Trillion. If the $700 Trillion did not produce anything, that money has to be taken from those producing. Do you think that is good for the world, or even for America?
Stop Waiting on Washington (+3 points)
Good article! Before I explain the title of my post, let me address 3 points you raised on national policy:
1. America's "pivot" towards Asia - I'm also lost on the strategy here and hope the administration can articulate more why this shift is important. It seems like more Cold War-style foreign policy that prioritizes diplomatic relations over domestic economic interests. Made sense in the mid- to late-20th century, but we need to be putting America first again.
2. Currency Manipulation - Important, but not as much as the other incentives you mentioned. Unlike the 1930s, complex global supply chains today diffuse the impact of exchange rates on prices across multiple economies. Discriminatory market barriers play a bigger role: What does it matter if your product is cheaper if you can't access the market, protect your IP, or face unclear rules? While prioritizing those larger issues, we should simultaneously look to have a new multilateral understanding on exchange rate disciplines for the 21st century (NOTE: WTO is holding a currency & trade seminar in late-March). The US will need to be prepared to defend its quantitative easing policies, however, lest we open ourselves up to retaliatory currency manipulation sanctions from Brazil, China, and others should we open that bottle ourselves.
3. High Tariffs in late-1800s and early-1900s - This is true, but we need to be honest that it wasn't all due to pure altruistic strategy. Many of those protected US industries had strong political connections and knew their home market was where the growth lied (we can see this mentality playing out in China today). In reflecting upon this defensive strategy, we need to appreciate that our world is vastly different than that of Lincoln, McKinley, and T.R. Tariffs may have been a sensible development strategy during the Industrial Era in which most production took place within a country, but technological advances in the last 30 years have made production across multiple countries the more competitive model. Production chains shift quickly today and excessive tariffs are a band-aid approach that unduly harm consumers while doing nothing to improve the global competitiveness of US industry.
Now to the point: Industrial Policies. The technologies of the Creative Era can empower more individuals and communities. We're beyond the need for the top-down administrative model of the 20th century; there is less need to wait around for Washington to get its act together. The 21st century is a time where technology enables agile, flatter, and decentralized organizations to be more competitive than antiquated hierarchical structures. The same is true of nations.
Bottom-up industrial policies are the better model for America today. Local communities better understand their own comparative advantages. Local governments should partner with their local chambers of commerce, schools & universities, and other stakeholders to develop targeted offensive strategies for building and maintaining industry-specific advantages. While doing so, they should remember that industrial means industry-level, not corporate-level. This means policies that neutrally favor all companies in a particular industry (foreign and domestic) while not picking winners and losers amongst particular companies based upon political connections.
Pivot to Asia Strategic (or Sinister)
@Will Turner:
The pivot to Asia is strategic (or sinister, depending on the viewpoint).
Some key features of the TPP is that member countries have to remove their controls on capital flows, and to open up their banking sectors. This is not new. America had sought to including banking as part of trade pacts since the WTO.
http://www.citizen.org/documents/FinanceReregulationFactSheetFINAL.pdf
"...Starting in the late 1970s, the U.S. government and corporations pushed to redefine “finance” from a service that supports the real economy to a tradable commodity whose flow across borders should be uninhibited. Starting in the late 1980s, they successfully pushed for financial services to be included in “trade” negotiations, including those establishing the World Trade Organization (WTO). “The sector was truly unique in that respect, and there is little doubt within the trade policy community that financial sector support in the European Union and the United States was a determining force in concluding the FSA [WTO Financial Services Agreement]” notes a study posted on the WTO’s own website “Financial Services and the WTO: What Next?”
The WTO rules require deregulation – and lock-in – of financial services that countries “liberalize” under these terms.
The TPP goes many steps further. Military re-engagement in Asia is very much a tool of the overall plan, to induce countries to join the TPP and give up their sovereign protection of their capital markets and financial industries, in exchange for a security guaranty.
WHY? What's the benefit to America? Well, to be cynical, bankers own Washington, and the newly re-engineered banks, bulked up with the full faith and credit of Uncle Sam ($7.77 Trillion in very low interest or no cost loans since the 2008 debacle), want access to foreign markets.
See my notes above on American banking. American banks don't bank anymore. They trade (gamble in OTC derivatives) to the tune of 50 times the size of the American economy (according to Bloomberg, by June 2011 the derivatives casino was $700 Trillion in size). To keep the fraud going, they need new blood (fresh victims). Nothing beats a bunch of compliant Asian banks whose governments rely on the good graces of the American military. It is no different from demanding war reparations, except it is prepaid.
Pivoting to Asia is a brilliant strategic move, or supremely sinister (or both?).
What is China's Reaction to this Pivot?
Beijing's response to the TPP and the pivoting?
You dance your dance, I'll dance mine.
Premier Wen, addressing the national financial work conference this last Saturday in Beijing, spoke with his hands placed firmly over the wallet.
"We should especially note that the global financial crisis has not yet ended. We should strengthen our awareness of risks and responsibilities in order to push financial work to new levels," he said. Wen voiced his support for the development of financial innovation, but stressed that this should not avert supervision or escape the real economy. "Risk-aversion should be the lifeline of our financial work," he said. China will further open up its financial sector to the outside world in an "independent, gradual, safe and win-win" way to ensure the country's economic and financial security, Wen said.
Translated (OK, it was sorta obscure), it means that Chinese banks will continue to lend to the real economy, and "We ain't gonna gamble with you boys; no siree . . . ."
Who can blame the Chicom leader? Looking back in the last 10 years, HOW MANY foreign banks or other foreign financial institutions had actually won (or at least not lose) playing derivatives with the American banks? Suspicion run rampant that the game is rigged, especially in view of the inscrutable contracts, drafted by the best Wall Street prospectus writers.
I completely agree with the analysis contained in the article.
However, one has to wonder which are the viable alternatives are.
The author invokes the successful tariff policies that helped the US economy to catch up with the then-dominant British and German industries. Where would this lead now? The system of tariffs work in an economy where there is a huge gap between the big buying power of the internal market and the modest capacity of domestic industries. Enabling import tariffs would trigger trading partners (like Europe) to do the same, thus exporting goods would be more expensive. I'm no economist, but I doubt the American market - big it may be - would be enough on its own to satiate the American industry's appetite, let alone growing it. Moreover, the corporations would be compelled to curb capacity or move it home, growing prices again. Other export-based economies (like China) would be hit even harder, true, but I doubt that triggering another Great Depression (sudden, huge loss of purchasing power) would solve the problem of slow growth. This approach would help economies like Brazil or Russia, but not the US as it is now.
Other than that, it is perfectly sensible. Providing security guarantees to other economies should be a tool (weapon?) used based on careful economic as well as political consideration:
It was repeated ad nauseam that no significant military presence is necessary in Europe, a continent which houses 4 of the world's top10 military spenders. The continent can easily fend off any external threat, or at least delay any conventional attacking force until US military presence can be re-established. So shrinking the forces there is beneficial.
Providing elevated security guarantees for major Asian powers is equally damaging and pointless. They players in the region are capable powers, sometimes overly suspicious of any US involvement (China, Russia). Therefore elevated military presence is unfruitful on several points:
- US military bases are not likely to stop any kind of power-games (take the Japanese-Chinese rare earth dispute);
- In case of an invasion, they would mean almost nothing, yet they could (inadvertently) drag the US into a war. Not that they are any reluctant to get into one...
- All the main players are indispensable partners on some fronts, favoring some of them militarily would incur inestimable diplomatic and economic costs.
The world's economic malady since 2008 was basically caused by an American decision about 15 years ago, to enable massive OTC derivatives trading, as the nation's industrial diykitchenblog policy in a post industrial world. The policy is imposed on the rest of the world through FREE TRADE, which eventually led to the 2008 debacle.
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.
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