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
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.