Fiddling while America burns

The United States is losing its long standing global technological leadership and is suffering a dramatic loss of competitiveness that is undermining both American living standards and American security.

That’s the message of three just-released studies. The National Science Board (NSB – the policy making body of the National Science Foundation) earlier this week published the results of an analysis showing that over the past decade the United States has lost more than a quarter of its high tech jobs as its once vaunted global leadership in science and technology evaporates at an ever accelerating rate. According to the NSB, the U.S. share of global research and development dropped between 1999 and 2009 from 38 to 31 percent while that of Asia climbed from 24 to 35 percent.

Yesterday, the Harvard Business School (HBS) released a presentation entitled: Prosperity at Risk.  It is the results of a survey of 10,000 HBS alumni from a wide range of industries, localities, and job responsibilities. The results show that 71 percent of those surveyed believe U.S. competitiveness will continue to decline over the next three years, putting continuing downward pressure on American living standards. They also believe that U.S. corporations will be much less able to compete and to pay high wages and benefits over the next three years.

Also yesterday, the U.S. Business and Industrial Council (USBIC) published a report showing that the foreign produced share of U.S. high valued added manufacturing consumption hit 38 percent in 2010. The significance of this number is enormous because the mantra of U.S. economists and policy makers for the past thirty years has been that America and American workers are moving to the "higher ground" of advanced technology and high value added production as the manufacture of commodities and lower value added products moves abroad to take advantage of inexpensive labor. But, as the USBIC study indicates, the high value added and advanced tech stuff seems to be moving off-shore as well, and instead of moving to higher ground, American workers are actually moving to lower ground.

Disturbing as these studies are, the most disturbing thing is that they are not new. Twenty five years ago, I wrote a book (Trading Places) about how America was giving away its future. Ten years ago, the National Academy of Science published Rising Above the Gathering Storm, an analysis that warned of decline and that called for moving to the "higher ground" of innovation, high value-added, and high technology. Since then others such as former Intel chief Andy Grove, former HP CEO John Young, Dow Chemical CEO Andrew LIveris, former IBM Chief Scientist and Sloan Foundation President Ralph Gomory, Harvard Economist Dani Rodrik, and author Pat Choate have warned of declining U.S. competitiveness and its devastating economic and security implications.

We have all been ignored, and as we have been consigned to nether regions, the loss of U.S. competitiveness, stagnation of U.S. living standards, rise of national and household debt, and over-stretch of U.S. military forces has accelerated.

In view of the vastly negative implications of declining competitiveness, the 64,000 question is why those of us crying wolf have been not only ignored but disdained and denigrated for so long.

There are three major reasons.

The first is that the number one national priority of the United States for the past sixty odd years has been national security defined in fairly narrow military and diplomatic terms. To play the "Great Game" and maintain hegemonic global power has been the main objective of American presidents and of the foreign policy establishment as constituted by the Council on Foreign Relations, the Departments of State, Defense, and Energy, and the network of security related think tanks and publications. To achieve use of foreign bases, votes in the UN or World Trade Organization (WTO), and other kinds of military/political assistance, Washington has been willing to make economic concessions. So, for example, during his first tour of China, President Obama promised to assist China in developing an indigenous jet-liner in order in order to encourage China to assist Washington in dealing with Iran and North Korea.

The second is the stubborn embrace by U.S. professional economists of the notion that what an economy makes really doesn’t matter very much. Former Chairman of the Council of Economic Advisers Herb Stein once told me with regard to Japan that the Japanese will supply us (Americans) with autos while we sell them poetry. A variety of other leading economists deny making the statement: "potato chips, computer chips, what’s the difference they’re all chips", but if they didn’t make it they should have because it well reflects the attitudes of the professional economics community. Indeed, former top White House economic adviser Larry Summers and Peterson Institute for International Economics both argue that America doesn’t need a manufacturing sector. They have consistently and persistently ignored and misunderstood the critical linkages between manufacturing, R&D , Science and Technology education, and economies of scale. Because spillovers and externalities (loss of key technology production leads to reduced enrollments in engineering classes, for example) are difficult to fit into the mathematical models they have been ignored or dismissed, and yet they are of utmost importance. The result has been that professional economists vote against adopting any kind of U.S. economic strategy as well as against countering the strategies of mercantilist economic partners.

Finally, there is the fact that global corporations respond more readily to the wishes of authoritarian, mercantilist regimes than to those of the liberal democracies. In Washington, after all, the head of a major global corporation is a powerful figure and political player whereas in China or Singapore or Moscow he or she has no special clout and must show deference like all the other supplicants. In effect, the big global CEOs  become hostages to the authoritarian regimes and effectively their lobbyists in Washington.

This latest batch of reports is a dramatic reminder that America can’t keep going this way indefinitely and that it desperately needs an economic strategy if for no other reason than to counter those of its economic partners and competitors. What countries make does matter. Markets are not perfectly competitive and are characterized by externalities and particularly by economies of scale. Much innovation is path dependent and first mover advantages can be decisive. Now is the moment when the presidential candidates must stop talking political nonsense and start talking competitive economic strategy.