No American plan, no American CEO

In a recent lament to friends, William Holstein, author most recently of The Next American Economy: Blueprint for a Real Recovery, wondered why the United States now seems unable to imitate countries like Germany, China, South Korea, and Singapore in taking steps to control its own economic destiny.  

He used the case of A123 Systems, Inc. as the trigger for the broader question. The company is an entrepreneurial U.S.-based effort to develop the advanced lithium ion batteries that are expected to power much of our future. Over the years, the U.S. government has made loans to the company of about $200 million, but now has approved the sale of the company and its leading edge technology to Wangxiang corp., one of China’s largest auto parts makers.

I didn’t find this deal in the least surprising. Indeed, I predicted something like it three years ago at a White House meeting called to deliberate ways of revitalizing U.S. manufacturing as a means of improving the lot of the American middle class. Some administration officials were urging that loans and other incentives be given to development of clean energy technologies like batteries, wind turbines, and solar cells. I pointed out that other countries like Germany, China, South Korea, and Japan were already doing that and that if we were serious we’d have to at least match their incentives. I doubted that we would do so because many of the White House economists were opposed to any such "industrial policy" action of "picking winners and losers." So, it turns out that my premonition was correct. The U.S. government may have made some loans available to A123, but they were a pittance compared to what other countries have made available to their producers.

Wangxiang may well turn out to be the salvation for A123. The Waltham, Massachusetts company’s executives say there will be no transfer of technology to China and that the Chinese investment will enable it to get over a rough patch and maintain production and jobs in the United States. But Holstein’s question is why there even needs to be a rescue and why the rescue can’t be American instead of foreign.  There are two basic answers.

One is that there is presently in the United States no concept of a national economic interest that is separate from and above the wish lists of the myriad of industries and interest groups. Unlike most Asian countries, the United States has no Five-Year Plan and unlike Germany it has no national level consultative mechanism among labor, industry, and government for achieving consensus on national economic performance. America’s professional economics community has, for the most part, embraced an extreme laissez faire doctrine that eschews concern for the structure or the economy and what it produces. This sentiment was well captured in the comment of one Reagan-Bush era economist who said: "potato chips, computer chips. What’s the difference? They’re all chips." A number of economists have denied making that comment. So perhaps it is apocryphal. But, even so, it perfectly captures the essence of the reigning economic orthodoxy. A number of leading economists have said that America does not need a manufacturing sector and this view finds wide expression in the notion of a primarily services based economy.

As a result, U.S. bureaucratic and political leaders are not guided by any principles of an independent American economic interest as they devise legislative and international negotiating agendas. Time and again the question of what we want is asked at the Department of Commerce and at the Office of the U.S. Trade Representative. Always the answer is the same. It is in the form of a counter question – what do the U.S. companies want. On rare occasions, that is supplemented with the question of what U.S. labor wants. But in either case, the implicit assumption is that the interests of the companies and the unions are the same as the American interest. That is not the situation in other leading countries.

The second reason is that as the heads of global companies U.S. CEOs are subject to pressures and feel responsibilities wholly divorced from American national interests. Holstein asks why something like the 1980s Sematech industry/government consortium that helped revitalize the U.S. semiconductor industry in the face of the Japanese challenge can’t be done today in batteries in the face of the Chinese challenge. The answer is that in the 1980s, Japan did not allow more than minimal U.S. semiconductor industry participation in the Japanese market. The U.S. semiconductor CEOs faced a situation in which they could not sell or invest more than minimally in the Japanese market while they were under aggressive attack in the U.S. market. In this situation, their interest was to survive in the U.S. market and they felt and acted like American companies threatened with extinction. It was easy then to define the interest of the semiconductor companies as the same as the interest of America. This is not so in the case of China now. Global companies can invest and operate in China, and, in fact, are under great pressure to do so. To the interest of the global company and that of the United States economy have been divorced.

Until either of these situations changes, there will be no more Sematechs and companies like A123 Systems will likely need to be rescued by foreigners.