Needed: a Serious US Economic Strategy
Making potato chips is not the same as making computer chips
IN the post-cold-war world, economic issues have replaced national security as America's No. 1 priority. Jobs, education, and health care top the worry parade of almost every public opinion poll. The collapse of the Soviet Union has allowed us to give undivided attention to domestic problems. The recession, finally ending, has focused the American public on economic issues more than at any other time since the Depression. But solutions to our economic woes seem hard to come by.
The United States once took economic strength for granted. Now we are learning the hard way that comparative advantages of US business are not written in stone. Foreign competition, much of it by firms with strong government backing, challenges US industrial and technological leadership as never before. The inadequate response by US government and business is driven home by the loss of 2 million manufacturing jobs since 1980, the loss or weakening of key industrial sectors such as consumer electronics, m achine tools, robotics, steel, semiconductors, and autos, and a standard of living lower than in the early 1970s.
Our forebears understood the importance of a strong economy. In his "Report on American Manufactures," Alexander Hamilton proposed a private-public partnership to create a sound banking system and a first-class transportation infrastructure. Americans then built the world's greatest industrial economy, often marshalling government support of and involvement with business.
After World War II, however, the US government adopted a laissez-faire free-trade theory with a vengeance, largely in reaction to the tariff walls that helped deepen the Depression. Although laissez-faire economics served our interests reasonably well when America was the predominant economic power, and accounted for a disproportionate share of the global market, it no longer encompasses international competitive realities. Yet, while other governments attempt to provide their corporations with advantage s in the world marketplace through strategies and public policy incentives, the US remains wedded to a let-'em-sink-or-swim attitude.
This hands-off philosophy of the laissez-faire theorists is reducing the US to a second-class economy. It isn't really a policy, it's a cop-out, a rationalization for government inaction. Slowly, many are realizing that laissez-faire rules don't bring the results in the global marketplace we need to maintain a high standard of living, often because our competitors are not playing by these rules. But the laissez-faire response has been it doesn't matter which industries we retain and which we lose - that it doesn't matter whether we make potato chips or computer chips, so long as we make something.
One doesn't have to be an economist to know instinctively this theory is wrong, that it does matter what industries a nation has, and that potato chip production does not produce the same wealth or opportunities as computer chip production. What we make and what we trade is critical to our future. The more high value-added work Americans have, the more advanced will be our industry and technology, and the better our standard of living.
In order to expand the number of high value-added, high-paying jobs, America needs to return to its Hamiltonian roots. It needs to get rid of laissez-faire notions that are reducing us to second-class economic status and to adopt a new private-public partnership, a new social compact among government, business, and labor as part of an overall economic strategy for the nation. We must concentrate our energies on renewing our global industrial and technological leadership.
A coordinated economic strategy is not protectionist or isolationist, nor is it a form of Japan-bashing. It is simply competing on the same terms as our economic rivals, and with the same policy tools. Throughout the cold-war period, US trade policy pushed rules and processes instead of results as it attempted to recreate the free world in its own economic image. This was well-intentioned but misguided. A coordinated economic strategy does not ignore rules, but it shifts the emphasis to results. A high s tandard of living for Americans through value-added work must be the goal of national economic policy, not proselytizing non-like-minded countries into adopting the American economic model and sacrificing jobs and industries while we wait for them to see the light.
As the presidential and congressional campaigns take shape, the political prospects for a new national economic agenda will be clearer. Those who would lead America must articulate a new vision, a comprehensive strategy for the post-cold-war world. Here are some key indicators against which to measure the candidates:
* Savings and investment: The US is regularly and significantly out-saved and out-invested by its competitors. Japan out-invests us 2.5 to 1 per capita, Europe 1.5 to 1 per capita. Much of the blame rests with a bloated federal budget and tax structure that discourages savings and investment and rewards only consumption. Thus, our companies don't buy the equipment or modernize the production processes they need to compete. To jump-start reform, the budget deficit has to be controlled. Incentives to save
must be created, perhaps through revitalized IRAs. To encourage investment we must institute a sliding-scale capital-gains tax, make the R&D tax credit permanent, and create investment tax credits.
* Economic policy coordination: The US needs a coordinating mechanism for economic policy to guarantee that new policies are thoroughly researched, focused tightly on strengthening American businesses, and unlikely to backfire down the road. This means revamping the current mishmash of policies, laws, and regulations that fragment authority and often work at cross purposes. In the international arena, the government needs to seize the initiative by backing American companies through appropriate industria l policies and technology stratagems, and not simply reacting to the programs of other nations.
* Trade: The US needs a new approach. We must begin by agreeing that leadership pays in key industries and not stand by while foreign competitors forge ahead assisted by unfair trading practices. We can no longer accept paper rules and empty promises. Reciprocity, meaning that the US must have the same opportunities in other markets that others have here, should be the cornerstone of a new trade policy. Finally, the US must realize that while multilateral agreements can be advantageous, we must not be so
tied to "global cooperation" that we accept any agreement.
* Physical infrastructure: The US must revamp its infrastructure. Rather than just repairing and replacing roads and bridges, we must invest in a 21st-century infrastructure. This includes a nationwide broad-band communications network, a mag lev transportation system, intelligent highways and smart vehicles, "Orient-Express" aircraft, supercomputer networks, digital libraries, homes, and businesses wired for fiber optic communications, and advanced technology R&D consortia.
* Defense industrial base conversion: The US needs to develop a dual-use industrial base. Greater integration of civilian and military R&D would benefit both and boost America's competitive position in the world. The military would receive access to commercial R&D and innovations in an era of tighter budgets, while civilian industry could tap the expertise of government laboratories.
* Corporate governance: US corporations are often criticized for short-term views. Yet that is precisely what many of our laws and regulatory agencies encourage. For example, companies live or die by Wall Street's reaction to quarterly earnings reports. By making this requirement annual, we could give CEOs some breathing room to plan for the longer run. We need to encourage managers to consider stakeholders - workers and communities - as well as shareholders in their decisions. Government should relax an titrust laws in order to allow competing companies to work together on R&D programs.
These suggestions represent common sense ideas rather than the partisan politics that has led to the current morass. Political candidates lacking the vision to outline a coordinated program for the nation's economic future will be best turned away from or out of office.
Getting America's economic house in order and returning to a high rate of growth should be our top national priority. Government, in partnership with industry, has always played a role in spurring growth. It's time for a new partnership to see that America remains focused on coordinated long-term goals, and that our companies are not hung out to dry against the industrial policies of other nations. Only through a cohesive economic strategy will America remain an industrial and technological leader in the
21st century and preserve for future generations her traditional promise of greater opportunity and better lives.