With markets at last recovering from the turn-of-the-century crash and the attacks of September 11, it is an opportune time to debate America’s future in a rapidly changing world economy. America’s establishment of liberal economists and media pundits, however, are joining in a cramped new nationalism that jeopardizes the future of American technology and prosperity. Like reactionary jingoes of the past, they are priming John Kerry with the delusional view that the U.S. and its workers are somehow victims of global trade and capital movements. But as the presidential debates turn to domestic policy and economics, voters need to recognize the realities of world economic transformation and the real threats to American dominance.
In a popular image, “Benedict Arnold CEOs” are seen to be offshoring factories and outsourcing jobs. Once-prestigious economists such as Paul Samuelson and once-responsible analysts such as Paul Krugman and once-sensible financial pundits such as Lou Dobbs are adducing twisted new theories of how free trade is no longer a win-win proposition. The alleged victims of expanding trade and globalization run from low-wage American workers to Third World environments, from aging American software engineers to overall U.S. competitiveness. Mr. Kerry is showing a disturbing receptivity to this alarming turn among his economic allies and advisers.
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With international trade expanding as a share of global GDP, these pundits want to revisit and politicize all trade compacts in order to incorporate favored rules for ecological and labor policy, presumably lowering the permitted exhalations of carbon dioxide by low wage workers abroad. They want to revive the entirely spurious issue of dumping, a system of price traps and controls used only against foreign rivals outperforming U.S. companies, usually using U.S. components.
Central to their concerns is the hugely beneficial emergence of China from barbarism and India from penury to become crucial sources of skills and components for U.S. companies and by far the fastest growing markets for high technology goods. But in a remarkably callous and destructive revulsion, these new self-defeating nationalists of the left want to deprive Indian engineers of jobs serving American companies and to harass China over spurious charges of currency “manipulation” and picayune technicalities of ever more complex U.S. trade laws.
In the crucial area of technology, the new nationalists claim to want a futuristic industrial policy. But when closely examined, their support for technology shuns most existing markets, energy sources, and technology companies in favor of subsidies for fashionably flaky or far out technologies, such as nanotech and hydrogen cars. Promises to achieve energy independence, for example, invoke the usual heliotropic mantras and Quixotic tilts at windmills, while opposing any demonstrably effective means of energy production, such as new drilling for oil and gas in Alaska or new generations of nuclear plants.
All these policies reflect an era when the U.S. was the global capitalist spearhead, dominant in technology deployment, and our major rivals routinely crippled themselves with socialism. Through these decades, the U.S. could afford to indulge in chemophobia, xenophobia, eco-legal self-abuse, rampant litigation, and regulatory excess without gravely harming what remained the world’s lowest taxed and freest major economy.
Today, however, our major rivals are China, Taiwan, South Korea, Japan, and other Asian tigers that are more aggressively capitalist and more resourceful in deploying technology than we are. Preparing to join them are Russia and its Baltic and Eastern European neighbors now competing with each other in lowering tax rates to flat levels in the low teens. China has become a new Wild East of enterprise, with the heart of its economy located in “free zones” with lower tax rates and regulations than Silicon Valley. In energy policy, China is far more advanced than the U.S. and has announced plans to build 60 new nuclear power plants over the next five years; Russia is unleashing petroleum venturers across its endless reaches of promising territory.
In high technology, China today has more Internet connections and its free zones have higher bandwidth than does the U.S. South Korea has 40 times more communications bandwidth per capita than we do. Japan is also far ahead of us in broadband deployment. India is advancing rapidly, particularly in software, fueled by graduates of its rigorous and competitive school system. Asian countries annually graduate 10 times more electrical engineers than does the U.S., and the U.S. still feels free to send back to their homes foreign engineers and scientists graduating from advanced education in the U.S.
At the same time that our rivals have turned sharply toward capitalism and technology, the U.S. intelligentsia is turning toward a technophobic fear of useful chemicals (DDT, PCBs) and fervent opposition to world-leading deployment of technology in the U.S. by such corporations as Wal-Mart and General Electric. In passionate support for the Kyoto treaty, they arouse false fears of global warming (global temperatures today stand just below the average of the last two millennia), and raise the hopes of foreign and U.S. bureaucrats bent on usurping control of U.S. energy usage from our citizens.
At the same time that this movement offers reefs of proposals that would ensnare the U.S. economy in new taxes and regulations, its economists accept a set of unduly pessimistic beliefs about current U.S. performance. Not only is the U.S. wartime budgetary deficit strangely seen as evidence of runaway tax cuts for the rich, but a growing trade gap is seen as evidence of a gullible America absorbing goods dumped from abroad while outsourcing jobs to cheap labor overseas. Over and over, the new American jingoes depict the U.S. as somehow a victim in the international economy.
Warning of a possible turn against the dollar by current holders of the currency, such establishment figures as Robert Rubin and Pete Peterson, and their academic and journalistic vicars, urge tax hikes, devaluations, trade restrictions, higher minimum wages for labor, as if the U.S. were a precarious Third World country to be pushed into crisis by the International Monetary Fund.
Their case is a tangle of contradictions. We are to run down the dollar, creating inflation and inflation premiums in interest rates, increasing the costs of all technology businesses that import crucial components (nearly all), crashing our markets ourselves, in order to prevent foreign banks from selling our securities, running down the dollar, and crashing our markets. Beat ’em to the punch. Hey, sounds smart, if the balance of payments were a sign of failing U.S. competitiveness rather than of flourishing American growth. Smart policy perhaps if the U.S. were likely long to remain the largest market for American technology companies.
But this is no longer the 19th century, when trade in goods dominated the balance of payments and a gap was filled with gold shipments across treacherous seas. In the 21st century, capital movements traveling on fiber lines at the speed of light precede and dominate goods movements, which are inhibited by all the obstacles of international trade. By definition, a trade gap means a capital surplus. For the last several years, foreign movements of capital to purchase long-term assets in the U.S. have exceeded the trade gap by between $200 billion and $300 billion per year. Most of the trade gap is capital goods used by American companies to compete internationally. Foreigners want to invest in the U.S. because we have the most creative and entrepreneurial culture and by far the deepest and most liquid financial markets. By Walter Wriston’s Law, capital goes where it is welcome and stays where it is well treated. People send us money because we welcome it and treat it well. The only way we can stop them is by slowing U.S. economic growth and destroying our uniquely resourceful financial industries.
While regularly incurring trade gaps and budgetary deficits, our economy has grown since the early 1980s from a level, depending on dollar valuation, between one-fifth and one-fourth of global GDP to close to one-third of global GDP last year. During this upsurge entirely unexpected by the same economists now advising Sen. Kerry, U.S. per capita GDP surged from 4.7 times per capita global GDP in 1980 to 6.5 times per capita global GDP in 2003. The U.S. created some 36 million net new jobs at ever higher levels of productivity and earnings, while Europe and Japan created scant employment at all outside of government and entered a productivity slump that continues today. Meanwhile, the U.S. won the Cold War, and since 1990 its stock markets soared from less than one-third to roughly one-half of global market cap. The net wealth of U.S. households in real terms trebled to all-time records ($45.9 trillion at last report). Debt has been shrinking as a share of overall national assets, which now stand at a level near $80 trillion.
Throughout this period of expanding trade, catastrophist economists like Mr. Rubin, Mr. Krugman, Fred Bergsten and Mr. Peterson have been predicting the same disastrous flight from the dollar that they would cause by their policies. The remedy is always tax rate increases and spending cuts — which always tend to mean reductions in defense, the only kind of spending that Congress permits to be cut.
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These proposals are silly and self-defeating. They reflect the continuing bankruptcy of demand-side economics. Empirically, the supply-side engine of global growth revived by President Bush with crucial tax rate reductions has outperformed all other countries. To adopt some panicky austerity regime now would crash our competitiveness without achieving any significant benefit.
The U.S. today stands at a crossroads. The key economic issue confronting the next president is whether to embrace the policies of decline and sclerosis that afflict old Europe and have left generations of young people unemployed; or whether to enlist with Asia in the supply-side policies of dynamism and growth that have brought more human beings out of poverty than any other regimes in world history.
It should be an easy choice. The American left once displayed a real concern for poor people, but today they exhibit merely a morbid envy of the rich. Once they supported American engagement in the world. Today, they retreat to a timorous parochialism. Now it is President Bush who shows compassion for the world’s poor and confidence rather than timidity before the forces of global capitalism. It is Mr. Bush who is embracing Asian dynamism rather than Eurosclerosis. For America, that is the winning side.
Mr. Gilder, a senior fellow at Seattle’s Discovery Institute, is editor of the Gilder Technology Report.