The Economic 9/11
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MJ: You argue that the US needs a strategy. What should it be?
CP: There are two levels, what I call “the big fix” and “the little fix.” The big fix is at the macro level. We’ve got ourselves a situation now such that because the US is the consumer of last resort, if US consumption were to quickly fall, and if consumption abroad did not rise, then the whole global economy would go into recession if not depression. So the first thing we’ve got to do is make a Grand Bargain between the US and the EU, Japan, China, the Asian export-oriented economies: We in the US are going to reduce our excess consumption, which effectively means we’re going to reduce our budget deficit. And we’re going to create incentives for US households to save. But we can prudently do that if the rest of the world is going to increase its consumption, and to increase incentives to consume.
MJ: And the little fix?
CP: That has to do with all of the myriad regulatory and tax and government spending decisions that affect the investment environment, that affect the efficiency and capability of firms. Look at telecommunications. Right now, the United States is number 17 in the world in the deployment of broadband Internet access. Now, for a country that says it’s the world leader in technology, being number 17 is not a very comfortable place to be. South Korea, which many Americans still think of as a developing country, is number 1. What’s going on? Ten years ago the South Korean government said, ‘Hey, this broadband technology can greatly enhance our competitiveness vis a vis the Chinese and the Japanese across a whole range of industries, and can help create whole new industries we never dreamed of before. But we’ve got to reach a kind of critical mass. So how do we get this Internet into as many places as possible as fast as possible? Well, if people filed their tax returns by email that would create more demand for this thing. So why don’t we give people a break on their taxes if they file by email? Or if people do their stock trades on the Internet? Why don’t we create incentives to induce people to do that? And so the Koreans took a very broad view of how they should be regulating and fostering competition in their telecommunications market.
At the same time the United States passed the 1996 Telecom Act, and spent really ten years ignoring broadband Internet deployment, focusing rather on how to create price competition among the telephone companies. And the way we did that was to force the telephone companies to lease their lines to newcomers at a discount, who would then resell the line to you or me. And there were huge disincentives to telephone companies to upgrade the lines or to install high-speed broadband lines because they’re just going to have to lease it to these other guys. So our policies, unlike the Koreans’, were unfriendly to broadband deployment. Our perspective was too narrow; we need to have a broader perspective, thinking about how does government facilitate innovation. We did this back in the early 20th century, but we kind of forgot about it.
MJ: OK, but doesn’t the United States have the best research and learning centers in the world?
CP: We constantly repeat that we have the best education system in the world. And that’s true of our elite educational institutions. But look at who studies at those universities, particularly in the graduate programs in computer science and engineering; well over half the students are not Americans. Now, I’m in no way opposed to having non-American students studying here, but the real difficulty here is that the number of American graduate students has declined both as a percentage and absolutely over the last 20 years, even as the population has grown. So what that means is that US students either don’t want to study in these institutions or can’t get in. And a lot of it is the latter; and the reason for that is that our secondary education is a disaster.
Also, we say we’re the leader in technology. And if you look broadly across all technologies, that’s probably still true. But it’s less true today than it was five or ten years ago. And there are many areas of technology that the US hardly plays in. So our superiority is less well founded than we like to tell ourselves.
MJ: What’s an area where the US hardly plays?
CP: One is flat panel technology. We use flat panels all the time—TVs, computers, cars.Americans don’t make that stuff and don’t have the technology; digital cameras—that technology is in Asia; night-sight vision technology, which is moving rapidly offshore; and even semiconductors, which are made with all kinds of esoteric equipment, the production of which is already heavily in Asia and becoming more so.
MJ: Won’t there always be areas in which the US still enjoys a comparative advantage?
CP: Yes, of course, but you have your comparative advantage has a lot to do with your standard of living. If you have a comparative advantage in making coffee beans, then you have a comparative advantage. But coffee beans have not historically been the basis of a high standard of living. And if you’re comparative advantage is in commodities or low-wage areas, then that’s not what you need to fulfill the American Dream. The second point is that one aspect of globalization that’s increasingly coming into play is the notion of absolute advantage. Increasingly, it seems to me, trade is being determined by this, because as the global economy becomes more integrated, manufacturers are looking at their costs on a global basis, rather than between countries, and so they’re calculating who’s the low-cost producer globally, not comparatively.
MJ: But those costs will rise over time, right? For example, wages in China will rise as demand for Chinese labor grows, diminishing the country’s advantage.
CP: Theoretically they should, and they have been, but in a kind of divided fashion. Skilled workers in China, particularly university graduates with advanced degrees who’ve been to, say, Harvard Business School or Stanford Business School, are in great demand. As you go down the skill level, wages in China haven’t been rising that much, and you have a situation where you have a vast reservoir of labor in the countryside, not of highly skilled workers but workers literate enough and skilled enough to be able to take a job in a factory and pretty quickly become reasonably productive. And that has acted, and will continue to act, as a damper on the wage-raising tendency. Now, over some long period of time, of course, if growth continues and demand continues to rise, and all those workers become absorbed into the economy, wages should rise and begin to equalize with the rest of the world. But you’re talking about hundreds of millions of people, so the long run could be very long.
MJ: So should we fear China’s economic rise?
CP: I don’t think we should fear it. In fact, I think we should welcome it. I think the truly fearful thing would be a failing China. It would be the source, eventually, of disruption and disease and all kinds of things you don’t want to think about. So we want China to succeed, but not at the expense of the United States. Better, China succeeds, and its success provides opportunities that allow us to continue to grow and raise living standards as well. So the issue is not whether we want China to get rich or not. We do. The issue is how China does that, and how do we take advantage of China’s development to improve our own situation?
Julian Brookes is the editor of MotherJones.com.
