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The Economic 9/11

On current trends the US is headed for serious economic trouble.

| Wed Nov. 9, 2005 4:00 AM EST

The United States, as we're endlesssly reminded, is the most powerful and prosperous nation in the history of the world, its success firmly rooted in a distinctive culture and optimal economic arrangements (not to mention the particular affection of the Almighty). Nor is this happy state of affairs likely to change—at least not in the lifetime of anyone reading this. Let China take care of manufactured goods, and India services; the US, with the best—and best-funded—centers of learning and research in the world, and an attitude toward risk that’s uniquely congenial to innovation, will always find a way to do something different and better, and stay on top.

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Well, that's one view. But, as Clyde Prestowitz argues in his recent book, Three Billion New Capitalists: The Great Shift of Wealth and Power to the East, we're basically kidding ourselves. America's preeminence is precarious. We're running unsustainable trade deficits; the dollar is dangerously overvalued; increasingly invention and technological innovation are happening elsewhere; 2.5 billion people in India and China are set to enter the world’s skilled job market; technology permits many formerly localized jobs to be done anywhere in the world; our public education system is a mess; America is a massive consumption machine, financed by Asian central bankers who must be starting to wonder if we'll ever be able to pay them back.

Prestowitz argues that without a major change of approach the United States—and indeed the dangerously unbalanced global economy—could be headed for an "economic 9/11." Unfortunately there's little sign that either government or corporate leaders are doing the necessary hard thinking that such a change requires. His book, then, is intended as a wake-up call.

Prestowitz, a sometime Mother Jones contributor, is founder and President of the Economic Strategy Institute, a Washington think-tank. He served as counselor to the Secretary of Commerce in the Reagan Administration and is the author of several books, including Rogue Nation, which addressed the disconnect between how the US perceives itself and how it is perceived. He recently talked with Mother Jones from Washington D.C.

Mother Jones: Your book came out around the same time as Tom Friedman’s new one, The World is Flat. He takes a rosier view of global economic trends. What’s he missing?

Clyde Prestowitz: Both books are about globalization and the negation of time and distance by the Internet. The difference is that Tom looks at all this and says, “This is fantastic! All the knowledge centers in the world are being tied together, that’s going to accelerate R&D and innovation. Don’t worry about China and India getting rich, because that just means they’re going to be able to buy more than us, and we’re going to get richer. Of course, educate your kids, let’s spend a bit more on R&D, and let’s invest in our infrastructure—but basically, everything is terrific.”

I’m looking at the same thing and I’m seeing a structure of globalization that is undermining long-term US economic capability and leading us to some kind of a major crash. And I see a world in which the dollar is no longer the world’s money, in which oil is priced in euros or yen, or some combination. I see a world in which the US can’t afford to keep troops in Iraq and hundreds of bases around the world. And I’m saying, look, I don’t begrudge China and India getting rich, but they’re not going to buy more from us—because we don’t make anything. So I have a much darker view about where things are going right now.

MJ: How did we get here?

CP: Since the end of the Second World War America’s economic growth strategy has been consumption. We’ve built into our economy enormous incentives to consume and disincentives to save. We have been very innovative and a leader in high-tech for three primary reasons. One is that this is a society that does encourage innovation, it’s open, and it has a high regard for entrepreneurs and innovators. At the same time, we had a huge industrial policy called defense. We didn’t call it industrial policy, but it kind of was. We had the government, in the guise of the defense department, pouring billions and billions of dollars into science and technology and that funded an awful lot of innovation. We got a lot of spinoff; we educated a lot of people. Third, we had the world’s only mass market, the biggest and the first, and so you had a quick way, if you had something good, to capitalize on it, and you had economies of scale that nobody else could match.

Over the last 30 or 40 years we also began to create a global economy. That meant this mass market suddenly became available to other countries. The unique economy of scale that was available only to American producers was available to producers in other countries. And there’s nothing wrong with that; it certain served US consumers. But unless US producers were going to get the same kind of open markets abroad that the foreigners were getting here, then over a period of time there was going to be a disadvantage. In fact, foreign markets weren’t nearly as open as US markets, and to some extent the advantages of economies of scale shifted. If you were a Japanese producer you now had access to the Japanese market and the US market. But US producers didn’t have the same kind of access to the Japanese market. The rest of the world, particularly Asia, developed a growth strategy based on high investment, which requires high saving, and excess production, which meant export-led growth. So while the US was building a consumption machine—via, for example, home equity loans, credit card solicitations, and numerous tax incentives to consume—the rest of the world, particularly Asia, was building a production machine.

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