Nov
15
By Paolo von Schirach
November 15, 2011
WASHINGTON – Until not too long ago the prevailing consensus was that globalization on balance was good for America. Growing trade interdependence, global supplies chains allowing sourcing in less expensive countries, new markets opening up for the US financial sector seemed to bring along ideal growth opportunities for the largest and most innovative economy on earth. All true. Except that America was not just Oracle, Google, IBM, FedEx and Goldman Sachs. America was also General Motors, old steel mills, antiquated furniture factories, apparel companies with high union wages and lots of medium sized manufacturing companies with old or ancient equipment and expensive labor.
Global competition hurt America
Exposed to the full force of international, mostly Asian, competition, the first tier did well. America is competitive in some key sectors. Big US multinationals, from Coca-Cola to IBM, from United Technologies to Caterpillar, have global strategies and now derive a large and growing percentage of their revenue from foreign sales. For them globalization, while presenting challenges from new competitors, on balance resulted in bigger markets and business expansion.
But almost everybody else suffered in America. Anybody involved or dependent upon a sector in which America had no world leadership had to suffer the consequences of competition, mostly from Asia. Some outfits succumbed. Most labor intensive or second tier manufacturing outfits just could not make it. Impossible to withstand the competition with Asian firms whose labor costs are 1/10 or less. Others have resisted; but they had to cut their costs just to survive. And this meant lower or stagnant wages and no employment growth.
Old jobs gone, remaining jobs pay less
And so half of America got squeezed by globalization. The old factory that was the life of the community moved to Mexico or China or it just disappeared altogether. And this translates into vanished jobs, loss of income for the former employees and the loss of business for all the other vendors ans suppliers who thrived because of that large company. Those who survived the destruction left or are doing poorly.
Sometimes, closed plants reopen under new management. Some workers get rehired. Except that they will get half the previous salary or less. Take it or leave it. No way that the refurbished paper mill in Maine can compete, (we learn from a National Public Radio story), unless its operating costs are kept to a minimum.
New GM had to close plants and cut wages
And everybody knows about General Motors’ bankruptcy. The company reopened and it is doing much better. But one of the conditions for relaunching the battered auto maker was to close inefficient plants and drastically cut the work force. More importantly, those who stayed and the new ones who get hired now had to make do with substantially lower wages and fewer benefits.
The nutty idea that GM could be magically insulated from the world wide competition of car manufacturers located in low wage countries is gone, for good. And is a sense GM is lucky. Besides the essential federal help it received, it still had a reservoir of world class talent that could be redeployed to develop interesting new products. But many other US firms do not have that kind of critical know-how. Therefore, they cannot even be bailed out, because they would have no leading technology on which to base a long term growth strategy.
Squeezed Americans
And so, because of all this, here we have the large army of Unhappy Americans, cut down to size by globalization. Of course, on top of all these damages, you can add devious practices. China manipulates its currency, so that its vast exports to America are undervalued, complicating even further the lives of US producers. And this is a real additional problem. Still, even if we fixed the currency issue, the underlying fundamentals that play against a high wage, high cost less innovative and thus less competitive America would not change dramatically.
Asia wins
Know-how travels fast these days. Capital knows no boundary and it does migrate to high growth, low cost countries. Except for IT, America no longer enjoys the vast technological advantage it used to have. Low cost Asian competitors set world prices for toasters, computer parts, lawn mowers and T shirts. And in most cases they are the only ones making them. Indian IT companies have taken over the back office operations of thousands of US firms. And if you call Dell or Microsoft customer service, the person answering the phone is in Chennai or Manila, these days, not somewhere in North Carolina or Utah. This is the inescapable reality. Those jobs are gone.
And so, this is the grim picture. Unless you are lucky enough to be highly educated and employable by a successful multinational at ease in the new global economy, your income will be lower than the historic average and your job far less secure.
Clueless Washington
In all this, what is most amazing is that, as all these challenges created by globalization were becoming clear, America’s political leaders were all looking the other way. Nobody had a clue. The silly assumption was and for some still is that America by definition is the best. We are Number 1. If we are not winning today, it is because the others are cheating. Hence the disproportionate focus on China’s dirty tricks. So, no strategy to counter the Asian onslaught that wiped out entire sectors.
Military diversions
On top of that, we had the September 11, 2001 attacks. They happened right after the 2000-2001 “dot.com” bust, at the time in which America would have needed to start reorganizing and retooling. But because of the shock and the horror of the collapsing Twin Towers, America got carried away. The US militarized the anti-terror efforts. A conflict that should have relied on intelligence services, covert operations and special forces became instead a gigantic military campaign. Aside from the horrible costs of the wars in Iraq and Afghanistan, these two unnecessary occupations absorbed national attention, focus and precious resources that should have been devoted to organize America’s response to globalization.
Add the bubble to the mix
And, of course, to make things a lot worse, on top of the military diversions, we had the 2004-2008 totally domestic real estate speculative craze, with the entire financial system jumping on board –an epic disaster that almost destroyed this already anemic country.
Poor America. Squeezed by China, lured to spend a fortune in two wars by a relative small band of al Qaeda transnational terrorists and then seduced by the hallucination of easy money in real estate. All in all, it is remarkable that we are still standing.
Poor leadership
But, wait, we are not finished. The long tale of our troubles is still not over. Unfortunately, as the country was looking for fresh leadership after the dismal 8 years of George W. Bush who made the gigantic strategic error of militarizing the conflict with international terror, it picked Barack Obama as the next president. And Obama missed the opportunity to revitalize America. His administration must be credited with a fairly good response to the financial crisis and with the successful auto industry bail out. But this is pretty much it.
Following his ”progressive” instincts, Obama chose to spend the precious political capital of his first two years in office on medical care reform, a social issue, instead of focusing on the economy. This has been a major strategic error. Now the damage is done. Obama lost his chance to lead on the economy. Right now, in a much more polarized climate, impossible to get anything done.
Add the fiscal crisis to the mix
And we are not done yet. To all this we have to add America’s changing demographics that vastly increased the cost of government programs for retirees. Simply stated, all the major US welfare programs were designed in a totally different era in which a large number of active workesr paid into a system planned for a much smaller number of recipients. Nobody at the time could fathom the fiscal consequences of longer lives and smaller numbers of new births which translates in fewer people paying into a system benefiting many more seniors. Now we are confronted with a larger and larger number of elderly Americans collecting Social Security checks for so many more years, while they extract more and more funds as Medicare recipients. Unless these programs are changed, and there is incredible resistance to doing that, America will go bankrupt.
An awful mix
So, to the negative economic consequences of globalization, the costly military diversions and the financial crisis caused by the real estate bubble, we have to add a gigantic fiscal crisis that needs to be addressed unless we want to go the way of Greece, Italy and Spain.
The debate on income inequality is a distraction
But instead of coming up with something new, like an energy policy more reliant on domestic resources, here we are wasting time examining the Occupy Wall Street movement, and the issue of income inequality it put forward; as if income disparity were the cause, as opposed to a consequence, of our huge problems. Sure, let’s squeeze the fat cats. Make them pay more. (By the way, they already pay more than every body else, while 50% of Americans pay no federal income tax). As if this would take care of our losses in leading technologies, China and the challenge of other emerging countries. (Even old Karl Marx would have disagreed. He famously argued that “Socialism is not about socializing poverty”. Successful Socialism, meaning equality, was predicated on economic growth. Yes, growth. Just like successful capitalism.)
Focus on growth
America’s total focus should be on renewed competitiveness. Do all we can to become once more the best place in the world to do business. (All international rankings show that we have been sliding). Simplify the federal tax code. Streamline regulations. Do away with silly environmental restrictions. Attract foreign talent. Develop domestic energy. Indeed, America sits on top of the largest gas reserves in the world, as Bloomberg Businessweek finally noticed in the cover story for November 7-13, 2011: What if you could solve the energy crisis, the jobs crisis, and the deficit with the flick of a little blue flame? This is a gigantic economic gift.
America has more natural gas than Russia. We can have cheaper electricity. We can use this abundant and inexpensive gas as feed stock for the US chemical industry. And finally we could transform the economics of our transportation system by using natural gas instead of gasoline as automotive fuel. We could save billions every day by importing less oil. But you hear none of this in Washington.
A national discussion on inequality is alright. A conversation on ways to pare down the budget is also totally appropriate. But the real and by far more important issue is how to create new economic growth. Our national energies should be devoted to crafting new strategies aimed at reasserting America’s old title as the most innovative economy in the world.
Make America the best place to innovate and do business
It is a matter of harnessing human capital, money, a good pro business eco-system and a national leadership that gets all this and will lead, with determination and confidence.
So many good Hollywood stories are about the disoriented good guys who are about finished until someone gets up and says with authority and enthusiasm: “Come on guys, we can do this“. The old actor Ronald Reagan knew this instinctively. Whatever his shortcomings, he was a true believer in America and he did reawaken American optimism. This is what semi-impoverished and disoriented America needs today: policy clarity set by strong and optimistic leaders.
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