Evening in America

I have been reading two new books on trade (this review was first published in the December 2010 issue of  the American Conservative).

  • The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How We Must Compete in the Post-Dollar Era, Clyde Prestowitz, Free Press, 340 pages
  • How the Economy Was Lost: The War of the Worlds, Paul Craig Roberts, CounterPunch, 264 pages

George W. Bush’s under secretary for international trade, Frank Lavin, was once described in an official press release as “America’s Salesman-in-Chief.” He emerges in a less glorious light in Clyde Prestowitz’s new book The Betrayal of American Prosperity. In a lengthy anecdote, Prestowitz cites Lavin as a prototypical example of the sort of thinking that engineered America’s economic trainwreck.

Prestowitz, who is president of the Washington-based Economic Strategy Institute, recounts how he contacted Lavin on behalf of FormFactor, a small American high technology firm whose patents were being stolen by a Korean competitor. A weakened FormFactor was considering drastic layoffs and was even being tempted by large grants to move its operations to Singapore. But the firm’s founder, a spunky Russian emigre named Igor Khandros, wanted to save as many American jobs as possible.

Naively perhaps, he set out to enlist the U.S. government’s help in cracking down on Korean intellectual property theft. So, accompanied by Prestowitz, he did the rounds in Washington. Lavin was more or less their last hope.

Prestowitz writes: “If there was one person in the U.S. government responsible for promoting American exports and the interests of American business abroad, he [Lavin] was the guy. Imagine our surprise then when he responded to our request for help by asking: ‘Have you considered moving your operations to Korea or maybe Singapore?’

“Igor nearly fell out of his chair. We didn’t bother to tell Lavin that we were talking to him in an effort to avoid moving the company, jobs, and technology out of the United States…. He [Lavin] wouldn’t have understood our values and intentions.”

The anecdote goes some way towards explaining why America’s trade deficits went from the merely disastrous under Bill Clinton to the totally catastrophic under George W. Bush. The result is what will surely be seen by future generations as the fastest implosion of any Great Power in history.

Again and again Prestowitz shows how, for nearly forty years now, the American economy has been  sold down the river by a dogma-crazed American elite. It is hard to imagine a more depressing story — hard that is until you read How the Economy was Lost: The War of the Worlds, a compilation of fiery essays by arch anti-globalist Paul Craig Roberts.

The two authors share similar backgrounds in that they both served under Ronald Reagan in the “morning-in-America” years of the early 1980s. In his capacity as an assistant Treasury secretary, Roberts was a principal architect of Reaganomics; Prestowitz was a top trade negotiator in Office of the United States Trade Representative.

Prestowitz was one of the earliest and most influential experts to hit the panic button about the deteriorating trade trend. His 1988 book Trading Places caused a sensation with its superbly written insider’s account of Japanese intransigence towards countless American market opening efforts. He went on to rank with James Fallows, Pat Choate, and Chalmers Johnson as one of the key American “revisionists” who inspired a brief, much publicized spell of hawkishness towards Japanese trade practices two decades ago. Thereafter, however, he seemed to lose heart. His standing among fellow trade hawks was notably dented in the mid 1990s when he reversed himself on NAFTA: although he had originally pronounced it a job killer, he sided in the end with the globalist lobby in helping ram it through Congress. (His earlier view has, of course, now been resoundingly vindicated.) Perhaps even more disappointingly, he remained invisible in the late 1990s as Congress debated China’s entry into the World Trade Organization. He now brands it “one of America’s dumbest deals.”

Roberts came to the trade debate much later than Prestowitz. As his impassioned essays show, however, he has been making up for lost time. His epiphany came as part of a general sense of disgust with George W. Bush’s agenda, not least the Iraq invasion.

While Roberts’s essays focus mainly on recent developments, Prestowitz takes a more expansive approach, devoting much space to an extended historical sketch of American trade policy over the last two centuries. The truth, as Prestowitz points out, is that in America’s years of fastest growth, American markets were protected by high tariffs.

As the United States unilaterally dismantled its trade barriers after World War II, other nations predictably increased their share of American markets. Yet this provoked little more than a yawn from the American establishment. He recounts a conversation in the mid 1980s with Herbert Stein, a former chairman of the Council of Economic Advisers. Prestowitz voiced concern about Japan’s increasing penetration of the American car market. A serene Stein replied, “They will sell us Toyotas and we’ll sell them poetry.”

This was an elliptical allusion to the then emerging consensus among economic policy analysts in the United States that manufacturing was yesterday’s game. Thus nations like Japan and Germany were more or less doing Americans a favor by vaporizing America’s “smokestack industries.” As the world’s leading economy, America supposedly no longer needed manufacturing, and the sooner its workers were redeployed in the new all-digital postindustrial economy, the better. Uniquely creative Americans would leave the “Rust Belt” behind to provide the world with advanced services such as computer software, financial engineering, various forms of consulting, product design, and scientific research. As some of us showed at the time, this argument was based on trick logic and ignorance. Yet, because it helped justify the elite’s free-trade-uber-alles agenda, it continued to be widely promoted until the current crisis hit in 2008.

One of the most obvious flaws in the postindustrialism story is that, in contrast with advanced manufacturing, most service industries are poor exporters. Worse, to the extent that certain advanced service products such as computer software _can_ be exported, it has been clear all along that in an age of cheap, instantaneous communications, the jobs would gravitate rapidly to low-wage nations like India and Russia. Computer software has in fact proved even more vulnerable to outsourcing than advanced manufacturing. (Software writing is generally extremely labor intensive, whereas advanced manufacturing is, of course, generally very capital intensive.)

Even many of postindustrialism’s erstwhile proponents have come to admit that manufacturing does still matter. Better late than never but the problem is that it is easier to destroy a nation’s industrial base than to rebuild it.

China, of course, has notably perpetuated the one-way free trade policies by which Japan, Korea, and Taiwan earlier catapulted themselves to the leading edge in key manufacturing industries. Ominously, however, Prestowitz suggests that in the long run America’s real problem with China may turn out to be more political than economic. As he points out, American corporations are taking on the role of Trojan horses in America’s increasingly fraught relations with China. To maximize their profits on their China-related activities, such corporations increasingly must pander to the Beijing authorities. One way to pander is to undertake to manipulate American politics to suit China’s growth agenda.

One disappointment in Prestowitz’s analysis is that he has little to say about Japan. This is a major missed opportunity. Pace all American press reports, Japan did _not_ stagnate after the Tokyo stock market crashed in 1990. As Mark Skousen has pointed out, _measured on a per-capita basis,_ Japan’s GDP actually kept pace with America’s over the last two decades. Japan lost place only in the sense that its population growth was much slower than America’s and thus growth in total Japanese output lagged.

In any case there are strong grounds for believing that Japanese growth is calculated on more conservative accounting principles than America’s. Certainly in many key aspects of consumer welfare Japan visibly outperformed the United States. Prestowitz points out, for instance, that Japan has raced ahead in telephone service with the result that there were recently about 40 million third-generation cell phones in Japan versus just 1 million in the United States. By the same token he reports, that thanks to remarkably greater deployment of optical fiber networks, the internet runs about 16 times faster in Japan than in the United States. A slew of other facts could usefully have been added. Prestowitz makes no mention, for instance, of the remarkable strides Japan has made in life expectancy since the 1980s. (The Japanese people now outlive Americans by fully five years.)

Prestowitz also overlooks Japan’s remarkable trade performance. In the teeth of two back-to-back supposed “lost decades,” Japanese exporters have never performed better. Exports to China have done particularly well, with the result that Japan ranks virtually alone among major nations in enjoying a broadly balanced bilateral trade relationship with the new East Asian juggernaut (on China’s numbers, Japan actually runs a bilateral surplus). A “stagnant” Japan moreover boosted its overall current account surplus more than three-fold between 1989 and 2008. By contrast a supposedly vigorous United States saw its current account _deficit_ balloon sixfold in the period.

Roberts’s book is notable for the depth of his intellectual case against globalism. Although he regards himself to this day as a true free trader, he argues convincingly that the world economy has changed in ways that render the classical case for free trade largely inapplicable. He repeatedly cites a landmark mathematical analysis in which Ralph Gomory and William Baumol in 2001 holed the classical theory below the water line.

A major sub-plot in Roberts’s book is the amazing growth of so-called H-1B visas, by which US corporations in industries like software can bring in thousands of workers from India and other poor nations to work on American soil at wages far below American norms. He points out that although such visas were originally conceived to address narrowly defined cases where there was a real and serious shortage of capable American workers, they have been issued so promiscuously that they have clearly depressed American wage rates. Roberts asks a pertinent question: “What economist has ever heard of a labor shortage leading to flat or declining pay?”

Roberts also tackles the extent to which militant globalism has taken hold in American universities. Harvard, for instance, has officially pronounced itself a “global” university, with evident negative implications for young Americans aspiring to an Ivy League education.

Roberts adds: “The corruption of the outside world has found its way into universities ….Money rules and professors who bring money to universities find it increasingly difficult to avoid serving the agendas of donors.”

Roberts’s diagnosis is dire: “A country whose workforce is employed in domestic non-tradable services is a Third World country with nothing to export. How will the United States pay for its heavy dependence on imports of manufactured goods and energy?…..As long as narrow private interests can cloak themselves in free trade’s claim of increased general welfare, the American economy will continue its relative and absolute decline, and American taxpayers will continue to bear the cost of workers displaced by offshoring and work visas.”

Of the two authors, Roberts is clearly the more pessimistic. It would be nice to suggest he has overdone the gloom. Unfortunately the unimpeachable quality of the evidence he brings to the discussion leaves little doubt that America’s fate has already been sealed.

Eamonn Fingleton is the author of In Praise of Hard Industries: Why Manufacturing, Not the Information Economy, Is the Key to Future Prosperity (Houghton Mifflin, 1999).

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