A conversation with the President of the Economic Strategy Institute.

Question: How did America really get rich? 

Clyde Prestowitz: It’s important, I think, to know that story because I think there’s a mythology in the United States that America kind of got rich as a result of entrepreneurial activity and free markets and lack of regulation. And for sure those were important elements, but what we need to understand is for most of our history—from about 1800 until about 1950—we acted, economically, pretty much the way China does today. 

In fact, it’s interesting to go back and read the discussions among the founding fathers. Adam Smith wrote “The Wealth of Nations,” published it in the same year, 1776, as, of course, the Declaration of Independence. Smith argued, for example that America had its greatest advantage in raw materials; timber, and iron ore, and cotton, and things like that. Smith actually argued that America should not industrialize. England was the industrial power and America should feed England with raw materials. It was Alexander Hamilton that said "No, no, no, Smith has it wrong. We can become a great industrial power and we should." And there was a big debate with Washington and Hamilton kind of on one side of the debate and Jefferson and Franklin on the other side. But, the war of 1812 was a war we almost lost because we didn’t make shoes, or rifles, or anything that we needed to fight a war. And that convinced Jefferson that he had been wrong, and so from that point forward, the U.S. government engaged in active promotion of the development of key industries, of infrastructure, of technology, the advance of science and so forth. So we had the Eerie Canal, the telegraph was invented and developed in the basis of government funding; a partnership with private industry. 

We had of course the national railroads, the transcontinental railroads. We had... in the early 1900s, Woodrow Wilson saw to the development of an American shipping industry, and created the national advisory committee in aeronautics to promote U.S. aircraft and aviation industry. So, it’s important to understand that there was a long partnership between industry and government in the United States that promoted this development of wealth-producing capacity. The Homestead Act is a brilliant example. America’s biggest industry in the 19th century was agriculture and the Homestead Act provided agricultural land. So, essentially factories to the populus at a very low cost from the government, and the proceeds of that were used to fund the land grant universities; the big state universities that dominate our scene today and to promote agricultural technology. So that was the basis of our wealth-producing capacity. 

Question: Why were the years after World War II the beginning of the U.S.’s downfall? 
Clyde Prestowitz: In the early 1950s the United States had a level of consumption that was about 56, 57 percent of GDP, very similar to that of many other countries. The great fear of our leaders after World War II was that without the war production, the economy would slip back into the Great Depression that they had all experienced in the 1930s. And they had 15 million men and women being demobilized from the armed forces all coming back looking for jobs, and the question was, “Wow where are the jobs going to come from?” And with Europe in ashes and Japan in ashes, it was obvious that an export-led drive was not likely to be successful, and so the focus was on promoting domestic consumption as a way of replacing the wartime production and providing jobs for the returning demobilized service people. And so, every effort was bent in the G.I. Bill, and G.I.s were given preferential assistance in getting mortgages for houses. People were able to deduct the interest on time payments for consumer durables, so all kinds of measures were taken to make it easy to consume. By the mid-1960s, consumption as a percent of GDP was up to 62 or 63 percent. By the mid-1970s it was up to about 67 percent. By the mid 1980s, it was approaching 70 percent. Today, it’s about 72 percent. So, there’s been this huge continual increase in consumption and reduction then in savings in the U.S., and in investment, and ultimately of course this is resulted in big imbalances. 

Question: What has our military superiority done to the other aspects of our power? 

Clyde Prestowitz: Well, two things. We spend more on the military than the rest of the world combined so we are, without question, the premier military power. And that has a lot of implications. For one thing, it tends to distort our industry. It means that we spend a lot of time and effort and research developing specialized products and technologies that we actually don't want to use; that we hope we'll never use, and that have very little application for our wealth-producing capacity. But yet it soaks up engineering talent and scientific talent. More important than that, because of our hegemonic security role, we tend to find ourselves in a position in which, number one, our leaders… For example, when our President wakes up in the morning the first thing that he looks at is a national intelligence report. Now, when the President of Singapore wakes up in the morning, the first thing he does is look at how much new investment Singapore is getting that day. 

So, the mindshare of U.S. leaders is pretty much focused on geopolitics, and at any particular moment the need for us to have support from our allies—or even from countries with whom we have difficult relations, will tend to override our economic interests. A good example: President Obama went to China in November and he stated in a press conference that the United States would attempt to assist China in developing and building its new regional commercial jet. 

Now, when I heard that I kind of shook my head, I thought, “Wait a minute, we make jets. We make commercial jets. We’re supposed to export something, and airplanes is one of the things that we export. Why are we helping China develop this?” And then I realized that well, the President wants Hu Jintao to help him out with North Korea. He wants him to help him out with Iran. He wants him to help him with global warming. So there are all these issues, and he makes an economic concession in order to get them. Or, if you go to the Web site of the Polish Embassy in Washington, you’ll see the Polish Embassy reporting that it has been able to achieve the offset production of about $8 billion worth or high tech U.S. military equipment. And offset means that the Poles buy American fighter jets and in order to induce them to do that, the U.S. agrees that we will transfer the production of a large portion of the jet to Poland. So in effect, we pay Poland for the privilege of defending them. So this geopolitical priority emphasis tends then to take away any thought of promoting our economic interests. 

Question: Why is the dollar becoming dangerous? 

Clyde Prestowitz: Well, the dollar is very interesting and it’s subtle. There’s an inherit tendency if you’re an American to think, "Yes, strong dollar that’s good. We want strong dollar it means America’s strong." And we’re kind of proud that the dollar is the world’s money that international transactions are done in dollars. And it certainly makes life easy for us because we can borrow in our own currency and we sell in our own currency, it just makes life easier. But actually, one, the role of the dollar is becoming increasingly more problematic because there’s so many dollars out there. We have such a huge international debt, and foreign banks are holding so many dollars, that the foreign banks are beginning to scratch their heads a little bit and say "Wait, all these dollars represent a promise of payment by the United States."

But, there’s a lot of them saying: "Are they really going to pay all of this? Aren't they going to inflate this away as most big countries do when they get into trouble?" But even more than that is the following situation. The dollar is a floating fiat currency, so it's not linked to gold, or silver, or any other commodity; it’s just the dollar. It’s just a promise of the full faith and credit of the United States. Now, what that means is that in international markets, countries like China can intervene in currency markets; they can buy dollars, which tends to raise the price of the dollar and reduce the price of the Yuan, which effectively reduces the price of their exports. So it's a kind of subsidy to their exports.

So they can intervene to keep the dollar strong, which then accelerates their exports into the U.S. market. It allows them effectively to overproduce and to over-export. Interestingly, on the other hand, because as long as the world will accept dollars, deficits really don’t matter to Americans; as long as the world will take dollars, we can just keep printing dollars and say "Hey, we want more oil here’s a few more green pieces of paper with presidential pictures." So it allows us to be irresponsible, allows us to over-consume, overspend, and over-borrow. And as a result, both we and our trading partners are acting irresponsibly. And that means the system is not sustainable.

We just saw with this crisis one element of what can happen when the system becomes unsustainable. And as I said earlier, we haven’t really fixed it; so it’s still unsustainable. And what can happen is that we could get into a situation in which other countries just say "Hey, we can’t keep taking all these dollars; we don’t want dollars anymore." And the oil producing countries, for example, maybe they say "Look, we’re just choking on dollars here; we’d rather be paid in a combination, maybe some dollars but some Euros, and some Yen or something like that." Or, what we find happened right now is that countries with large dollar holdings are trying to diversify. China is buying agricultural land in Africa or oil wells in other parts of the world, and other countries are investing in commodities but they’re trying quietly to kind of get away from the dollar. So the long-term prospect here is that at some point the dollar is likely to devalue and the living standard of Americans—we’re living above our means right now, we’re living beyond our means, so the living standard of Americans is likely to decline. 

Question: How can we turn around America's decline? 

Clyde Prestowitz: Well the first one I would take is the dollar; I think we need to really mount a major effort to reset the global exchange rates. Other currencies need to revalue against the dollar so the dollar would be worth relatively less. And I’d like to be able to do that through negotiations in the International Monetary Fund and even in the World Trade Organization. I think we should try that. If that doesn’t work, then of course we’ll have to think of other steps that we might have to take, but we should try to negotiate a serious resetting of currencies. I think we should lead an effort to create a new global financial currency system; one based on a basket of currencies, not just the dollar and maybe even eventually a single global currency. We had a gold standard, of course, in the late 19th century and the 20th century that was a single global currency. It has its advantages and disadvantages, but in a globalized integrated world economy, that’s a direction in which I think we should be going. Beyond that, I think it’s very important for the United States to respond to these investment incentives that are being offered by other countries to induce the movement of productive facilities out of the U.S. and to offshore locations. 

So I would have a war chest, or a fund, that I would call a "matching fund," and for every time a country offered to make a capital grab or a tax rebate to a global company in the U.S., I would match it to try and keep that production in the U.S. I think we should have a national infrastructure bank and launch a kind of an Apollo moonshot kind of a project or a Manhattan kind of project to achieve a modern infrastructure. I find it embarrassing, frankly. I travel a lot internationally and when I go through foreign airports and come back to JFK or to Washington Dulles, I feel like I’m in a Third World country. Just coming here today I was talking to you on the telephone and you know we lost the call three times. Well, that doesn’t happen in Egypt, let alone in Singapore or Korea. And we talk in the United States about broadband, fast Internet. The Koreans laugh at us; our "fast Internet" is what they call snail mail. So I’d like to upgrade and make the U.S. world class in infrastructure and that would drive a lot of investment and technology development, that I think part of that, should be a pressure or a policy to encourage production of that in the United States. I’d like to reduce corporate taxes. We have the highest corporate taxes in the world except for Japan. I’d like to reduce them to 15 or 20 percent. I’d like to adopt a value added tax. That has the advantage of taxing our over-consumption, it would help to solve our fiscal deficit problems, and the value added tax is rebated on exports so it would make us much more competitive in the global import/export markets. I would like us to focus on developing leading-edge technology pretty much across the board with industry government partnerships, and I think that it’s very important for us to dramatically revamp our schools with national standards and with serious testing so that we maintain competitive education levels with the other leading countries of the world. 

Question: If we don’t take action, what will happen? 

Clyde Prestowitz: Well I dread to think. I don’t want to think that way; I mean the path that we’re on right now is one full of sorrow and tears for Americans—and not just Americans, but for much of the world. America is the world’s buyer of last resort. America is the defender of important global values and the world will suffer, we will suffer, as a result if we stay on the path that we’re on. I like to think about it this way: I think about this as kind of a game of bridge and I ask myself each country has a hand of cards, and I ask myself which hand would I like to play. Would I like to play the Chinese hand, or the E.U. hand, or the Japan hand, or the U.S. hand? As I’ve been telling you, the US hand is not as good today as it was ten years ago and not as 20 years ago, but it’s still not a bad hand. We still have some pretty good cards. We still have the world’s leading universities, and we still have leadership in a number of key technologies. We have the world’s biggest market, we have the greatest economies of scale potential in the U.S. market, we have the rule of law. We have a lot of good cards. But you know, if you play bridge you can have good cards and you can still lose if you play the cards badly. And right now, we’re playing the cards just about as badly as it’s possible to play them. So we really desperately need to start playing the cards better, and that’s why I have adduced the Prestowitz plan as a guide to how to play the cards better. 

Question: What should the role of the global corporation be? 

Clyde Prestowitz: We tend to casually talk about American companies. We think of GE as an American company, or Caterpillar as an American company. Of course these companies are headquartered in America—they’re chartered, their corporate charter is in America—but they’re really global companies and the CEOs of those companies, often they’re getting more than half of their sales outside the U.S., often more than half their profits outside the U.S. They have subsidiary companies or branch companies around the world. They have other constituencies. They have workers in China, or in Brazil, or France, or wherever. They have to treat those workers fairly, they have to deal with the Chinese government and the... and Brussels and Tokyo. So in a way, they’re almost quasi-sovereign entities; they're not countries exactly, but they have resources that far exceed those of most countries. And so they’re global players, and they’re allegiance is to their shareholders but not necessarily to any particular country. And I’m not saying that it should be because as I said, the CEOs do have responsibilities to a broad constituency. But, we as American citizens—and particularly officials in the U.S. government—tend to think of them as American companies in the sense having some kind of special allegiance or special obligation to the United States. 

Now, in talking about globalization over the last ten or 15 years we’ve had kind of a mantra—Bill Clinton actually popularized it—that globalization will make everybody rich and being rich they’ll become democratic, and being democratic they’ll be peaceful. Well, it looks as if people can be rich without being democratic, without having the rule of law. We thought that the global corporation would be the transmission bill of democratic values into authoritarian societies. But ironically and perversely, it seems that the transmission could be the other way. The head of a global company in Washington is a big political player, the CEO of a global company makes big political donations. He or she has an legions of lawyers and lobbyists. In the United States, with the rule of law, companies can challenge the government in court and win. They can stop the U.S. government. They can cause legislation to be written, they can cause legislation to be blocked or to be passed. They’re big political players. In Beijing, they’re not; in Riyadh, they’re not; in Singapore, they’re not; they’re supplicants. They don’t deal with a rule of law in Beijing, they’re careful about the relationships they have with officials. They have to stay on the right side. They don’t make political donations. They don’t have, they don’t challenge the governments in court. 

And so, in a funny way, the head of a global company is more responsive to the wishes and the desires of the authoritarian regime than of the democratic regime. And so, what’s beginning to happen is the transmission of authoritarian values into the U.S. regime. And those global corporations, who... frequently are on government advisory committees. So you have this funny thing where the government thinks they’re American companies and we have advisory committees for the U.S. trade representative and other officials and the heads of these global corporations come into advise the American negotiators. But you wonder, are they thinking about the interests of America or are they thinking about the interests of their corporations? And in thinking about the interests of their corporations, to what extent are they beholden to the desires of the authoritarian regimes? Again, I’m not trying to be critical of the CEOs, I think they’re in a very difficult position and I think many of them struggle. Jeffery Immelt of GE has voiced this. He’s talked about GE being a global corporation and yet, understanding that maybe shareholders are not the only obligation, maybe it has other obligations. It’s a difficult position for the CEO, but my main point is that in making policy for the United States, we need to completely understand the role of the global corporation and right now we don't. 

Question: Should there be a global entity in charge? 

Clyde Prestowitz: Well, in conjunction with other countries I’m not sure. That’s an interesting question actually. Maybe there should be some kind of a global chartering, corporate chartering mechanism. But for ourselves, I think that I would like to have corporations chartered with a federal charter, rather than a state charter and I would like to have a rule in the U.S. like the Canadian rule. In Canada, only natural persons can make political donations. I’d like to have only natural persons making political donations in the U.S. And I would like to see a revamping of the advisory committees in the U.S. government so that there’s a better mechanism for defining and considering the American interest rather than the corporate, global corporations interest.