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Chapter I Economic Survival
1992 Democratic Presidential Primary
The Tsongas Committee
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A CALL TO ECONOMIC ARMS
Forging A New American Mandate
PAUL E. TSONGAS
l. Economic Survival - The Creation of National Wealth
There is no reason why the United States should not be the pre-eminent economic power on earth. No reason whatsoever. We have the land, the resources and the people. What we lack is the leadership. Our political leadership has chosen to ignore difficult economic realities. It has, instead, decided to finance short-term avoidance by placing the nation under crushing and unsustainable debt. As a result, America is facing great economic peril. We are daily witnessing this ever-mounting national debt, the inexorable sale of America to foreign interests, and the steady deterioration of our capacity to compete in the global marketplace.
Yet, the alarm remains unsounded. Washington is recession proof. The rest of the country, however, is not. Washington talk about "it's morning in America" rings hollow in communities devastated by failing industries. To them it's high noon. Bravado talk about "we can out-compete, out-produce and out-sell" any country in the world without change in our national economic policies is a self-serving delusion.
Washington politicians should experience service on corporate boards of companies that are trying to compete internationally. They should have their financial survival riding on a startup business struggling under the burden of the high costs of American capital. They should have close relatives seeking to manage companies under the quarterly gaze of Wall Street vultures and getting battered by foreign companies whose investors think in terms of years. They should watch a son or daughter sell off technological genius to the Japanese or Germans or Swiss because no American company is interested.
This is what is happening outside the Beltway.
America's manufacturing base is under attack and Washington treats it as just another issue.
It is not just another issue. It is the issue. This problem is our collective kryptonite. An ever less competitive manufacturing base inevitably means cataclysmic erosion of our standard of living. If we are reduced to just flipping hamburgers and exploiting our raw materials, we will have an economy, but it will be a diminished economy of decline and defeat. The American people would never stand for such a prospect. As the recent MIT report on competitiveness put it, "In order to live well, a country must produce well." This is the slogan which should sit on the President's desk.
It would perhaps be useful to put numbers on this concern. There are three major indices that tell the tale - the number of persons employed in manufacturing, our balance of trade and the federal budget deficit.
Manufacturing employment: The United States today has only 17% of its total workforce in manufacturing, down from 26% in 1970. If defense industries are removed, we have only 15%. The Germans have 33% of their companies in manufacturing and the Japanese have 28%.
During the 1970's, the United States paid its production workers the highest wages in the world and still maintained a positive balance of trade. Today, nine other nations pay higher wages, yet our trade balance is chronically negative.
Over the past five years, our average trade balance has been $133 billion negative while the Germans have averaged $61 billion positive. Yet, the German average production wage and benefits is $18.02 per hour compared with $13.92 in the United States.
Overall productivity in this country grew at over 3% per year from 1960 to 1973 but has risen by only 1% per year since then.
The average weekly earnings of the prívate nonagricultural workforce grew (in 1984 dollars) from $262 in 1949 to $336 in 1959 to $387 in 1969. Since then, it has declined to $376 in 1979 and $335 in 1989.
Balance of Trade: Hard as it may be to believe, the United States used to be a net exporter. In 1960 we had a net balance of trade surplus of $2.8 billion. In 1970 it was a surplus of $2.3 billion. In 1980 it stood at a surplus of $1.1 billion. The 1980's have seen deficits steadily grow. In 1990 our trade deficit totalled over $95 billion.
This deficit accumulation totals some $910 billion since 1980. What does this mean? It means that $910 billion of our wealth has been transferred to someone else - either by resources leaving this country or by foreigners buying up America. At the current rate we will either be in total hock to the outside world or the outside world will own us.
In contrast, the same timeframe saw Japan net a balance of trade surplus of $57 billion in 1989. (And this despite the fact that it is far more dependent on imported oil than we are.) Germany enjoyed a surplus in 1989 of $55 billion. These two countries lost World War II, but they are the clear victors in the global economic wars of the present day.
Again, this massive bleeding of America's economic base should galvanize a fierce collective response with Washington in the lead. Check your local newspapers to see when it was last mentioned and on which page it was printed. This is avoidance politics at its most destructive.
Federal budget deficit: Someday, teachers of political history will relate the rhetoric and reality of the Reagan-Bush economic era. They will talk of two Republican conservatives who successfully bashed Democrats as wild spenders. They will speak of these two leaders adamantly calling for a Constitutional Amendment to force a balanced federal budget. They will recall the constant rhetoric of the need for the federal government to match expenditures with incomes "like every American household." The students will readily understand the sheer power of this political approach.
Then the teacher will provide numbers.
All 40 presidents before Ronald Reagan ran up a combined national debt of $994.3 billion. Reagan-Bush alone added another $2,623.5 billion.
The much criticized Jimmy Carter ran an average budget deficit of $57 billion. George Bush has averaged $245 billion.
George Bush in the FY 1990 budget alone ran a deficit greater than the deficits of Democratic Presidents Carter, Johnson, Kennedy and Truman combined.
The students will not believe the teacher. How could this be, they will ask. How could Reagan and Bush have gotten away with balanced-budget rhetoric at a time of massive budget deficit realities? How could they lull the American people into accepting such staggering debt without widespread revolt?
More pointedly, they will ask, why did people allow this enormous accumulation of debt which now burdens their generation? This, of course, raises the pointed question of generational morality.
In FY 1991 the interest on the federal debt is $197 billion. By the year 2000, it is expected to reach 25% of the entire federal budget. This reality is morally reprehensible. It is the record of the Reagan-Bush years.
The Democratic response must, above all, seek to reestablish our manufacturing capability at, or above, that of the Japanese. The Republicans, of course, have carefully avoided the articulation of any goals whatsoever.
Some of them argue that the decline in our manufacturing base is acceptable because it will be replaced by a service-based economy. This is the avoidance politician's drug of choice. There is no such thing as being a major financial center in the world without a vibrant competitive manufacturing sector. Again, numbers tell the story. The largest American bank is Citicorp. In 1970, it ranked 2nd worldwide. Chase Manhattan Bank ranked 3rd. In 1980, they ranked 5th and 11th, respectively. Today, they rank 24th and 54th. Sixteen Japanese banks rank ahead of our biggest. In major financial transactions we are, in effect, dropping from the radar screen. It is no accident that the world's six largest banks are now Japanese. The Germans and French also have major banking entities and they are resolute in emphasizing manufacturing. A nation without a manufacturing base is a nation heading toward third world status. So much for morning in America.
This economic silent spring is a disgrace. Yet, no word of alarm escapes from George Bush. "Read my lips, add more debt."
Our forefathers labored mightily to establish America as the preeminent economic power on earth. W e have allowed the fruits of their labors to be sold off to foreign buyers, one national treasure after another. We accept enormous trade deficits month after month, year after year, with hardly a murmur. We treat the staggering federal deficits as inevitable results of political gridlock. It's time we faced up to our peril.
This is where democracies rely upon the courage of their elected leaders. The normal political instinct is to always engage in happy talk. It is courage which allows a politician to take a people beyond that. It takes toughness to lead a people toward their preservation no matter how disquieting the journey may be. For avoidance of unpleasant reality is simply part of human nature.
I learned that lesson once more in the aftermath of my cancer diagnosis in 1983. I found myself wishing for soothing reassurance, but what I needed was tough love. Not feeling ill, I wanted to just go home and live a normal life and not deal with the disease until I absolutely had to. For a while that's what I did. And it was possible to push away the awareness of the realities inside of me.
By 1985, however, I was put on mild oral chemotherapy. This was done in hopes of avoiding the more toxic intravenous drugs. And I knew that after that would come radiation. And after that, perhaps, would come the still experimental bone marrow transplant. I even put myself on a macrobiotic diet in search of an effortless deliverance. My doctor was not impressed.
When the time came for my late fall checkup my doctor was shocked at my deteriorated condition and upset with me for not seeking him out earlier than my scheduled appointment. The disease was voluminous in my body and was about to consume me.
The next ten months contained no happy talk. Monthly sessions of intravenous chemotherapy were followed by target radiation. In late August, I was undergoing the bone marrow transplant with its massive chemotherapy and whole body radiation. For the next six weeks I was confined to a sterile hospital room, attempting to recover from these assaults to my body. These were weeks of fear and discomfort, of course, but they were also weeks of slowly realizing that I was now able to look at the monster full face. In early October I was released from that room. I was back to work by mid-November, thin as a rail, bald as a billiard hall and wonderous at my survival.
I have often reflected back upon those ten months. I know that my hard-nosed, no-margin-for-error doctors saved my life. But I also know that I resented their tough approach during that period.
My story is my own but there are millions of Americans who have had to learn the same lesson in countless other personal crises. Avoidance of hard truths makes the inevitable dealing with them all the more difficult. And what is true for individuals is also true for nations.
In 1991 there is a need for us to acknowledge that we must get our financial house in order. The New American Mandate is, above all, an economic imperative. It is committing ourselves to the actions necessary to achieve full economic recovery and unassailable competitive strength. This involves what we do every day in the workplace and every day in the marketplace. It is thinking about these daily events as expressions of economic patriotism - as necessary prerequisites for the preservation of our standard of living.
Through the New American Mandate we will demand that our leaders articulate the policies for this economic regeneration. Not just the comfortable policies, but the difficult ones as well. Not at some distant time when it will be politically easier, but now, while we still have the capacity to control our destiny.
We need a national economic policy. What we have today is a naive faith that our companies can compete without any public sector help as they struggle against foreign companies linked to governments with resolute industrial policies. Our companies are going forth to do one-on-one battle and are being mugged. Their competitors are aided by governments that aggressively seek out the advantages of uneven playing fields whenever possible.
The Reagan-Bush response to all this has been benign neglect on a global basis. And the muggings continue unabated. We Democrats must do better. We must level the playing field.
There are many components to a national economic policy. Let me list a few.
Democratic and Republican Shibboleths
Both political parties are going to have to abandon the rusty core elements of their economic philosophies and head off in new directions. These archaic old saws are much embraced by party chieftains. The affection for them expressed by party ideologues is matched only by our trading competitors' fervent hope that they will never disappear. These nations benefit by our politics of self-delusion.
Democrats
Democrats have always believed that their essential mission is social and economic justice. And so it is. Look for such advancements in the twentieth century and in almost every instance a Democrat's hand has been at work. It is a noble tradition.
That tradition must never be abandoned.
Underlying that mission, however, has been a rarely acknowledged but enduring notion. Wealth would be created by others and after its creation we Democrats would intervene to preserve fairness by the equitable redistribution of that wealth. During most of this century that may have been a logical battle plan. Not so any more.
There is today one glaring truth. You cannot redistribute wealth that is never created. A party devoted to the purpose of carving up the economic pie should be alarmed by the reality that the pie is shrinking. Witness the devastation being visited upon critical social programs by the shortfall in tax revenues in most states in the country.
Democrats are going to have to go back to the original act - the creation of national wealth. They are going to have to sit down with the business community and jointly establish policies of wealth creation. It means giving up comfortable political nuclear weapons - such as the marvelous boost gained from routinely attacking corporate America and big business. Some recent Democratic rhetoric presents itself as traditional populism, an "us-them" view of the world where the "them" is anyone in the manufacturing, service or banking industries. Wake up, Democrats. Without viable manufacturing, service and banking sectors, there is no country. A marriage - note the word is marriage, not liaison - with corporate America is essential. Corporate America must survive, indeed thrive, if our Democratic social agenda is to have any hope of implementation.
This does not mean that we put aside our concern about social and economic justice. That standard must remain in the forefront of our consciousness. But it must coexist with a resolute determination that America must create wealth in order to provide a decent standard of living for our people.
To effectively deal with the problems of homelessness, of AIDS, of affordable housing, of catastrophic health care for everyone, of college scholarships, of all the human needs we care about there must be revenue flow from which to secure the necessary funds. The more we want to solve the great human injustices in our society, the more we are going to need a full throttle economic engine. One cannot exist without the other.
Pro-business, some would call it. And so it is. Aggressively so. But commonwealth is what it is as well. There is a real political opening here for our party. Many in the business community are quite alarmed by the economic decline of America and want to fight back. They see an administration that has always devoted its energies elsewhere and offers no real hope that its interest will ever end. These business leaders, however, view the Democrats with deep skepticism. They do truly see us as "tax and spend" advocates who are instinctively hostile to business interests. Our task is to convince them that we really understand one simple reality. America's standard of living is totally dependent upon their capacity to compete and be profitable. It's about time we said so and acted accordingly.
To me this is not an abstraction. My childhood was spent experiencing the economic decline of my home city, Lowell, Massachusetts. My father (a Republican) owned a dry cleaners and the entire family worked in the business. My father worked from 6:30 a.m. to 6:30 p.m., six days a week, 51 weeks a year. Sundays were spent doing the books and repairing the machinery. By any fair standard, this staggering workload should have resulted in just rewards for him. It didn't. No matter how hard he worked, no matter how conscientious he was, the forces of Lowell's economic decline were too much to overcome.
The remembrance of those days has left me with an inability to view economic dislocation casually. Perhaps I have too good a memory. But when I see our nation's economic indices, I have a foreboding sense of not wanting these trends to run their course. I want to determine my own fate. I believe the business world is full of people who share this deep concern. We Democrats must reach out to them.
Republicans
Whereas the Democrats must learn to embrace the world of industrialists, entrepreneurs and venture capitalists, Republicans are going to have to alter their views as well.
At the Republican core is the almost religious belief that an unfettered free market is the best of all worlds.
Industrial policy is seen as equivalent to child pornography. It is seen as the domain of such reprobates as Castro, the Sandinistas and the now discredited Communist planners.
This view is unschooled. Industrial policies presuppose a market system. They show how to improve the competitiveness of private firms through public policies. Since Communist central planning systems have neither markets nor private companies, it is by definition a contradiction in terms to refer to them as having industrial policies.
Republicans are going to have to refine their perspectives to realize that to embrace any component of an industrial policy is not to immediately be guilty of Soviet-style central planning activities.
Industrial policy is what Japan has. It is what Germany has. It is what we must have as well.
When I was involved with the Chrysler bill some eleven years ago, the attitude of the purist laissez faire proponents was, basically, "let it die." To argue the case for sustaining a company with a viable future product line was difficult because some felt it was government intervention. And it was. But if the company had gone under would America have been better off? Of course not. The government even made money on the deal when it was all over. But I never heard anyone say that they would have voted differently. An America with just two major auto manufacturers is not an industrial policy. Saving Chrysler was industrial policy. It worked and we should not be so quick to forget that fact.
Republicans are well trained to look at potential military adversaries and demand weapon equivalence in defense of the nation. If these adversaries have a particular military capability, then by definition, we must put aside all other considerations to make our military capability even bigger and better.
Today our economic enemies are our political friends. The war they wage is in the marketplace, not on the battlefield. America can be done away with by economic decay just as assuredly as by foreign invasion. The implosion of the Warsaw Pact was economic, political and social. It collapsed from its own internal weaknesses, not by the force of outside military attack. An ever diminishing standard of living in the United States will cause us to battle each other over diminishing resources. W e will cease to be a major factor in world affairs as we focus only upon our downward spiral.
For the Republicans as well there should be one glaring truth. American companies need the United States government as a full partner if they are to have any hope of competing internationally. That means an industrial policy. Take a deep breath, my Republican friends. It's a brave new world out there. Adam Smith was a marvelous man but he wouldn't know a superconductor or memory chip if he tripped over one.
Take another deep breath. The threat to America today is not only a diminished Soviet Union. It is not just Saddam Hussein. It is the threat of a different dimension. It is Japanese, German, Taiwanese, Swiss, French, South Korean, etc. Friends all. But just as capable of reducing us to impotence. They have already begun. The adrenalin that Republicans would call up at will to confront Soviets or Cubans or Sandinistas or East Germans or North Koreans or the Iraqi Republican Guard must be called up to confront our friends.
This is war by another playwright. But it's still war.
It doesn't take a genius to understand the post-Gulf War era. The Japanese and Germans will have emerged as even more formidable economic competitors. They chose to bypass the conflict while we made it our foremost national purpose. It is no accident that CNN and network coverage of the war was viewed by Americans on Japanese TV sets and was interspersed with ads from Japanese manufactured products.
Republicans must acknowledge this and begin to mobilize accordingly. This means opening up to aggressive and resolute policies which will put the government in the foxhole with our beleaguered American companies. Republicans who focus on "defense strength" must be made to understand that such capabilities come from government funds. Government funds come from taxes. And taxes come from a vibrant economy. Kill the economy and you have no "defense strength."
If the New American Mandate requires Democrats to embrace the creation of wealth, it also requires Republicans to see honor in asking the question "what works" and to see dishonor in slavish adherence to past economic dogma.
For Democrats the political opportunity lies in the likelihood that George Bush will not act any differently about this than Ronald Reagan did. There are three reasons for this.
First, the politics are an impediment. Avoidance politics have always been, and will always be, powerfully seductive. "Read my lips, no new taxes" was just the latest in a long line of homage to false gods. The Reagan-Bush line has been to gloss over the dangers ("morning in America") and simply ignore fundamental economic trends. Their concern is the immediate judgment of their electoral contemporaries not the judgment of historians - even if that history is rapidly coming upon us: It is my contention that the accumulation of hard data as to our economic dilemma has provided a base for electoral realism in 1992. That base can only expand. The 1992 Democratic campaign must take it on faith that Americans are prepared to wage this economic battle ferociously. The Republicans will presume the opposite and will continue their avoidance politics.
Second, there is no sense of urgency. Most of the key economic decision makers in the administration come from circumstances of affluence. For them there will be financial insulation no matter what hap pens. Their economic safety nets are made of steel cables. There is no foreboding. There is no perception that the economic ground beneath them can tremble. It is just too removed from their own personal histories and circumstances. This is not meant to suggest venality. It is meant to suggest that perception of a particular threat is more acute in those who have faced it before.
Third, the trade deficit, the budget deficits and manufacturing employment numbers listed above are all Reagan-Bush. They occurred during their watch. They are the party of record.
To reverse course would be to acknowledge that their unaided free market policies have been dysfunctional as we confront trade competitors who have their public and private sectors in resolute harmony. To reverse course is to admit error. It will never happen. At best they will work around the margins. A full blown frontal assault on the economic threat would require a self-analysis of the past eleven years that will inevitably sully the Reagan-Bush record. George Bush cannot, and will not, do this. His course was set more than a decade ago when he retreated from his declaration that Reagan's policies were "voodoo economics." Once he capitulated to that Republican realpolitik, his options were narrowed forever.
We Democrats must insure that George Bush's dilemma is not America's dilemma.
Recognize the Peril
This is step one. This is where America and George Bush must part company. No one ever solved a problem he refused to acknowledge.
Yes, we are losing ground, particularly in high technology, basic manufacturing, and financial services.
Yes, it is the national crisis of the highest priority.
Yes, it will destroy the economic foundation of our military national security.
Yes, it will severely compromise our capability to play a peacekeeping role in world affairs.
Yes, we now believe that government must be an active partner in this great challenge.
Yes, America should be the pre-eminent manufacturing nation on earth again.
Yes, it threatens to seriously reduce the American standard of living.
Yes, Americans are the equal of any workforce in the world.
Good. Now let's get on with it.
Be Prepared to Make Strategic Investments
The notion of investing in the technologies necessary to create the Star Wars program was hotly debated. But it became national policy and billions were allocated to that purpose.
Why? National security.
What about investments in technologies that could impact our economic national security? Horrors. That's central planning.
In the long run would America be better off with hundreds of billions invested in an improbable Star Wars system arrayed only against an imploding Soviet Union or by developing an insurmountable lead in ceramic engines, supercomputers and memory chips? Indeed, without a thriving manufacturing capability in these industries the economic base to fund military research cannot exist. Many anti-industrial policy Republicans would say that the non-functionality of Star Wars against the Soviet Union is an unfortunate but necessary price of eternal vigilance against a foreign military threat. These people would also argue against major governmental investments in strategic technologies because, unlike the Japanese, "we can't pick winners and losers." What about the economic foreign threat?
Again, it's a matter of mindset.
Washington has been focused on the Soviet challenge for the en tire adult years of most of its leaders. It rebels at the notion that in the 1990's there are real dangers that do not emanate from missiles or tanks or fighter aircraft.
It must rethink threat. Threat can be venal such as a Saddam Hussein. But threat can come from people who are friendly and have no evil intent.
The threat to America is economic as well. W e must think of government and industry as partners with the same level of enthusiasm, indeed patriotism, that the military-industrial complex generates for its joint mission. Strategic investments in emerging technologies is part of an industrial policy which will result in some losers, yes, but will also result in some critical winners as well. These winners will be a major part of our economic future. Particularly now that American venture capital has shrunk dramatically, government has a contributing role to play in insuring that our push for technological competitiveness has a fair chance at success.
Promotion of Science and Research
This is one area where the rhetoric is in place but not the reality. The National Science Foundation, the National Institutes of Health, NASA, the Departments of Energy and Agriculture among others, are the mother's milk of cutting edge research investigations. We should not be satisfied with marginal increases in these budgets. Again, it's a matter of mindset. The Manhattan Project. The Apollo program. The war in the Persian Gulf. It's just a matter of recognizing the threat and responding to it. There will be no manufacturing sector without a powerful basic and applied research capability. Put these agencies at the top of our funding priorities.
In addition to the traditional areas of basic and applied research, we must devote more attention to applied engineering and manufacturing engineering.
The economic war that we are losing is centered on process technologies. The taking of new ideas, indeed, even old ideas, and converting them to manufactured goods is the great trade battle ground. The winners here are those who can take high and low tech products and simply manufacture them better. It is the process of manufacturing that should also be the recipient of research monies since it is only the production of a technology which creates wealth. The initial discovery and development of a product are the stuff of Nobel Prizes and prideful articles in trade journals. But that is not enough.
The prior definition of success embraced those who could conceive new product ideas. Today the definition of success embraces those who can take those ideas, wherever they may originate, and tum them into products quickly, efficiently, and with great quality control. The Japanese takeover of the American-originated VCR market is an obvious example. These are the cash cows. These are the providers of employment for a nation's people. They are equally worthy of intellectual inquiry and investigation.
The need here is to exalt science in all its dimensions. There must be a White House effort to create an environment wherein young Americans choose science (and engineering) as a career. The society as a whole needs to acknowledge that we will survive as a viable economy only by the fruits of the minds of young American scientists. To have our best and brightest heading to law schools and Wall Street is a gross misallocation of resources. The best and the brightest should be in the laboratories and in the production facilities. The best and the brightest should be deployed to reinvigorate our manufacturing sector. This will require a sea change away from the values of the 1980's that drove our young away from occupations of production and into the occupations of the paper chase.
A society which pays its 29-year-old science researchers $25,000 a year and its 29-year-old lawyers $100,000 a year and its 29-year-old investment bankers $200,000 a year and its 29-year-old left fielders $2 million a year is sending all the wrong messages. It is a formula for unrelenting decline. The young American scientist must be recognized as the fuel of any viable economic engine.
Change Anti-Trust Laws
Current anti-trust laws prevent American companies from joint venturing in almost any area including such critical ones as research and development. The rationale for this policy is rooted in America of years past, long before our companies faced foreign corporate behemoths. We need to pool our resources to be equal with our competition. We have to allow our companies to muscle up. Joint venturing is the sine qua non of that capability. It must become an everyday occurrence in order to equip these companies to compete in the global marketplace.
American companies should be released from anti-trust constraints in areas which impact on their capabilities in international trade.
This is one area where our Japanese and German competitors view us with great mirth. To them the concept of group strategies is an obvious way of maximizing your strengths. Seeing America hobbled by her own hand must seem to be a heaven-sent advantage.
Current American law pays homage to a period when all the producers were American and thus cooperation between them was clearly dangerous to the consuming public. Today most of the producers are foreign and they threaten to eradicate American producers. There must be a serious rethinking. The fact that our anti-trust laws were not changed years ago speaks to the absolute neglect of the cutting edge issues of competitiveness while we engage endlessly in the rhetoric of promoting competitiveness. Democrats are particularly vulnerable to this criticism. W e must give our companies a more level playing field through policy changes that don't require massive federal expenditures.
Increase Our Savings Rate
Congress should pass laws which encourage savings over consumption. This will create a capital pool which will begin to match the resource base that countries with high savings rates enjoy. The lack of a capital pool is the economic equivalent of unilateral disarmament.
The numbers here are staggering. Compare the United States, Japan and Germany in years 1980, 1984 and 1988. Our national savings as a percentage of GNP went from 18.8 to 17.0 to 15.1.
Germany had rates of 21.7 to 21.7 to 24.5.
Japan, of course, was in a class by itself. It had rates of 31.1 to 30.7 to 33.3.
W e need a dramatic improvement in our rate of savings in order to provide the much needed capital base for investment.
A much greater abundance of capital will serve two purposes. First, it will reduce the cost of capital to U.S. companies. Currently, the cost of capital in America far exceeds that of Japan and Germany. It renders corporate decision makers unable to make investments whose payout is long term. This financial barrier is lethal to the kinds of corporate strategies that are necessary in order to compete.
Second, it will reduce our current hazardous dependence on outside sources of capital. These are sources which can quickly evaporate when these nations decide they have other more pressing uses for these funds: i.e. West Germany's current interest in investing in the restoration of former East Germany. Being dependent on foreign capital is not unlike being dependent on foreign oil. You don't control your own destiny. Various I.R.A.s for retirement, college expenses, home ownership are examples of pro-savings incentives. Other ideas should be aggressively explored.
Finally, the savings ethic must be fully ingrained in the American culture forever, not just to get us through this difficult period. That means our children must be part of it. Schools should work with banks to give each child a savings account or some equivalent. No matter how small, such accounts establish a thought process. Efforts should be made to allow the pooling of funds into Childrens' Mutual Funds, wherein school groups could invest minor amounts of money at reduced service fees. This would have the additional benefit of directly involving children in learning about and caring about the American economic system. These would be latter day Economic Liberty Bonds. Young people would be taking a personal step in helping to provide the capital necessary in America's battle for economic survival.
The secondary value of such participation by the young is the early awareness of how dependent America is upon the actions of individuals. Hopefully, this sense of personal relevance will be reinforced by other actions and lead to a more contributory attitude towards citizenship. Our people must perceive America's economic vulnerability and see their own essential role in safeguarding their nation.
Investment Over Consumption
There are a lot of indices that show the inevitable decline of American economic fortunes compared to those of the Japanese and Germans. Inevitable, that is, if these numbers are not changed.
Probably the most significant are the numbers which reflect the differences in mindset relative to investment and consumption.
Consumption is today.
Investment is tomorrow.
It is seed corn consumed versus seed corn planted. Nothing is more basic.
Yet relative to our competitors, we are devoted to consumption, and they are devoted to investment.
Again raw numbers. The investment rates of the United States, Japan and Germany. Public and private. Years 1970, 1980 and 1988.
The reasons for this are historical. Japan and Germany were ravaged during World War II. Their leadership and their populations had known the horrors of economic disequilibrium - from runaway inflation to personal deprivation. Out of this adversity came the intense Post-War determination to create patterns of economic behavior that value future stability and security over present day consumption. We saw the Post-War period as the time to reap the fruits of our victory. Present day consumption was seen as an earned reward eclipsing any widespread sense of providing for the future. The 1980's were the epitome of that attitude. It was assumed the future would always be economically secure. That assumption was wrong. The result of these national patterns if allowed to persist will be a much lesser America. Fewer good jobs. More foreign ownership. More social dislocation. Less world influence. More crushing debt, both personal and national. The savers will dominate the spenders. The investors will eclipse the consumers. The lean and hungry will always prevail over the comfortable and complacent.
The problem here is not that all of this is not understood. The problem is that being understood by economists is one thing. Being understood by politicians is quite another. And transforming understanding into action is more difficult still.
The economists will say that investment and consumption are like a seesaw. In order for investment to go up, consumption must come down. Herein lies the political dilemma. But herein also lies the opportunity for political leadership.
Through the New American Mandate, our people will affirm their commitment to a policy that defines the common good as the promotion of investment over consumption. We need to create in ourselves the kind of steely will to survive economically that our Japanese and German counterparts still have. We must fashion a political environment wherein a drumbeat for necessary economic policies allows our elected officials to do what is right without fear of immediate ouster. Voting for needed economic reform must be demanded by the electorate. Continued avoidance of such reform must be clearly identified as unacceptable pandering by politicians who are putting their own re-election concerns above the national interest.
This involves choices, few of which will be easy. Yet relative to the economic decisions being faced by countries like Poland and the Soviet Union they are far less onerous. Far less. It means looking at the entitlement programs, heretofore a political never-never land in American politics. Would the Congress support a policy of reducing the yearly increase in entitlements by one percent below the cost of living? It's not a great deal but it would establish a policy of economic response. But politically it will not pass, even for those above a certain income level, in the absence of a clear understanding as to the nation's need for such a measure. It must be seen as patriotic to rally all of us to this cause. The principle of shared sacrifice for the common good must be advanced. This is the "vision thing" that George Bush finds so hard to come to grips with.
The policy must be made clear to every American. We must make the transition from a high consumption/low investment country to a lesser consumption/high investment country. Japan and Germany did so decades ago because adversity gave them no choice. Can America do the same without having experienced such deprivation? Can we act in time to lessen the impact of far more painful decisions in the future?
I believe we can if the political leadership is prepared to show the way.
Reduce the capital gains tax for investments in appropriate securities held for a long period of time
The current capital gains tax debate would only happen in a political environment far removed from the pressures faced by American companies. We don't need an across the board capital gains reduction as President Bush fought so desperately for last year. Encouraging people to invest in raw land or commercial buildings or art collections adds nothing to our competitiveness. They are simply less critical recipients of our capital. Providing capital gains advantages to people who speculate in the stock market is equally counterproductive since it rewards short-term corporate horizons at the expense of long-term corporate strategies. It also encourages our most talented to seek their fortunes by speculative and manipulative paper shuffling as opposed to production oriented careers. Michael Milken at $500 million a year is very powerful career counseling of the worse kind.
We need to limit capital gains incentives to long-term investments in corporate America. This signals that such investments are our nation's top investment priority. To be effective, this signal cannot be rhetoric, but must be pure marketplace. Invest here and your returns will be maximized. Very simple. Invest in an American company, hold that stock rather than speculate with it, and you get a significantly lower capital gains tax rate. The longer the stock is held, the lower the tax rate.
In addition, efforts should be made to define new enterprises. While the focus of the capital gains tax differential must be on corporate investments, it makes obvious sense to give an added incentive to such new enterprises. The growth of the American industrial base has always come from small and emerging businesses. These are the entrepreneurs with the greatest maneuverability. But they also have the greatest vulnerabilty. Today with the shrinking of the venture capital markets they are at even greater risk. There should be differentials here large enough to attract serious investment into those new ventures which will provide sources of fresh employment in the years ahead. It is time for paying attention to sunrise enterprises as well as sunset enterprises.
It is this combination of criteria that should make the capital gains reduction a central part of creating an America in economic rebound. Such a program would channel capital towards our industrial/manufacturing sector and would stretch out the time horizons of investors.
The obstacle here is party politics. Some Democrats oppose any capital gains differential because supporting it prevents them from using the "class warfare" argument against the Republicans. Taking aggressive anti-business positions is second nature to them. Class warfare is certainly good politics. But it's good politics at the expense of the nation's industrial base. Democrats should be concerned with what a targeted capital gains tax would do for America and not be focused on a myopic discourse about who benefits the most under such a system. It is the common good that counts.
I learned this lesson in 1975 in Lowell. My home city was being crushed under double digit unemployment. The downtown was a visually unattractive array of buildings that had not seen any reinvestment for decades. Lowell was everyone's model of a depressed mill city.
As a new Congressman I proposed the creation of the Lowell Financial and Development Corporation. This entity would be funded by the local banks contributing one-twentieth of one percent of their assets to it. The corporation would then reinvest those funds in restoring the historic buildings of the downtown. There was the expected resistance from some of the bankers but eventually they agreed because they, in essence, owned this devaluating property.
What was not expected was the feeling by a few non-business people that the corporation was inappropriate because it would benefit some building owners that they considered unsavory. These people don't deserve to receive financial rewards, they argued, because they are responsible for letting these buildings fall into disarray in the first place.
I must admit that I felt some sympathy for this righteousness but not enough to change my mind. The corporation was created, and it and its organizational twin, the Lowell Plan, have been very successful. Lowell has become a national model of urban renaissance.
Did the "unsavory" people benefit? They sure did. But so did everyone else in a once-depressed mill city with what had seemed a marginal future.
Provide for a Research & Development Tax Credit
This should be self-explanatory. We can't compete long term if we are not putting our earnings back into research and development. Such reinvestment back into a company should be viewed as the corporate investment of highest priority and taxed accordingly. Farmers who consume their seed corn are never heard from again. The same is true of companies. We have to help American companies strengthen their prospects for the long term.
Change the counterproductive short term U.S. corporate perspective
The U.S. system of corporate survival is strictly a short term game. All of the forces in the marketplace reward the shortsighted and penalize the wise. It cuts clown the chief executive officer (and his board of directors) who thinks long term and is willing to put his money where his strategy is. For example, CEO #1 and CEO #2 have similar companies with equivalent earnings. CEO #1 takes 30% of his earnings and invests it in a long term research project in which they have faith. CEO #2 shares that faith but chooses to retain that 30% as an earnings dividend to the shareholder. Company #1's stock, therefore, will be lower than Company #2's because its earnings are lower. Company #1, therefore, is more attractive to a takeover since its stock can be acquired at a lower price and it has a long term technology strategy. Company #2 is less attractive to a takeover for exactly the opposite reasons - higher stock price and less long term technological promise. Who is the better CEO? Who is the safer CEO? These are questions that will yield two different answers. This is especially true if company #2 uses its higher stock price to acquire company #1 and then slashes the research and development budget in order to help pay off the resultant debt. This is the true American corporate nightmare. W e must enact fundamental changes to reverse this reality. It means charting new waters but it must be done.
The role of CEO must be redefined in accordance with the new world economic realities. Historically the CEO was charged with maximizing the short term value of the stockholder's holdings, no more, no less. Any policy which veered from this. approach was an invitation to hostile shareholder lawsuits.
The new definition must include the notion of the CEO as keeper of the assets of the company. Those assets are all-inclusive - human, technological, physical and financial. The primary responsibility must be the advancement and growth of those assets over the long term. It must prevail over the policy of short term shareholder value that comes at the expense of the nation's long term need to have growing vibrant companies. We must get to the point where the pursuit of short term profits by destroying assets, selling off assets, and ravaging research and development budgets, will be seen as highly inappropriate.
Unshackling a progressive CEO also demands that we redefine the proper role for corporate directors as we attempt to be internationally competitive. At issue here are the same concerns - i.e. corporate strategies and corporate time horizons. But it also involves the attendant issue of director exposure to shareholder lawsuits where the shareholder's interest is immediate cash-in value irrespective of management practices that strengthen the company's future. Corporate board meetings are generally focused on month-to-month or quarter-to-quarter reporting of data, as opposed to exhaustive examination of long term corporate strategies. W e must implement ways for directors to support long term horizon strategies that benefit the company and the nation over the long haul and not have these directors subject to instant legal liability.
I experienced this catch-22 while serving on the board of a publicly-held company. The corporation had accumulated excess cash as a result of divestitures and had to decide what to do with this resource. The choices were pretty straightforward. Keeping the cash on hand was an open invitation for a takeover bid by someone seeking to buy the company, take the cash and just dump the rest of the assets. This would weaken the remaining company dramatically and we all knew that.
Distribution of the cash as dividends and a possible management buyout, etc. were a second possible approach. This was the safest of director options since it would be well received by the shareholders. The problem with it was simple. The company would not have gained any new strength as it ventured forth in the future. The cash would have been expended without impact on our competitive capability. It would have created a company with lesser viability over the long term.
The final possibility was to use the cash to acquire a complementary second company and end up with a larger corporation. This would mean better market share, a broader technology base and real economies of scale. It was a classic example of technological synergy and corporation muscling up. An easy decision? Hardly. It was the decision most likely to put the directors at risk because we would be choosing to bet on long term stock appreciation rather than immediate shareholder gain.
There was a direct correlation between director legal liability and preserving the company. Put another way, to maximize our own personal legal security, we would have had to vote to leave the company in a weakened position.
W e chose not to do so. W e made the acquisition. The company is now profitable and the stock is appreciating.
That's all very nice but I vividly remember walking to my car after the meeting wondering whether I had risked the financial well-being of my family by deciding to make the company as competitive as possible. What if the gamble had failed and I had been sued? Would I have been able to convince my family that their financial sacrifice was warranted?
These dynamics are lethal to American competitiveness. Unless directors are convinced that long term strategies will not invite hostile takeovers, unless directors are convinced that supporting long term strategies will not expose them to serious legal exposure unless these are the new realities in the corporate board room, nothing will change no matter how progressive corporate management wants to be.
There is, admittedly, a very fine line here. The threat of stockholder lawsuits has a real and valid function. Corporate directors should fear a reckoning if they do not meet their fiduciary responsibilities. But why should short term shareholder value be considered more responsible by our legal system than long term competitive viability? Why should the de_facto damaging of the nation's industrial capability be a safeguard against lawsuits? Somehow the ground rules have to change. We must seize the opportunity to step back and rethink existing assumptions. This would entail changing the scope of director responsibility to include the requirement that long term competitive viability be a standard component of any decision making process. Another would be a requirement that directors annually review research and development budgets both as to the percentage of the total corporate budget compared to competitors and as to the particular research agenda. Boards should include directors who possess relevant skills in the appropriate technologies and not just financial and management expertise.
Another counterproductive assumption is the one that holds that every public corporation must release its financial data every three months. These quarterly reports define corporate America today. Their release triggers instant response by Wall Street and other like watchers. Nothing is as sacred as these quarterly announcements. Nothing is as traditional and nothing is as expected.
Yet that doesn't make them necessarily valuable. Is it not time to ponder the following? Neither Japan nor Germany has such a practice. They rely upon annual reports. They are known to have much longer corporate time horizons than we do. We should explore the concept of stretching out quarterly reports to semi-annual reports. Or indeed even to just annual reports. If our very successful trading competitors do just nicely, thank you, without quarterly reports, why are they essential here? I would suggest that serving the gurus and traders and speculators and raiders of Wall Street is far less important than serving those within our companies who are trying to survive.
Let the debate begin. The need is to stretch out corporate horizons. Quarterly reports do just the opposite.
Management-Labor Attitude Changes
The rhetoric about management-labor cooperation is oft-heard but needs a boost from the Presidential bully pulpit.
Management must be encouraged to drop old attitudes about workers being the "other side" and to engage workers in true joint consultation and decision making. These are the only avenues to the kind of productivity and quality control necessary to have competitive products. There is a new awareness about the need to change archaic management techniques but change comes hard. Management of the old school still occupies too many executive suites, buttressed by too many old bulls in the board rooms.
The President should give high and consistent visibility to companies that are inclusive in their practices and progressive in their techniques by visiting plants where these practices are in place.
By publicly holding out such companies as models, it will help create an environment wherein regressive management techniques will be more and more isolated over time. It will bring about the kind of dialogue about management practices that will accelerate progressive change. This dialogue will provoke the kind of critical corporate selfanalysis that too often happens only after Chapter 11 has been filed and the golden parachutes deployed. The need is for mid-course corrections, not better corporate autopsies.
Correspondingly, the unions (and non-unions) must change more rapidly as well. Union officials should save their ammunition to fight for issues like wage scale, health benefits and worker safety. No effort should be expended trying to defend illogical work rules that are nothing but feather bedding. The common goal should be highest possible productivity at the highest possible wage rates. Many union officials have been very active in forging this new direction but if we are to be competitive there needs to be near unanimous acceptance of this perspective. A President, especially a Democratic President, should give overt support to progressive union leaders while being willing to criticize those who cling to outmoded views.
This rationale applies equally to non-union work forces. The New American Mandate means workers who proudly embrace their responsibility to help their companies prosper.
Companies saddled with management that distrusts its workforce combined with workforce leadership which feels no responsibility to maximize productivity are doomed. Such foolish leadership causes job loss for innocent workers and GNP loss for the country. Pick up any paper and you will read about such lamentable situations every day in almost every industry. The President has a role to play to guide management and labor away from such destructive practices.
Economic Loyalty
This is one area where the political leadership in both parties at every level has failed to call forth America's capacity to promote its own self-interest.
Economic loyalty to one's fellow countrymen is not a value that is fashionable in America today. To raise the matter in a public speech is to cause more seat squirming than a discourse on safe sex. To suggest it to the generation of the 80's is to invite barely concealed disdain.
Yet, what is loyalty to one's country? What is loyalty to one's fellow countryman? What is one's obligation to the larger societal "family" in times of economic distress?
If, during the last four decades, I had sent $100 to the Soviet Union to aid them in their war effort against us I would have been justly accused of treason. I would be vilified by both conservatives and liberals as having aided and abetted a nation which threatens my country. Properly so.
If, at the same time, I had sent $40,000 to Japan or Germany (or Great Britain, etc.) to aid them in their economic war effort against us, however friendly, I would be totally ignored by American conservatives. I would be the recipient of comments about how nice my Mercedes or Lexus (or Jaguar or Audi or BMW, etc.) looked. In addition, there would be absolutely no suggestion from American liberals that the American auto worker rendered unemployed by my car purchase decision should be of any relevance to me.
We are in the grip of a kind of 1980's loyalty, that is, loyalty to one's self and one's image with no concern for the common wealth. Indeed, to suggest a rethinking of our collective responsibilities to each other is to encounter extreme defensiveness.
This 1980's loyalty is not confined to "Me-Generation" fast trackers.
The average corporate chief executive officer is often no better. Chances are excellent that he or she drives to work in an expensive foreign import, dressed to the nines in foreign shoes and clothing, all the while lamenting the decline of America's industrial base and the easy availability of capital in other countries.
This is where the New American Mandate would seek to change attitudes. We used to think that patriotism was supporting our troops in the Persian Gulf and buying a Mercedes on the same day. The New American Mandate would be a lot more comprehensive.
An American parable for the 1980's is as follows. A well paid engineer working for an American company buys an Infiniti. Six months later he/ she gets a layoff notice because his/her company can't compete with its Japanese counterpart. The engineer drives home in a funk and never, never equates the two events.
This is not an argument for a mindless Buy America policy. That approach suggested that we buy domestically produced items irrespective of all other considerations - such as quality and price. As the not-so proud owner of a Ford Pinto and Chevy Vega in my time, I am all too fully aware of the downside of such a policy. It promotes the laziness and inefficiency of any protectionist policy. It is more compassionate but ultimately leads to the same kind of inevitable manufacturing base deterioration. The incentive to excel is seriously weakened.
But there are harbors of logical refuge between mindless Buy America and soulless 1980's non-loyalty. In between there are cases where a consumer is faced with choices where the distinctions are not so obvious. Economic loyalty is simply opting to put one's capital towards the strengthening of America, not the strengthening of another country. These are cases where the benefit of the doubt tips the scales in favor of the American product.
The recent focus on quality control in American cars, for example, clearly offers such opportunities today.
Finally, it should be emphasized that this is not a call for protectionism or foreign bashing. These two are the siren's temptation. The former is nothing more than the acceptance of full scale competitive retreat. It is a warm refuge but only temporary and eventually fatal. Erecting protectionist barriers is counterproductive. Our efforts should be focused on openness elsewhere and full reciprocity in world trade.
The latter is equally dangerous. It is quite appropriate to criticize foreign countries when their policies are in error. Certainly there is no shortage of selfish and irresponsible practices carried out by our allies and trading partners. We should not be hesitant about pointing these out and calling for correction.
Some politicians, however, go beyond this and seek to swim in the murky waters of demagoguery. Blaming foreign nations for our economic woes is standard fare for elected officials because it is invariably well received - particularly in areas of high unemployment. It is a lot more rewarding politically to bash imports than to suggest that there may be fault in attitudes or strategies here at home. This political tactic is avoidance politics of a different kind. It allows people to walk away resenting other nations when they should be demanding changes in how we do things in America. By continuing to persist in denial we put off the necessary self-examination and rethinking that will lead to true competitiveness. Thus, the foreign basher ultimately serves the interests of the foreigner by putting off the critical day of our own renewal.
But the issue here is not just economic. It is social as well. A sense among consumers that we care about our fellow countrymen and are willing to demonstrate economic loyalty in their behalf strengthens the bonds between us. Imagine if a neighbor owned a particular business and you needed to buy a product sold by such a business. Is it not natural to want to give the neighbor your business if at all possible? Well, this is the same thing except your neighbor lives further away.
The issue here is not about where productive economic loyalty ends and counterproductive Buy America begins. The issue is a collective recognition of the economic peril faced by our country. It is incorporating that recognition into our daily lives as a constant thought process. In the economic war we are all by definition soldiers because we are consumers. The issue is deciding which army we are part of.
A final thought. This call for economic loyalty is in response to our current economic dilemma. The point here is not to despise foreign products. On the contrary, we all need a viable global economy with the free flow of goods across borders. The point is to calibrate our consumer decision making to the economic conditions prevailing in the country we all call home. In other times this would not be as relevant. In the happy future it will not be as necessary either. But in today's troubled conditions, it is very important. It is, ironically, calling upon Americans to begin to think the way Japanese corporate leaders and German consumers have acted for decades. They have viewed this attitude as a kind of deep patriotism. Hokey, isn't it? But who is buying up whose national treasures? Their citizens understand economic loyalty instinctively. It's about time we did the same.
We are all part of one team. And we are tied to the success, or lack thereof, of all the other members of our team.
Today an American professor, for example, is paid less than her German counterpart teaching the same subject matter and more than her British counterpart. Since the skills are equivalent, why are the salaries different? Very simple. The German "team" is doing very well, the American "team" less well and the British "team" even less well. The American professor is being dragged down by the relative lack of success of her "team." Does that professor ever think in these terms? Very doubtful. But we must bring about that kind of awareness.
The role here of our political leadership is to make Americans aware that if one American worker is thrown overboard, we are all dragged down just a bit. The more of our team members that are cast overboard, the further down we all go.
What it comes down to is this. I go to buy a product, let's say an automobile. I live in a cold climate and want four-wheel drive capability. My choice is narrowed to a Jeep and an Isuzu.
My judgment will involve issues like style and cost. But it doesn't end there. When I see the Jeep I sense an American autoworker who will remain employed if I buy it. I derive a quiet pleasure knowing that my money will remain in our economy and multiply. I instinctively understand that my economic well-being will eventually be determined by the economic well-being of every other American. I think like a Japanese would. Or a German would. I think like an economic patriot.
Index
Forging A New American Mandate
PAUL E. TSONGAS
l. Economic Survival - The Creation of National Wealth
There is no reason why the United States should not be the pre-eminent economic power on earth. No reason whatsoever. We have the land, the resources and the people. What we lack is the leadership. Our political leadership has chosen to ignore difficult economic realities. It has, instead, decided to finance short-term avoidance by placing the nation under crushing and unsustainable debt. As a result, America is facing great economic peril. We are daily witnessing this ever-mounting national debt, the inexorable sale of America to foreign interests, and the steady deterioration of our capacity to compete in the global marketplace.
Yet, the alarm remains unsounded. Washington is recession proof. The rest of the country, however, is not. Washington talk about "it's morning in America" rings hollow in communities devastated by failing industries. To them it's high noon. Bravado talk about "we can out-compete, out-produce and out-sell" any country in the world without change in our national economic policies is a self-serving delusion.
Washington politicians should experience service on corporate boards of companies that are trying to compete internationally. They should have their financial survival riding on a startup business struggling under the burden of the high costs of American capital. They should have close relatives seeking to manage companies under the quarterly gaze of Wall Street vultures and getting battered by foreign companies whose investors think in terms of years. They should watch a son or daughter sell off technological genius to the Japanese or Germans or Swiss because no American company is interested.
This is what is happening outside the Beltway.
America's manufacturing base is under attack and Washington treats it as just another issue.
It is not just another issue. It is the issue. This problem is our collective kryptonite. An ever less competitive manufacturing base inevitably means cataclysmic erosion of our standard of living. If we are reduced to just flipping hamburgers and exploiting our raw materials, we will have an economy, but it will be a diminished economy of decline and defeat. The American people would never stand for such a prospect. As the recent MIT report on competitiveness put it, "In order to live well, a country must produce well." This is the slogan which should sit on the President's desk.
It would perhaps be useful to put numbers on this concern. There are three major indices that tell the tale - the number of persons employed in manufacturing, our balance of trade and the federal budget deficit.
Manufacturing employment: The United States today has only 17% of its total workforce in manufacturing, down from 26% in 1970. If defense industries are removed, we have only 15%. The Germans have 33% of their companies in manufacturing and the Japanese have 28%.
During the 1970's, the United States paid its production workers the highest wages in the world and still maintained a positive balance of trade. Today, nine other nations pay higher wages, yet our trade balance is chronically negative.
Over the past five years, our average trade balance has been $133 billion negative while the Germans have averaged $61 billion positive. Yet, the German average production wage and benefits is $18.02 per hour compared with $13.92 in the United States.
Overall productivity in this country grew at over 3% per year from 1960 to 1973 but has risen by only 1% per year since then.
The average weekly earnings of the prívate nonagricultural workforce grew (in 1984 dollars) from $262 in 1949 to $336 in 1959 to $387 in 1969. Since then, it has declined to $376 in 1979 and $335 in 1989.
Balance of Trade: Hard as it may be to believe, the United States used to be a net exporter. In 1960 we had a net balance of trade surplus of $2.8 billion. In 1970 it was a surplus of $2.3 billion. In 1980 it stood at a surplus of $1.1 billion. The 1980's have seen deficits steadily grow. In 1990 our trade deficit totalled over $95 billion.
This deficit accumulation totals some $910 billion since 1980. What does this mean? It means that $910 billion of our wealth has been transferred to someone else - either by resources leaving this country or by foreigners buying up America. At the current rate we will either be in total hock to the outside world or the outside world will own us.
In contrast, the same timeframe saw Japan net a balance of trade surplus of $57 billion in 1989. (And this despite the fact that it is far more dependent on imported oil than we are.) Germany enjoyed a surplus in 1989 of $55 billion. These two countries lost World War II, but they are the clear victors in the global economic wars of the present day.
Again, this massive bleeding of America's economic base should galvanize a fierce collective response with Washington in the lead. Check your local newspapers to see when it was last mentioned and on which page it was printed. This is avoidance politics at its most destructive.
Federal budget deficit: Someday, teachers of political history will relate the rhetoric and reality of the Reagan-Bush economic era. They will talk of two Republican conservatives who successfully bashed Democrats as wild spenders. They will speak of these two leaders adamantly calling for a Constitutional Amendment to force a balanced federal budget. They will recall the constant rhetoric of the need for the federal government to match expenditures with incomes "like every American household." The students will readily understand the sheer power of this political approach.
Then the teacher will provide numbers.
All 40 presidents before Ronald Reagan ran up a combined national debt of $994.3 billion. Reagan-Bush alone added another $2,623.5 billion.
The much criticized Jimmy Carter ran an average budget deficit of $57 billion. George Bush has averaged $245 billion.
George Bush in the FY 1990 budget alone ran a deficit greater than the deficits of Democratic Presidents Carter, Johnson, Kennedy and Truman combined.
The students will not believe the teacher. How could this be, they will ask. How could Reagan and Bush have gotten away with balanced-budget rhetoric at a time of massive budget deficit realities? How could they lull the American people into accepting such staggering debt without widespread revolt?
More pointedly, they will ask, why did people allow this enormous accumulation of debt which now burdens their generation? This, of course, raises the pointed question of generational morality.
In FY 1991 the interest on the federal debt is $197 billion. By the year 2000, it is expected to reach 25% of the entire federal budget. This reality is morally reprehensible. It is the record of the Reagan-Bush years.
The Democratic response must, above all, seek to reestablish our manufacturing capability at, or above, that of the Japanese. The Republicans, of course, have carefully avoided the articulation of any goals whatsoever.
Some of them argue that the decline in our manufacturing base is acceptable because it will be replaced by a service-based economy. This is the avoidance politician's drug of choice. There is no such thing as being a major financial center in the world without a vibrant competitive manufacturing sector. Again, numbers tell the story. The largest American bank is Citicorp. In 1970, it ranked 2nd worldwide. Chase Manhattan Bank ranked 3rd. In 1980, they ranked 5th and 11th, respectively. Today, they rank 24th and 54th. Sixteen Japanese banks rank ahead of our biggest. In major financial transactions we are, in effect, dropping from the radar screen. It is no accident that the world's six largest banks are now Japanese. The Germans and French also have major banking entities and they are resolute in emphasizing manufacturing. A nation without a manufacturing base is a nation heading toward third world status. So much for morning in America.
This economic silent spring is a disgrace. Yet, no word of alarm escapes from George Bush. "Read my lips, add more debt."
Our forefathers labored mightily to establish America as the preeminent economic power on earth. W e have allowed the fruits of their labors to be sold off to foreign buyers, one national treasure after another. We accept enormous trade deficits month after month, year after year, with hardly a murmur. We treat the staggering federal deficits as inevitable results of political gridlock. It's time we faced up to our peril.
This is where democracies rely upon the courage of their elected leaders. The normal political instinct is to always engage in happy talk. It is courage which allows a politician to take a people beyond that. It takes toughness to lead a people toward their preservation no matter how disquieting the journey may be. For avoidance of unpleasant reality is simply part of human nature.
I learned that lesson once more in the aftermath of my cancer diagnosis in 1983. I found myself wishing for soothing reassurance, but what I needed was tough love. Not feeling ill, I wanted to just go home and live a normal life and not deal with the disease until I absolutely had to. For a while that's what I did. And it was possible to push away the awareness of the realities inside of me.
By 1985, however, I was put on mild oral chemotherapy. This was done in hopes of avoiding the more toxic intravenous drugs. And I knew that after that would come radiation. And after that, perhaps, would come the still experimental bone marrow transplant. I even put myself on a macrobiotic diet in search of an effortless deliverance. My doctor was not impressed.
When the time came for my late fall checkup my doctor was shocked at my deteriorated condition and upset with me for not seeking him out earlier than my scheduled appointment. The disease was voluminous in my body and was about to consume me.
The next ten months contained no happy talk. Monthly sessions of intravenous chemotherapy were followed by target radiation. In late August, I was undergoing the bone marrow transplant with its massive chemotherapy and whole body radiation. For the next six weeks I was confined to a sterile hospital room, attempting to recover from these assaults to my body. These were weeks of fear and discomfort, of course, but they were also weeks of slowly realizing that I was now able to look at the monster full face. In early October I was released from that room. I was back to work by mid-November, thin as a rail, bald as a billiard hall and wonderous at my survival.
I have often reflected back upon those ten months. I know that my hard-nosed, no-margin-for-error doctors saved my life. But I also know that I resented their tough approach during that period.
My story is my own but there are millions of Americans who have had to learn the same lesson in countless other personal crises. Avoidance of hard truths makes the inevitable dealing with them all the more difficult. And what is true for individuals is also true for nations.
In 1991 there is a need for us to acknowledge that we must get our financial house in order. The New American Mandate is, above all, an economic imperative. It is committing ourselves to the actions necessary to achieve full economic recovery and unassailable competitive strength. This involves what we do every day in the workplace and every day in the marketplace. It is thinking about these daily events as expressions of economic patriotism - as necessary prerequisites for the preservation of our standard of living.
Through the New American Mandate we will demand that our leaders articulate the policies for this economic regeneration. Not just the comfortable policies, but the difficult ones as well. Not at some distant time when it will be politically easier, but now, while we still have the capacity to control our destiny.
We need a national economic policy. What we have today is a naive faith that our companies can compete without any public sector help as they struggle against foreign companies linked to governments with resolute industrial policies. Our companies are going forth to do one-on-one battle and are being mugged. Their competitors are aided by governments that aggressively seek out the advantages of uneven playing fields whenever possible.
The Reagan-Bush response to all this has been benign neglect on a global basis. And the muggings continue unabated. We Democrats must do better. We must level the playing field.
There are many components to a national economic policy. Let me list a few.
Democratic and Republican Shibboleths
Both political parties are going to have to abandon the rusty core elements of their economic philosophies and head off in new directions. These archaic old saws are much embraced by party chieftains. The affection for them expressed by party ideologues is matched only by our trading competitors' fervent hope that they will never disappear. These nations benefit by our politics of self-delusion.
Democrats
Democrats have always believed that their essential mission is social and economic justice. And so it is. Look for such advancements in the twentieth century and in almost every instance a Democrat's hand has been at work. It is a noble tradition.
That tradition must never be abandoned.
Underlying that mission, however, has been a rarely acknowledged but enduring notion. Wealth would be created by others and after its creation we Democrats would intervene to preserve fairness by the equitable redistribution of that wealth. During most of this century that may have been a logical battle plan. Not so any more.
There is today one glaring truth. You cannot redistribute wealth that is never created. A party devoted to the purpose of carving up the economic pie should be alarmed by the reality that the pie is shrinking. Witness the devastation being visited upon critical social programs by the shortfall in tax revenues in most states in the country.
Democrats are going to have to go back to the original act - the creation of national wealth. They are going to have to sit down with the business community and jointly establish policies of wealth creation. It means giving up comfortable political nuclear weapons - such as the marvelous boost gained from routinely attacking corporate America and big business. Some recent Democratic rhetoric presents itself as traditional populism, an "us-them" view of the world where the "them" is anyone in the manufacturing, service or banking industries. Wake up, Democrats. Without viable manufacturing, service and banking sectors, there is no country. A marriage - note the word is marriage, not liaison - with corporate America is essential. Corporate America must survive, indeed thrive, if our Democratic social agenda is to have any hope of implementation.
This does not mean that we put aside our concern about social and economic justice. That standard must remain in the forefront of our consciousness. But it must coexist with a resolute determination that America must create wealth in order to provide a decent standard of living for our people.
To effectively deal with the problems of homelessness, of AIDS, of affordable housing, of catastrophic health care for everyone, of college scholarships, of all the human needs we care about there must be revenue flow from which to secure the necessary funds. The more we want to solve the great human injustices in our society, the more we are going to need a full throttle economic engine. One cannot exist without the other.
Pro-business, some would call it. And so it is. Aggressively so. But commonwealth is what it is as well. There is a real political opening here for our party. Many in the business community are quite alarmed by the economic decline of America and want to fight back. They see an administration that has always devoted its energies elsewhere and offers no real hope that its interest will ever end. These business leaders, however, view the Democrats with deep skepticism. They do truly see us as "tax and spend" advocates who are instinctively hostile to business interests. Our task is to convince them that we really understand one simple reality. America's standard of living is totally dependent upon their capacity to compete and be profitable. It's about time we said so and acted accordingly.
To me this is not an abstraction. My childhood was spent experiencing the economic decline of my home city, Lowell, Massachusetts. My father (a Republican) owned a dry cleaners and the entire family worked in the business. My father worked from 6:30 a.m. to 6:30 p.m., six days a week, 51 weeks a year. Sundays were spent doing the books and repairing the machinery. By any fair standard, this staggering workload should have resulted in just rewards for him. It didn't. No matter how hard he worked, no matter how conscientious he was, the forces of Lowell's economic decline were too much to overcome.
The remembrance of those days has left me with an inability to view economic dislocation casually. Perhaps I have too good a memory. But when I see our nation's economic indices, I have a foreboding sense of not wanting these trends to run their course. I want to determine my own fate. I believe the business world is full of people who share this deep concern. We Democrats must reach out to them.
Republicans
Whereas the Democrats must learn to embrace the world of industrialists, entrepreneurs and venture capitalists, Republicans are going to have to alter their views as well.
At the Republican core is the almost religious belief that an unfettered free market is the best of all worlds.
Industrial policy is seen as equivalent to child pornography. It is seen as the domain of such reprobates as Castro, the Sandinistas and the now discredited Communist planners.
This view is unschooled. Industrial policies presuppose a market system. They show how to improve the competitiveness of private firms through public policies. Since Communist central planning systems have neither markets nor private companies, it is by definition a contradiction in terms to refer to them as having industrial policies.
Republicans are going to have to refine their perspectives to realize that to embrace any component of an industrial policy is not to immediately be guilty of Soviet-style central planning activities.
Industrial policy is what Japan has. It is what Germany has. It is what we must have as well.
When I was involved with the Chrysler bill some eleven years ago, the attitude of the purist laissez faire proponents was, basically, "let it die." To argue the case for sustaining a company with a viable future product line was difficult because some felt it was government intervention. And it was. But if the company had gone under would America have been better off? Of course not. The government even made money on the deal when it was all over. But I never heard anyone say that they would have voted differently. An America with just two major auto manufacturers is not an industrial policy. Saving Chrysler was industrial policy. It worked and we should not be so quick to forget that fact.
Republicans are well trained to look at potential military adversaries and demand weapon equivalence in defense of the nation. If these adversaries have a particular military capability, then by definition, we must put aside all other considerations to make our military capability even bigger and better.
Today our economic enemies are our political friends. The war they wage is in the marketplace, not on the battlefield. America can be done away with by economic decay just as assuredly as by foreign invasion. The implosion of the Warsaw Pact was economic, political and social. It collapsed from its own internal weaknesses, not by the force of outside military attack. An ever diminishing standard of living in the United States will cause us to battle each other over diminishing resources. W e will cease to be a major factor in world affairs as we focus only upon our downward spiral.
For the Republicans as well there should be one glaring truth. American companies need the United States government as a full partner if they are to have any hope of competing internationally. That means an industrial policy. Take a deep breath, my Republican friends. It's a brave new world out there. Adam Smith was a marvelous man but he wouldn't know a superconductor or memory chip if he tripped over one.
Take another deep breath. The threat to America today is not only a diminished Soviet Union. It is not just Saddam Hussein. It is the threat of a different dimension. It is Japanese, German, Taiwanese, Swiss, French, South Korean, etc. Friends all. But just as capable of reducing us to impotence. They have already begun. The adrenalin that Republicans would call up at will to confront Soviets or Cubans or Sandinistas or East Germans or North Koreans or the Iraqi Republican Guard must be called up to confront our friends.
This is war by another playwright. But it's still war.
It doesn't take a genius to understand the post-Gulf War era. The Japanese and Germans will have emerged as even more formidable economic competitors. They chose to bypass the conflict while we made it our foremost national purpose. It is no accident that CNN and network coverage of the war was viewed by Americans on Japanese TV sets and was interspersed with ads from Japanese manufactured products.
Republicans must acknowledge this and begin to mobilize accordingly. This means opening up to aggressive and resolute policies which will put the government in the foxhole with our beleaguered American companies. Republicans who focus on "defense strength" must be made to understand that such capabilities come from government funds. Government funds come from taxes. And taxes come from a vibrant economy. Kill the economy and you have no "defense strength."
If the New American Mandate requires Democrats to embrace the creation of wealth, it also requires Republicans to see honor in asking the question "what works" and to see dishonor in slavish adherence to past economic dogma.
For Democrats the political opportunity lies in the likelihood that George Bush will not act any differently about this than Ronald Reagan did. There are three reasons for this.
First, the politics are an impediment. Avoidance politics have always been, and will always be, powerfully seductive. "Read my lips, no new taxes" was just the latest in a long line of homage to false gods. The Reagan-Bush line has been to gloss over the dangers ("morning in America") and simply ignore fundamental economic trends. Their concern is the immediate judgment of their electoral contemporaries not the judgment of historians - even if that history is rapidly coming upon us: It is my contention that the accumulation of hard data as to our economic dilemma has provided a base for electoral realism in 1992. That base can only expand. The 1992 Democratic campaign must take it on faith that Americans are prepared to wage this economic battle ferociously. The Republicans will presume the opposite and will continue their avoidance politics.
Second, there is no sense of urgency. Most of the key economic decision makers in the administration come from circumstances of affluence. For them there will be financial insulation no matter what hap pens. Their economic safety nets are made of steel cables. There is no foreboding. There is no perception that the economic ground beneath them can tremble. It is just too removed from their own personal histories and circumstances. This is not meant to suggest venality. It is meant to suggest that perception of a particular threat is more acute in those who have faced it before.
Third, the trade deficit, the budget deficits and manufacturing employment numbers listed above are all Reagan-Bush. They occurred during their watch. They are the party of record.
To reverse course would be to acknowledge that their unaided free market policies have been dysfunctional as we confront trade competitors who have their public and private sectors in resolute harmony. To reverse course is to admit error. It will never happen. At best they will work around the margins. A full blown frontal assault on the economic threat would require a self-analysis of the past eleven years that will inevitably sully the Reagan-Bush record. George Bush cannot, and will not, do this. His course was set more than a decade ago when he retreated from his declaration that Reagan's policies were "voodoo economics." Once he capitulated to that Republican realpolitik, his options were narrowed forever.
We Democrats must insure that George Bush's dilemma is not America's dilemma.
Recognize the Peril
This is step one. This is where America and George Bush must part company. No one ever solved a problem he refused to acknowledge.
Yes, we are losing ground, particularly in high technology, basic manufacturing, and financial services.
Yes, it is the national crisis of the highest priority.
Yes, it will destroy the economic foundation of our military national security.
Yes, it will severely compromise our capability to play a peacekeeping role in world affairs.
Yes, we now believe that government must be an active partner in this great challenge.
Yes, America should be the pre-eminent manufacturing nation on earth again.
Yes, it threatens to seriously reduce the American standard of living.
Yes, Americans are the equal of any workforce in the world.
Good. Now let's get on with it.
Be Prepared to Make Strategic Investments
The notion of investing in the technologies necessary to create the Star Wars program was hotly debated. But it became national policy and billions were allocated to that purpose.
Why? National security.
What about investments in technologies that could impact our economic national security? Horrors. That's central planning.
In the long run would America be better off with hundreds of billions invested in an improbable Star Wars system arrayed only against an imploding Soviet Union or by developing an insurmountable lead in ceramic engines, supercomputers and memory chips? Indeed, without a thriving manufacturing capability in these industries the economic base to fund military research cannot exist. Many anti-industrial policy Republicans would say that the non-functionality of Star Wars against the Soviet Union is an unfortunate but necessary price of eternal vigilance against a foreign military threat. These people would also argue against major governmental investments in strategic technologies because, unlike the Japanese, "we can't pick winners and losers." What about the economic foreign threat?
Again, it's a matter of mindset.
Washington has been focused on the Soviet challenge for the en tire adult years of most of its leaders. It rebels at the notion that in the 1990's there are real dangers that do not emanate from missiles or tanks or fighter aircraft.
It must rethink threat. Threat can be venal such as a Saddam Hussein. But threat can come from people who are friendly and have no evil intent.
The threat to America is economic as well. W e must think of government and industry as partners with the same level of enthusiasm, indeed patriotism, that the military-industrial complex generates for its joint mission. Strategic investments in emerging technologies is part of an industrial policy which will result in some losers, yes, but will also result in some critical winners as well. These winners will be a major part of our economic future. Particularly now that American venture capital has shrunk dramatically, government has a contributing role to play in insuring that our push for technological competitiveness has a fair chance at success.
Promotion of Science and Research
This is one area where the rhetoric is in place but not the reality. The National Science Foundation, the National Institutes of Health, NASA, the Departments of Energy and Agriculture among others, are the mother's milk of cutting edge research investigations. We should not be satisfied with marginal increases in these budgets. Again, it's a matter of mindset. The Manhattan Project. The Apollo program. The war in the Persian Gulf. It's just a matter of recognizing the threat and responding to it. There will be no manufacturing sector without a powerful basic and applied research capability. Put these agencies at the top of our funding priorities.
In addition to the traditional areas of basic and applied research, we must devote more attention to applied engineering and manufacturing engineering.
The economic war that we are losing is centered on process technologies. The taking of new ideas, indeed, even old ideas, and converting them to manufactured goods is the great trade battle ground. The winners here are those who can take high and low tech products and simply manufacture them better. It is the process of manufacturing that should also be the recipient of research monies since it is only the production of a technology which creates wealth. The initial discovery and development of a product are the stuff of Nobel Prizes and prideful articles in trade journals. But that is not enough.
The prior definition of success embraced those who could conceive new product ideas. Today the definition of success embraces those who can take those ideas, wherever they may originate, and tum them into products quickly, efficiently, and with great quality control. The Japanese takeover of the American-originated VCR market is an obvious example. These are the cash cows. These are the providers of employment for a nation's people. They are equally worthy of intellectual inquiry and investigation.
The need here is to exalt science in all its dimensions. There must be a White House effort to create an environment wherein young Americans choose science (and engineering) as a career. The society as a whole needs to acknowledge that we will survive as a viable economy only by the fruits of the minds of young American scientists. To have our best and brightest heading to law schools and Wall Street is a gross misallocation of resources. The best and the brightest should be in the laboratories and in the production facilities. The best and the brightest should be deployed to reinvigorate our manufacturing sector. This will require a sea change away from the values of the 1980's that drove our young away from occupations of production and into the occupations of the paper chase.
A society which pays its 29-year-old science researchers $25,000 a year and its 29-year-old lawyers $100,000 a year and its 29-year-old investment bankers $200,000 a year and its 29-year-old left fielders $2 million a year is sending all the wrong messages. It is a formula for unrelenting decline. The young American scientist must be recognized as the fuel of any viable economic engine.
Change Anti-Trust Laws
Current anti-trust laws prevent American companies from joint venturing in almost any area including such critical ones as research and development. The rationale for this policy is rooted in America of years past, long before our companies faced foreign corporate behemoths. We need to pool our resources to be equal with our competition. We have to allow our companies to muscle up. Joint venturing is the sine qua non of that capability. It must become an everyday occurrence in order to equip these companies to compete in the global marketplace.
American companies should be released from anti-trust constraints in areas which impact on their capabilities in international trade.
This is one area where our Japanese and German competitors view us with great mirth. To them the concept of group strategies is an obvious way of maximizing your strengths. Seeing America hobbled by her own hand must seem to be a heaven-sent advantage.
Current American law pays homage to a period when all the producers were American and thus cooperation between them was clearly dangerous to the consuming public. Today most of the producers are foreign and they threaten to eradicate American producers. There must be a serious rethinking. The fact that our anti-trust laws were not changed years ago speaks to the absolute neglect of the cutting edge issues of competitiveness while we engage endlessly in the rhetoric of promoting competitiveness. Democrats are particularly vulnerable to this criticism. W e must give our companies a more level playing field through policy changes that don't require massive federal expenditures.
Increase Our Savings Rate
Congress should pass laws which encourage savings over consumption. This will create a capital pool which will begin to match the resource base that countries with high savings rates enjoy. The lack of a capital pool is the economic equivalent of unilateral disarmament.
The numbers here are staggering. Compare the United States, Japan and Germany in years 1980, 1984 and 1988. Our national savings as a percentage of GNP went from 18.8 to 17.0 to 15.1.
Germany had rates of 21.7 to 21.7 to 24.5.
Japan, of course, was in a class by itself. It had rates of 31.1 to 30.7 to 33.3.
W e need a dramatic improvement in our rate of savings in order to provide the much needed capital base for investment.
A much greater abundance of capital will serve two purposes. First, it will reduce the cost of capital to U.S. companies. Currently, the cost of capital in America far exceeds that of Japan and Germany. It renders corporate decision makers unable to make investments whose payout is long term. This financial barrier is lethal to the kinds of corporate strategies that are necessary in order to compete.
Second, it will reduce our current hazardous dependence on outside sources of capital. These are sources which can quickly evaporate when these nations decide they have other more pressing uses for these funds: i.e. West Germany's current interest in investing in the restoration of former East Germany. Being dependent on foreign capital is not unlike being dependent on foreign oil. You don't control your own destiny. Various I.R.A.s for retirement, college expenses, home ownership are examples of pro-savings incentives. Other ideas should be aggressively explored.
Finally, the savings ethic must be fully ingrained in the American culture forever, not just to get us through this difficult period. That means our children must be part of it. Schools should work with banks to give each child a savings account or some equivalent. No matter how small, such accounts establish a thought process. Efforts should be made to allow the pooling of funds into Childrens' Mutual Funds, wherein school groups could invest minor amounts of money at reduced service fees. This would have the additional benefit of directly involving children in learning about and caring about the American economic system. These would be latter day Economic Liberty Bonds. Young people would be taking a personal step in helping to provide the capital necessary in America's battle for economic survival.
The secondary value of such participation by the young is the early awareness of how dependent America is upon the actions of individuals. Hopefully, this sense of personal relevance will be reinforced by other actions and lead to a more contributory attitude towards citizenship. Our people must perceive America's economic vulnerability and see their own essential role in safeguarding their nation.
Investment Over Consumption
There are a lot of indices that show the inevitable decline of American economic fortunes compared to those of the Japanese and Germans. Inevitable, that is, if these numbers are not changed.
Probably the most significant are the numbers which reflect the differences in mindset relative to investment and consumption.
Consumption is today.
Investment is tomorrow.
It is seed corn consumed versus seed corn planted. Nothing is more basic.
Yet relative to our competitors, we are devoted to consumption, and they are devoted to investment.
Again raw numbers. The investment rates of the United States, Japan and Germany. Public and private. Years 1970, 1980 and 1988.
| 1970 |
1980 |
1988 |
||
| United States |
Public Private |
15.1 2.5 |
15.6 1.8 |
15.5 1.6 |
| Germany |
Public Private |
20.9 4.6 |
19.1 3.6 |
17.5 2.4 |
| Japan |
Public Private |
31.0 4.5 |
25.5 6.1 |
25.3 5.2 |
The reasons for this are historical. Japan and Germany were ravaged during World War II. Their leadership and their populations had known the horrors of economic disequilibrium - from runaway inflation to personal deprivation. Out of this adversity came the intense Post-War determination to create patterns of economic behavior that value future stability and security over present day consumption. We saw the Post-War period as the time to reap the fruits of our victory. Present day consumption was seen as an earned reward eclipsing any widespread sense of providing for the future. The 1980's were the epitome of that attitude. It was assumed the future would always be economically secure. That assumption was wrong. The result of these national patterns if allowed to persist will be a much lesser America. Fewer good jobs. More foreign ownership. More social dislocation. Less world influence. More crushing debt, both personal and national. The savers will dominate the spenders. The investors will eclipse the consumers. The lean and hungry will always prevail over the comfortable and complacent.
The problem here is not that all of this is not understood. The problem is that being understood by economists is one thing. Being understood by politicians is quite another. And transforming understanding into action is more difficult still.
The economists will say that investment and consumption are like a seesaw. In order for investment to go up, consumption must come down. Herein lies the political dilemma. But herein also lies the opportunity for political leadership.
Through the New American Mandate, our people will affirm their commitment to a policy that defines the common good as the promotion of investment over consumption. We need to create in ourselves the kind of steely will to survive economically that our Japanese and German counterparts still have. We must fashion a political environment wherein a drumbeat for necessary economic policies allows our elected officials to do what is right without fear of immediate ouster. Voting for needed economic reform must be demanded by the electorate. Continued avoidance of such reform must be clearly identified as unacceptable pandering by politicians who are putting their own re-election concerns above the national interest.
This involves choices, few of which will be easy. Yet relative to the economic decisions being faced by countries like Poland and the Soviet Union they are far less onerous. Far less. It means looking at the entitlement programs, heretofore a political never-never land in American politics. Would the Congress support a policy of reducing the yearly increase in entitlements by one percent below the cost of living? It's not a great deal but it would establish a policy of economic response. But politically it will not pass, even for those above a certain income level, in the absence of a clear understanding as to the nation's need for such a measure. It must be seen as patriotic to rally all of us to this cause. The principle of shared sacrifice for the common good must be advanced. This is the "vision thing" that George Bush finds so hard to come to grips with.
The policy must be made clear to every American. We must make the transition from a high consumption/low investment country to a lesser consumption/high investment country. Japan and Germany did so decades ago because adversity gave them no choice. Can America do the same without having experienced such deprivation? Can we act in time to lessen the impact of far more painful decisions in the future?
I believe we can if the political leadership is prepared to show the way.
Reduce the capital gains tax for investments in appropriate securities held for a long period of time
The current capital gains tax debate would only happen in a political environment far removed from the pressures faced by American companies. We don't need an across the board capital gains reduction as President Bush fought so desperately for last year. Encouraging people to invest in raw land or commercial buildings or art collections adds nothing to our competitiveness. They are simply less critical recipients of our capital. Providing capital gains advantages to people who speculate in the stock market is equally counterproductive since it rewards short-term corporate horizons at the expense of long-term corporate strategies. It also encourages our most talented to seek their fortunes by speculative and manipulative paper shuffling as opposed to production oriented careers. Michael Milken at $500 million a year is very powerful career counseling of the worse kind.
We need to limit capital gains incentives to long-term investments in corporate America. This signals that such investments are our nation's top investment priority. To be effective, this signal cannot be rhetoric, but must be pure marketplace. Invest here and your returns will be maximized. Very simple. Invest in an American company, hold that stock rather than speculate with it, and you get a significantly lower capital gains tax rate. The longer the stock is held, the lower the tax rate.
In addition, efforts should be made to define new enterprises. While the focus of the capital gains tax differential must be on corporate investments, it makes obvious sense to give an added incentive to such new enterprises. The growth of the American industrial base has always come from small and emerging businesses. These are the entrepreneurs with the greatest maneuverability. But they also have the greatest vulnerabilty. Today with the shrinking of the venture capital markets they are at even greater risk. There should be differentials here large enough to attract serious investment into those new ventures which will provide sources of fresh employment in the years ahead. It is time for paying attention to sunrise enterprises as well as sunset enterprises.
It is this combination of criteria that should make the capital gains reduction a central part of creating an America in economic rebound. Such a program would channel capital towards our industrial/manufacturing sector and would stretch out the time horizons of investors.
The obstacle here is party politics. Some Democrats oppose any capital gains differential because supporting it prevents them from using the "class warfare" argument against the Republicans. Taking aggressive anti-business positions is second nature to them. Class warfare is certainly good politics. But it's good politics at the expense of the nation's industrial base. Democrats should be concerned with what a targeted capital gains tax would do for America and not be focused on a myopic discourse about who benefits the most under such a system. It is the common good that counts.
I learned this lesson in 1975 in Lowell. My home city was being crushed under double digit unemployment. The downtown was a visually unattractive array of buildings that had not seen any reinvestment for decades. Lowell was everyone's model of a depressed mill city.
As a new Congressman I proposed the creation of the Lowell Financial and Development Corporation. This entity would be funded by the local banks contributing one-twentieth of one percent of their assets to it. The corporation would then reinvest those funds in restoring the historic buildings of the downtown. There was the expected resistance from some of the bankers but eventually they agreed because they, in essence, owned this devaluating property.
What was not expected was the feeling by a few non-business people that the corporation was inappropriate because it would benefit some building owners that they considered unsavory. These people don't deserve to receive financial rewards, they argued, because they are responsible for letting these buildings fall into disarray in the first place.
I must admit that I felt some sympathy for this righteousness but not enough to change my mind. The corporation was created, and it and its organizational twin, the Lowell Plan, have been very successful. Lowell has become a national model of urban renaissance.
Did the "unsavory" people benefit? They sure did. But so did everyone else in a once-depressed mill city with what had seemed a marginal future.
Provide for a Research & Development Tax Credit
This should be self-explanatory. We can't compete long term if we are not putting our earnings back into research and development. Such reinvestment back into a company should be viewed as the corporate investment of highest priority and taxed accordingly. Farmers who consume their seed corn are never heard from again. The same is true of companies. We have to help American companies strengthen their prospects for the long term.
Change the counterproductive short term U.S. corporate perspective
The U.S. system of corporate survival is strictly a short term game. All of the forces in the marketplace reward the shortsighted and penalize the wise. It cuts clown the chief executive officer (and his board of directors) who thinks long term and is willing to put his money where his strategy is. For example, CEO #1 and CEO #2 have similar companies with equivalent earnings. CEO #1 takes 30% of his earnings and invests it in a long term research project in which they have faith. CEO #2 shares that faith but chooses to retain that 30% as an earnings dividend to the shareholder. Company #1's stock, therefore, will be lower than Company #2's because its earnings are lower. Company #1, therefore, is more attractive to a takeover since its stock can be acquired at a lower price and it has a long term technology strategy. Company #2 is less attractive to a takeover for exactly the opposite reasons - higher stock price and less long term technological promise. Who is the better CEO? Who is the safer CEO? These are questions that will yield two different answers. This is especially true if company #2 uses its higher stock price to acquire company #1 and then slashes the research and development budget in order to help pay off the resultant debt. This is the true American corporate nightmare. W e must enact fundamental changes to reverse this reality. It means charting new waters but it must be done.
The role of CEO must be redefined in accordance with the new world economic realities. Historically the CEO was charged with maximizing the short term value of the stockholder's holdings, no more, no less. Any policy which veered from this. approach was an invitation to hostile shareholder lawsuits.
The new definition must include the notion of the CEO as keeper of the assets of the company. Those assets are all-inclusive - human, technological, physical and financial. The primary responsibility must be the advancement and growth of those assets over the long term. It must prevail over the policy of short term shareholder value that comes at the expense of the nation's long term need to have growing vibrant companies. We must get to the point where the pursuit of short term profits by destroying assets, selling off assets, and ravaging research and development budgets, will be seen as highly inappropriate.
Unshackling a progressive CEO also demands that we redefine the proper role for corporate directors as we attempt to be internationally competitive. At issue here are the same concerns - i.e. corporate strategies and corporate time horizons. But it also involves the attendant issue of director exposure to shareholder lawsuits where the shareholder's interest is immediate cash-in value irrespective of management practices that strengthen the company's future. Corporate board meetings are generally focused on month-to-month or quarter-to-quarter reporting of data, as opposed to exhaustive examination of long term corporate strategies. W e must implement ways for directors to support long term horizon strategies that benefit the company and the nation over the long haul and not have these directors subject to instant legal liability.
I experienced this catch-22 while serving on the board of a publicly-held company. The corporation had accumulated excess cash as a result of divestitures and had to decide what to do with this resource. The choices were pretty straightforward. Keeping the cash on hand was an open invitation for a takeover bid by someone seeking to buy the company, take the cash and just dump the rest of the assets. This would weaken the remaining company dramatically and we all knew that.
Distribution of the cash as dividends and a possible management buyout, etc. were a second possible approach. This was the safest of director options since it would be well received by the shareholders. The problem with it was simple. The company would not have gained any new strength as it ventured forth in the future. The cash would have been expended without impact on our competitive capability. It would have created a company with lesser viability over the long term.
The final possibility was to use the cash to acquire a complementary second company and end up with a larger corporation. This would mean better market share, a broader technology base and real economies of scale. It was a classic example of technological synergy and corporation muscling up. An easy decision? Hardly. It was the decision most likely to put the directors at risk because we would be choosing to bet on long term stock appreciation rather than immediate shareholder gain.
There was a direct correlation between director legal liability and preserving the company. Put another way, to maximize our own personal legal security, we would have had to vote to leave the company in a weakened position.
W e chose not to do so. W e made the acquisition. The company is now profitable and the stock is appreciating.
That's all very nice but I vividly remember walking to my car after the meeting wondering whether I had risked the financial well-being of my family by deciding to make the company as competitive as possible. What if the gamble had failed and I had been sued? Would I have been able to convince my family that their financial sacrifice was warranted?
These dynamics are lethal to American competitiveness. Unless directors are convinced that long term strategies will not invite hostile takeovers, unless directors are convinced that supporting long term strategies will not expose them to serious legal exposure unless these are the new realities in the corporate board room, nothing will change no matter how progressive corporate management wants to be.
There is, admittedly, a very fine line here. The threat of stockholder lawsuits has a real and valid function. Corporate directors should fear a reckoning if they do not meet their fiduciary responsibilities. But why should short term shareholder value be considered more responsible by our legal system than long term competitive viability? Why should the de_facto damaging of the nation's industrial capability be a safeguard against lawsuits? Somehow the ground rules have to change. We must seize the opportunity to step back and rethink existing assumptions. This would entail changing the scope of director responsibility to include the requirement that long term competitive viability be a standard component of any decision making process. Another would be a requirement that directors annually review research and development budgets both as to the percentage of the total corporate budget compared to competitors and as to the particular research agenda. Boards should include directors who possess relevant skills in the appropriate technologies and not just financial and management expertise.
Another counterproductive assumption is the one that holds that every public corporation must release its financial data every three months. These quarterly reports define corporate America today. Their release triggers instant response by Wall Street and other like watchers. Nothing is as sacred as these quarterly announcements. Nothing is as traditional and nothing is as expected.
Yet that doesn't make them necessarily valuable. Is it not time to ponder the following? Neither Japan nor Germany has such a practice. They rely upon annual reports. They are known to have much longer corporate time horizons than we do. We should explore the concept of stretching out quarterly reports to semi-annual reports. Or indeed even to just annual reports. If our very successful trading competitors do just nicely, thank you, without quarterly reports, why are they essential here? I would suggest that serving the gurus and traders and speculators and raiders of Wall Street is far less important than serving those within our companies who are trying to survive.
Let the debate begin. The need is to stretch out corporate horizons. Quarterly reports do just the opposite.
Management-Labor Attitude Changes
The rhetoric about management-labor cooperation is oft-heard but needs a boost from the Presidential bully pulpit.
Management must be encouraged to drop old attitudes about workers being the "other side" and to engage workers in true joint consultation and decision making. These are the only avenues to the kind of productivity and quality control necessary to have competitive products. There is a new awareness about the need to change archaic management techniques but change comes hard. Management of the old school still occupies too many executive suites, buttressed by too many old bulls in the board rooms.
The President should give high and consistent visibility to companies that are inclusive in their practices and progressive in their techniques by visiting plants where these practices are in place.
By publicly holding out such companies as models, it will help create an environment wherein regressive management techniques will be more and more isolated over time. It will bring about the kind of dialogue about management practices that will accelerate progressive change. This dialogue will provoke the kind of critical corporate selfanalysis that too often happens only after Chapter 11 has been filed and the golden parachutes deployed. The need is for mid-course corrections, not better corporate autopsies.
Correspondingly, the unions (and non-unions) must change more rapidly as well. Union officials should save their ammunition to fight for issues like wage scale, health benefits and worker safety. No effort should be expended trying to defend illogical work rules that are nothing but feather bedding. The common goal should be highest possible productivity at the highest possible wage rates. Many union officials have been very active in forging this new direction but if we are to be competitive there needs to be near unanimous acceptance of this perspective. A President, especially a Democratic President, should give overt support to progressive union leaders while being willing to criticize those who cling to outmoded views.
This rationale applies equally to non-union work forces. The New American Mandate means workers who proudly embrace their responsibility to help their companies prosper.
Companies saddled with management that distrusts its workforce combined with workforce leadership which feels no responsibility to maximize productivity are doomed. Such foolish leadership causes job loss for innocent workers and GNP loss for the country. Pick up any paper and you will read about such lamentable situations every day in almost every industry. The President has a role to play to guide management and labor away from such destructive practices.
Economic Loyalty
This is one area where the political leadership in both parties at every level has failed to call forth America's capacity to promote its own self-interest.
Economic loyalty to one's fellow countrymen is not a value that is fashionable in America today. To raise the matter in a public speech is to cause more seat squirming than a discourse on safe sex. To suggest it to the generation of the 80's is to invite barely concealed disdain.
Yet, what is loyalty to one's country? What is loyalty to one's fellow countryman? What is one's obligation to the larger societal "family" in times of economic distress?
If, during the last four decades, I had sent $100 to the Soviet Union to aid them in their war effort against us I would have been justly accused of treason. I would be vilified by both conservatives and liberals as having aided and abetted a nation which threatens my country. Properly so.
If, at the same time, I had sent $40,000 to Japan or Germany (or Great Britain, etc.) to aid them in their economic war effort against us, however friendly, I would be totally ignored by American conservatives. I would be the recipient of comments about how nice my Mercedes or Lexus (or Jaguar or Audi or BMW, etc.) looked. In addition, there would be absolutely no suggestion from American liberals that the American auto worker rendered unemployed by my car purchase decision should be of any relevance to me.
We are in the grip of a kind of 1980's loyalty, that is, loyalty to one's self and one's image with no concern for the common wealth. Indeed, to suggest a rethinking of our collective responsibilities to each other is to encounter extreme defensiveness.
This 1980's loyalty is not confined to "Me-Generation" fast trackers.
The average corporate chief executive officer is often no better. Chances are excellent that he or she drives to work in an expensive foreign import, dressed to the nines in foreign shoes and clothing, all the while lamenting the decline of America's industrial base and the easy availability of capital in other countries.
This is where the New American Mandate would seek to change attitudes. We used to think that patriotism was supporting our troops in the Persian Gulf and buying a Mercedes on the same day. The New American Mandate would be a lot more comprehensive.
An American parable for the 1980's is as follows. A well paid engineer working for an American company buys an Infiniti. Six months later he/ she gets a layoff notice because his/her company can't compete with its Japanese counterpart. The engineer drives home in a funk and never, never equates the two events.
This is not an argument for a mindless Buy America policy. That approach suggested that we buy domestically produced items irrespective of all other considerations - such as quality and price. As the not-so proud owner of a Ford Pinto and Chevy Vega in my time, I am all too fully aware of the downside of such a policy. It promotes the laziness and inefficiency of any protectionist policy. It is more compassionate but ultimately leads to the same kind of inevitable manufacturing base deterioration. The incentive to excel is seriously weakened.
But there are harbors of logical refuge between mindless Buy America and soulless 1980's non-loyalty. In between there are cases where a consumer is faced with choices where the distinctions are not so obvious. Economic loyalty is simply opting to put one's capital towards the strengthening of America, not the strengthening of another country. These are cases where the benefit of the doubt tips the scales in favor of the American product.
The recent focus on quality control in American cars, for example, clearly offers such opportunities today.
Finally, it should be emphasized that this is not a call for protectionism or foreign bashing. These two are the siren's temptation. The former is nothing more than the acceptance of full scale competitive retreat. It is a warm refuge but only temporary and eventually fatal. Erecting protectionist barriers is counterproductive. Our efforts should be focused on openness elsewhere and full reciprocity in world trade.
The latter is equally dangerous. It is quite appropriate to criticize foreign countries when their policies are in error. Certainly there is no shortage of selfish and irresponsible practices carried out by our allies and trading partners. We should not be hesitant about pointing these out and calling for correction.
Some politicians, however, go beyond this and seek to swim in the murky waters of demagoguery. Blaming foreign nations for our economic woes is standard fare for elected officials because it is invariably well received - particularly in areas of high unemployment. It is a lot more rewarding politically to bash imports than to suggest that there may be fault in attitudes or strategies here at home. This political tactic is avoidance politics of a different kind. It allows people to walk away resenting other nations when they should be demanding changes in how we do things in America. By continuing to persist in denial we put off the necessary self-examination and rethinking that will lead to true competitiveness. Thus, the foreign basher ultimately serves the interests of the foreigner by putting off the critical day of our own renewal.
But the issue here is not just economic. It is social as well. A sense among consumers that we care about our fellow countrymen and are willing to demonstrate economic loyalty in their behalf strengthens the bonds between us. Imagine if a neighbor owned a particular business and you needed to buy a product sold by such a business. Is it not natural to want to give the neighbor your business if at all possible? Well, this is the same thing except your neighbor lives further away.
The issue here is not about where productive economic loyalty ends and counterproductive Buy America begins. The issue is a collective recognition of the economic peril faced by our country. It is incorporating that recognition into our daily lives as a constant thought process. In the economic war we are all by definition soldiers because we are consumers. The issue is deciding which army we are part of.
A final thought. This call for economic loyalty is in response to our current economic dilemma. The point here is not to despise foreign products. On the contrary, we all need a viable global economy with the free flow of goods across borders. The point is to calibrate our consumer decision making to the economic conditions prevailing in the country we all call home. In other times this would not be as relevant. In the happy future it will not be as necessary either. But in today's troubled conditions, it is very important. It is, ironically, calling upon Americans to begin to think the way Japanese corporate leaders and German consumers have acted for decades. They have viewed this attitude as a kind of deep patriotism. Hokey, isn't it? But who is buying up whose national treasures? Their citizens understand economic loyalty instinctively. It's about time we did the same.
We are all part of one team. And we are tied to the success, or lack thereof, of all the other members of our team.
Today an American professor, for example, is paid less than her German counterpart teaching the same subject matter and more than her British counterpart. Since the skills are equivalent, why are the salaries different? Very simple. The German "team" is doing very well, the American "team" less well and the British "team" even less well. The American professor is being dragged down by the relative lack of success of her "team." Does that professor ever think in these terms? Very doubtful. But we must bring about that kind of awareness.
The role here of our political leadership is to make Americans aware that if one American worker is thrown overboard, we are all dragged down just a bit. The more of our team members that are cast overboard, the further down we all go.
What it comes down to is this. I go to buy a product, let's say an automobile. I live in a cold climate and want four-wheel drive capability. My choice is narrowed to a Jeep and an Isuzu.
My judgment will involve issues like style and cost. But it doesn't end there. When I see the Jeep I sense an American autoworker who will remain employed if I buy it. I derive a quiet pleasure knowing that my money will remain in our economy and multiply. I instinctively understand that my economic well-being will eventually be determined by the economic well-being of every other American. I think like a Japanese would. Or a German would. I think like an economic patriot.
Index
| Introduction |
1 |
||
| I. |
Economic Survival
– The Creation of National Wealth |
5 |
|
| II. |
Education – The
Meeting House of Our Society |
32 |
|
| III. |
The Environment —
Equilibrium With Earth |
38 |
|
| IV. |
Energy, Fossil Fuels
– Someday There Won't Be Any |
47 |
|
| V. |
Foreign Policy – Time
to Heal Thyself |
58 |
|
| VI. |
The
Culture of America – The Essential Need |
70 |
|
| VII. |
Return to Purpose |
85 |
|
| VIII. |
Biography |
86 |
Copyright © 2023 Eric M. Appleman/Democracy in
Action. 