"The Eonomic Quagmire - A Commonsensical Recommendation"

Sydney M. Williams

Thought of the Day

“The Economic Quagmire – A Commonsensical Recommendation”

August 18, 2010

Joseph Schumpeter first used the term “creative destruction” in 1942, in his book Capitalism, Socialism and Democracy. The concept is that capitalism expands as new businesses replace old ones, allowing for a continuous process of innovation, thereby providing economic growth and improving living standards. Yesterday a friend sent me a piece by Gordon Long, who authors “Tipping Points”, entitled “Innovation, What made America great is now killing her.” It can be accessed through the following link: http: //www.safehaven.com/print/17818/what-made-america-great-is-now-killing-her. The title, admittedly dramatic, refers to the fact that other countries, especially China, have learned the lessons of “innovate and adapt” just as we appear to be moving in the opposite direction.

His message is worth considering. The point is that America prospered because of her creative abilities and her willingness to adapt to the changes resulting from the destruction of the old industries and technologies. It is a harsh world in that some fail, but more succeed and society benefits. He writes that we are falling behind the rest of the world, especially the emerging segment, both in terms of innovation and adaption. He points out that in 1997 the U.S. created 33.4 million new jobs and obsolesced 30.4 million, for a net addition of 3 million new jobs. In 2009, new job creation amounted to 24.7 million, but 33.4 million jobs were eliminated – a net loss of 8.7 million jobs.

What caused this change? Mr. Long suggests a number of possibilities, including a failure in education, particularly in the sciences, which has been inadequate and the government’s emphasis on fairness of outcomes, rather than opportunities. R&D spending has not kept pace with GDP growth. U.S. GDP growth has compounded at about 5.6% over the past thirty years, while the R&D spending of private industry has compounded at 4.5%. (When one includes government R&D spending the total numbers are even lower.) In terms of the distribution of the world’s researchers, as Mr. Long points out, the United States’ share has declined from 23.2% over the past five years to 20.2%, while China’s share has risen from 14% to 20.1%. According to the National Academies, the number of graduating engineers in 2005 in the U.S. was 70,000. In the same year China graduated 600,000 and India, 350,000.

As America abandoned the habits that made us strong and competitive, China and much of the emerging world have picked them up.

Gordon Long points out that our principal strength (and which is now at risk) is “Intellectual Capital” – “the knowledge of knowing how to do something. How to design and build something – not the actual ‘doing it’”. As he writes, “the costs of manufactured products today are less and less in labor and production and increasingly in materials and innovation.” It is an arena in which we should be competitive, but it is one in which we are abrogating our advantage.

Mr. Long suggests ten “starting points” for change, some of which may be only peripherally relevant, but nevertheless are worthy of consideration – that government employees earn 30% to 40% more than their private sector counterparts and that we use money we can ill afford to fund military operations in 130 countries. He points out that the $165 billion we spent bailing out AIG would have paid for four years of college for 750,000 young adults. He indicates that S&P 500 companies “paid almost net zero taxes, reduced U.S. hiring, yet received the bulk of the government bailouts”. At the same time the government has done little for small business “other than burden them with ObamaCare and the potential removal of the Bush tax cuts.”

Thomas Sowell, in Dismantling America, attributes America’s problems to a failure to maintain our culture, a concern expressed by the late Samuel Huntington of Harvard. (Ayaan Hirsi Ali, a former member of the Dutch parliament and author of Infidel, makes the same point in an op-ed in today’s Wall Street Journal.) Mr. Sowell suggests that Washington has inverted our country’s motto, E Pluribus Unum (from many come one) to an emphasis on the differences between us for political expediency. Whatever the cause, our leaders in Washington have ignored this erosion of our competitive advantage. As I wrote yesterday, the answers are not rocket science, but they are imperative. Innovate and adapt. If we don’t, we die.