"In the long run, we are all dead." But even in the long run, America isn't dead, and neither are our children and our grandchildren, and we have an obligation to plan for them. People in the prime of health and youth have difficulty planning for their retirement, but to avoid doing so is foolhardy and short-sighted. The US is in its prime now, but our national policy-making often seems to assume that we will continue in our current state of dominance forever. This paper proposes a framework for making policy for our long-term future, in which we are one among equals in international power.
My framework consists of three steps. 1) Identify the inherent advantages of America, where we have a permanent superiority relative to the rest of the world, based on the "national character" of our culture, which will endure beyond our current political ascendancy. 2) Identify industries and activities which exploit those inherent advantages, either to our economic benefit or political benefit. 3) Identify how to foster those industries and activities, by domestic policy as well as by using our current ascendancy to create an international system of rules which would work to our benefit after we lose the ability to dictate the rules.
I specifically preclude thinking in terms of an "industrial policy," and I do not advocate that the federal government should take steps to foster particular industries, because it is counter to our inherent characteristics and hence diminishes our international competitiveness. Instead, I advocate that the federal government negotiate with other national governments to establish international institutions which will work in our favor. On the domestic front, I advocate that the federal government refrain from activities which interfere with our "comparative advantages."
In 1960, the US economy accounted for 31.0% of the world's GDP. Our share has steadily fallen, to 29.5% in 1972 and 26.5% in 1992 (see Table 1, next page). The US GDP grew for most years in this period -- we're getting a smaller share of a larger pie. During 1972 to 1992, Japan's share of the world's GDP rose from 13.0% to 16.0%, and the NICs' share more than doubled from 1.5% to 3.6%. There is little doubt that our share will continue to fall, since Japan and the NICs will enjoy much higher growth rates than the US. The growth rate of the PRC seems likely to grow substantially; the planners in Beijing debate whether they should "limit" annual growth to 10% or let it grow freely at 17%. The EC's growth rate is likely to improve as the salutary effect of eliminating borders becomes more pronounced. And the FSRs are unlikely to do worse than they have since the USSR's breakup. So every one of our direct competitors will maintain or improve their growth rate relative to ours.
What can we do about it? Preserving our share of world GDP is unimportant, but preserving our competitiveness is important. To remain competitive, we can exploit fields in which the US has a comparative advantage -- not fields in which we're dominant in the world today, but fields in which something about American culture or American society ensures that we will always be dominant. We were once dominant in motorcycle manufacturing, for instance, but now Japan has become the world's leading producer. America never had a "comparative advantage" in motorcycles, so we lost our lead. Japan does have a comparative advantage in motorcycle production, as well as in automobiles in general and in manufactured goods even more generally, because Japan's culture is oriented towards applied technology and manufacturing. America's is not, evidently. Japan's cultural acceptance of hierarchy and orientation toward teamwork creates an environment conducive to large-scale manufacturing. Let's look at what our culture and orientations are, and what fields those are conducive towards.
Source: The World Bank's "World Tables 1994", table 8, GDP in constant 1987 US$.
Some figures estimated and extrapolated as needed (especially FSRs before 1985).
The CIA Handbook would have the FSRs at about 20% instead of 6% in 1972, based on official ruble conversion rates. The CIA and World Bank figures agree for the PRC.
"FSRs" includes all former Soviet republics, including USSR and Eastern Europe.
"NICs+" includes Korea, Hong Kong, Taiwan, and Singapore, plus ASEAN (see footnote 1).
"EC+" includes all European members of the OECD (EC plus Austria, Finland, Iceland, Norway, Sweden, Switzerland, and Turkey, all of whom have applied for some form of EC membership). The current 12 countries of the EC would have a GDP share slightly smaller than the US.
INVENTIVENESS: "Yankee ingenuity" has been an American characteristic since before the Industrial Revolution. From electricity to assembly lines, from light bulbs to transistors, we have been the world's foremost discoverers and inventors.
As evidence of American inventiveness, let's look at the number of patents in the US versus the number in other countries (Table 2). Column 1 indicates the actual number of patents in force for each of the countries or regions. Column 2 indicates how many patents would be expected, if all patents were distributed evenly by population among all of the selected countries. Column 3 indicates the ratio between the two: 0% would mean that the expected number equals the actual number, +100% would mean the actual number is twice the expected number, -50% would mean the actual number is half the expected number, and so on.
(Signatories ACTUAL PATENTS RATIO OF RATIO OF to PCT) PATENTS EXPECTED BY ACTUAL TO ACTUAL TO IN FORCE POPULATION EXPECTED: EXPECTED: in force grants US 1,151,200 677,118 +70% +11% Japan 542,500 334,693 +62% +50% W. Europe 1,460,000 955,323 +53% +87% FSRs 82,400 892,173 -91% -94% NICs/ASEAN 26,900 133,032 -80% -70% Other Asia 30,040 105,027 -71% -79% Africa 19,260 121,800 -84% -87% Latin Am. 35,000 415,388 -92% -93% Australia 59,200 46,290 +28% +96% Canada 346,200 71,855 382% +79% TOTAL 3,752,700 3,752,700
Source: United Nations Statistical Yearbook, 37th ed., 1988/89. Population data cited in Appendix.
Countries are only included if they are both signatories to the Patent Cooperation Treaty (PCT) and submitted patent data to the UN. Column 4 derived in same manner as Column 3, with numbers omitted.
Table 2 indicates that the US has among the highest number per capita of patents in force compared to other signatories of the PCT. I limited the countries selected to signatories of the PCT in order to address the variation in patent laws across countries -- signatories conform to certain standards, at least in the application process. However, Column 4 of Table 2 indicates that variations in patent law possibly outweigh the apparent "advantage" evidenced by the US in patents in force -- we are below our direct competitors in patents granted per capita. The interpretation is that US patents are stricter (fewer patents are granted) but have longer duration (so more are in force). The lack of international standards for patents applies to any measurement of "inventiveness" based on national law, so I use an international measure, the Nobel Prize.
We win much more than our share of science Nobel Prizes (see Table 3). This table is organized in the same manner as Table 2, showing the actual number of Prizes, the expected number based on an even distribution by population, and the ratio between the two. The US receives over twice as many Nobel prizes per capita as Western Europe, and 14 times as many per capita as Japan. This measure of "inventiveness" is unambiguous, since one standard applies to all countries. I attribute this discrepancy to something in the American national character which favors discovery and innovation.
ACTUAL PRIZES RATIO OF PRIZES EXPECTED BY ACTUAL TO 1943-1992 POPULATION EXPECTED US 96 8 +1100% Japan 3 4 -25% W. Europe 65 15 +333% UK 25 2 +1150% Germany 13 3 +333% Scandinavia 10 0.8 +1150% France 7 2 +250% Benelux 3 0.5 +500% Other W.Europe 8 7 +14% Former USSR 4 10 -60% PRC 0 38 -100% NICs/ASEAN 0 13 -100% All Others 10 90 -89% TOTAL PRIZES 178 178
Source: World Almanac and Book of Facts, 1994, pp. 300-302.
Summing number of Nobel awards in Physics, Chemistry, Medicine, and Economics.
Each year's prize counts as one award; split awards are divided by self-described nationality of recipients.
The US receives 54% of all Nobel Prizes with under 5% of the world's people, or eleven times the number of Nobel Prizes that would be expected based on our population. Is this a valid measure of "inventiveness"? A better comparison against the whole world would be the expected number of prizes versus number of college graduates. But since our direct competitors have comparable education levels to us, a population comparison is valid against Japan and Western Europe. The Nobel Prize statistics could be biased because of the way that Nobel prizes are awarded; a "home court advantage" is perhaps seen in the high ratio of Scandinavian recipients, but any such bias presumably works against the US.
ENTREPRENEURIALISM: The entrepreneurial spirit in America is related to inventiveness and the frontier mentality. I'll leave for another paper the exploration of the psychological connection between the three; I base my conclusion on anecdotal evidence and on statistics cited below. I look at 1) the number of small companies in the US compared to large companies; 2) US corporations in the world's largest corporations; and 3) US banks in the world's largest banks.
Of all US companies, 74% are small businesses (under 10 persons) and another 23% are mid-sized businesses (between 10 and 100 persons). Only 2% of all US business establishments are large businesses (over 100 persons), as detailed later in Table 9 and discussed further there. Businesses in the US are overwhelmingly "startup enterprises," since most of the small companies grow into larger companies once past the "startup" phase. How does this predominance of small businesses compare with the rest of the world? To avoid variations in domestic laws, let's look at the numbers of multinational corporations and international banks.
Number of ACTUAL SALES SALES: RATIO ASSETS: RATIO Firms in SALES EXPECTED OF ACTUAL OF ACTUAL Largest 500 ($B) BY GDP ($B) TO EXPECTED TO EXPECTED US 157 $1,785 $1,308 +36% +44% Japan 119 $1,097 $757 +45% +46% W. Europe 8* 153 $1,769 $1,244 +42% +33% South Korea 13 $143 $54 +164% +105% India 6 $27 $69 -61% -55% Australia 9 $48 $69 -30% -9% Canada 9 $49 $133 -63% -52%
Source: "The Fortune Directories," Time-Warner NY, via World Book 1994, No. 1410, p. 861.
* Western Europe has 8 countries with companies in the world's largest 500.
These are: Finland, France, Germany, Italy, Netherlands, Sweden, Switzerland, and the UK.
The "W. Europe" share of the world's GDP is scaled accordingly, omitting the GDP from others in W. Europe.
If all of W. Europe were included in the GDP, the sales ratio would be +15% and the assets ratio would be +8%.
Similarly, the NICs are represented here only by South Korea; if all of the NICs' GDPs were included, the sales ratio for the NICs would be -19% and the assets ratio would be -37%.
Table 4 presents an actual total and then an expected total if the sales and assets of the world's largest 500 corporations were evenly distributed. These statistics are scaled by GDP rather than by population, since availability of capital is a determining factor in running companies. Column 4 indicates that the US is slightly under-represented compared to our direct competitors in terms of sales volume (but ahead of the world average). We are about average compared to our direct competitors in terms of companies' assets (shown in Column 5, with the supporting numbers omitted). The conventional wisdom is that the world's MNCs, the large multi-national corporations which comprise this list, are predominantly American. While we have our share, we do not dominate the world's large corporations; that is, we do not seem to have any strong comparative advantage with regards to big businesses.
American banks are small in comparison to the banks of our competitors. Table 5 indicates the assets of the world's 50 largest banks, summed by their home country. Since the US economy is 27% of the world economy, we should have 27% of the assets of the world's largest banks (again scaling by GDP), which come to just over $3 trillion. In fact, we have under $400 billion in assets in the world's largest banks, or 87% below the even distribution amount. The US has only three banks in the top fifty, compared to 21 for Japan and 23 for Western Europe. I believe that this is due to a greater need abroad for very large banks to handle the financial needs of very large companies. Perhaps the small size of US banks is in part due to interstate banking regulations. But New York or California are comparable in GDP to Italy or the Netherlands or Switzerland, yet those three countries each have assets in the top fifty banks comparable to the entire US.
(in billions NUMBER OF ACTUAL ASSETS ASSETS EXPECTED RATIO OF of 1993 $) BANKS IN IN WORLD'S 50 BY SHARE OF ACTUAL TO LARGEST 50 LARGEST BANKS WORLD'S GDP EXPECTED US 3 $402 $3,002 -87% Japan 21 $6,241 $1,739 +259% W. Europe 23 $4,315 $3,532 +22% NICs 1 $125 $411 -70% Canada 2 $214 $300 -29% TOTAL 50 $11,297 $8,984
Source: American Banker, 7/29/93, via "1994 Information Please Almanac", p. 52
POLITICAL AND LINGUISTIC UNITY: The United States is the only large country which has "internal unity." All of our competitors, plus the upcoming generation of competitors, either have linguistic differences between regions (China or India), have internal borders (the EC or ASEAN), have internal ethnic differences (Russia or South Africa), or are geographically small (Japan or Korea). Of our upcoming competitors, perhaps the most comparable in terms of "unity" is Brazil, which is large and about as monocultural as the US; a developed Brazil could exploit the same "unity" benefits as the US.
I do not mean to imply that we are monoethnic, but that we are monocultural in the sense that American culture is more or less the same everywhere, enough so that any citizen could reside or conduct business with little difficulty anywhere in the country. That is not the case for the EC; while "harmonization" may ease the burden of learning multiple sets of laws, well into the future a Briton will still have more trouble conducting business in Italy than will a New Englander in Texas. In terms of political boundaries, not even the most visionary Singaporean would claim that shipping a cargo to Malaysia will have as little border control as a shipment from New York to Chicago. In terms of linguistic barriers, the difficulty communicating in English in predominantly Spanish-speaking communities in the US (the worst linguistic problem we're likely to encounter) is negligible compared to the difficulties a Mandarin speaker from Beijing experiences in Xinjiang Province.
A related advantage is that English is the de facto international language. Similarly, the US dollar is a de facto international currency. US businesses can denominate all transactions in our currency without seeming unreasonable to foreign clients and without causing them undue hardship. Companies based in Hong Kong, for example, must deal with currency conversions, exchange rate fluctuations, and calculating business reports in multiple currencies. US companies can avoid these problems and their associated costs.
THE CONSTITUTION AND EQUALITY OF OPPORTUNITY: I'm going to dismiss the US Constitution as an element of our "national character." Of course, it has been the basis of all of our laws and has been a strong determining influence on all of our characteristics. But our Constitution is no longer unique; many nations have constitutions similar to ours, and often based on ours (most obviously Japan's Constitution, which we wrote at the end of WWII). Any inherent advantage which our Constitution gave us has long since passed. The US Constitution has some relevance in terms of "exporting democracy," as I'll discuss in the subsequent sections, but I will not include it in the defining list of national characteristics.
Similarly, the "equal opportunity" society established by the US Constitution has become the model for the rest of the world, and hence no longer confers upon us any distinctive characteristics. Western Europe has adopted our model of classless democracy (i.e., one in which class mobility is possible regardless of one's station of birth), and the former Soviet Union and Eastern Europe are doing their best to adopt the same model. The societies of Japan, China, and the NICs are based on the Confucian model, which emphasizes meritocracy and is today ostensibly "classless." Class mobility has improved as Japan and China have abolished vestiges of their traditional birthright-based hierarchy, and as the rest of the Far East has shed its vestiges of colonialism. We have succeeded in establishing our model of classlessness as the standard for the world, but in doing so we have lost the opportunity to exploit the advantage it once gave us.
In our history, equality of opportunity was certainly a defining characteristic of the American character -- Alexis de Tocqueville devoted much attention to it in his 1835 classic under the rubric of "equality of condition." But Tocqueville was contrasting the relatively classless society of America with the class-minded societies of his era's Europe. If the purpose of this analysis were to compare our character with class-minded parts of the world, such as South America (with its relative lack of middle class) or India (with its caste remnants), equality of opportunity would be relevant. Our equality of opportunity today is comparable with that in the societies of our direct competitors and our potential future competitors, and hence this characteristic is irrelevant for this analysis.
NATURAL RESOURCE BASE: I'm going to also dismiss any "inherent advantage" of having a rich endowment of natural resources. Although this may have been a factor early in the country's development and expansion, we no longer have particularly easy access to mineral or energy resources. Since the attribution of a "rich resource base" is pervasive when describing our national advantage compared to the world, I present Table 6 and Table 7 to illustrate that this is a misconception. In fact, saying that the US has an advantage in natural resources is the same thing as saying that we have an advantage in geographical area. Since public policy cannot change how big we are, I omit consideration of natural resource policy in my subsequent analysis.
ACTUAL NUMBER NO. OF SITES RATIO OF OF MAJOR EXPECTED ACTUAL TO MINERAL SITES BY AREA EXPECTED US 60 49 +22% Japan 7 2 +252% W.Europe 62 35 +77% E. Europe 23 6 +276% FSU 88 117 -25% PRC 43 50 -15% NICs/ASEAN 43 17 +157% Mideast 19 32 -40% Other Asia 40 40 +0% Africa 108 159 -32% Oceania/ANZ 49 45 +10% Latin Am. 108 108 +0% Canada 61 52 +17%
Source: National Geographic Atlas of the World, 6th ed., 1992, p.10.
Sum of the number of major mineral deposits of all types, per region.
Minerals summed: Ferrous, Non-ferrous, Precious metals, Light metals, & Mineral fertilizers.
Table 6 presents the number of major mineral deposits within each region. Here, I scale by area, so Column 2 is what would be expected if major mineral deposits were evenly distributed geographically. The US has a slight advantage compared to the world average. More importantly, compare to our direct competitors, and we often are at a disadvantage. Compared to Western Europe on an area basis, we have less mineral reserves, for example. We only seemŹbetter endowed because we are larger. Japan, which is usually described as "resource poor," only seems so because it has so little land area; in fact it has its share of mineral reserves. Africa, which is usually described as "resource rich," indeed has the highest number of major mineral sites in the world. But because it also has the largest area of the regions listed (yes, Africa is bigger than the former USSR, Mercator Projections to the contrary), Africa has a below average ratio for mineral resources. (I count "major deposits" instead of production to discount the level of development; but part of this difference is because Japan perhaps exploits their reserves more than Africa, e.g.).
ACTUAL GAS RESERVES GAS: RATIO OIL: RATIO COAL: RATIO RESERVES EXPECTED OF ACTUAL OF ACTUAL OF ACTUAL (bln.cu.ft.) BY AREA TO EXPECTED TO EXPECTED TO EXPECTED US 167,100 302,400 -45% -64% +409% Japan 0 12,300 -100% -100% -100% W.Europe 181,400 215,700 -16% -70% +85% E. Europe 13,500 37,600 -64% -82% +527% FSU 1,750,000 718,900 +143% -65% +97% PRC 35,400 309,800 -89% -66% n.a. NICs/ASEAN 148,700 102,800 +45% -52% -83% Mideast 1,319,100 195,200 +576% +1400% -100% Other Asia 96,700 245,000 -61% -87% +50% Africa 310,200 977,100 -68% -73% -67% Oceania/ANZ 18,500 273,900 -93% -97% n.a. Latin Am. 238,500 662,100 -64% -20% -94% Canada 96,700 322,100 -70% -92% -88%
"GAS" = Natural Gas; "OIL" = crude oil; "COAL" = coal equivalents including anthracite and other forms.
Source: "Oil and Gas Journal", from Energy Information Administration, US DOE, Annual Energy Review, 1992, Figures as of 1/1/92 for Oil and Gas. Via World Almanac 1994 p. 155.
Coal figures as of 1/1/91, from Handbook of Economic Statistics, © 1990 CIA, Table 58, p. 94.
Table 7 presents energy resources in the same format. The first three columns show actual reserves, expected reserves for an even distribution by area, and their ratio for natural gas. Column 4 presents the ratio for crude oil reserves, and column 5 for coal, omitting the columns of supporting figures. Because the Middle East is so richly endowed with oil and gas, nearly every other part of the world is below average, so we should compare our ratio to those of our direct competitors. In terms of oil and gas endowment, we are better off than Japan (which has none), worse off than the FSU and the NICs, and roughly even with Europe and China. We are well-endowed with coal, but we are unlikely to further exploit this advantage because of coal's environmental problems. The point is that contrary to conventional wisdom, we are not particularly richly endowed with natural resources in comparison with our competitors.
CONCLUSIONS ON AMERICA'S NATIONAL CHARACTERISTICS: For purposes of this analysis, the relevant "national characteristics" of Americans are: a frontier mentality; inventiveness; entrepreneurialism; and political and linguistic unity. These characteristics are by no means unique to the United States. All of Central America and South America could make the same claim to frontier mentality. Much of Western Europe could make a claim to as much inventiveness as the US. The Cantonese of Hong Kong, Singapore, and China may have a stronger claim to entrepreneurialism. And Japan certainly leads the world in political and linguistic homogeneity. The advantaged industries and recommended policies which follow from each national characteristic apply to any country which shares that characteristic. Indeed, in order to benefit from a comparative advantage, we do not have to be uniquely endowed with a particular characteristic, nor do we even have to be the world's leader in that characteristic. We achieve a competitive edge by exploiting characteristics in which we are superior relative to our other characteristics, regardless of whether we are absolutely superior to the rest of the world. We'll do well if we promote activities which exploit characteristics at which Americans are best, even if "best" means "best within America" and not "best in the world." Let's look next at the activities which follow from America's "advantaged" characteristics described above.
In the computer hardware industry, the US has had trouble competing worldwide with run-of-the-mill computer chips, and Texas Instruments is losing market share to manufacturers in Malaysia and Thailand. But we've never been rivaled in "state-of-the-art" high tech chips (such as CPU chips like the Pentium processor), because their manufacture requires inventiveness and entrepreneurialism. We have consistently followed a pattern of making technological breakthroughs, gaining an early lead in manufacturing the new product, and then losing our lead as the manufacturing process became well-established. We maintain a lead as long as the product is innovative; we lose our lead when the product becomes routine. I believe this indicates a market advantage in newly-invented processes, and a market disadvantage in large-scale production. I present Table 8 as evidence of our comparative advantage in high technology.
Micro- Telecomm. Tools and Precision Medicine & Organic electronics Computers Equip. Aerospace Robotics Equipment Biologicals Chemicals US Up Down Up Up Same Same Up Same Japan Up Up Up Same Up Up Same Same W. Eur. Down Down Down Down Down Down Down Down NICs+ Down Up Up Same Up Same Same Same Canada Up Down Same Same Down Same Same Same
"Same" means that the share of exports changed less than 1 percent share either up or down.
The data counts only the top ten exporters in each category, so the NICs and Canada are likely under-reported (they may have done better than shown here, but not worse), since they are often at the bottom of the top ten list..
Western Europe is a sum of its countries, which are listed separately in the data and hence may be subject to the same under-reporting, but the trend for Western Europe is eminently clear.
Source: "Handbook of Economic Statistics," © 1991 CIA, Table 97, p. 144.
During the past decade, the US has either maintained or improved its share of exports in seven out of eight categories of high technology products. The one category in which our share declined, computers, might be viewed as a "mature" industry much more than the other categories, and hence this decline makes sense in our context of national characteristics. (Computer components now come marked "exact country of origin unknown" because the place of manufacture is irrelevant to the quality; that's often not yet true for other high-tech products).
This trend is particularly relevant because during this same period our share of exports declined in step with the general decline in our share of the world's GDP discussed earlier. During the 1980s, America's share of all exports fell, as did our share of manufactured goods exports. This is not to say that our exports fell; our volume of exports increased, but our share of exports fell because the total volume of world exports grew. Table 8 indicates that our volume of high tech exports grew enough in the 1980s to increase our share of exports. We more than kept up with the rest of the world in high tech, despite the growth of Japan and the entrance of the NICs and ASEAN into high tech during this decade. In conclusion, I believe this indicates a comparative advantage in high tech, that will not diminish despite increased competition, because high tech takes advantage of our national strengths.
NEW PRODUCTS AND R&D: Again supporting conventional wisdom, the US would do well to invest more heavily in research and development. The same logic that relates innovativeness to high tech products applies to any new products. Exploiting new products requires risk-taking, venture capital, self-reliance and a strong belief in the product's chances of success. Those characteristics define entrepreneurialism and are all associated with our national character; a preference for innovation is a component of the "frontier mentality."
In 1950, the US was the world leader in steel production, with 47% of the world's output. We lost our lead as the industry became "mature," and by 1979 our share of the world's production had dropped to 16% and is currently about 13%. Japan passed us in crude steel production in the late 1970s (and the USSR passed us in the early 1970s), as the industry moved from large-scale production using existing technology (open hearths) to smaller-scale production using new technologies (electric furnaces, e.g.). American industry focused on protecting existing US technology rather than switching to the new technology, which was in the interest of the big steel producers but against the strengths of the American character. Now we are regaining our share of world steel production as we focus on specialized mini-mills, which require innovation and entrepreneurialism much more than the big mills of the "Rust Belt." If we are to avoid future fiascoes like occurred with the steel industry in the 1970s, we should focus on researching and developing new products and new technologies rather than preserving old ones.
SMALL BUSINESS: The home of entrepreneurialism and the primary source of innovation in American business lies with small companies. Small business means jobs for millions of Americans at the corner store and services for tens of millions from the local handyman. But small business is also the source of major changes in society: the report you're reading was written on a personal computer (first manufactured in the early 1970s in a garage workshop), using a spreadsheet program (first written in the late 1970s in a basement office).
Number of Percent Number Percent Establishments of Total of Jobs of Total Size of business: Start-up: < 10 employees 4,613,125 74% 14,080,007 15% Small: 10 - 99 employees 1,451,339 23% 37,688,867 41% Large: 100+ employees 134,875 2% 41,026,573 44% Total all Sizes: 6,199,339 92,795,447
Source: "1991 County Business Patterns," in "The 1994 Information Please Almanac," p. 73
Referring to Table 9, "Comparison of Business Sizes," we see that 98% of all business establishments in the US are small (under 100 employees). In fact, 74% of all business establishments employ under 10 persons. Yet when we make public policy, we focus on the needs of the 2% of companies which employ over 100 persons. If the other 98% are addressed, it's usually as exceptions to the proposed policy. The big 2% are the focus of legislation because they are big enough to have a voice in Congress, while the other 98% are too decentralized to speak with unified voices.
Of course, in terms of number of jobs, big business provides substantially more than 2% of American employment. But even in those terms, small businesses are in the majority, accounting for 56% of all American employment. When we make public policy for business, we should consider first the needs of small businesses, since that's where most of us work.
In terms of our framework, the comparative advantage of the American economy lay with small business, because small businesses fit in with our national character. Promoting small business exploits our inherent advantages and allows us to compete successfully in the world market. As discussed with Table 4 and 5, the US seems to have no strong competitive edge with regards to multinational corporations and is at a disadvantage with regards to multinational banks. Our comparative advantages are not with big MNCs, contrary to their focus in US policy-making. Focusing on MNCs to the exclusion of small businesses misallocates American resources and hurts our international competitiveness.
POP CULTURE: Popular culture is a major net export item. I attribute the popularity of American cultural goods abroad to two factors discussed as our "inherent advantages": 1) We have become the model for democratic capitalism, and hence foreigners want our "pop culture" goods as a means of understanding American society or as a means of identifying themselves with it. 2) English is the international language, and many foreigners want to learn English; hence goods which include linguistic components can be sold abroad with little alteration.
"Pop culture" means not just movies, but also music, TV shows, clothes, toys, food, ad. inf. Tokyo has a Madonna store and a Michael Jackson store in downtown Shinjuku. Last year's Christmas television season in Denmark was dominated by a nightly airing of "Twin Peaks." In remotest China, one can find Levis and T-shirts emblazoned with American sports logos. My 11-year-old niece in Finland demands a Barbie doll of every American visitor. There are McDonald's restaurants in Hong Kong, Shenzen, Moscow, Budapest, Tokyo, in Piccadilly Circus, and on the Champs Elysˇes. Even in Anglophobic France, American movies (with subtitling de rigueur) are readily available on the streets of Paris, while French movies are relegated to New York art venues. American pop culture is "in" worldwide, and rather than treat it as commentary on the foibles of our society, we should respect it as the income earner that it is.
EXPORTING DEMOCRACY: Turning from the economic realm to the political realm, we have been successful exporters of our Constitution and of the American model of democracy since the early days of the country's existence. As discussed in an earlier section, we have lost the comparative advantage of having a classless capitalist society with a strong democratic Constitution because we have successfully converted all of our direct competitors to that model (or more optimistically, those that convert become our direct competitors in the long run).
The developing world, while not important enough to our economy to enter into the economic analysis above, is important enough to our politics to warrant promoting this "export." All of our military involvements since WWII have been in the developing world, and none have been in capitalist democracies. Every military action of the last decade, both before and after the end of the Cold War, has been justified as "restoring democracy" or as fighting the lack of democracy, either as "fighting totalitarianism" or "stabilizing anarchy." Clearly, our government considers exporting democracy to the developing world to be in our political interest; it is in our economic interest as well, since war has a high economic cost and having more capitalist democracies means having less war. In the long run, creating capitalist democracies works to our economic benefit by creating more trading partners. I will discuss in the next section public policy and military policy to further export democracy.
NEGOTIATE AN INTERNATIONAL PATENT SYSTEM
Inventors and entrepreneurs need patent protection in order to capitalize on their products; in order to export those products, patent protection needs to be extended abroad. The current international patent system is based on the Patent Cooperation Treaty (PCT), an agreement negotiated in 1970 and adhered to by 43 countries. The PCT allows a single application for patents in all signatory countries, filed in the home country and home language. The applicant must still pay national fees in each country applied for, but the cost is reduced substantially (from £7,000 for a set of twenty industrialized countries' patents to £1,300 for the same twenty by PCT). The PCT applies to most countries in this analysis, with exceptions of Singapore, Taiwan, the PRC, and Canada.
The PCT system is considered by many patent agents to be too complex and too expensive, and hence is not heavily used. Only 15,000 applications were filed with the PCT in 1989, compared to 1.4 million patents filed nationally in PCT countries. The PCT allows patents and industrial designs, but not copyrights, trademarks, or protection of other intellectual property. Patent infringement cases are not addressed, and hence must be undertaken in the foreign country's courts.
To exploit our comparative advantage of inventiveness, we need a more workable international patent system. The GATT process is the logical place for patent negotiations, since patents are a component of international trade. The US addressed "intellectual property" in GATT's Uruguay Round, but compromised in order to complete the round. We should negotiate, as part of GATT's new World Trade Organization, a "General Agreement on Patents and Copyrights," or include the existing PCT as part of the WTO negotiations. Our goals for the treaty should include: 1) bioengineered entities (genetically manipulated plants, invented bacteria, and so on); 2) computer software copyrights and other intellectual property rights; 3) property rights for entertainment products (musical tapes, movies, and so on); and 4) a means to sue for patent infringement at reasonable cost (which would help small businesses overcome the prohibitive costs of patent enforcement abroad). Such a treaty addresses the primary industries which exploit our comparative advantage, and hence would promote out international competitiveness.
SIMPLIFY EXPORTING AND IMPORTING REGULATIONS
Trading with our direct competitors (Japan, Western Europe, and the NICs) requires only a readily-obtained export license and minimal paperwork that even small businesses can handle. The process has gotten simpler in recent years, with GATT removing many import restrictions, and with the demise of COCOM removing restrictions against trade with the Communist bloc. However, trading with non-OECD countries has a substantially greater paperwork burden, which is often sufficient to preclude dealing with those countries. Opening trade to new countries, especially to developing countries which are not capitalist democracies, would help America in our goal of "exporting democracy," and in universalizing English and the US dollar.
We should again address this issue under the GATT/WTO process. GATT does not address the regulatory burden of importing and exporting, only the legislative side of trade (except if regulations are so onerous as to be construed as "non-tariff barriers"). We should seek to include the regulatory side of trade under the WTO, with an aim of minimizing regulatory burdens as well as removing legislated barriers.
AVOID IMPORT PROTECTION OF "MATURE" INDUSTRIES
This is conventional wisdom in the economic world but suicide in the political world. I'll make the case against protectionism under the framework of comparative advantages. The usual economic argument is that "infant industries" need protection in order to compete during their start-up phase. The usual political argument is that constituents' jobs are at stake when large factories close due to foreign competition. The usual national security argument is that we're vulnerable to embargo without domestic production. The US should reject all of these arguments.
The economic "infant industry" argument may hold for developing countries, where limited capital, rudimentary infrastructure, or some other "market failure" creates a need for government assistance. In the US, there are no restrictions on new industries except the risk associated with anything new. Accepting risk is part of entrepreneurialism, one of our national characteristics, so we should encourage risk-taking rather than protect against it. US legislators have accepted this argument and Americans enjoy an unprotected market in start-up industries.
In contrast, Americans suffer a protected market in mature industries because of the political "job protection" argument. If the American national character favors start-up industries over mature industries, we should spend less on protecting mature industries than we do on start-up industries. That is, we would compete better internationally by letting our foreign competitors take over mature industries while we focus on creating the next generation of new industry.
Let's refer back to the case of steel production discussed earlier. The US government and the large steel companies protected the industry from foreign competition, which implied maintaining an existing technology with no new research and development. The rest of the world's steel industry moved on to new technologies while our steel industry focused on imposing import restrictions and countervailing import duties. The federal government offered protection because they felt that too many jobs were involved to allow the industry to risk failure. This protectionism continues today -- we imposed countervailing duties on 19 steel importers in 1993, implying the logical implausibility that 60% of the world's foreign steel producers were simultaneously "dumping" steel in the US. The result has been the demise of the steel industry and the demise of much of the US Midwest along with it. I believe that this demise results from legislating against our national characteristics. If we let foreigners import steel freely, we will lose some big mills, but we will gain smaller mills which would focus on innovative technologies and on new research and development. That's where our strength lies, and we should muster the political will to get there.
The "National Security" argument is cited as one of the standards for the steel industry, since steel is needed for war matˇriel. This argument rarely holds true for a country the size of the US (i.e., we can exploit our comparative advantage of being big by rejecting almost all national security arguments for protectionism). With steel, as with most industries, the danger of foreign competition is that we'll reduce the size of the domestic industry, not that the whole industry will be eliminated. Even a few mini-mills could supply war needs in an emergency. It's ironic that we'd be fighting a war presumably to protect the free market, but we won't trust that market to deliver goods in times of trouble. If we're truly at risk, then we should stockpile steel (like we do oil) rather than maintain an industry which is counter to our natural advantages.
REMOVE DISINCENTIVES AGAINST SMALL BUSINESSES
The big steel companies have a powerful voice in Congress, through lobbyists and through Congressional representatives who have steel companies as the major employers in their home districts. Small businesses have no such advantage in the legislative process, and hence have numerous legislative disincentives. I discussed above how small business promotes America's international competitiveness by exploiting our national characteristics of entrepreneurialism and innovativeness; here I'll address policies that would assist small businesses. I do not mean to imply that promoting big business is bad for America (unless they use their legislative advantage to unduly favor themselves). I'll make the case here for small businesses; big businesses can make the case for themselves. If legislators similarly focus on small businesses, the political advantages of big business will level the playing field, and both sides will get represented fairly. Without a conscious effort by legislators to bias themselves towards small business, big business will get an undue advantage, and America will suffer in international competitiveness.
LOOSEN CREDIT: Often the bottleneck in small business growth is a lack of access to credit. Banks are not amenable to providing small businesses with credit because big businesses are better risks. Hence, in times of "tight credit," small businesses have great difficulty getting loans (even in times of loose credit, banks aren't forthcoming to small businesses, but during tight credit small businesses need not even apply). A "tight credit" policy hurts small business. The Fed should consider that when making credit policy, and loosen credit accordingly.
REDUCE EMPLOYMENT TAX PAPERWORK: Filling out government forms disproportionately affects small businesses because they can not maintain staff members who are familiar with the various paperwork. I discussed above, in the section on GATT, reducing the paperwork burden for imports and exports. But most small businesses are on Main Street and international trade does not apply to them; their paperwork burden comes from domestic requirements and especially for paying employment taxes.
In running my consulting company, I hire subcontractors instead of hiring employees (even when they're acting as employees) in order to avoid the paperwork burden, and I believe this is typical for small businesses. Subcontractors only require a 1099 form at the end of the year. Employees require: filing a W2 form at the end of the year; weekly withholding statements; weekly deposits of withheld taxes; periodic submission of withheld taxes to the IRS; calculation of FICA, FWT, unemployment insurance, and state taxes; researching and maintaining an I-9 form for the INS; and so on. In addition, hiring employees makes the company subject to a myriad of laws that protect employees from capricious employers.
Small businesses have two choices: comply and pass on the cost to their customers, disadvantaging them because big businesses can handle tax paperwork less expensively; or they can hire subcontractors, disadvantaging them because most people prefer to work as employees and hence small businesses must pay higher salaries or settle for lower quality. In either case, the more paperwork involved with complying with tax laws, the more small business is disadvantaged, and the more America's competitiveness suffers.
AVOID MANDATED BENEFITS: Obligatory employee expenses hurt small business disproportionately in the same manner that they are hurt by the expenses of tax compliance, because they have less means than large businesses of efficiently handling the costs. Therefore, the federal government should remove mandated benefits where possible and should be wary of adding mandated benefits in the future. Consideration for the injury to small business was an important component of the debate on Clinton's health plan. This analysis indicates that a mandated health benefit would hurt small business and is therefore counter to our national character.
TAX COMPANY BENEFITS: "Benefits" are a primary reason why workers choose large companies over small companies. Large companies offer "benefits" because they are tax-deductible to the company and non-taxable to the worker. While small companies could enjoy the same tax advantages, they cannot achieve the savings of scale which a large company does with, say, an in-house day-care center. Since small businesses cannot provide the same level of benefits, anything which favors company benefits also favors large businesses. Therefore, the tax status of company benefits strongly favors large businesses over small businesses. To promote small businesses, the federal tax policy should eliminate the tax advantages of company benefits, i.e., treat benefits as taxable income.
MAKE CAPITAL GAINS DEDUCTIBLE: "Capital gains tax reform" would seem to be favored by this analysis, since such a tax policy change would favor risk-taking, and therefore would promote our comparative advantage in entrepreneurialism. However, this is only true to the extent that capital gains become tax-deductible in start-up industries, since risk-taking there is the national characteristic we wish to promote. The capital gains policy recently under discussion in Congress focuses on the deductibility of windfall stock income, stock options, and other forms of remuneration prevalent in large businesses. To the extent that capital gains reform benefits small businesses, such a policy change would improve our comparative advantage. But the current capital gains reform favors big business, and therefore does not improve our international competitiveness.
REINTRODUCE INCOME AVERAGING: In general, research and development expenses are tax-deductible. Big businesses can deduct the salaries and costs of R&D as part of their normal operating expenses. Small businesses can only deduct R&D expenses up to the point where the expenses equal income for the year. If a small business undertakes a large-scale project (such as building the first personal computer), and sees no sales for the entire year, all of the expenses are non-deductible because there is no offsetting income. The losses from a previous year may not be carried over to the next year. Before the 1980s, such a carry-over was permitted as "income averaging." Reintroducing that policy would promote R&D in small businesses.
COMMERCIALIZE OUTER SPACE AND THE DEEP OCEANS
Let's turn our attention to a field where big business is needed and can exploit our "frontier mentality." There is still a frontier, in outer space and in the deep oceans. These are ideal frontiers for the American character because their exploration and exploitation require high-tech equipment. This analysis suggests that, once commercialization of these frontiers begins, US firms will dominate the industry, as we have dominated other high-tech fields and as we rose to the challenge of our own frontier.
The exploitation of these frontiers is amenable to government action because the startup costs are so high -- the proper government action should be to do the preliminary research and development, build the infrastructure, and then exit the industry. As with "infant industries," the industry should be weaned from government support as soon as possible.
That point may come fairly soon for space exploitation. We should focus our efforts in space on potential commercial applications, including "renting" the space shuttle to private enterprises, using facilities aboard a space station for business purposes, and developing the "space plane" as a viable means of transportation. While a Mars mission might excite the imagination and stimulate international cooperation, getting American companies into space will do more for our international competitiveness.
Exploitation of the deep oceans seems somewhat further off, but the same analysis holds true. The government should sponsor exploration of the deep sea floor for purposes of mining, energy sources, or other commercial applications. The government should then develop a means to exploit these resources, and then let private companies do the exploitation.
RAISE THE GAS TAX OR INSTITUTE A BTU TAX
President Clinton attempted to institute a "BTU tax" in 1992, taxing all forms of energy consumption, in order to reduce the federal deficit. Vice President Gore supported it for the environmental benefit of reducing energy consumption. It finally passed Congress as a small rise in the gasoline pump tax, insufficient to have much effect on either the deficit or the environment. Within our framework, there is a third reason to raise an energy tax: in order to promote the "energy efficiency industry." This is a high-tech industry, with potentially large volume, in which America is falling behind our competitors because our energy costs are so low that we have no incentive to enter the industry. Raising our energy prices would provide an incentive for US firms to enter this field, where they would soon predominate.
Let me initially establish two facts: 1) energy is much cheaper in the US than in any of our direct competitors; and 2) energy efficiency is much lower in the US than in any of our direct competitors. Basic microeconomics implies that the first fact causes the second fact.
Gasoline prices are a fair measure of general energy price levels. Gasoline in the US costs about $1.10 per gallon. Gasoline in Japan costs about $3.70 per gallon, and in Western Europe varies from about $2.50 in Germany to $3.90 in Italy. Gasoline usage is inversely related to gasoline prices, as microeconomics predicts: US usage is 500 gallons per person per year, Germany uses 200, Japan uses 170, and Italy uses 170 gallons per person per year. We have cheap gas and we drive accordingly.
ACTUAL ENERGY USAGE RATIO OF ENERGY USAGE EXPECTED ACTUAL TO (MMBTU) BY GDP EXPECTED ------- ------ -------- US 76,728 83,436 -8% Japan 15,813 48,330 -67% W.Europe 57,424 98,169 -42% E. Europe 15,374 3,967 +288% FSU 39,285 12,554 +213% PRC 27,337 6,484 +322% NICs (4) 5,739 7,257 -21% ASEAN 6,133 4,152 +48% Mideast 9,666 7,996 +21% Other Asia 16,012 6,738 +138% Africa 9,328 6,057 +54% Oceania/ANZ 4,503 5,399 -17% South Am. 13,873 10,157 +37% Cent.Am./Carib. 6,152 4,934 +25% Canada 10,609 8,344 +27% WORLD 313,976 313,976
Note: A negative ratio indicates greater-than-average energy efficiency, and a positive ratio indicates inefficiency compared to the world average.
"MMBTU" = millions of millions of British Thermal Units, a measure of energy consumption.
Source: Environmental Almanac, © 1992 World Resources Institute, pp. 296-7.
Estimations added as needed for unavailable data. ASEAN excludes Singapore to avoid double counting with the separated NICs.
Table 10 illustrates the second fact, that we are less energy-efficient than our direct competitors. In the usual format, I show our actual energy usage, our expected usage if the world's usage were evenly distributed by GDP, and the ratio between the two. The US ratio is -8%, which means we're slightly more efficient than the world average. But Japan, Western Europe, the NICs, and even Australia, have ratios two to eight times ours. In fact, the only country in the industrialized world with a worse energy efficiency than the US is Canada, and they spend a lot of energy on winter heating. This inefficiency costs us money. It implies that every part of our industrial process uses more energy than the same processes done by our direct competitors. (Yes, our competitors pay the difference as energy taxes, but those are "transfers" which cost the customer and do not cost the economy as a whole.)
Regardless of the industrial efficiency justification, the budget deficit justification, and the environmental justification, we need an energy tax in order to enter the field of energy-efficient technology. The US is currently a laggard in this industry because of low energy prices, but we could certainly benefit immediately (as our relative inefficiency indicates) if products were made available. Such products include: solar, wind, wave, and other small-scale renewable energy sources; solar electric cells for direct photovoltaic energy generation; ultra-fuel-efficient passenger automobiles; high-tech materials for light automobiles; super-insulation; and high-temperature ceramic engines; and possibly super-conducting materials for efficient energy transmission.
By every measure of comparative advantages based on our national character, we should be the world leader in all of those fields: they are high-tech; they are innovative; they are R&D-intensive; they are high-risk and potentially high-profit; they are subject to entrepreneurial exploitation. Instead, Western Europe has eight different prototypes of ultra-fuel-efficient cars made in four different countries, while GM has one low-tech prototype and Ford has one model in research. Denmark has functional wind-farms of turbine generators while ours are still tourist attractions. Japan's MITI plans increases in efficiency technology and their upcoming export while we can barely raise the gas tax for revenue purposes. We are laggards because our government keeps our energy prices cheap. This policy keeps us from being leaders in an upcoming high-tech revolution and hurts our international competitiveness.
PROMOTE "INTERNATIONAL ENGLISH"
We gain the more that English is the de facto world language, so we should do what we can to further encourage that. American movies and television achieve this objective well, as does American tourism abroad (discussed two sections below). The US government can attempt to create a synergy to further accomplish the universalization of English: 1) We should provide international development aid for English-language schools (such as the British did in colonial India). 2) We should promote foreign tourism in America (which would encourage learning English) by promoting tourism opportunities abroad and by reducing visa requirements for incoming tourists. 3) The government should fervently pursue cases of criminal acts against tourists (such as the rash of tourist robberies in Florida last year, which severely decreased foreign visitation), as well as discouraging xenophobia.
"MAINSTREAM" NON-ENGLISH-SPEAKING IMMIGRANTS
What about English as the official language within the US? This analysis indicates that we'd be better off if everyone in the country spoke a common language, since that would foster our political and linguistic unity. While I recognize the value of bilingual education, it should be used only as a stop-gap measure -- teach immigrants in their own language only while they are learning English and get them "mainstreamed" as soon as possible.
ENCOURAGE "GRASSROOTS" INTERNATIONAL CONTACTS
Let's relate the universalization of English to "exporting democracy;" I address the social policies here and the military policies next. We can promote international English and the dollar as international currency (and hence reap the benefits of the resulting comparative advantage) by getting more Americans overseas. However, the "ugly tourist" and "exploitative businessman" are legacies which we should avoid by encouraging more individualized contact. The goals of exporting democracy and of universalizing our language and currency is only achieved if we present ourselves in a positive light abroad.
In international aid, we should promote small "grassroots" aid projects instead of large-scale industrial projects. Japan's foreign aid, which has surpassed America's in recent years, focuses on mega-projects (such as building new ports and roads to service them). Such mega-projects indeed benefit Japan by creating more viable trading partners, but they do not promote contact between people and do not present Japanese people in a particularly positive light. We should focus on "micro-projects" such as local schools, village-level irrigation systems, local health clinics, and so on. American NGOs (non-government organizations) are abundant in the realm of grassroots international projects and should be promoted as a main focus of American foreign aid. The Peace Corps serves much the same function and should be further promoted accordingly.
In international business, the tax deductibility of foreign travel should be made more lenient. Specifically, if a businessperson wants to stay abroad for a week after her business is done, she must pro-rate the deduction of her airline ticket price by the percentage of time spent on business versus non-business. The business ticket would have to be purchased in whole anyway, regardless of how long she stays later, so our tax policy should be to exclude deductions of the marginal non-business components. The current system excludes deductions on average instead of on the margin, and since business airline tickets are typically more expensive than tickets purchased for pleasure travel, this policy discourages mixing business and non-business trips. Encouraging businesspeople to visit the countries in which they are doing business achieves our goal of presenting Americans in a positive light abroad.
In our education system, we should teach more foreign languages. Paradoxically, having more Americans know foreign languages would promote the universalization of English, because more Americans would travel to more foreign countries and the increased contact would encourage more English. In Europe and Japan, foreign language education begins in earnest at around the fourth grade (age eight or nine) while even in good American school systems we wait until seventh grade. Schools in Europe and Japan often require learning foreign languages while it is an option to American students. Even speaking a few words of the local language presents American tourists in a positive light, and should be encouraged.
If we are sufficiently confident that our system is the "right" model (and I am), than exposing foreigners to our model should be sufficient to bring about democratic capitalism in the long run. The Chinese, before they undertook their current "capitalist road," recognized that exposure to democracy would breed democracy, and hence discouraged all contact with foreigners. We should do what we can to expose foreigners to positive contacts with Americans, which will move foreign countries further down the "capitalist road."
INTERNATIONALIZE THE MILITARY
Let's look at the military side of "exporting democracy." The creation of capitalist democracies worldwide brings America great benefits, but occasionally entails the great cost of military action. Does exporting democracy mean that we have to be the "world's policeman?" I will assume here that in upcoming decades: 1) we will continue to use military means to enforce democracy overseas; and 2) if we do so unilaterally we will bankrupt ourselves. We can avoid the cost while still reaping the benefit by sharing the military burden with other capitalist democracies (who simultaneously reap the benefits anyway).
Specifically, we should use the UN, NATO, OAS, ANZUS, SEATO, and our other military alliances as the basis of future military actions in a more substantial manner than we have in recent wars. In terms of our framework, this would fulfill the goal of promoting American culture overseas by removing the imperialist connotations of unilateral military action. Fully "internationalizing" the military would allow the US and its allies to "specialize" in components of military production, which for the US would mean maintaining our R&D work in high-tech military hardware, without actually building equipment beyond early prototypes.
An "international military" would also imply a smaller US military, since we would not have to undertake military action alone. In our framework, a smaller military exploits American comparative advantages because the military promotes big business. DoD buys from Lockheed and Raytheon, not from the corner hardware store. All of the same arguments that apply against avoiding an industrial policy (discussed next) hence apply to reducing the size of the military. Admittedly, an "international military" requires trusting our allies (since we could no longer fight wars without them) and losing some degree of "sovereignty" (since we would have joint control), but without such a policy, we are in danger of becoming a bankrupt superpower in the long run.
AVOID INDUSTRIAL POLICY
None of this analysis should be construed as implying that the US should undertake an "industrial policy." I think an industrial policy is politically untenable in America, and I think an industrial policy should be politically untenable in America, because it favors big business and disfavors entrepreneurialism. The policy recommendations that I make above generally entail the government excluding itself from certain activities, rather than actively promoting certain activities as would be done in an industrial policy.
But for example, isn't instituting a BTU tax an activist government policy? Yes, that policy is the most industrial-policy-like of the list, but its purpose is to counter other government policies which maintain cheap energy (oil tax windfall credits, military intervention in the Persian Gulf, maintaining a relatively toll-free interstate highway system, and so on). Since addressing these other policies is politically untenable, an activist counter-policy is the only alternative to maintain parity with our competitors. They recognize that their energy is cheap because of US foreign policy, and tax it to make up for the "external costs" of energy. We should too.
"Picking winners and losers" via government policy is a long-term losing proposition. I view this process as a parent views a child: you don't want to pick what your child does, but you do want your child to be able to take advantage well of whatever she chooses herself. You therefore encourage general development, without specifying any particular fields. You can guess that your kids will likely be good at things that you are good at, and you naturally focus on those anyway. You arrange your home and your child's life so that your child is exposed to as many opportunities as possible. That's the objective here -- to arrange America, and the world, so that America's next generation can take advantage of the fields that it finds itself good at. I'm assuming that America's next generation will be good at the same sorts of things that the current generation is, but the goal is to avoid precluding fields rather than picking particular fields.
Industrial policy favors big business. In Japan, where MITI formally promulgates industrial policy, that policy addresses large-scale enterprises and heavy industry. The result has been that Japan has caught up with the US and Western Europe in its share of global businesses (see Table 4) despite starting from near zero in 1945. In fact, Japan's business sizes are likely under-reported because the formally stated size of Japanese businesses ignores the informal keiretsu arrangements (keiretsu are conglomerates of interrelated supporting industries which would likely be considered a breach of anti-trust laws in America; Korean chaebol do the same thing). The Japanese national character is perhaps suited for big business, and MITI's industrial policies support big business. The American national character is suited for small business in preference to big business. If we are to compete in the world market by promoting our comparative advantages, we should promote policies which favor small business and avoid policies which favor big business. Therefore, industrial policy is against our long-term interest.
Federal government activity favors big business, in general, because large companies have a voice in government and are easy, centralized targets of legislative actions. To that extent, the federal government should stay out of the business realm altogether, since entering that realm will perforce favor big business at the expense of small business. When formulating policy, we should be on guard about activities which government touts as "in our long-term interest." Industrial policy is very much in the interest of the federal government and in the interest of big business, since both benefit by centralized control of the economy. American citizens would be hurt by such centralized control, not only because centralized control damages the economy, but because it goes against our national character.
This entire analysis is intentionally "self-centered" on the contemporary United States. However, there is no reason that the framework cannot apply to other countries or to other time periods. I am not enough of an historian nor enough of an international cultural expert to attempt any historical or foreign analysis. Certainly Japan could perform the same analysis, to identify "advantaged" industries and policies to foster them, based on Japanese national characteristics. I suspect that MITI does something like this analysis in forming Japan's industrial policy and decade-long planning. If we are to remain competitive in a world of equals, it's time that America did the same.
1 NICs = Newly Industrialized Countries of East Asia, namely Hong Kong, South Korea, Taiwan, and Singapore. On Table 1, and for most of this analysis, I include ASEAN as part of "NICs+". ASEAN = Association of Southeast Asian Nations: Singapore, Malaysia, Indonesia, Philippines, Thailand, and Brunei. On Table 1, the "EC+" statistics include all countries of Western Europe, to account for future EC expansion. The former Soviet republics are referred to as "FSU", or as "FSRs" when statistics include the former Soviet republics of Eastern Europe.
2 Share of world GDP prior to 1989 is made difficult by the inaccuracies in measuring Communist economies (PRC and FSRs), and hence the US share is likely understated. Prior to 1960, the US share was disproportionately high due to other economies' damage from WWII. Source of 1960 figures: "Handbook of Economic Statistics," © 1989 CIA. See Table 1 for other sources.
3 During 1972 to 1992, the average annual real growth rate for the US was 2.3%, for the EC 2.4%, for Japan 3.9%, for the NICs 8.0%, and for China 7.2%. Russia's GDP is insufficiently documented to state an annual average. The world average GDP growth was 2.9% per year.
4 Native Americans account for 0.8% of the population in the 1990 census. Source: "The 1994 Information Please Almanac", p. 284.
5 The PCT, or Patent Cooperation Treaty, includes 43 countries as of 1989, including all of the comparison countries in this study except for the PRC and some NICs. The functioning of the PCT is discussed in detail in a later section of this study.
6 In 1970, the US' share of all exports among the OECD was 19%, by 1980 it had fallen to 18%, and by 1988 to 16%. Source: "Handbook of Econ. Stats. 1989" © CIA, Table 123, p. 138. In 1970, the US' share of manufacturing exports among the G7 was 34%, by 1980 it had fallen to 21%, and by 1990 to 19%. Source: "Handbook of Econ. Stats. 1991" © CIA, Table 94, p. 138, "OECD" = Organization of Economic Cooperation & Development = W. Europe, US, Japan, Australia, & Canada. "G7" = Group of Seven = US, Japan, UK, Germany, France, Italy, & Canada.
7 Interpolated from "The World in Figures," © 1976, The Economist Newspaper Ltd., p. 34. Additional steel data from "Handbook of Economic Statistics", © 1991, CIA, Table 74.
8 As a current example of innovation inherent in small size, this month one mini-mill (Nucor) unveiled its plans for a new "iron carbide closed chamber" furnace, an experimental energy-efficient smelting technology which may "leapfrog [the US] ahead of Japanese and German researchers." Source: Business Week, 11/7/94. p. 106.
9 Under "restoring democracy": Haiti 1994, Panama 1989, Grenada 1983; under "fighting totalitarianism": Iraq 1990-91, Libya 1989, Libya 1986, Nicaragua early 1980s; under "stabilizing anarchy": Somalia 1992-93, Lebanon mid-1980s.
10 Information and quotations in this section are from "The Patent Cooperation Treaty: A New Era," James Lahore, ed., © 1986 Center for Commercial Law Studies. The text of the treaty itself can be found as "PCT and Regulations Under the PCT," done at Washington, 6/19/70, amended 10/2/79, modified 2/3/84, available under that title © 1985 World Intellectual Property Organization.
11 The world total is 1.53 million applications, only 170,000 higher than the PCT total, since PCT signatories include almost all major patent-granting countries. Source: Statistical Yearbook 1988/89, 37th edition, © United Nations, table 123, pp. 837-41. For comparative statistics of patents in force, see Table 2 and discussion.
12 The US imposed countervailing duties on Jan. 27 1993 for "dumping" against: Argentina, Australia, Austria, Belgium, Brazil, Canada, Finland, France, Germany, Italy, Japan, Korea, Mexico, Netherlands, Poland, Romania, Spain, Sweden, & the UK. This list comprises 60% of US steel imports and 58% of all non-US steel production. Despite being denounced at GATT, the US ITC found 15 of the countries guilty of dumping; representatives of large US steel companies were "pleased." Source: Newspaper reports from Oct. 28 1992 through July 27 1993.
13 Prices are from 1988. Source for all data in this paragraph: "Driving Forces," © 1990 World Resources Institute, via the 1992 "Environmental Almanac," p. 68.
14 The European models include: 1 from British Leyland, 2 from Volkswagen, 1 from Volvo, 2 from Renault, and 2 from Peugeot. All European vehicles are available in 4-passenger models. GM's prototype is 2-person only, and achieves its fuel efficiency by using an aluminum engine. The European models include supercharged diesels, high-tech materials, heat-insulated engines, diesel injection, and flywheels. Source: "The New Oil Crisis and Fuel Economy Technologies," in the 1992 Environmental Almanac, p. 72. Data as of 1988.
15 This concept is explored at length in Paul Kennedy's "The Rise and Fall of the Great Powers." In summary, historical powers from ancient Rome to imperial England have fallen because of over-ambitious military objectives and over-stretched empires.
16 MITI, the Ministry for International Trade & Industry, has as its objectives "to reduce imports, to foster higher growth in key industries, and to change the industrial structure." "Key industries" is equivalent to "big business," since large potential exporters with economies of scale are targeted. Small and medium-sized businesses usually suffer from MITI's structural changes, according to "The Japanese Economy," by Takatoshi Ito, © 1992 MIT Press.
Jesse Gordon, 1770 Mass Ave., #630
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