Who Stole the American Dream?

by Hedrick Smith

  The dynamic interaction between innovation, production, and job growth in America was disrupted, they say, when major U.S. multinationals moved overseas the mass production of commodities—from computer and aircraft components to auto parts, appliances, and cellphones—to places like China. “Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution,” cautions Andy Grove. “Abandoning today’s ‘commodity’ manufacturing can lock you out of tomorrow’s emerging industry.”

  Behind Germany’s Success: A Social Contract for Jobs and Exports

  As the United States looks ahead, many economic analysts see valuable lessons in Germany, the linchpin of the euro zone, over the last two decades. Germany’s response to the challenge of globalization and low-cost competition from China and Asia has been different from ours, as we saw earlier, and its outcome has been better.

  Since the mid-1990s, the German economy has grown faster than the U.S. economy, and its middle class has shared more of the gains. Since 1985, Germany’s average wage went up nearly 30 percent versus only 6 percent in the United States. In foreign trade, Germany generated $2 trillion in trade surpluses from 2000 to 2010, while the United States racked up $6 trillion in trade deficits. So today, Germany still has twice as many people working in manufacturing as the United States—21 percent of its workforce to 9 percent of ours.

  “The German model shows that a developed country can remain competitive even in a world where new economic giants, such as China, India, and others, are emerging,” observes Wall Street investment manager Steve Rattner. One reason is that German consumers import less than half as much, per capita, from China as Americans do, and German industry, with its marquee brands and precision machine tools, exports more successfully. BMW, for example, makes 25 percent of its profits selling luxury cars in China.

  But what explains Germany’s so-called economic miracle is a social contract that brings together business, labor, and government working for the nation’s benefit. “It isn’t a miracle,” former German economy minister Michael Glos explained. “It’s because we stuck to manufacturing whereas other countries de-industrialized”—moved into services and shifted their production offshore.

  Klaus Kleinfeld, former CEO of the German electrical giant Siemens and now CEO of Alcoa, asserts that the key ingredient of Germany’s success is “the social contract, the willingness of business, labor, and political leaders to put aside some of their differences and make agreements in the national interest.”

  Trade union leaders sit on the supervisory boards of major firms such as Volkswagen, Daimler, and Siemens, positioned to persuade management to keep the highest value-added work in Germany. As a trade-off, unions have eased demands for pay increases.

  “To keep work at home, German unions also agreed to continual productivity and efficiency increases,” noted commentator Harold Meyerson. “They can afford to do this because, as is not the case in the United States, such increases don’t necessarily mean their members will be sacked.”

  In fact, during the 2008 economic collapse, big German companies adopted a “short work” policy to spread the pain of recession. Instead of laying off masses of workers, German companies shortened everyone’s workweek, saving five hundred thousand jobs, so Germany’s unemployment rate went down during the recession while America’s rose sharply and stayed high.

  Ten Steps to Reclaim the Dream

  Reclaiming the American Dream will not be quick or simple. We have a long-term structural jobs problem that demands new thinking and an ambitious new economic agenda. Hence the call from the Horizon Project CEOs for a domestic Marshall Plan. What they advocate is a government-led industrial policy focused on generating millions of new jobs, exporting more products, modernizing our infrastructure, making our tax laws smarter and fairer, restoring America’s manufacturing at home, and legally challenging or retaliating against China’s unfair trade practices.

  From their thinking and that of others, here are ten steps for reclaiming the American Dream.

  Step #1: Infrastructure Jobs to Compete Better

  Step #1 is to form a new public-private partnership to modernize America’s outdated transportation networks and create five million jobs—and maybe many more—with major investments over the next decade. Follow the model of President Lincoln, who used government aid to promote and subsidize the transcontinental railway, or President Theodore Roosevelt, who built the inland waterways, or President Dwight Eisenhower, who fathered America’s modern interstate highway network.

  Wall Street is reported to be eager to invest in infrastructure projects if the government puts up seed money. That plan wins backing from such traditional political adversaries as the U.S. Chamber of Commerce and the AFL-CIO. It wins bipartisan endorsement from politicians like New York mayor Michael Bloomberg, Texas senator Kay Bailey Hutchison, and former California governor Arnold Schwarzenegger, all Republicans, and Democrats such as Senators John Kerry of Massachusetts and Mark Warner of Virginia and former Pennsylvania governor Ed Rendell.

  The U.S. Chamber of Commerce estimates that America’s faltering infrastructure costs the United States $1 trillion in economic growth and hampers U.S. exports. In world rankings of infrastructure, the United States has fallen from No. 1 to No. 15. Not only do we have sixty-nine thousand structurally deficient bridges, but our national rail network has such serious bottlenecks that it takes a freight train longer to get through the city of Chicago than it does to go from Chicago to Los Angeles. In high-speed rail development, China is outspending the United States $300 billion to $10 billion. Our aviation control system is so outdated and overloaded that the Federal Aviation Administration predicts it “will reach total gridlock by 2015” unless it is urgently modernized. Our ports are overloaded. Our highways are clogged. In 2009, Americans wasted 4.8 billion hours and 3.9 billion gallons of fuel sitting in traffic at an estimated cost of $115 billion.

  Leaders from both parties as well as business-oriented task forces advocate responding to this challenge with a national infrastructure bank to spark the financing of a ten-year plan to improve our ports, airports, and commercial and commuter rail systems, as well as our bridges and highways. Because of current low interest rates and high unemployment, one economic study pointed out that it will “never be cheaper” for the nation to undertake a major infrastructure push because “capital costs are now at historic lows … and labor is in abundant supply….”

  The U.S. Chamber of Commerce estimates that $10 billion to $30 billion in government start-up funds could attract up to $600 billion in private investments. Another $1 trillion in private investments could be generated, some economists suggest, from the overseas profits of U.S. multinational corporations, if they were given attractive terms to bring those funds home and invest them in financing U.S. infrastructure development. They could profit from that investment, while paying U.S. taxes—a win-win for all sides.

  As a parallel move, former CEO Leo Hindery, Jr., and United Steelworkers president Leo Gerard have proposed that the government provide funds to put five million young people to work on modest infrastructure projects, especially in urban areas. A youth jobs program, similar to the New Deal Civilian Conservation Corps, they assert, would not only reduce the much higher than average unemployment rates among young people, but reduce the risk of idled youth turning to crime. Hiring young people would have a multiplier effect on the economy, economists explain, because young people are known for spending their earnings fast.

  Step #2: Push Innovation, Science, and High-Tech Research

  Step #2 is a major new national commitment to rebuild America’s capacity to out-invent and out-innovate the world. Despite breakthroughs by companies such as Apple and Google, the United States has slipped in innovation, which has long been America’s bedrock advantage in the world. In 2007, the National Academy of Sciences, joined by leaders in industry and education, reported that a “gathering storm” from fore
ign competitors was threatening America’s traditional edge in science, high tech, and innovation. In a second major report three years later, the academy issued an even sharper warning of a “rapidly approaching category 5” disaster.

  Scientists date the American slide in research from the Reagan administration’s sharp cuts in government funding for basic research in the early 1980s—from nearly $9 billion in 1979 to $1.4 billion in 2006, figures adjusted for inflation. The impact has been disastrous on America’s once invincible lead in research and innovation. From a No. 1 innovation ranking in 2000, the United States fell to No. 4 in 2011, behind Finland, Singapore, and Sweden. Georgia Tech University’s global study of high-tech indicators found that China in 2008 surpassed the United States in overall “technological standing.” The World Economic Forum ranked the United States fifth in global competitiveness in 2011.

  The trends in patents, a key indicator of innovation, are worrisome. After decades of domination by U.S. firms, universities, and individuals, 51 percent of the U.S. patents awarded in 2009 went to non-American companies. In clean energy development and production, the United States was once the undisputed leader but has been surpassed in production by China, Japan, and South Korea. Without large new U.S. investment, the Information Technology and Innovation Foundation predicts that the United States will soon be importing “the overwhelming majority” of its clean energy technologies, jeopardizing the U.S. economic recovery and our balance of trade.

  Business and Science Leaders Look to Government to Take the Lead

  Not only scientists and educators, but corporate leaders such as former CEOs Norman Augustine of Lockheed Martin, Craig Barrett of Intel, and Roy Vagelos of Merck support the National Academy of Sciences finding that it will take dramatically expanded government funding for the United States to bounce back in the R&D race. The private sector and universities will do the work, they say, but they need a big financial shot in the arm from Washington. In 2007, industry leaders urged Congress to appropriate $130 billion over the next decade for government funding of research, innovation, and targeted aid to education, plus tax credits to industry for research and development.

  In April 2009, President Obama provided a kick start. He announced plans to add $42.6 billion to science and technology research over the next decade and he set up a new Advanced Research Projects Agency at the Department of Energy (ARPA-E). It was modeled on the Pentagon’s DARPA (Defense Advanced Research Projects Agency), which has spawned thousands of important new technologies with commercial as well as defense applications. Obama put $400 million in his 2009 stimulus package to launch ARPA-E and to fund more than thirty of the most daring new energy projects. But as we saw from the bankruptcy of the solar energy firm Solyndra after it got more than $500 million in government loan guarantees, the government has to be much smarter in picking the companies it funds and much tougher in overseeing their performance.

  Step #3: Generate a Manufacturing Renaissance

  Step #3 is to generate a manufacturing renaissance in America—perhaps the boldest step of all, and one that will require not only a series of public-private partnerships, but a reset in New Economy thinking.

  To those on Wall Street, in Washington, or within academia who say that the United States does not need an industrial base, General Electric’s CEO Jeffrey Immelt and Intel’s Andy Grove retort that this is dangerous nonsense. “Many bought into the idea that America could go from a technology-based, export-oriented powerhouse to a services-led, consumption-based economy—and somehow still expect to prosper,” Immelt told the Detroit Economic Club in 2009. “That idea was flat wrong.”

  Richard McCormack, editor of Manufacturing & Technology News, points to the slow, jobless U.S. recovery as evidence of the fallacy in that thinking. “Without an industrial base, an increase in consumer spending, which pulled the country out of past recessions, will not put Americans back to work,” McCormack argues. “Without an industrial base, the nation’s trade deficit will continue to grow…. Without an industrial base, the United States will be increasingly dependent on foreign manufacturers even for its key military technology.”

  Immelt, too, insists that technology-based manufacturing must be central to reviving the U.S. economy. His goal is to see manufacturing employment double, from 9 to 20 percent of the nation’s workforce—a target endorsed by the Horizon Project, a task force of former CEOs led by Leo Hindery, Jr., who used to run AT&T Broadband. “You cannot survive as a nation of such size and complexity with such a small manufacturing workforce as we have,” Hindery asserts. “If you have only 9 percent making things, the only way you can grow is to have credit bubbles.”

  In the decade from 2001 to 2011, U.S. employment in manufacturing fell from 17.2 million to 11.7 million, and more than fifty-nine thousand factories were shut down. The damage was even wider because of the ripple effect. Each job lost in manufacturing cut 2.5 other jobs in the rest of the economy.

  “Close a manufacturing plant, and a supply chain of producers disappears with it,” says Richard McCormack. “Dozens of companies get hurt: those supplying computer-aided design and business software; automation and robotics equipment, packaging, office equipment and supplies; telecommunications services; energy and water utilities; research and development, marketing and sales support…. The burden spreads to local restaurants, cultural establishments, shopping outlets, and then to the tax base that supports police, firemen, schoolteachers, and libraries.”

  Reversing the multiplier effect—to make it work for economic expansion—is essential to America’s economic growth, but it is a tough challenge. Rebuilding our industrial base, Andy Grove points out, means being sharp enough to convert American innovations into American-based production for U.S. jobs, and that requires new government initiatives and public-private partnerships.

  Take clean energy. Before the recession, the green energy sector was growing faster than the economy in general, and many forecast great job potential. The consulting firm Booz Allen Hamilton predicted a jump from 2.4 million jobs in 2008 to 7.9 million jobs in 2013 in construction of green energy projects. More modest job growth in producing clean energy devices was expected—from a few hundred thousand to 1.7 million jobs. But the test is whether the United States can move fast enough to ensure that technologies invented in the United States are produced here and not in Asia.

  To do that, the Alliance for American Manufacturing wants help from Washington—federal loan guarantees to help finance new energy infrastructure projects, tax credits for clean energy manufacturing, and tax changes that permit up-front expensing on capital investment in plant and equipment. More broadly, the alliance wants the government to fund a new investment facility to initiate and promote financing for new U.S. energy plants and other domestic manufacturing, and to do it before fragile American start-up firms are driven out of business by government-subsidized competitors in China, Korea, Singapore, and Hong Kong.

  Buy American

  One other major change in government policy—and in the actions of American consumers—could bolster U.S. manufacturing, and that is to Buy American. Many in business urge that state and federal governments tighten the “Buy American” requirements for government contracts, consistent with U.S. trade agreements.

  In two recent high-profile cases, the state of California hired U.S. contractors to help rebuild the San Francisco–Oakland Bay Bridge, but the steel was imported from China. And in Washington, the monument to Martin Luther King, Jr., was designed by a Chinese architect, built by workmen from China, and constructed from marble that came thousands of miles from China.

  To prevent such episodes in the future, job-first advocates say that both the federal and state contracts should establish tighter “Buy American” standards that require at least 75 percent domestic content in products and services.

  Step #4: Make the U.S. Tax Code Fairer

  Step #4 is to rebalance the U.S. income tax code to reduce its heavy tilt in favor of the supe
r-rich. As nonpartisan economists have reported, the large Reagan tax cuts of the 1980s and the even larger George W. Bush tax cuts in 2001 to 2003 contributed greatly to the vast economic inequality in America today by generating more than $1 trillion in tax savings for America’s superclass every decade, with only modest benefits to the middle class.

  Large majorities of the public favor taxing the super-rich more by letting the 2001 Bush tax cuts for the wealthy expire. An alternative idea is to let the Bush tax cuts expire for all Americans and then pass a new tax reform to lower tax rates, especially for 90 percent of American families earning less than $138,925 a year—and to simplify the tax code by eliminating loopholes and tax breaks that benefit mainly the wealthy.

  Simplifying the tax code will make it easier to enforce. So many exotic tax shelters have been invented by ingenious tax lawyers and accountants to reduce the taxes of the super-rich that former IRS commissioner Charles Rossotti, a Republican businessman, estimated the tax loss to illegitimate tax evasions at $250 billion to $350 billion a year. As a result, Rossotti told me, honest taxpayers have to pay 15 percent more in their taxes.

  “Stop Coddling the Super-Rich,” declares Warren Buffett, the famous billionaire investor from Omaha. “I know well many of the mega-rich and, by and large, they are very decent people. They love America and appreciate the opportunity this country has given them…. Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.”