2/10/06 Bush’s American Competitiveness and Advanced Energy Initiatives: “Deja Vu All Over Again” Twenty-five Years Too Late? 1974 words

“The American Competitiveness Initiative will help our nation remain the world's economic leader. By investing in research and development, unleashing the innovative spirit of America's entrepreneurs, and making sure that our economy has workers highly skilled in math and science, we will lay the foundation for lasting economic prosperity.” President Bush, Radio Address, Feb 4, 2006

“Even Silicon Valley executives were shocked recently…For the first time ever, the nation's electronics sector [trade balance]…had gone into the red. And not just slightly...America's high-tech trade problem centers largely on the huge and growing deficit with Japan….The Young commission's report, which apparently has generated no more than polite applause among Administration officials….does hammer home the need to get on with previous proposals, such as creating a Cabinet-level Science & Technology Dept. to coordinate research efforts -- and a Trade & Industry Dept. to help focus federal resources on international competitiveness…believe it's essential to retain the R&D tax credit…would like to see the credit expanded to include all R&D spending. Trimming the federal deficit to ease interest rates is another top-priority item... revising the tax code to stimulate savings and long-term investments….Without at least the minimum remedies, high-tech companies will have little choice but to move more and more manufacturing offshore. Some executives don't find that notion disturbing…they believe the U.S. will ultimately end up functioning as a hothouse for new technology and venture capital startups. Then, when a business gets firmly established, it would shift its production to Asia or South America. ” “America’s High-Tech Crisis,” "Business Week" cover story, March 11, 1985

“America is addicted to oil, which is often imported from unstable parts of the world. The best way to break this addiction is through technology. Since 2001, we have spent nearly $10 billion to develop cleaner, cheaper, more reliable alternative energy sources, and we are on the threshold of incredible advances. So tonight, I announce the Advanced Energy Initiative, a 22% increase in clean-energy research at the Department of Energy, to push for breakthroughs in two vital areas. To change how we power our homes and offices, we will invest more in zero-emission coal-fired plants, revolutionary solar and wind technologies, and clean, safe nuclear energy. We must also change how we power our automobiles. We will increase our research in better batteries for hybrid and electric cars, and in pollution-free cars that run on hydrogen. We will also fund additional research in cutting-edge methods of producing ethanol, not just from corn but from wood chips, stalks or switch grass.” President Bush, “State of the Union,” January 31, 2006

“This intolerable dependence on foreign oil threatens our economic independence and the very security of our nation….Beginning this moment, this nation will never use more foreign oil than we did in 1977 -- never. From now on, every new addition to our demand for energy will be met from our own production and our own conservation. The generation-long growth in our dependence on foreign oil will be stopped dead in its tracks right now...To give us energy security, I am asking for the most massive peacetime commitment of funds and resources in our nation's history to develop America's own alternative sources of fuel -- from coal, from oil shale, from plant products for gasohol, from unconventional gas, from the sun.” President Jimmy Carter, “Crisis of Confidence” speech, July 15, 1979

In his State of the Union Address, President Bush put out his new agenda for improving America’s competitiveness and energy independence. As the quotes above indicate, these ideas have been around for over twenty-five years. Unfortunately, we think this is probably, yet once again, going to be far too little, far too late, long after the horses have been leaving the proverbial barn.

Most of what Bush proposed in his State of the Union speech seems to be re-cycled, re-packaged, already-existing programs, with a small bump up in additional funding. With the U.S. budget running deep deficits far into the baby boomer retirement horizon, and Bush’s “political capital” currently quite low, the Administration evidently feels it is not in a position for bold new initiatives.

Much more fundamentally, the major problems confronting the U.S. probably can’t be solved unless the U.S. seriously addresses flaws in how the market allocation of resources is being massively distorted by the global speculative financial system. Unless and until that is changed, tinkering at the margin with government programs, while perhaps well meaning, simply won’t have much impact in the real world, and is likely to miss the mark anyway, given the current array of political forces.

The Democratic Party, for lack of a better noun, has yet to respond with a program of its own. But it looks like the Republicans and Democrats (some call them Republocrats) have finally found something they can agree on, the need for America to become more competitive and energy independent, certainly worthy goals. Pres. Bush then took his new competitiveness show on the road, including a scheduled appearance with Intel’s highly regarded Craig Barrett, according to a press report.

Very brief background, the American competitiveness movement has been around for a long time, including a commission chaired by John Young, then CEO of Hewlett-Packard, in the mid-1980s referred to in a quote leading off this article. With the long-term devastation of American manufacturing since the late 1970s, which was at its worst, losing millions of high-paying jobs, during Reagan’s first term and then again in Bush II’s first term, the competitiveness movement went into deep hibernation, most recently coming out with a “National Innovation Initiative Summit” on Dec 15 by the Council on Competitiveness.

Long-considered reforms don’t make any headway in the U.S. (See 1 below for a list of some reforms from across the political spectrum.)

E.g members of the elite, currently including such corporate leaders as high-tech ex-CEOs Gerstner and Barrett and journalists such as Friedman, have continually sounded the alarm for much needed K-12 educational reform at least since the official 1983 report, "A Nation at Risk: The Imperative for Ecuational Reform," with little real progress ever since. But why should American students be motivated to study and compete globally in engineering, the hard sciences and advanced math when much more lucrative and easier career paths seem open in real estate and other speculative financial areas?

The reasons for the lack of seriousness of purpose and tangible results regarding much-needed reforms, which would not be tolerated in corporate America, seem simple. First, globalization has meant that the leaders of increasingly nation-less global, including financial, corporations simply do not feel seriously enough affected by these issues, since they can seemingly sidestep many of their more dire domestic consequences simply by outsourcing and offshoring. And second, the housing boom of the past eight years, offseting the ongoing five-year stagnation of workers' average real earnings (which are down 16% since 1972), has provided enough new “paper wealth” for the middle class voter to feel somewhat satisfied with the current state of things, for the time being.

Warnings of potential risks for the U.S. have been made ad nausea for the past few years by everyone from the most die-hard perma-bears and gold bugs to the IMF, OECD, BIS, various “enlightened capitalist” financiers, such as Robert Rubin, and numerous well-known economists (2). Some in the elite, such as ex-Fed Chairman Volcker, even have said that it may take a crisis to wake up the U.S. (See 3 below for a list of some well-known potential risks to the U.S.)

Without a real sense of urgency, America will probably continue to muddle through its various well-known problems, perhaps unless and until a major economic downturn were to occur and force re-thinking of basic assumptions.

Right now, financial markets continue not to consider that even a remote possibility, with interest rates, credit spreads and risk premiums low, and valuations high, especially for more risky assets and trades. While the price of energy, commodities and gold have soared, since the more dire predictions haven’t materialized, the financial markets simply ignore them as coming from boys crying wolf one too many times, with a “what, me worry” grin (all the way to the bank).

But the basic problem with muddling through isn’t just that it builds up financial and other stresses that may eventually erupt. While Nero fiddles away, over the past thirty years the U.S. increasingly, perhaps irretrievably, has lost its “margin of safety” and “fallback” position.

If the permanent structural shift to an economy dominated by global financial speculation and asset-light business models ever does start to look like its not working for the elite and upper middle class (it stopped working for everyone else a long time ago), a shift presided over during the 19-year tenure of just retired Fed Chairman Greenspan, then there may no longer be sufficient lead times and necessary resources to turn things around.

In the real world, one can’t just snap one’s fingers, devalue the dollar, promise to some day balance the budget, and then hope and pray that competitive U.S. exports magically appear, courtesy of the “free market,” to lessen global economic imbalances.

In addition, income/wealth inequality keeps worsening everywhere. While most of Wall Street seemingly could care less, politicians must pay a little more heed to the potential consequences. If the financial “masters of the universe” don’t finally start to realize this problem, and don’t hold your breath on that, then sooner or later, in some form or another, there will be a larger backlash than is already occurring that will set back globalization.

Several well-connected speakers at the World Economic Forum in Davos clearly warned about this. E.g. the European corporate CEO co-chair of the 2006 Annual Meeting said, “I think this dream [of building the global village] is over for me.” Larry Summers (Harvard Pres, Clinton Treasury Secretary and Rubin’s point man in the emerging market crises of the 1990s) noted that “continuation [of global integration] is by no means guaranteed. Issues of local disintegration, whether that means Flint, Michigan, whether that means failed states, whether that means struggling middle classes caught in binds everywhere, are of equal importance.”

Not to mention more than 1 billion people living on less than $1 per day and 2 billion on less than $2.

(1) Proposed reforms include: providing affordable and adequate universal healthcare coverage; reforming K-12 education; responsibly funding retirement programs; re-training programs and tax relief for displaced U.S. workers; raising the minimum wage; boosting government funding of basic science and technology; increasing immigration of highly skilled workers; tightening borders against illegal immigration; focusing on homeland security; reigning in Sarbox; reforming and simplifying the tax code; increasing foreign aid to pledged levels; supporting philanthropies and ngo’s; “Fair trade” buying of coffee and t-shrts; creating and enforcing global labor and environmental standards; passing “Patriot Corporations” legislation; etc.

2) The most well-known include Rogoff, Obstfeld, Eichengreen, Krugman, Wolf, Summers, Cline, Mann, Truman, Roubini, Rajan, Cotis, Roach, Xie.

3) The standard litany of potential risks, almost all of which continue to get worse, include: high energy and other commodity prices; topping of the global real estate markets; huge global economic imbalances and fiscal deficits, threatening the dollar; intense global competition, especially impacting workers; out of control health care costs, combined with under-coverage; terrorism, nuclear proliferation and geopolitical instability; the unfunded costs of the impending retirement of the baby boomer generation in aging developed economies; the effects of widespread global poverty, including disease (e.g. HIV/AIDS, bird flu, malaria, etc.), civil wars, famine, natural disasters; global warming, water shortages and environmental degradation; derivatives markets whose size defies comprehension that have never been “stress tested” (a Dec 28 op-ed in the “Financial Times” by law professor Frank Partnoy notes that “in 2006, the derivatives market will grow to nearly half a quadrillion dollars (fourteen zeros), more than 10 times the world's domestic product”); etc.