The American Disease

Among the chattering classes and discount store habitues, the conversation for once is the same: how low and how long? The Times finally writes about Bernake’s Princeton background and his multi-year (decade) study of Japan’s “Lost Decade”. Nice for them to read their own Op-Ed page — Krugman addressed this almost three weeks ago. How embarrassing for them both that USA Today first ran a far more in depth and useful article earlier in January.

American financial leaders (such as they are) and economically illiterate political leadership do have the advantage of studying the Japan case (as in a Harvard or Wharton “case study”). All of the above links emphasize differences remain. Yet none, however, address the most important: what Japan expert Chalmers Johnson and Ron Paul both hammer home — the overt and hidden costs of Empire. Japan in the 1990s did not run massive deficits to maintain a Syracuse Expedition (again) to occupy Micronesia. Their deficits, while unproductive, at least were directed towards infrastructure improvement (and Diet crony construction companies). Our deficits have no productive ROI at all -short or long term.

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Sic Transit Gloria

Most of the Japanese first tier economy (those keiretsu formed to attack global markets; the second tier is the protected, amazingly inefficient Japanese domestics economy) eventually succumbed to the Pearl River complex. Sony and other famous brands now manufacture everything from TVs to computers there. Others are determined to retain control of their technological destiny. These few fight ferociously to retain both R&D and manufacturing in Japan. It may be a losing cause.

As you know well, the U.S. long ago abandoned all of this, and wrote off the foundations for the middle and aspiring middle class. Now the oursourcing migrates upwards to the intellectual and technical class — R&D and manufacturing both go to China, Malaysia, Taiwan and elsewhere. Or H1(B) visas for importing less expensive talent here.

Financial returns to institutional private equity are all that matters. This is the other side of American fragility — there is no there there to cushion reverses in an American financial abritrage facade. Greenwich Connecticut and other small, opulent oasises of liquidity are shrinking in a growing desert. Brittle? One is reminded of Liberty Ships snapping in half in the middle of the Atlantic due to faulty welds. Snap. And gone. Paulson in his recent trip to Tokyo engaged in “frank” talks about the U.S. economy and finances.

This didn’t happen overnight. We remember sitting in on some of the largest trade and commerce organizations meetings in the early 1990s to 2000s. They would bring Chinese officials to meet privately with senior American executives. Outsource and all will be yours. While offering lessons and success stories on how to do it well. John Chambers of Cisco famously said he wanted to turn Cisco into a Chinese company. His fault? Candor. A few footsteps they say determine a path. We are five miles down that trek.

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Tragically, Clyde Prestowitz and others in the 1980s foresaw much of this (although his analysis is similar but distinct from Buchanan’s more racially nativist approach). One of Prestowitz’s more colorful stories involved negotiating “fair trade” with the Japanese — i.e., we would allow them to hollow out the American economy with subsidized keiretsu (turning Detroit much to Japanese delight into a modern Dresden, something unachievable in 1941-45) but ask them to buy the few remaining items we actually did produce, in this case satellites. In typical Japanese fashion, they complied and visited Hughes (at that time a meaningful company that did more than advertise for broadband to remote rural areas). Hughes’ officials called Prestowitz, enraged. All the Japanese wanted to buy? The blueprints. Eventually the American concept of purchase of actual goods prevailed. The Japanese offered to buy mops and buckets (according to Prestowitz).

American ideology long ago allowed the Japanese to act so. And now the Chinese similarly eviscerate our economy and social infrastructure. The famous case of Zenith v. Matsushita comes to mind. There, Zenith, an actual American-based manufacturer of televisions, claimed the Japanese dumped TVs on America below costs and thus fair market value. American jurists schooled in the pernicious “Chicago School” and others on the bench ruled in favor of the Japanese. How absurd. Matsushita is a company. A company exits to make profits and return value to shareholders. Ipso facto it cannot and would not sell mass quantities below cost when it is not in a monopoly position (or allegedly seeking such). You know the rest. What you may not know how many Japanese cackled at the stupid Americans openly in print and books. Americans, of course, don’t read Japanese. And Ambassadors at the time Mansfield and later Armacost suppressed many – the majority — of ‘negative’ cables back to Washington. We have little reason much changed until the mid 1990s. Perhaps the most recent covered Elvis impersonators in Tokyo.

But we digress. The American housing slump promises to be merely one of the last nails in the artificially inflated American lifestyle. We agree the swaggering “Bring ‘Em On” Imperial self image will suffer a deflation more lasting than strategic stalemate or defeat in Iraq. Long term $100 oil is a cruel additional cut. It used to be that an Empire of Liberty referred to (at the time massive) North American continent. A first step is a necessary audit of our strategic commitments abroad and to realign our force structure accordingly.

This will be a challenge. Consider the Japanese predicament of the early 1990s mentioned in the links, supra. Theirs was limited to the stunning Chinese expansion. Throughout the 1990s, for example, the Chinese were building a Verizon or SBC (now purchaser of AT&T) a year (think of that for a moment). You may have seen Tom Brokaw mention something along these lines for 35 seconds in 1997 after covering a chemical fire in Strawberry Point, Iowa. We face something far different: a strategic challenge with our largest creditor. We can not think of any historical parallel. A Suez Crisis will not even be needed. One phone call. Or shift in holdings. And it’s over.

Can this conundrum be overcome by Stakhanovite Audacity? Even if the second flight after Tehran would be to Tianamen Square with an interest payment cheque? Doubtful. The Chinese have centuries of eloquence and Confucian respect for experience to rebuff orations from a 40 something.

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Reality is often cruel to lofty rhetoric. A more arduous path lies ahead: sustained, coherent and explicit explanation in direct and often blunt terms to the American people. A period of possibly painful realignment and rebirth is the needed ‘change’. The goal? An escape from seemingly eggshell disintegration to a more stable and maintainable future. (Please save hollow posturing of “You are too negative and Yankee ingenuity and genius always wins blah blah blah”).

Can one find the political skills while avoiding “malaise” impotence? Projecting visceral demonstration of proactive executive action — while avoiding the impotence of the “Rose Garden strategy”? The horizon is not promising. Still, the easiest part is realigning foreign policy ends and means. Strategic calculations based on interest rather than romantic (or camouflaged as such) ideology are more within Executive means — as we have painfully learned under this regime — even if pursued without Addington’s destructive zeal. Add a Commission or three, some hearings, and one at least has a beginning.

Rebirth? More difficult. Restoration of a viable middle class and the willing (one hopes) or frankly political recognition by the plutocratic elites that this too is in their self interest will invite a maelstrom. Yet even those elites are beginning to feel the pinch but don’t understand why and blame Sarbanes Oxley, legislation enacted after the Enron, MCI and other fiascos of corporate deception. Regardless, a viable middle class will not be based on selling services to each other. The most obvious reason? Services are not exportable in sufficient scale to make a meaningful impact (except when we outsourced the whole bathtub to Bangalore). The political combat involved on any of this will be explosive. Beyond the most dynamic moments of the 1990s — or even 1960s.

A key barometer of success will be eliminating the cant that America should maintain the by now socially suicidal notion of “free trade” or even its pathetic cousin “fair trade” as a substitute for thought. Even TMZ viewers feel in their bones this to be untrue. At some primal level, they recognize that exporters overseas simply want access to the temporarily most lucrative consumptive market. How to finesse rebirth when our rival and creditor holds the cards?

We must also ask, even if this is accomplished, will Americans actually want to work making things? Will they recognize the addiction of buying electronic trinkets that become obsolete in 18 months and return nothing to the American industrial or social fabric is a debilitating habit? It’s a non-trivial question. Americans are bombarded by TV, magazines and neighbors to seek careers where offices are work free, cars are expensive and almost everyone sleeps with everyone else. Knowing this is fantasy while trapped by “golden handcuffs” in a hated office job offers no reprieve. Work still consists of sitting at a desk in an air conditioned office. Or filled with endless meetings with other ‘similarly productive’ colleagues.

Perhaps it is all asking too much. To realign foreign strategic interests while seeking domestic realignment is a gargantuan task. Each alone is a huge undertaking. Both or one could fail — perhaps in epic electoral disaster. Oh, the humanity indeed. Yet we see few other ways out.

McCain sadly offers not even a sliver of hope. (We say this acknowledging we drank the Kool Aid there in 2000 contra the Warlord). HRC? Difficult to say. Triangulation is always a gnawing legacy. Though she has the guts we think to make hard calls. Perhaps compromise might be worse than a course pursued and articulated in full. The Crown Prince? His new era of Change we still believe will get crushed like a bug by the permanent Imperial City and plutocratic interests. Once he is in office — to mix metaphors — the schools of political reality pirahanas will swerve in for the kill. And the 25 year olds now lionized on news magazine covers will play Radiohead some more, tune out and talk about the fix. Maybe not, and Obamamania will be more than a car wreck. Still not a roll of dice we are willing to take at this remove.

Perhaps MoDo will guide us.