America in Decline, Again . . . and Again . . . and Again . . .

Once again, the United States economy stands on the brink of historical irrelevance. That, at least, seems to be the consensus emerging from several books, reports, and public statements that have appeared in the last couple of years.

The din of the chorus has grown louder with the current economic turmoil. The latest salvo has come from Byron Wien of Pequot Capital Management, in the Financial Times a few days ago. Wien recounts the decline of American manufacturing, rising deficits, and our seemingly shoddy international performance in math and science. Wien has the facts right: yes, the U.S. has lost manufacturing jobs; yes, our debt and deficits have risen; yes, our students don't compare well to other countries.

The problem is that these are only numbers, and incomplete numbers at that. Declines in manufacturing employment are due in large part to productivity gains: China, remember, has also lost manufacturing jobs as its productivity has risen. Others have pointed to the danger of doing cross-country comparisons in test scores, as well as the possible explanations for discrepancies. In fact, I don't want to dwell on the general idea of decline here--others, too, have adequately covered that. (Here was a good response to Wien's column, and I hear Joel Kotkin is working on a book about persistent declinism in America.)

The most revealing thing about these periodic bouts of anxiety is that the proposed remedies are eerily similar. I offer two short book excerpts:

(1) "The National Innovation Council would be convened and led by the National Innovation Advisor. . . . This would be a 'guiding coalition,' setting direction and overseeing the innovation transformation process for our country. Its responsibilities would include adjudicating competing priorities, making useful exceptions, and orchestrating funding from multiple sources."

(2) "Solving our energy and growth problems demands that government gets more heavilty involved in the economy's major investment decisions. . . . To compete we need the national equivalent of a corporate investment committee. Major investment decisions have become too important to be left to the private market alone, but a way must be found to incorporate private corporate planning into this process in a non-adversary way."

(Wien's FT column echoes these.)

The last period of anxiety over the economic future of the United States was the late 1970s and early 1980s. One of the above excerpts is from 1980, the other from 2007 (answers below).  As Kauffman Foundation president Carl Schramm has chronicled (also explored in Good Capitalism, Bad Capitalism), the American economy in the last 25 years experienced a surge of entrepreneurship and growth driven by the confluence of a number of factors.

In 1967, for example, John Kenneth Galbraith published The New Industrial State. As Carl Schramm has written, "within a year of the first edition of The New Industrial State, Intel was founded out of Fairchild Semiconductor. The 1970s saw the appearance of firms such as FedEx, Microsoft, Apple, and Home Depot, and the expansion of companies such as Target and Wal-Mart, all of which became fast-growing parts of an entrepreneurial economy."

The rise of entrepreneurial capitalism began well before the economic troubles of 1980. By 1985, in fact, Peter Drucker was heralding the arrival of an "entrepreneurial economy." What happened was that far beneath the radar, the economy was transforming in a number of ways. The military, a major engine of the "bureaucratic capitalism" that grew up in the 1950s and 1960s, actually became a source of new discoveries and entrepreneurial opportunities. Thanks in part to deregulation, individuals and firms carved out new pathways of business in financial services and insurance. Some areas of manufacturing, even, enjoyed growth. (Take a look at the Inc. 500 list for 1983.)

It seems likely, in other words, that today the seeds of tomorrow's economic growth are being sown by individuals "out there" forging ahead, forming new firms, innovating, and seeking profit. We won't see them until they move onto the radar screen, but they're there for sure. I love analogies, and I have used this one elsewhere, but maybe we can think of this as the "dark matter" of the economy: we know it's there, expanding the economy, but we can't fully detect or measure it.

A side note: above I mentioned the military's role in in funding the research and development that helped give rise to entrepreneurial capitalism. That's not a new story. But what is often forgotten (or ignored) is the importance of the military in shaping what became Silicon Valley. When urban experts today discuss Silicon Valley and how other cities and regions can imitate it, they default to venture capital, research universities, and start-up firms. Those were all important, of course, but a very strong case can be made that the Pentagon was the sine qua non in creating Silicon Valley. You have to go back to about 1900 to see it fully play out, but the evidence is persuasive. I have yet to see, however, a mayor or urban planner propose the military as a strategic piece of economic development. (Although the Washington D.C. metropolitan area has certainly benefited from government contracting.) Anyway, this is turning into a separate topic--I'll leave it by saying that with thousands of returning veterans all over the country and the skills they are learning in the armed forces today, it is a rich but untapped resource for any city or region seeking a new avenue of growth.

Answer to book excerpts: (1) is from Innovation Nation by John Kao (2007); (2) is from The Zero-Sum Society by Lester Thurow (1980).

Comments

[Michael F. Martin]

Highly recommended YouTube video of Steve Blank lecture on "The Secret History of Silicon Valley":

http://www.youtube.com/watch?v=hFSPHfZQpIQ

It was all defense funding sixty years ago.

[Michael F. Martin]

The part about Silicon Valley starts around 26 minutes. "Fred Terman was the father of the military industrial complex in Silicon Valley."

[Barry Ritholtz]

I am not agreeing or disagreeing with Byron Wien --

But by your analysis, this country can never move to the down side -- its only numbers, and after all , we've always rebounded.

Who can argue with logic such as that?

[Dave]

Don't worry. Once Obama is elected all this 'decline' talk will disappear instantly.

We'll all have the audacity of hope!

[Derek Kerton]

OK, but you seem to offer a too flippant reaction to terrible math and science test scores, the export of manufacturing jobs, and such other numerically tracked failings.

Even if you're right, that enterpreneurial "magic" will save us from leaving the head of the pack, well then surely we could do even better if we weren't failing in education?

Surely we could do even better if we had some kind of national vision for innovation?

Surely we could do better if our R&D investments were guided as much by long-term national competitive interests instead of next quarters numbers for the street?

If it sounds like I might be in favor of some government intervention, I am. But I'm very pro-capitalism. On a micro sense, our companies compete and do well, but on a nation to nation basis, we also need to compete. In so doing, we will raise our game, and also the game of our competitors. Good for the globe.

Complacency and pollyannism have as long and a storied history as declinism - in fact, I'd say longer. There are always people in high places who like the status quo and defent it for better or worse. At least the declinists are induced to take action and try to improve the situation.

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