Small-Ball Conservatism or National Greatness?

Small-ball conservatism dominates mainstream Republican thinking.

It finds expression in the writing of Ramesh Pommeru, Ross Douthat, and Yuval Levin, whose “conservative governing vision” sees a kind of:

… American life in which government does not use society as an instrument to advance progressive aims but rather sustains and strengthens the space in which society can thrive and enables all Americans to take part in what happens in that space.

Levin calls this a “modernized politics of subsidiarity — that is, of putting power, authority and significance as close to the level of interpersonal community as reasonably possible,” that is, doing a lot of good, small things at the base of civil society.

If we play small ball, we will lose. Specifically, we will lose America’s technological and scientific pre-eminence, our dominant position as a military power, and a significant part of our living standard. In a competitive world, “losing” doesn’t mean giving up a couple of points of GDP growth: It means the sort of decline that the United Kingdom suffered in the 1950s and 1960s, when its auto, shipbuilding gand machine-building industries virtually disappeared.

Small-ball conservatism ignores the most important feature of the global economic landscape: our competitors. This isn’t 1981, when the digital revolution overwhelmed the Soviet Union’s formidable advantages in conventional arms. When Ronald Reagan took office, the world’s high-tech entrepreneurs had no place to go except America. American universities had a monopoly on high-end technology, the American defense and space programs dominated cutting-edge research, and American capital markets were the only ready source of capital for high-tech startups.

We still have an edge but it is eroding quickly. America is a second-rate power in high-tech manufacturing, and our monopoly in key fields of knowledge is far from secure. We spend half of what we used to on defense R&D as a fraction of GDP. And we face new and self-confident competitors determined to leapfrog the United States. If we do not meet the hurdle of global competition, whatever good we do in small ways will not help.

America won’t stumble its way back to national greatness. We have to hit on all cylinders at the same time, something we have not done since Ronald Reagan was in office. America’s decline in productivity, competitiveness, and skills is so advanced that nothing short of a focused national recovery plan will save us from a decline like that of the post-war United Kingdom. We need a national initiative to restore American technological supremacy, basic infrastructure, labor force participation, and above all a sense of national purpose and morale.

Our point of reference should be Ronald Reagan’s Strategic Defense Initiative, a mustering of intellectual and entrepreneurial resources to leapfrog the Asian competitors who now threaten to gain a technological edge that we may never reverse unless we reverse it soon. This is the conservatism of big things: the melding of national defense and space exploration with an opening of opportunities to a new generation of entrepreneurs.

Tax cuts and regulatory rollback is an indispensable component of the policy mix—just as it was under Reagan. America’s success formula in the past allowed private risk-takers to adopt the new technologies that emerged from the requirements of defense and aerospace. Industrial policy—foisting risk onto the taxpayers—produces cronyism, corruption and failure. But the demands of defense technology raised the bar in basic R&D and created game-changing innovations that made the modern American economy possible. A defense driver in scientific research allied to private risk-taking is the combination that raised America out of 1970s stagflation and gave us the longest expansion in modern history.

Our national security requirements and economic needs are complementary. America’s technological edge in defense is under severe challenge. We confront a host of new prospective threats: satellite-killer technologies, ship-killer missiles, hypersonic missiles designed to defeat our air defenses, new radar designed to defeat existing stealth technology, and cyberwar, to name the most visible. Russia’s S-400 and S-500 may now be the best air defense systems available. China’s anti-ship missiles and stealth submarines may neutralize American aircraft carriers in the Western Pacific. Quantum computing and other technologies threaten the security of communications. Our power grid is vulnerable to electromagnetic pulse weapons. It is easy to talk about getting tough with Russia and China. But it is not clear that we would win a sea war with China in the South China Sea or a land war with Russia in the Ukraine, for example.

That enervates our negotiating position with our competitors and prospective adversaries and leaves us to deal from a weaker position than we have had since the 1980s. We spent over US$4 trillion in Iraq and Afghanistan since 2002, but we allowed defense R&D spending to fall by half as a percentage of GDP.

America’s position is more perilous than it was at the end of the stagflation of the 1970s:

1. America’s population is aging rapidly, with 15% of the total above 65 in 2015, rising to 20% by 2030.
2. America had little foreign competition as a venue for entrepreneurial startups in 1979. The world’s capital and talent had nowhere else to go but the United States. Now there are numerous competing venues for technological entrepreneurship.
3. Asia, and particularly China, has acted aggressively to close the technology gap with the United States and have leapfrogged American manufacturing in a number of key industries.
4. Federal debt was only 30% of GDP in 1979 (not counting unfunded entitlements), but rose to 110% in 2015.
5. Obstacles to growth (a 70% top marginal tax rate and inflationary monetary policy) were easy to identity and remedy.
6. America’s backlog of productivity-enhancing technologies has shrunk, in large part because defense R&D is half of what is was in the late 1970s relative to GDP.

We need to

1. Double federal spending on defense and aerospace R&D
2. Institute crash programs to leapfrog our competitors in key weapons systems, including cyberwar, air defense, drone technologies, stealth, EMP and battlefield command and control;
3. Take the initiative to land on Mars in emulation of the 1960s Moonshot program;
4. Repair basic infrastructure.
5. Roll back regulations that strangle small business and stifle competition;
6. Drastically reduce corporate and capital gains taxes.
7. Defend selected industries against predatory practices by Asian competitors

We need a dramatic national initiative rather than incremental solutions. The American engine of growth and innovation has broken down, and time is short.

We have the lowest productivity growth since the Jimmy Carter era, and low productivity growth corresponds to declining federal R&D spending.

As a percent of GDP, federal R&D spending is half of what it was during the Reagan era. The actual state of affairs is worse than the aggregate numbers suggest, because so much of the national R&D budget has been absorbed by a single program, the F-35 fighter. Whatever the merits of this weapons system—and its merits are persuasively deprecated by many credible analysts—its cost has been such to starve every other field of defense R&D during the past ten years.

To be great again, America has to the retake the lead in innovation. And the great source of innovation has been defense and the space program. Henry Kressel, the former director of RCA Labs, and I described how defense R&D created technologies with great commercial potential, in an October 2013 essay for The American Interest:

Among the other notable outcomes of R&D funded under government defense and space programs were the standard manufacturing process for integrated circuits and commercially feasible lasers. Both innovations were developed at RCA, the company David Sarnoff built. Today practically all chips produced worldwide are made in the CMOS process, which began as a Defense Department project at RCA in the 1970s. Defense wanted to explore the possibility of creating computing chips with lower power dissipation than the then-current technology could produce. After successful completion of the project, CMOS technology was used to manufacture chips for avionic radar systems, among other applications. It found its way into the commercial market in the 1980s.

A second example, the development of semiconductor lasers at RCA Laboratories… was originally funded in the 1960s by the Defense Department to develop infrared searchlights that could illuminate a battlefield, but would be invisible to the naked eye. As the technology progressed in the late 1960s and early 1970s, it became clear that it would be possible to use such lasers in fiber optic communications systems. RCA announced a commercial laser in 1969 that was based on technology developed largely under Defense Department funding. Companion technologies also sprang up that greatly expanded the ways in which lasers could be used. This led to their current status as not only the key to all fiber optic communication systems, including voice and data networks, but also as the enabling technology of millions of instruments, DVD players and a host of other devices.

At the request of Norman A. Bailey, then Director of Plans at National Security Council, this writer produced a study in 1985 arguing that the Strategic Defense Initiative then floated by the Reagan Administration would pay for itself by fostering innovation, just as the Apollo Program had created US$7 in economic output for every US$1 spent by NASA, according to one estimate.

National security drives innovation because it places demands on science to do things that have not been done before, and that our adversaries cannot do.

Without productivity growth, investment, wages and real incomes will remain depressed. Economic growth will continue to languish at near-recession levels.

During the 1980s, a new set of technologies transformed the American economy. Semiconductors, communications, lasers and other innovations created new industries in computation, telecommunications, entertainment, media and retail. According to the Census Bureau’s Business Dynamics Statistics, new firms created more than 100% of all jobs created between 1992 and 2005. The Kaufmann Foundation summarized the Census Data in a July 2010report:

Firms in their first year of existence add an average of 3 million jobs per year. By construction, the BDS defines an existing firm—age one up to age twenty-six and beyond—such that it can both create and lose jobs. In contrast, a startup, or age zero firm, only creates jobs because it experiences no gross job destruction. We might anticipate that the net job gain also would be positive at existing firms, but that is decisively not the case during most years on record. Notably, the figure shows that, during recessionary years, job creation at startups remains stable, while net job losses at existing firms are highly sensitive to the business cycle.

A radical turnaround took place after the Great Recession. Census Bureau data show a net reduction in the number of new firms as well as workers employed by new firms between 2007 and 2013.

At the grass roots of the economy, venture capital investment has sought social media, apps and other “soft” investments with low capital and labor requirements and avoided “hard” investments in manufacturing, telecommunications and other fields with large capital and labor requirements.

During the 1980s and 1990s, America dominated technological progress through a group of disruptive new companies—Microsoft, Google, Cisco, Intel, Oracle and others. The former technological vanguard, though, has turned into a group of stable consumer monopolies. This is clear from the trading pattern of their stocks. We see that the technology subsector of the S&P 500 equity index traded with a volatility (standard deviation of returns calculated over a rolling six-month period) roughly double that of the overall index during the late 1990s and early 2000’s. That reflects the greater risk and reward attached to innovators as opposed to established companies. By the late 2000’s, the volatility of the tech sector was the same as that of the overall index. The risk (and also the prospective reward) had shrunk to the overall level of the economy as the great wave of innovation dissipated.

We are in a depression in all but name.

When the unemployment rate peaked at 25% in 1933, it was reckoned against a male labor force participation rate in excess of 90 percent. The percentage of men employed stood in the high 60 percent range. Today we have a male labor force participation rate of 68%, roughly the same—disguised by social programs, college loans, and other means of enabling a quarter of the labor force to remain permanently idle.

High-tech industrial production has been shifting away from the United States since the late 1990s. Until the late 1990s, America ran a substantial surplus in high-tech goods. In the early 2000’s that turned into a deficit which is likely to reach US$100 billion during 2016.

Most of America’s trade deficit in high-tech goods consists of technologies invented in the United States, supported in each case by federally-fund research sponsored by the Department of Defense and NASA. The seven technologies listed below constitute the basic elements of all modern electronics from computers to smart phones. And in each case, their manufacture has migrated to Asia because Asian governments adopted the previous American practice of supporting basic R&D. The economic benefits of the digital revolution that originated in the United States have shifted to Asia. America’s share in the manufacture and distribution of its own inventions is relatively small.

The core digital technologies are:

• Liquid crystal displays employed in almost all economic products, with US$100 billion in annual sales. South Korea controls 35% of the market, Taiwan 25% and China 20.%
• Light-emitting diodes (LEDs) are produced mainly in China and Taiwan.
• China and Taiwan dominate the production of semiconductor lasers, the energy source for fiber optic communications.
• Solid state sensors, which generate images in digital cameras and related devices, are produced mainly in Taiwan and Japan.
• Flash memory is produced mainly in South Korea, Japan and China, with only 10% of world output coming from the US.
• Integrated circuits are a US$270 billion global industry. Most are produced in Taiwan and South Korea, and China has undertaken an aggressive investment program in the industry. Less than a quarter of world output is produced in the US.
• Solar energy panels, a US$30 billion industry, are dominated by China.

Some of the Asian advantage is the result of theft of intellectual property, but most of it stems from above-board collaboration of government and industry. Asian countries have licensed US technologies, supported joint ventures with US companies in order to foster technology transfer, and made cheap capital available to high-tech industry. Asian governments also have supported technical education. China now graduates twice as many STEM PhD’s each year as the United States.

America developed most, but not all, of the technology that build Asian manufacturing. But Asian dependence on American technology is starting to diminish. China’s flagship high-tech manufacturer, Huawei, now employs tens of thousands of engineers, including thousands of Western researchers in several centers in Europe. A decade ago Huawei was regularly accused of stealing Western technology; now it is a vigorous defender of intellectual property rights, because it is heavily committed to innovation of its own.

It is a slippery slope. If we continue to lose ground, we may never have the chance to come back. Nothing short of a great national effort will give us the chance to come back. And the first thing that is required is for an American president to declare that a great national effort is underway, with the sense of purpose that informed the Eisenhower and Kennedy responses to Russian gains in space during the 1950s, or Reagan’s commitment to win the Cold War and defend America from missile attack. There are many individual things that must be done, but there is one big thing that must be done. That is to identify a national goal and commit the full resources of the United States to achieving it.

Cross-posted from Asia Times