To Help the Victims of Globalization, Unleash U.S. Productivity

"There's a world of difference between winning, and making ourselves feel better while we're losing," I told the Washington conference on National Conservatism last week. Many of the contributions called more more assistance to Americans left behind by globalization. I'm all for this, with a caveat: It's great to get the mice into the same room to deliberate on the cat problem, and another thing altogether to bell the cat.

George H.W. Bush's "kinder and gentler" conservatism comes to mind. I'm all for that. My mentor in American politics and erstwhile business partner, the late Jude Wanniski, propounded the "two Santa Clauses" theory: The Democrats were the spending Santa Claus and the Republicans were the tax cut Santa Claus, and Republicans never would win elections by clawing back the gifts of the other Santa Claus.

Consider the chart below (hat tip to the Concord Coalition): Under the Nixon Adminstration transfer payments rose to 48 percent of the federal budget from 28 percent. They stabilized at this level until Clinton arrived in 1992, whereupon they rose to 60 percent. The George W. Bush Administration held at this proportion, but when Obama took office, transfer payments jumped to 72 percent of GDP. And that doesn't take into account our massive future obligations for Social Security, Medicare, and so forth. Federal investment has declined correspondingly.

It's well and good to want to help people who need help, but eventually we won't be able to. We're borrowing $1 trillion a year, aided by extremely low interest rates. I doubt that America's ability to borrow will weaken any time during the next several years. Ten-year bonds of France, Germany, Sweden, the Netherlands, Switzerland, and Japan bear negative yields—you pay their governments to borrow your money—and a 2 percent yield on 10-year treasuries looks attractive by comparison. Nonetheless, our situation is untenable in the long run.

If we want to extend more federal largesse to Americans whom globalization is left behind, we require more productivity growth. We haven't done too well in that department.

Shown above is the annualized ten-year productivity growth rate of non-farm U.S. business. We hit bottom at 1 percent annualized growth in 1982 after the stagflation of the 1970s. Ronald Reagan's economic revival pushed us back to the moonshot-era peak of 3 percent, as the digital economy took hold. After eight years of Obama, we're back at rock bottom.

There are two big reasons for the decline.

The first is that the U.S. economy has shifted away from capital-intensive, high-productivity employment to labor-intensive, low-productivity employment, as manufacturing left the United States.

The second is that federal R&D expenditures (mainly directed by the Defense Department) have shrunk by half relative to the size of the U.S. economy.

As Henry Kressel and I wrote in the Wall Street Journal in 2016, "American innovations from the 1960s, the peak of the government’s commitment to defense and aerospace R&D, created the basis for a trillion-dollar electronics industry. Researchers with corporate and federal support invented the key components: microchips, lasers, LEDs, flat-panel displays, memory chips, imaging devices and solar-energy panels, among others. Today, these manufacturing industries employ millions of Asians but relatively few Americans."

We need to go back to the future, to the hugely succesful Reagan-era collaboration between the Defense Department and private industry: The government picked up the tab for basic research and the private sector took the risk of commercializing the results. It won't be easy, and the competition is a lot stiffer. China is a lot bigger than Russia and its leadership is a lot smarter. The alternative is mediocrity and national decline.