Raymond Richman       -       Jesse Richman       -       Howard Richman

 Richmans' Trade and Taxes Blog

The Insights and Outsights of Clyde Prestowitz -- A review of his 2010 book: The Betrayal of American Prosperity
Raymond Richman, 10/27/2011

Clyde Prestowitz, The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How We Must Compete in the Post-Dollar Era  (NY: Free Press, 2010)

In some matters, Clyde Prestowitz displays a brilliant mind. His account of how we went from the world’s leading creditor to the world’s leading debtor is better than anything that we have read. But when it comes to finding a solution to our chronic trade deficits that our foolish domestic and foreign policies have caused, he suddenly becomes “politically correct” –lacking a single original thought.  The first eight chapters are must reading for the intelligent layman and economists could profit from them. His solutions are another story; they are worth less than nothing.

In the introduction, he writes of the contrast between the incoming and outgoing cargo at the port of Long Beach. “The imports.. include everything from shoes..to computers..and photo voltaic panels for generating solar energy. The exports, though are few, consisting mostly of scrap metal and waste paper—this millennium’s dung, you might say.”  Clearly U.S. government policies have been completely ineffectual and are Trading Away Our Future, the title of our 2008 book.

He notes the popular myth that the Smoot-Hawley tariff passed in 1930 exacerbated the recession.  He argues that it was not “the disaster of conventional mythology”. We agree with him and have so argued on this site. He notes that the nearly equally high Fordney-McCumber tariff of 1922 was followed by the boom of the 1920s.

Foolish domestic policies have been compounding the errors of our international trade policies. In the foolish domestic policy known as “cash for clunkers”, Prestowitz estimates that about half the cash paid went for imported autos or parts. Likewise the continuing subsidies for wind turbines in the green energy programs went largely for purchases of wind turbines from China, hardly a stimulus to domestic employment.

Over the past several decades, “a host of U.S corporations built factories abroad. While the U.S. domestic economy collapsed into a recession, our multinationals did quite well making large profits from their operations abroad.” In 2009 at a White House meeting their CEOs told the president that to prevent retaliation he must avoid inclusion of any “buy American” provisions in his stimulus package! A loan of $529 million two years ago to a start-up auto maker, Fisker, to build an electric car in the U.S. ended up with the car being produced in Finland, suggesting the need for some “buy American” provision when American taxpayers are financing an enterprise.

Prestowitz points out that the chronic US trade deficits “have turned America from the world’s leading creditor nation to its largest debtor.” These deficits which peaked in 2008 at about eight million jobs have cost the U.S. “somewhere around 10 million jobs.”

Eliminating our trade deficits would contribute greatly to restoring full employment. We have suggested the single-country-variable-tariff, our scaled tariff which we believe accords with WTO rules. Prestowitz’s solutions would not bring trade into balance. Our recommended solution would.

He devotes several chapters to a critique of economic beliefs that free markets are efficient, produce optimal welfare, and should be left alone to work their magic. He approves critiques of comparative advantage. As Profs. Baumol and Gomory have shown, comparative advantage in manufacturing can often be acquired by making an adequate investment and therefore is an unsatisfactory laissez faire trade strategy. Diversification and industrialization are more often the path to riches for a country as Japanese and Chinese mercantilist policies have shown. In trade policy-making, “The issue was always how to respond to the subsidies, protectionist market barriers, currency manipulation, and aggressive dumping of our trading partners.”  He argues that failure to respond to such challenges because of fears of retaliation is a joke. “It was like saying don’t call the police when your house is robbed because the robbers might take more if you do.”  He criticizes the Clinton administration which embraced simple free-trade-based globalization culminating in China’s entry into the WTO without requiring China to remove its barriers to free trade. Major import penetration of the U.S. market means foreign producers  gain economies of scale and increased worker productivity while U.S. based producers lose both.  He cites the FormFactor case in which we allowed Korea to steal the former’s patents and took no counteraction. 

He notes that many if not most economists believe that the reduction or elimination of manufacturing is a natural process resulting from a shift of production from manufacturing to the service sector. They ignore that we are importing hundreds of billions of dollars of manufactured goods which the laid off workers are quite capable of producing here.

Up to this point, my reaction to the book was that it was the best writing on the cause of the outsourcing of American industry and the consequent decline in manufacturing. But his solutions are totally devoid of political and economic rationality, about on a par with his criticisms of unilateral laissez faire.

He writes, “In the face of globalization, of the division of the world into half free trade and half mercantilism, and of the present collision course of ourselves and most of Asia, we need to explicitly define our national interest and to devise a strategy to further it.” This needs government policy and action. The truth is that the government cannot avoid industrial policies. “Laissez faire globalization is the false god that will be most reluctantly abandoned.” He would reform the World Trade Organization(WTO) to outlaw export-led growth strategies. Why? The U.S. is quite capable of solving its problems under current WTO rules. We can balance our trade by the simple expedient, which we believe is authorized under current WTO rules, of single-country-variable-tariffs, our invention and which we call the “scaled tariff.”

All of a sudden, he chooses “politically correct” political expediency. The Trade Policy Advisory Council, currently made up mostly of CEOs, should include more reps from smaller producers, labor, and independent analysts.  What basis is there for more sensible trade policies from such a group?

He suggests energy independence by the “fastest and least expensive” means: energy conservation. We do not believe that is the way to American energy independence. America is not short of cheap energy sources at all. We have the means to achieve energy independence that requires no government mandates or rationing or an expanded bureaucracy. All government would have to do is end its obstructions such as the prohibition of drilling on public lands. Note how the government allows the use of public lands for wind and solar plants which are almost entirely financed by state and federal subsidies. It chooses uneconomic industries to subsidize that cost jobs rather than create them (cf. the Spanish experience where a Spanish economist argues they created one job but at the cost of two jobs in private unsubsidized industries.) While we agreed with many of Prestowitz’s criticisms of laissez faire, he does not display any real knowledge of  how the free market works or is supposed to work. The problem is that environmental leaders do not want a “fast and least expensive” route to energy independence.

He argues for the need to align the business interests of “American” internationals with American interests. He would impose a carbon surcharge on imports from countries that have lax carbon regulations. What bureaucracy would make that determination? He would spend more on training and education. But a distinguished economist from whom Prestowitz borrowed his current theory of comparative advantage, Prof. Ralph Gomory of New York University, does not see additional expenditures on training as required.  He urges political reform of congressional redistricting and election to ensure the election of the kind of people that are not beholden to their corporate citizens. We ask why should our representatives not be beholden to people and businesses in their districts?

Prestowitz greatest mistake is his belief that US “addiction” to cheap energy increases our reliance on imported oil and he favors alternative energy which relies heavily on foreign imports as well.  He fails to see that we are quite capable of becoming independent of foreign sources of oil by exploiting known oil reserves on public lands and by facilitating the production of natural gas, especially by horizontal drilling, an American invention, in shale. Compressed Natural Gas (CNG) would likely replace gasoline and diesel oil in millions of vehicles. All the federal government would have to do is eliminate its impediments to the production of fossil fuels, imposed for foolish environmental reasons.

His error, a commitment to wind and solar energy, is illustrated by his statement that “Energy: cheap is expensive.” Clearly, as we have frequently pointed out, we can have self-sufficiency and cheap energy. Prestowitz has swallowed the anthropogenic global warming theory hook, line, and sinker. Hundreds of physicists have expressed their skepticism respecting the theory of man-made global warming. Prof. Henrik Svensmark of Denmark has been developing an alternative theory of how the sun’s magnetic cycles affect the amount of cosmic rays that strike the earth causing warming and cooling. Since the publication of this book, the cosmic ray theory has been strengthened by a “Cloud” experiment at CERN, the world’s leading nuclear research institution that shows the likely role of cosmic rays in climate change.

On October 18, Prestowitz wrote on his blog,

The truth is that the U.S. economy cannot experience a significant, stable, and lasting recovery with out some kind of a manufacturing renaissance.... So if a solid recovery is to come, it must come in goods, especially manufactured goods.

Fortunately , two recent and important studies indicate that it will. The conventional wisdom to the contrary notwithstanding, Booz & Company's report on the Future of American Manufacturing suggests that production from an American base can be quite competitive except in only a relatively small number of manufacturing industry sectors.....

A second recent report by the Boston Consulting Group (BCG) argues that, in fact, that is just the direction in which U.S. manufacturers are heading. It points out that more and more producers are realizing that the combination of rising wages in China and large hidden costs attached to producing in China is already leading a number of major U.S. companies to begin "re-shoring" some or all of their production back to the United States from Asia.

As we understand Prestowitz’s position, it is that free markets will eventually restore a balance of trade. The statistics do not show it as happening. Traditional free market theory also maintains that if real wages fall sufficiently in the U.S., say over the next several decades, our industries will be able to compete with countries with current lower costs. Of course, this assumes that totalitarian China will allow free trade and that she has no ambitions to overtake the U.S. industrially and will do nothing to counter or prevent an American renaissance. Maybe Mr. Prestowitz believes in free markets after all. Reading his book certainly gave the impression that drastic action needed to be taken. Which Prestowitz do you believe?