PART 1: THE CHINA CHALLENGE
By John Seiler
Is America, and California in particular, ready for the challenge of new world markets and strong, new players?
For some industries, the world is changing right before our eyes. Dwight Decker, the chairman of Conexant in Newport Beach, told members of the Register’s editorial board last week that he is helping to promote proposed legislation that he believes will help make America more competitive in years ahead.
His own experience at Conexant tells a story of some aspects of engineering being outsourced to India and China, while other aspects of engineering – the creativity, the architects – stay in the United States. He noted that venture capitalists, who provide the seed money for entrepreneurs, today always look for the efficiencies of international sourcing in business proposals they evaluate.
We decided to begin the discussion of American competitiveness by relating our editorial-board discussion, in three components: The economic progress in China, the legislative proposals and the education challenges.
We’d like to ask you to join the discussion: Do you run a company that has begun relying on Asia for sourcing, and what have you observed? What do you think are America’s biggest challenges and how to solve them? Maybe you work for a company that has been impacted by global competitiveness – how has your job and life changed, and what do you believe lies ahead? See addresses on page 3 “How to reach us” to participate.
And now, the China challenge …
If you look at the economic future of America, what’s coming at us full speed down the track is the economy of China. That doesn’t mean America will lose and become the world’s second-largest industrial power.
But it means that Americans had better get serious about putting the U.S. political and economic house in order to keep businesses here competitive. This is not a threat, but an opportunity because China remains a vast and still largely untapped market for American goods.
China’s rapid growth since economic liberalization in the late 1970s is likely to continue. In a trip earlier this month to China, 1999 Nobel economics laureate Robert Mundell told the Chinese what they should expect with continued free-market policies.
China should expect economic growth averaging 7 percent over the next two decades – meaning about a quadrupling of its economy, he said in a talk with the People’s Daily Online, posted on the Internet on Feb. 14. By contrast, U.S. economic growth was 4.2 percent in 2004, 3.5 percent in 2005 and is projected at 3.1 percent in 2006.
Mundell said that China’s share of world exports would grow at a rate of about 7 percent to 9 percent annually, up from 5 percent to 6 percent currently. “Nobody is going to be able to stop it,” he told the paper. “It’s inevitable when a country grows rapidly.” He cited Japan’s post-World War II growth as a previous example.
The paper reported that Mundell “projected that the Sino-U.S. trade would increase rapidly, and the two economies would integrate rapidly.”
The wrong answer to this challenge is protectionism, which would steal capital from innovative new industries to prop up rusting old industries. The right answer is competitiveness.
“This year, our only issue is competitiveness,” Bill Archer, CEO of the American Electronics Association, told the Register editorial board Feb. 14 in a meeting that included other association members.
Dwight W. Decker, chairman and CEO of Conexant Systems Inc. in Newport Beach, said that 80 percent of his company’s products now are exported to Asia. Conexant makes broadband communications devices. And he said that half the company’s engineers now are located in Asia, up from 10 percent 18 months ago.The model now, he said, “is for the innovators and architects” to be in America, with the “implementation” by Asian engineers.
Protectionists should realize that trying to “protect” American jobs such as those Conexant has sent overseas only would mean Conexant’s costs would rise unnecessarily, and the firm might move its headquarters overseas.
The CEOs favored more federal spending on basic research and development and higher education. We favored private investment in such areas, pointing out that government programs never are the most efficient way to produce anything.
Let me conclude by adding some more things that I believe not only are needed, but essential in America’s competition with China, India and other growing competitors. The association members welcomed, but downplayed the importance of tax cuts. But for me this is the essence of competitiveness. The capital-gains tax, currently 15 percent at the federal level and a stunning extra 9.3 percent in California, must be eliminated to give innovators the rewards they need for risking their efforts on innovation.
The business tax, currently 35 percent at the federal level and 8.8 percent extra in California, also should be eliminated, or at least reduced sharply.
The incredible costs of government, especially federal entitlements and local and state pension spiking, need to be brought under control. Government employee unions, currently the most powerful entities in California, need to be tamed before they devour the entire state.
If the Chinese can go from Maoism to capitalist powerhouse in less than three decades, surely America and California can free their citizens of antiquated high-tax and big-government policies.
Really, there is no other way to avoid becoming No. 2 economically. And I don’t think Americans ever will settle for anything less than being
No. 1.
Part 2: THE GOVERNMENT SOLUTION
By Alan W. Bock
The legislative vehicle by which at least 60 senators who have signed on as co-sponsors hope to improve American competitiveness is a package of the bills (S2197, S2198, S2199) cumulatively called the PACE (Preserving America’s Competitive Edge) package. It is based in large part on a report requested from the National Academies of Science by Tennessee Republican Lamar Alexander and New Mexico Democrat Jeff Bingaman. It also tracks closely with a paper put out by the American Electronics Association a couple of years ago.
The key sentence in the report is this: “Although the U.S. economy is doing well today, current trends in each of these areas [mainly leadership in science and technology]indicate that the United States may not fare so well in the future without government intervention.” It strikes me that what threatens U.S. competitiveness is more a surfeit of government intervention, through high taxes and pervasive regulation, than a deficit.
S2197 would set up programs in the Department of Energy to fund more basic research in physics and other hard sciences and support more math and science education.
S2198 would provide subsidies, scholarships and grants with the goal of producing 10,000 more math and science teachers through the Education Department, the National Science Foundation, NASA other agencies. It would promote visa reform to attract more math and science graduate students and workers, and streamline patent procedures, in part by using patent fees to fund the patent office.
S2199 would make permanent tax credits for research and development expenses and authorize a study of the impact of the tax code on research and innovation. It would also create tax credits for employee continuing education in science and engineering.
The American Electronics Association also wants to modify the Sarbanes-Oxley bill passed in the wake of the Enron scandal, to “address the rising costs of health care for U.S. business” and change the tax treatment of stock options to make them more attractive as employee compensation.
Given that we’re unlikely to move from an income tax with high marginal rates and exceptions to mitigate the destructive effects of high taxation, tax credits for R&D and employee education probably make a certain amount of sense. And while any government program is inefficient, subsidizing basic science is probably not harmful.
As Lew Rockwell pointed out recently, however (www.mises.org/ story/2051), the market is a better indicator than hunches by politicians and bureaucrats as to whether there’s really a shortage of mathematicians and scientists, and the market, as judged by salary levels, indicates otherwise.
A danger of tax credits, of course, is that, is that they can distort market signals that indicate true demand, and thus provide employment for tax accountants more than they increase the supply of scientists.
Wayne Crews of the Competitive Enterprise Institute suggested to me that when politicians and policy wonks look at an economy they tend to visualize it as something like a race track, and are tempted to pick deserving winners and help them out. A better approach would be to improve the condition of the track so everybody can run faster.
Crews is working on this year’s edition of CEI’s “10,000 Commandments,” an assessment of the regulatory state. He notes that the Small Business Administration estimates the cost of federal regulations to U.S. businesses – an indirect tax – at about $1 trillion a year, more than a third of the direct cost, at $2.7 trillion, of the federal budget. The Federal Register, the official record of new regulations, weighs in at 75,000 pages a year of new rules and mandates that Congress doesn’t review.
Streamlining (and eliminating) regulations would do much more for U.S. competitiveness across the board than subsidizing the production of scientists and mathematicians and tinkering with the tax code. It wouldn’t hurt to make it easier to hire people rather than more complicated. Then we can look at reducing taxes across the board.
Innovation comes less from official guidance than from unexpected breakthroughs and applications by mavericks and established companies alike. The best way to facilitate it is through freedom rather than central planning.
Part 3: THE FREE-MARKET SOLUTION
By Steven Greenhut
International competition, especially in growing high-tech markets, is a wonderful thing, particularly for consumers who get to enjoy computers and other technology products at decreasing prices as the global marketplace farms out labor to the most productive and cost-effective regions.
Nevertheless, having lived most of my life in industrial regions of the Northeast and Midwest, I get a sense of foreboding as we talk about a shift in competitiveness away from the United States and toward Asia. I know what it’s like when factories close, when good-paying jobs evaporate, and the former middle-class workers have few options other than working in (gasp!) government or at Wal-Mart.
During a Register editorial board meeting last week with representatives of the American Electronics Association, I was struck by Conexant Chairman and CEO Dwight Decker’s description of what will happen if our nation loses its competitive edge. Yes, America will still be home to the innovative elite, where the innovators and architects of technology systems will still be gainfully employed and handsomely compensated. But engineers and even assemblers will be located overseas, which will knock several rungs off the nation’s economic ladder.
Already, Decker said, his company has shifted 55 percent of its engineering jobs to China and India in the past 18 months, where they are not just cheaper but far more plentiful.
I’ve got nothing against Wal-Mart, but there needs to be some career option between $15,000-a-year store greeter and a $150,000-a-year software designer.
Unfortunately, most politicians and even corporate entrepreneurs have no real solution other than looking for more cash from the government. There is something government can do here, but not by creating more subsidies or regulation. Government needs to get out of the way in the field of education, which is the key stumbling block to high-tech competitiveness today. Quite simply, America’s monopoly public schools are not churning out the numbers of skilled math and science students needed to sustain a vibrant high-tech industry. (They are doing a lot of other things poorly, also, but that’s a subject for another day.)
As the National Journal reported, the Program for International Student Assessment’s 2003 measurement of math abilities for 15-year-olds placed the United States at 25th among 29 industrialized nations. The U.S. also is graduating far fewer engineers (in raw numbers and per capita) than China and India.
Unfortunately, corporate leaders want a quick fix, through more federal research and development subsidies. They aren’t pushing for changes in the one place that will make the most difference, albeit over a longer term: the school systems.
Sure, corporate benefactors sometimes invest private dollars into school programs, but, as is the case with Microsoft’s Bill Gates, those dollars typically are pumped into the current ill-performing schools. Is there anyone left on the planet who still thinks that the only thing standing in the way of better education is a lack of money?
California spends on average more than $10,000 per student per year including federal dollars, and look what we get. The worst systems, such as Los Angeles Unified, have the highest per-pupil spending. It never gets better – no matter how many reforms, how many new bonds, now many new superintendents or board members. You can’t turn a pig’s ear into a silk purse.
What would Conexant and other technology companies be like if they were run by the government rather than private managers and stockholders? They would be stodgy, wasteful, bureaucratic and incompetent. That’s what happens when there is no competition, when the “customers” have to pay up, whether they want to purchase the product or not.
Yet these entrepreneurial and impressive companies are depending upon failing government schools to provide them with a highly skilled workforce.
Granted, business leaders can’t be expected to give up what they do best and become school-reform activists. But to start solving a problem, one must first identify a proper solution. And the solution to America’s declining math and science competitiveness is to create a new system for educating students.
That system, like all good systems, must be based on choice, competitiveness, freedom and voluntaryism. The AEA folks agreed with the premise, but argued that it’s politically impossible to get there from here. Maybe so, but if we don’t try, I guarantee that the competitiveness problem won’t be getting any better.
Contact the writer: (714) 796-5025 or jseiler@ocregister.com
