Book Reviews & Citations
(07/03/05) Three Billion New Capitalists reviews in the New York Times
Consider the Outsource
New York Times (NY)
Copyright (c) 2005 The New York Times. All rights reserved.
July 3, 2005
Consider the Outsource
THREE BILLION NEW CAPITALISTS
The Great Shift of Wealth and Power to the East.
By Clyde Prestowitz.
321 pp. Basic Books. $26.95.
If you've managed to ignore the alarm bells on the outlook for American
economic leadership -- and you enjoy dreaming -- don't read Clyde
Prestowitz's "Three Billion New Capitalists: The Great Shift of Wealth
and Power to the East." It argues that the United States faces such
serious fiscal and competitive challenges that we may be headed not
only for a declining standard of living but for a 1930's-style
depression with a capital D.
Here's the story. In the golden age, 1950-73, we had it all -- low-cost
manufacturing, rising wages, technological dominance, a highly educated
and motivated work force, a trade surplus. Until 1971, our reserve
currency was backed by gold, forcing us to be responsible. We had
control over our economic destiny. Since then, bit by bit, we've lost
much of our strength and are in danger of losing the rest.
Our first problem is the surge in competitiveness on the part of the
rest of the world, especially China and India, a trend Thomas L.
Friedman analyzes in detail in "The World Is Flat." Even if the playing
field were level -- which it isn't -- we would not be able to compete
with the combination of low-cost labor, talent and fire in the belly of
these two behemoths. Our second problem is that we still think we're
living in the golden age. In fact, we suffer from a misguided sense of
superiority, profligate spending habits, a weak education system,
mammoth debts, a ballooning trade deficit and a religious devotion to
free-trade theories developed before the Industrial Revolution.
Each of these issues could consume a book, but Prestowitz, president of
the Economic Strategy Institute and a trade negotiator in the Reagan
administration, packs them into one. The heart of the question, as he
sees it, is that we are not defending the jewel in our economic crown
-- our technology and manufacturing capabilities -- but are instead
waxing poetic about the virtues of free trade while more practical
countries walk off with our loot. This, he contends, will lead to the
gutting of our economy, with well-paid skilled jobs replaced by
low-paid menial ones, and an America in hock to the world's next
Globalization, of course, is nothing new. The "hollowing out" debate
hinges on whether the United States can replace the jobs it loses with
equal or better ones. Capitalism is fueled by Schumpeter's creative
destruction -- new forever displacing old -- and this country has
thrived through transitions from agriculture to manufacturing to
automation to outsourcing to services. Free-trade advocates argue that
globalization is just the latest phase of a continuing evolution. Trade
hawks like Prestowitz argue that now is different because of the sheer
size of India and China and our inadequate response to the new
Globalization has always been a touchy subject (after all, Americans
lose jobs when companies move production and services overseas) -- so
touchy that most popular discussion of it is inflammatory or inane or
both. Last year, John Kerry branded corporations and executives who
send jobs offshore "Benedict Arnold companies and C.E.O.'s," and a
White House adviser, N. Gregory Mankiw, provoked many a storm by
suggesting that offshoring was actually beneficial because, among other
things, it lowers prices and makes labor available for new
opportunities. Mankiw may have been impolitic, but Kerry was just
pandering. If the choice is go offshore or go out of business, a chief
executive doesn't have a choice.
Prestowitz acknowledges that many companies can't survive today without
offshoring, but argues that we often abandon industries we could
continue to dominate and so lose the ability to lead the next wave of
innovation. He lays the blame on government, not the private sector.
"Whether it recognizes the fact or not," he declares, "the United
States has a de facto economic strategy, and right now it is to send
the country's most important industries overseas." He observes,
moreover, that the benefits of offshoring go beyond cost:
"You do save money," a senior manager at the semiconductor equipment
maker KLA-Tencor says about sending work to India. "But pretty soon,
you realize the work is getting done faster and better, and you start
sending more and more of it. You also start sending more advanced work
and then have to figure out what, if anything, you really don't want to
The work is getting done faster and better, Prestowitz argues, because
Indians are not only hungrier than we are, but better educated. China,
India, Japan and Europe all churn out more science and engineering
degrees than we do. Worse -- and downright embarrassing -- is the state
of American education. Globally, our 12th-graders rank only in the 10th
percentile in math (that's 10th percentile, not 10th). Our students
also rank first in their assessment of their own performance: we're not
only poorly prepared, we have delusions of grandeur.
One common argument against the hollowing-out theory is that we can
afford to lose jobs in low-tech manufacturing because we retain our
high-tech design and manufacturing capabilities. Prestowitz counters
that China's and India's incentives and resources are so compelling
that the high-tech work is leaving, too.
Another argument is that a revaluation of the yuan will curb imports
and stimulate exports, thus repairing the trade deficit. In fact,
Prestowitz asserts, our manufacturing capacity has been so gutted that
we can't export our way out, even if the dollar's value drops to zero.
The only path is to cut spending.
But Prestowitz risks sounding like Chicken Little when he pronounces
the globalization of today more than just another "gale of creative
destruction" to which our economy will eventually adapt. Manufacturing
has long been declining as a percentage of the United States economy,
but the jobs lost have been more than offset by growth in services (in
health care, financial services, law, retailing, and so on). Prestowitz
points out that services are now being offshored, too, but not (yet) at
a rate threatening our main growth industries. The McKinsey Global
Institute, for example, reports that while 24 million Americans switch
jobs each year, only 3 million jobs are estimated to go offshore by
The critical question, still to be satisfactorily answered, is whether
offshoring produces net economic gain or loss. Prestowitz deconstructs
an oft-cited McKinsey study concluding that each $1 of spending sent
offshore results in an overall gain in the gross domestic product of
$1.12 to $1.14. He points out the study relies on data suggesting that
69 percent of displaced workers found jobs at an average of 97 percent
of their former pay. This leaves 31 percent who didn't find new jobs.
Not only that, "if employers took McKinsey's advice to increase their
offshoring," he says, the gain would quickly become a loss.
In America's boom time, government-business cooperation was considered
anathema to free-market principles -- "Politicians shouldn't pick
winners and losers!" In Prestowitz's view, the laissez-faire trade
theories of the 19th century have no place in 2005; since he holds that
many of our successes have resulted from public-private collaboration,
most of his proposals for maintaining American competitiveness boil
down to government taking a more active role. Pay teachers more. Help
workers move between jobs by offering wage insurance and portable
health coverage. Reduce oil consumption by providing incentives for
efficient cars (and include S.U.V.'s in mileage regulations). Tax
spending, not saving. Help strategic industries with federal loan
guarantees and grants. Call "a new Bretton Woods Conference" to set
steps for reducing the role of the dollar in the world economy and so
defuse the trade-deficit bomb. Whatever you think about offshoring,
most of these ideas are no-brainers.
Drawing (Drawing by Ray Bartkus)