Is America Losing Its Edge?

It’s Sunday morning. Time for a little gloom and doom from David Goldman.

It would be nice to dismiss Goldman’s tocsin for America’s economic future, but his argument is based on fact, not ideology. It’s always more difficult to argue with fact.

Goldman begins by debunking what everyone believes to be the basis for America’s economic future: fracking and Facebook.

He begins by casting a cold eye on the fracking boom:

The collapse of oil prices portends a collapse of the shale boom. High-yield energy bond yields have soared from 5% to 12% in the past few months, and investors are fighting to get to the door. Most unconventional oil and gas projects are unprofitable at $60 a barrel, and that’s where oil will trade for the next year or two.

Next Goldman dismisses the high-tech wonder-child called Facebook:

Facebook is a clever gimmick, but it doesn’t do much for productivity.

The bad news keeps on coming:

Take out the energy sector, and capital investment by S&P companies remains 8% below the 2008 peak. We never had an investment recovery.

Take out the top six companies in the S&P technology sector (IBM, Apple, Microsoft, Intel, HP, Micron), and S&P tech capital expenditures are down by a 40% since 2000 and down by 25% since 2013. The top six account for 75% of all capital expenditures among S&P tech companies (in 2000, it was less than 50%). All but the quasi-monopoly tech giants show an investment depression.

In deflated dollars, nondefense capital goods orders from American manufacturers are 20% below the 2000 peak and 5% below 2008.

It’s no surprise that productivity and wages are stagnating: investment in plant and equipment is falling. 

When we come to research and development (R & D) things do not look much better. American technology firms are outsourcing it to China and India. Apparently, they do not believe that they can solve their problems by undergoing more diversity training.

Goldman cites an article from the Harvard Business Review blog:

The remarkable reality is that many big American R&D spenders have undergone a quiet transformation of their product development capabilities during the last decade that includes embedding Asian capabilities much closer to the core of their operation. Offshore engineering centers have become central to businesses such as Microsoft, Abobe, and Synopsys.

As a rule, those who defend the American educational system against its Chinese counterpart often explain that freeing American children from the obligation to learn by rote allows them to become more creative and innovative.

Nowadays, China appears to be innovating at a quicker pace than America is.

How can we solve these problems? Goldman offers his policy prescriptions:

1) We need to jump from 30th place to 1st place in secondary-school math achievement. That means our kids have to stop playing video games and crack the calculus text.

2) We need to spend hundreds of billions of dollars on frontier R&D on the old DARPA model. No more trillion-dollar budgets for an F-35 that won’t fly.

3) We need to aggressively recruit talented engineers, scientists and tech entrepreneurs from overseas. We are still training a lot of the rest of the world’s best talent, and we should strive to keep them in the U.S. That’s the urgent priority of immigration reform. Latin Americans are irrelevant to the U.S. economy (net immigration basically stopped when the construction boom collapsed). We’re arguing about the wrong things.

4) We need patent reform (cutting the duration of many classes of patents to perhaps 5 years from 20), as Prof. Reuven Brenner brilliantly argued last year in the Wall Street Journal.

5) We need reductions in corporate and capital gains tax rates and a regulatory rollback.

6) We need to rebuild basic infrastructure. Some of this can be done through private initiative but not all, or most.

Many of these points have been discussed elsewhere. They continue to be valid.

Surely, the American educational system is doing a poor job of teaching children how to do mathematics. I suspect that Common Core will not fix the problem. It is more likely to aggravate it.

Surely, Goldman is right—if politically incorrect—to point out that we need to facilitate immigration for talented engineers and scientists. Like it or not, our economic problems will not be solved by allowing in more undereducated people from Latin America.

And, of course, point 5 is salient. We do need to lower taxes and reduce government regulations. Put together they are crushing the economy.