The Betrayal of American Prosperity: Free Market Delusions, America's Decline, and How We Must Compete in the Post-Dollar Era

"We're in big trouble. It's not too late, but it's getting too late." Those words, spoken by Clyde Prestowitz, founder and President of the Economic Strategy Institute, were meant not as alarmist, but as a wake up call to all those concerned about the continued vitality of the United States' economy. Prestowitz, appearing at the Wilson Center to discuss his book The Betrayal of American Prosperity: Free Market Delusions, America's Decline and How We Must Compete in the Post-Dollar Era, described in detail how America reached its current position as an economic power and the false economic doctrines that have played a role in its current financial downturn.

Following an introduction by the Program on America and the Global Economy Director, Kent Hughes, Prestowitz began by describing America's rise from a small agrarian collection of colonies into an industrial powerhouse in the 19th century. In order to illustrate his point, Prestowitz drew many parallels to China's ascension. "The United States was the China of the 19th Century." Prestowitz argued. Among other policies, both nations slowly built up a manufacturing base, lacked strong intellectual property laws, and featured export-led growth.

After touching on America's economic history, Prestowitz then laid out a series of false economic doctrines that have led the United States to where it is today. Prestowitz compared these theories to other methods of statecraft, such as the domino theory that helped draw the United States into Vietnam War. These doctrines, Prestowitz argued came about when, "...our leadership, our elite, glommed onto a doctrine that turned out to be badly flawed..."

The first false economic doctrine Prestowitz cited was consumerism. He argued that much of our consumer driven economy can be traced to the Great Depression and the post-World War II era in which, "the U.S. government turned its efforts towards developing and stimulating domestic consumption." He cited the proliferation of easy credit, the G.I. bill, and the incentives for home ownership that drove post- World War II consumption. Since the implementation of these policies, U.S. consumption has comprised a larger and larger portion of our gross domestic product and has helped lead us to our low-savings and high-debt consumer economy.

The second doctrine that Prestowitz mentioned was that of market fundamentalism; specifically the notion that the market is always right and regulation is always wrong. Prestowitz argued that this belief causes trouble when wedded to complex mathematical models that rely on assumptions which sometimes fail to capture the underlying reality.

Thirdly, Prestowitz cited America's belief in a simple version of free trade as another false doctrine. He pointed to the reliance on the two-century old theory of comparative advantage developed by David Ricardo. Based on a time when advantages were largely the product of natural endowments, the theory does little to describe trade in a period where patterns of trade and comparative advantage are the product of a host of public and private investments. Nor does the simple trade theory take account of the economic strategies or mercantilist practices of many trading partners. Prestowitz claimed that in reality, markets aren't truly open and subsidies distort the freedom of trade, which leads to what he called, "unilateral free trade" and not actual free and reciprocal trade. The remaining false doctrines Prestowitz mentioned touched on the overemphasis on increasing shareholder value within the business community, and America's addiction to cheap fuel and overstretched geopolitical priorities.

While Prestowitz was candid about America's economic shortcomings, he was not without solutions. Prestowitz argued that America's economic fate is not inevitable and he offered a number of policy prescriptions that he believed could solve some of these seemingly intractable problems. He asserted that America "need(s) to be moving in a direction away from the dollar as the world's major money," needs to create a fund to provide incentives to keep multinational corporations investing in the United States, needs to reduce corporate tax rates, needs to greatly increase its investment in infrastructure, should put heavy emphasis on domestic manufacturing, and desperately needs to face reality with regards to dependence on fossil fuel. Above all, Prestowitz maintained that America needs to change its outlook and how it views itself as an economic power in the 21st century, "the main thing is changing the mindset."

By: Clark Taylor
Kent Hughes, Director, Program on America and the Global Economy