Let's Think Big Again: A Growth Program to Put America Back to Work
Ken Davis Jr. interviewed by Will Wilkin
Part 1 of 2
The recent "fiscal cliff" obsession in Washington DC is hardly America's biggest problem. Our real problem is the historic collapse of our economy, the loss of half of our manufacturing jobs since 1979, and the mass unemployment and poverty now spreading through the USA.
Former U.S. Assistant Secretary of Commerce Ken Davis predicted big trouble for the U.S. 40 years ago, when he resigned his position to protest the one-sided new U.S. "free trade" policies that were then just taking shape under President Nixon. Those new policies were intended to help America’s position in the new world of globalization, but instead they have backfired terribly. The results are deindustrialization and huge trade deficit, totaling more than $8 trillion since then! That is the biggest transfer of wealth from one nation to other nations in all world history!
The chart tells the story. Through trade deficits, we now lose about 4 percent of our GDP every year and $600 billion in national income. Shockingly, this disastrous U.S. economic performance wasn’t discussed at all in the presidential campaign or in the “fiscal cliff” meetings.
Today Mr. Davis offers not only the historical perspective to explain how we got into this mess, but even more importantly, a PLAN TO MAKE OUR COUNTRY GROW AND PROSPER AGAIN.
WW: Ken, what did you think of the "fiscal cliff" discussions?
KD: They showed very limited and pessimistic thinking. There was a TV interview where Alan Simpson, of Simpson-Bowles, said "there's no way we can grow our way out of these 'fiscal cliff' difficulties." Well I disagree, we CAN grow if we make a real effort. Let’s think and act big again! That way we can stop having the fights we’re having now between the haves and the have-nots, between the 1% and the 99%, or between reducing the debt or keeping social benefits. If we create a bigger income pie to share, it will be far better than this battle over dividing up the pie now. We should all be growing together rather than playing “beggar thy neighbor!” Instead say "We’re going to grow and be great again!”
WW: Why are our leaders so pessimistic? What should we be most worried about?
KD: Right now, our domestic industries are collapsing and China wants to replace us as world leader. At our peril, we are literally de-industrializing America! We are more and more dependent on cheap imports from China and other nations, and cheap labor by moving manufacturing over there. We lost 56,000 manufacturing companies in the last 10 years, and 6 million manufacturing jobs. W can't do that. We can't have all these people unemployed. We've got to put them back to work, and they want to go to work.
WW: At some level, everybody must see it but they don't offer solutions. Are there any?
KD: Yes, of course we can turn it around. We can do it with a high-priority, well-run Growth Program. Our country has a real need to get on a sustainable growth track again, like after WW2, which we are not on today.
WW: What would be the objectives of your Growth Program?
KD: The first is to balance our trade. Return $600 billion of annual production to the U.S. to replace excessive imports with American-made goods, At 7,000 jobs for each billion dollars of production, that’s more than four million jobs we can directly create with millions more to come as U.S. industry returns to its historic normal growth. Don't you agree that growing our GDP and wages and our income and tax base would make any future “fiscal cliff” discussions much easier to handle?
WW: But could we replace imports to balance our trade? Is there a policy or strategy that would do it? Are we suffering a necessary natural decline or can we do something about it? Don’t Americans want all the cheap imports they can get?
KD: Oh, what we’ve done is not natural at all. No other industrial country runs trade deficits, not one. Why should we? Especially when we’ve always been strong. What we must do is enact legislation to restore balanced trade as the law of the land and put in place a system to enforce it by limiting the amount of imports each year to roughly equal the total amount of our exports. Some goods may cost a little more, but we won’t have a shattered economy that’s hurting everyone badly.
WW: How would you do it?
KD: Strong legislation is the only way to succeed in a national program of this size and impact. Draft legislation already exists to use a system of tradable Import Certificates (ICs). To import into this country you'd have to have an import certificate. How would an importer get it? They’d purchase them at nominal cost on an open trading market with the total amount of I.C.s available set by the U.S. government each year, which after a few years of incrementing down would be equal to the amount of our exports. That would balance our trade. There’s excellent draft legislation ready - based on a proposal by CEO and financier Warren Buffett. It’s bill S3899, the "Balanced Trade Restoration Act of 2006." [See attached bill] It went as far as the Senate Finance Committee, but was not pursued by President Bush, or President Obama so far.
WW: Would that be a good plan today?
KD: Yes, definitely, with a few minor changes to simplify its operations. Here’s a little more on how it would work. We have a current annual trade deficit of $600 billion in goods and services, based on annual imports of $2.2 trillion and exports of $1.6 trillion. If we reduce total imports by 10% each year, that would reduce the annual trade deficit by $220 billion each year and take less than 3 years to cut $600 billion from the trade deficit. It would thus be a phased gradual reduction. Total annual U.S. imports would only be cut by 25% and we’d still be the world’s biggest importer.
WW: Would a system of Import Certificates to balance our trade be legal under the trade treaties to which we are now a party? Would it be legal under the terms of our membership in the World Trade Organization?
KD: Yes it would be perfectly legal. The Balanced Trade Restoration Act of 2006 states explicitly that "Article XII of the General Agreement on Tariff and Trade (GATT 1994), annexed to the Agreement Establishing the World Trade Organization entered into on April 15, 1994, permits any member country to restrict the quantity or value of imports in order to safeguard the external financial position and the balance of payments of the member country."
WW: OK, so why do you advocate tapering down imports gradually?
KD: So as not to be disruptive to trade activity, and to give domestic producers time to ramp up and rehire needed workers. 10% this year, 10% more next year, on that basis within a few years we could get rid of the trade deficit altogether. This would give time for everybody to adjust - the importers, the manufacturers, US factories could be retooled and hire people back.
WW: "Buy American" campaigns aren't enough?
KD: You can't just work on encouraging people with "Buy American" campaigns, those are very nice and good for morale but it offers no assurance of getting the results we need. So we need to pass a balanced trade law and enforce it. Even eliminating the trade deficit is itself just a means to put America back to work, to get out of debt. We want a prosperous growing nation, and we can't have it now because that $600 Billion annual trade deficit anchor holding us back. Every year it its costing us 4% points in our GDP.
WW: Is the whole Growth Program as simple as just balancing our trade?
KD: No! But that's where it starts, that's how we grow the national income for all the other aspects of the Growth Program. Once we’re growing again, we will then be able to afford to modernize our infrastructure, strengthen our scientific and technological capabilities, and fund other essential growth activities like education and training.
WW: What would be some important objectives along the way?
KD: To start, take a look at our national security situation. We have lost technologies that we can't afford to lose. We're getting to the point where we couldn't make the weaponry we need for war, we're losing key capabilities, we don't even make printed circuit boards in this country now, and they’re needed in all electronic military gear.
WW: How effective is the cooperation between government and business now?
KD: There are some good programs now, but more are needed, such as in education and training, better health care, the National Network for Manufacturing Innovation, and supporting technology development, infrastructure - all the things that contribute to a strong nation. But there’s no overall framework now. The Growth Program we need would provide that coordination by putting the national interest at the heart of a cooperative relationship between government and industry, to strengthen our manufacturing industries and workforce, our infrastructure and our technologies.
WW: How would a U.S. Growth Program compare to what the rest of the world is doing now?
KD: In former vice presidential candidate Pat Choate's book Saving Capitalism, the main idea is the arrival of economic statism in competitive nations. China has it, Germany and Japan have it, as do many smaller nations like South Korea. There’s very heavy involvement of government in their industrial programs. Many view that as another form of mercantilism. Look at China’s whole command economy and Germany's successful public-private cooperation in technology centers geared to commercial production. German government involvement includes the Max Planck network of 80 institutes of science, and the Raunhofer Society with a network of 60 technology centers, co-financed by the government and businesses. Here in the USA, the tendency is to say the government shouldn't pick or back winners. The Republicans especially have objected to the money that was spent on solar, and even the bail out of the auto industry is still getting a lot of criticism. But many countries have much more aggressive policies than the US in their international dealings and in helping their industry, supporting industries they want to keep, and limiting what imports they allow in.
WW: The U.S investor seems to be doing very well, but much of these profits are earned abroad. The stocks of multinational companies have done well despite our weak economy at home. What’s our problem with our domestic industries?
KD: A big part of that is the long-running conflict between our multinationals and our domestic industries on such basic issues as trade policy and severe import competition. A major goal has to be getting them both to recognize that business has a big job to do to bring our country back. We can't just ship jobs overseas to help company bottom lines, we can't afford to lose thousands of manufacturing businesses every year. There are varying ways that our successful multinational companies can directly help our domestic industries recover. All of our business establishment, both domestic and multinational, must work together to fix the trade deficit if we’re going to restore growth and prosperity in America.
WW: Does American business need a new kind of thinking?
KD: The best overall way to approach it is to restore patriotic thinking in America, in our lives and in the way we run our companies. Always ask, "what are the implications for our country?" Aircraft is probably the best example in business now, where deals are being made to transfer our technology in return for access to their market.
WW: Put Boeing and General Electric in China, is that what we're talking about?
KD: I guess you could say “Sort of, except the airplane company in China will be owned by China, not by our Boeing or our GE." Both companies are apparently doing that, they've already agreed to give up a great deal of technology. They defend it by saying "we're going full bore for the Chinese market."
WW: Is there any benefit to the USA in that?
KD: Not in the long run, as far as I can see. And that is where the need to keep our nation strong should influence the way our companies are run. That’s where the White House Jobs and Competitiveness Council could be very important. It’s not the kind of thing each company should decide in a vacuum with their own standards, as to when they might agree to produce something at home that their numbers might say to do abroad. The Council should be reminding them of their obligation to our country, and trade policy should make sure it happens. That’s part of that missing framework I'm talking about. The rebirth of more active patriotism is a key element in this Growth Program for America. If you ask people "Are you patriotic?" most say "Yes, of course," but the higher up we go the less it’s there and the more it is only about making the best financial decisions for one’s company and one’s self.
WW: How would you get that ethical transformation of management to become more patriotic again? How can a policy make sure that we get patriotic results? Being patriotic might not trump what executives do with billions of dollars. Will they tell their investors "I was patriotic and therefore we're going to make less money?"
KD: A lot can be done with tax incentives and penalties. Having a precise executive decision policy would be really hard to develop, as in setting standards for how to make decisions. But certainly at the very beginning of this Growth Program it would be very important for the President to bring into Washington a group of top people to tell them the President’s objectives and to get their ideas.
WW: Top executives from both domestic and multinational companies?
KD: Yes, bring them in for a day or two of discussion. Lay out what we've got to do to get back on a real growth track, and what the consequences are if we don’t succeed.
WW: Let's talk more about that Growth Program. Is that something the U.S. has ever had? Did we have one after WW2, when our economy grew so dramatically?
KD: It would be unprecedented here, but we had a very successful Marshall Plan to rebuild Europe after WW2 . We didn't need one here because we had a strong industry, opportunities were everywhere, up up up, we just had growth everywhere. We had diverted all our consumer activity into the war, so we had to redirect that to consumers. We also had the resources to lead a Marshall Plan to help the shattered countries of the rest of the world recover and get back into production. And there was plenty of money around to fund growth, if there was a plant to build or rebuild. it wasn't that difficult.
WW: It was a completely different world economy then?
KD: Absolutely. Those 20 years I had with IBM, 1949 to 1969, were wonderful years, it was great fun getting out and selling new technology, I was selling data processing, first with punched cards, then computers, everything was very positive. No one had trouble getting jobs, there were plenty available and a lot of companies looking for people. One can’t compare that to today’s job situation.
WW: So it would be an unprecedented Growth Program because we are in an unprecedented economic situation?
KD: Yes. What's mainly different is there are a lot more strong countries out there now, with their own development programs. They are economically and industrially strong. They all have export programs aimed at us, because ours is the biggest market and we have fewest trade barriers. The best intelligence data for trade strategy Is published by a firm named PIERS. They are the standard in trade export and import intelligence data. Their reports show there are something like a half million exporters around the world aimed here. That a huge difference from the situation after WWII.
WW: Yes, I can see that must be an immense difference!
KD: It really is and we haven’t dealt with it effectively at all! The change has come along gradually, aided by the whole liberalization and expansion of global trade - the birth of the World Trade Organization (WTO), and all these Free Trade Agreements like NAFTA. The rest of the world and many of our own trade policy people always look on the U.S. as the golden goose - we were the place to turn to make the whole new world trade system work. But the way its gone, the golden goose will be killed if we can't keep a viable industry and share of the business in our own U.S. market. That's why we need balanced trade as the foundation of our Growth Program.
WW: Does the President see that? Does Congress?
KD: Some in Congress do. But I don't think the President spends much time on trade, and that’s a huge mistake. If we've got one big thing that's killing us it is the $600 Billion a year trade deficit, $6 Trillion over a decade. We just cannot afford that loss of national wealth. In a way its a shame that that doesn't get reflected immediately in the budget deficit, so when you look at the $16 Trillion national debt, that trade debt isn't there, its taken care of separately but its mostly still handled by separate US Treasury bond debt.
WW: Is President Obama doing anything about it?
KD: No! Its getting worse but the President is still pushing more free trade deals. He says he wants them for more exports, but we're not going to get more NET exports. We'll get some exports, but we give up a lot more through more imports. The last free trade agreements he pushed through before the election were with Korea, Colombia and Panama. Now the Trans-Pacific Partnership (TPP) is going to be bigger and worse than NAFTA, it involves 10 low wage Pacific Rim countries, plus Canada and Mexico, Japan I think is going to come into it too. And in this case the business lobbyists have an inside track in contributing terms to it, but he hasn't even let Congress have a look at it, the President has instructed the Special Trade Representative to permit all of that!
WW: That sounds like he’s allowing corporations to write our trade policy. Is there any justification for that, do they have some specially well-qualified people to be in these negotiations?
KD: No, the only qualification they have is they are registered lobbyists. So they have a right to make their calls and, if an agency gives them a chance, to present their comments on a planned policy. But when they are invited to do it, as in this case, it says, on one hand the President doesn't seem worried about our trade deficits, and on the other, he’s using lax free trade deals for his world diplomacy agenda. That says he isn't thinking very much about our trade deficit as it gets worse and worse, not better.
WW: Have you tried to reach the President or his staff?
KD: Yes, I’ve tried to reach him by registered mail, but I don’t even get the receipt back. When we have tried to take this trade problem to the White House Jobs and Competitiveness Council, they don't want to hear about it, because they're not getting any pressure from the White House for ideas for rebuilding domestic industry and jobs.
WW: Who's in charge of the Jobs and Competitiveness Council? What are they doing?
KD: It is run by Jeff Immelt, CEO of GE, and has been very multinational-company-oriented. The Council is mostly made up of multinational CEOs, so what they think about mostly was "what do we need as multinational companies?" They want less regulation of course, but give no thought at all about "How can we rebuild a strong secure domestic industrial base that puts America back to work?"
WW: They don't sound serious about American jobs and American competitiveness! Is the Council misnamed, are they really about something else? Are they making big mistakes or are they just mis-managed?
KD: The best way I can come at that is to say when the President created the Jobs and Competitiveness Council, it was a good idea, we need one. But then who did he put in charge of it? Should he have picked a busy CEO of a big multinational company and expected him to do much about our struggling domestic industry and jobs? The results speak for themselves. The Council's staff assistant refused whenever I kept trying to see her. She said over the phone "you must understand Mr. Davis these are all multinational companies represented on the Council, and they're not much interested in domestic industry." I said "well they're supposed to be looking for job opportunities here." She said " I’m sorry, but that's the way it is."
WW: It seems like a bad failure of priorities.
KD: One of the things that we're not doing in this country now is building for the future. How could we permit prime big industrial cities like Cleveland and Detroit to disappear? Doesn’t the Jobs Council care?
WW: Free houses. Abandoned neighborhoods.
KD: Yeah, and there is so little national concern shown over that. When I cite those examples, some people say "that was bound to happen, the auto industry and so on," but I say "no, we let it happen."
WW: Let's get back to that Growth Program. What if President Obama invited you to the White House to talk about jobs and competitiveness, and asked your advice about how to create a Growth Program? What would you say to him?
KD: I’d say: "Our main operative goal must be to restore the country's trade balance and eliminate our annual trade deficits. We can do it with a fair system of Import Certificates to keep imports from exceeding our exports each year. We must return to where we’re earning our way with the rest of the world. We cannot be a strong nation and world leader while we’re so terribly in debt."
WW: Is the trade deficit really the key to this debt problem? And aren't our problems bigger than just debt?
KD: The trade deficit isn't the only way to work on the debt problem but it is the biggest single thing that we know we can do something about. A balanced trade policy would inject $600 billion a year into America’s economy without costing the Treasury a dime and without adding costs to consumers. Our plan would return some production and millions of jobs to the U.S. by reducing excessive imports, and it would rebuild our weak domestic industries. $600 Billion more in wages, jobs, GDP and tax base would make a major contribution to this country. It wouldn't just decrease debt, it would make prosperity and national economic strength.
Ken Davis Jr. was born in 1928. He earned his B.S. from the Massachusetts Institute of Technology and his MBA from Stanford University. He had a 20-year career with IBM Corporation, serving as Vice President and Chief Financial Officer for five years until 1969. He then was US Assistant Secretary of Commerce, serving on trade policy and negotiations during the Nixon administration. Then he joined Syntex Corporation, a multinational pharmaceutical firm, as Senior Vice President and Chief Financial Officer. Mr. Davis first became an investment banker with White, Weld & Co. in 1975. Later, he managed merger and acquisition departments at Tucker Anthony and at Advest, and also had his own firm, Corporate Development Associates, for five years. In 1988 he joined Bentley Associates at its founding and was a Managing Director until 2008. Currently Mr. Davis is founder and President of Economic Strategy Associates, Inc., in Stamford CT. As an investment banker, he has specialized in working with high technology growth companies, both in raising capital and in mergers, acquisitions, and strategic partnering assignments.