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Catching the Wave of the Next Big Thing

May 31, 2017 7 minute Read by Matthew Rooney
In a way, NAFTA made the internet possible. To call NAFTA and globalization into question today is to inhibit this process of “creative destruction” from taking place.

Twenty-five years ago, the United States made the internet into an economic motor. Not coincidentally, 25 years ago we embraced globalization and free trade, first with the North American Free Trade Agreement and then with other free trade agreements. 

The two phenomena are interrelated: the digital revolution facilitated globalization by slashing the cost of communication, bringing global markets within reach of every inventor and entrepreneur. At the same time, the embrace of free trade made the digital revolution possible by encouraging America’s workers, entrepreneurs, and investors to turn their attention from fading, low-wage and low-productivity industries to computer applications.

In a way, NAFTA made the internet possible. To call NAFTA and globalization into question today is to inhibit this process of “creative destruction” from taking place. By clinging to yesterday’s industries and technologies, we are preventing the industries and technologies of tomorrow from taking root in the U.S.  Others will be happy to embrace them.

It is true that the adjustment process in industrialized countries has been more beneficial to some parts of society than others. In the U.S., employment in parts of the manufacturing value chain has fallen dramatically as workers with lower levels of training and skill have been squeezed by competition from automation on one hand and foreign workers on the other. 

We have generally shied away from using federally-led industrial policies to manage this adjustment process. Instead, we have let market forces set prices, relying on capital, real estate, and labor markets to adjust.

 To call NAFTA and globalization into question today is to inhibit this process of “creative destruction” from taking place. By clinging to yesterday’s industries and technologies, we are preventing the industries and technologies of tomorrow from taking root in the U.S.  Others will be happy to embrace them.

Some companies have disappeared, others have arisen to dominate their markets; homes and factory buildings in some regions have lost value while other regions have seen increases in value; some kinds of work have seen their compensation decline while others have been rewarded. A high school diploma used to be a ticket to the middle class, but labor markets today assign it a lesser value and pay an increasing premium to higher levels of education and training. 

But is it politically and socially sustainable for millions of our fellow citizens to feel taken advantage of and ignored? What happens to America’s prosperity if this dynamic, as appears likely, weakens U.S. global leadership and undermines the economic integration that underpins our prosperity?  There is a need for creative thought leadership on how policy can and should respond.

The first option is to attempt to preserve existing industrial structures, and maybe even claw back some lower-skilled manufacturing jobs.

History suggests that this approach might succeed on its own terms, but that the cost in terms of foregone economic opportunity and social wealth would be significant. Consider the U.S. government bailout of the Chrysler Corporation in the 1980s, an attempt to preserve American jobs and push back against Japanese competition in the auto market.  Two near-bankruptcies later, Chrysler is still making cars, but many of its manufacturing jobs have disappeared as it has cut costs to compete with international competition, which has grown more challenging and complex over the years. 

More to the point, this approach requires significant government interference in corporate investment decisions and a trade policy that would raise prices and limit consumer choice and freedom. It requires us to admit, in effect, that our confidence in markets was misplaced.

On the other hand, we could embrace a future industry that is today largely unknown and work to prepare our workforce to support it. American history suggests that embracing the next big innovation tends to work out well for us. The very markets we relied on to manage the adjustment to trade and innovation put us in a strong position, but those markets are weakened in certain ways since the financial crisis of 2008 and 2009.

Our economic problems are not the result of too much market, but of too little. Government has assumed too much initiative and accumulated too much debt, weakening the market’s ability to overcome the structural adjustment challenge. 

A policy strategy that embraces free markets, supports innovation, and responds to the economic concerns of disadvantaged regions and groups would include a number of elements:

  • Reaffirm NAFTA and global engagement. We should look for ways to make NAFTA supply chains more efficient by removing unnecessary costs. Two examples come to mind: Using more market-driven approaches to infrastructure and strengthening cooperation on trade facilitation. These efficiencies would boost productivity and competitiveness. We also would benefit from strengthening cooperation with Mexican and Canadian authorities to enforce rules of origin and other NAFTA disciplines.
  • Strengthen labor markets. Falling labor market participation rates, especially among less-educated white men, point to a growing skills gap and a less-mobile workforce. We should make better use of programs like Trade Adjustment Assistance to encourage retraining and facilitate geographic mobility. Portable, widely-recognized skills certifications would also encourage mobility and facilitate structural adjustment.
  • Strengthen capital markets. Sustained net borrowing by the government, together with negative real interest rates, are crowding out private investment and stifling innovation. Regulation has squeezed small local banks out of the market and raised the cost of doing business to the point that smaller firms are unable to grow and thrive, depriving the economy of a major source of innovation and job creation.

Our economic problems are not the result of too much market, but of too little. Government has assumed too much initiative and accumulated too much debt, weakening the market’s ability to overcome the structural adjustment challenge. 

Meanwhile, The Next Big Thing is probably already present and technologically viable, but we do not have the right combination of ready capital, entrepreneurial energy, and workforce to seize it and make it into an economic motor. The economic zone that does – our most likely competitors are the European Union, China, and perhaps India – will ride the resulting wave of innovation and wealth to the forefront of the global economy.


Author

Matthew Rooney
Matthew Rooney

Matt Rooney joined the Bush Center in June 2015 from a career as a Foreign Service Officer with the U.S. Department of State.  At postings in Washington and abroad, Matt focused on advocating market-driven solutions to economic policy challenges in both industrialized and developing countries, and on protecting the interests of U.S. companies abroad. 

In Washington, Matt was on loan to the U.S. Chamber of Commerce to create a high-level private sector advisory body for the Summits of the Americas, working closely with the U.S. private sector and with companies and business associations from throughout the Americas to negotiate an agenda to promote economic integration in the region for presentation to the leaders of the Americas.  Previously, he was Deputy Assistant Secretary responsible for relations with Canada and Mexico and for regional economic policy.   Prior to this, as Director of the Office of Economic Policy, he led interagency and international negotiations in 2008 that produced the Secretary’s Pathways to Prosperity in the Americas initiative, designed to engage with our Free Trade Agreement partners on strategies for ensuring that the benefits of globalization are broadly shared in our societies.

Abroad, Matt was Consul General in Munich, a Consulate General providing a full range of Consular and export promotion services, supporting a permanent presence of 30,000 U.S. forces in two major base complexes, and performing political and economic analysis in support of U.S. diplomatic objectives in Germany. As Counselor for Economic and Commercial Affairs at the U.S. Embassy in San Salvador, El Salvador, he laid the groundwork for free trade negotiations between the United States and the five countries of Central America, and promoted market-based reforms for electrical power.  Prior to this, Matt served in various posts in Germany, Gabon and Côte d’Ivoire. 

Matt studied Economics, German and French at the University of Texas at Austin and received his Master’s Degree in International Management at the University of Texas at Dallas.  With his wife Dianna, Matt has two young adult sons.

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