Rebuilding Brand America

A tough nut of a nation

Writing off America is a risky proposition. "Despite appearances, America is one of the most capable countries in the world," says Rahul Sagar, an expert in political science at Princeton University. "It handles governance in a manner few powers in history can rival." Facts support his assertion.

Fareed Zakaria argues in his most recent book, The Post American World:  "Its economy has received hundreds of billions of dollars in investment-a rarity in a country with much capital of its own. GDP growth has averaged 3 percent for 25 years, significantly higher than Europe. Productivity growth has been over 2.5 percent, a full percentage point more than the European average. Since 1979, it has consistently emerged on World Economic Forum reports as the most competitive economy in the world."

At the centre of any doom theory about the US is the argument that the dollar will concede its primacy as the globe's reserve currency. History shows that the greenback has defied oblivion for several decades now, despite the fears. In 1990, only half of the world's foreign exchange reserves were held in dollars. Today, the number stands at 63 percent. It is indeed a big hole in any argument that the euro or Chinese yuan are emerging as a credible alternative to the dollar. In any case, Europe is in recession and China doesn't believe in a fully convertible currency. Writing an obituary to the American currency, therefore, would be premature and naive.

America's ability to marshal global powers behind its own agenda is still unparalleled. As Jagdish Sheth of Emory University says, "Eventually, the rest of the world will rally behind Brand America." The most recent precedent of the world toeing the American line happened a few hours after the World Trade Center attacks on September 11, 2001. "Washington increased its defense budget by $50 billion-more than the annual defense budgets of Britain and Germany put together. In just a few weeks, it single-handedly put terrorism on top of the global agenda and compelled every country in the world to reorient its foreign policy," Zakaria writes.

When looked at from this perspective, it becomes important to all of us in the rest of the world to understand what is top of mind in America right now. And that deep down, America is an incredibly paranoid nation.

Rethinking capitalism

When the former Soviet Union launched the Sputnik, it triggered panic in the US. The Americans fretted that they were losing their scientific edge. Eventually, they beat the Soviets and were the first to put a man on the moon. In the 1970s, when America stared at slow growth and high oil prices, policy makers imagined America was on the brink of losing its economic pre-eminence to Western Europe and Saudi Arabia. Again, in the 1980s, it was widely believed that America would concede ground to Japan.

Writes Zakaria in his book: "None of these scenarios came to pass... The economic dysfunctions in America today are real, but by and large, they are not the product of deep inefficiencies within the American economy, nor are they reflections of cultural decay.  They're the consequences of specific government policies."

To get a sense of the issues here, consider this number. Until very recently, a staggering 30 percent of corporate America's profits were accounted for by Wall Street. By all accounts, the number is an obscene one. To middle class Americans, the crisis they are currently grappling with is the outcome of policies that created huge wealth for a few at the expense of many over the last few years.

The question now is, how does America deal with the capitalism it has sold to the world, but has found to be problematic in its own backyard? Responding to the question on his campaign trail, Obama said: "I do not believe that government should stand in the way of innovation or turn back the clock to an older era of regulation. But I do believe that government has a role to play in advancing our common prosperity, by providing stable macroeconomic and financial conditions for sustained growth, by demanding transparency and by insuring fair competition in the marketplace. Our history should give us confidence that we don't have to choose between an oppressive government-run economy and a chaotic and unforgiving capitalism."

How that view translates into the policy making apparatus will be interesting to watch. A key Obama aide, who did not wish to be named, offered a few pointers on what may happen when the new administration takes charge: "More dollars will be given to banks on credit. I won't be surprised if the government buys equity in certain large banks by giving them money so that small businesses can get credit. Expect tax cuts for the middle class.

"The financial architecture of the country will come under intense scrutiny. Lot more control, more regulation and more accountability. Corporate governance will come into the picture. It will be passed in Congress very quickly."

Rahul Sagar of Princeton University alludes to a similar future: "By virtue of the recession, we are likely to see a less brash form of capitalism for a few years. Every crisis sparks a period of repentance before human greed returns to dominate."

But that is precisely the kind of thinking that has another set of experts worried. "Barack Obama's campaign has been long on slogans and mood music but short on concrete proposals and policies," wrote political economist Willem Buiter in the London-based Financial Times. The London School of Economics professor argued that "Obama's proposals are reactionary, populist, xenophobic and just plain silly."

The concerns voiced by Buiter find precedents in the economic policies that followed the Great Depression in the 1930s. Thomas Cooley of the Stern Business School wrote in Newsweek: "The period was marked by an unprecedented increase in government intervention that substantially distorted markets and reduced economic well being... Many economists have concluded that these policies were responsible for keeping unemployment well above 10 percent until World War II..."

There is yet another danger, says Arun Maira, senior advisor with Boston Consulting Group (BCG), India: "Whenever there is a need to make things happen faster, or scale up good work, we think of putting someone in charge...Consequently, we tend to rely on the cult of the charismatic CEO and rely on simplistic measures like GDP."

"The problem with this approach," says Maira, "is that the right action to address the major problems confronting the world are not obvious...Bold fixes often backfire because the systemic connections among a variety of interacting forces are not clearly understood."

Paul Martin, former Canadian prime minister, in an interview to Foreign Policy, dwells further on the argument: "There was a clear failure of surveillance and regulation in the United States. That was a domestic failure, coupled with a failure to understand the complete seamlessness of the global financial system. When somebody who can't afford it buys a high-priced home in California and subsequently defaults, a continent away a small municipality in Norway goes broke. Misunderstanding that connectedness was a failure on behalf of all of those who were involved, certainly in Europe and the United States."

It seems entirely likely these thoughts have already crossed the minds of people on Team Obama as they grapple with the more immediate task of transitioning to the White House and putting together a crack team to deal with the problems on hand. What the world needs to know is how America and Obama navigate the tricky ground that lies between the hope he sold and the demands that reason places.

Rethinking innovation

But America didn't build its dominance exclusively on the back of economic might and capitalism, which it exported to the rest of the world. It also has its scientific and technological prowess, which much like capitalism in the country, is going through its own gut-wrenching moments.

Sometime in 2005, a high-powered committee tabled a report in the US Congress. It contained a few startling numbers that invoked mass hysteria and an enormous amount of breast beating.

Sample some numbers from the report:

·         Just about 6 percent of US undergraduate students take up science and engineering. As against this, 12 percent in Europe do. Singapore reports 20 percent. And China, a very impressive 40 percent.

·         Nearly 38 percent of people who hold doctorates in the American science and engineering workforce are foreign-born, as compared to 24 percent in 1990. Two years from now, studies indicate American numbers will fall to about 15 percent.

·         In 1980, industrial patents filed from the US amounted to nearly 60 percent of total global output. It now stands at 52 percent.

"The US is like a frog that is slowly boiling in water. It doesn't jump out because it doesn't notice it is about to die," Steven Chu, director at the Lawrence Berkeley National Laboratory in California, was reported as saying. A prominent American senator was equally outraged. "We're on track to a second rate economy and a second rate country," he thundered.

The numbers have since been dissed. Consider India, a country whose engineering workforce America seems terrified of. Every year, India produced anywhere between 35 to 50 engineers with a doctorate in computer science. America produces 1,000.

When it comes to industries of the future, say, nanotechnology, America's dominance is insurmountable. It has more nano centres than the next three competing nations (Germany, UK and China) put together. More than $3.3 billion in venture capital funding went to US biotech companies in 2005. European companies received barely half that amount. Not surprisingly, US biotech revenues approached $50 billion that year, five times greater than those in Europe, and represented 76 percent of global revenues.

But it did little to calm the hysteria-so much so that it soon morphed into an issue on the presidential campaign agenda that spilt over into the contentious issue of immigration. "This is clearly an opportunity for the next president to do something," Vivek Wadhwa of the Pratt School of Engineering argues.

The H1B visa for instance, is an example of a policy that will come under the scanner. It brings in talented people, but only for the short term. In the longer run, it leaves the US weaker because talented people eventually have to leave. From a policy perspective, Obama and his advisors have argued this will have to change. What it means is simple. If more immigrants are needed to keep the engines of American innovation moving, open the damn doors.

The same can hardly be said of Europe, Japan, China, or for that matter any other significant global power.