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Clyde Prestowitz is founder and president of the Economic Strategy Institute. He has played key roles in achieving congressional passage of NAFTA and in shaping the final content of the[…]

From 1800 to 1950, we acted, economically, the way China is acting today.

Question: How did America really get rich? 

Clydern Prestowitz: It’s important, I think, to know that story because I rnthink there’s a mythology in the United States that America kind of got rnrich as a result of entrepreneurial activity and free markets and lack rnof regulation. And for sure those were important elements, but what we rnneed to understand is for most of our history—from about 1800 until rnabout 1950—we acted, economically, pretty much the way China does rntoday. 

In fact, it’s interesting to go back and read the rndiscussions among the founding fathers. Adam Smith wrote “The Wealth of rnNations,” published it in the same year, 1776, as, of course, the rnDeclaration of Independence. Smith argued, for example that America had rnits greatest advantage in raw materials; timber, and iron ore, and rncotton, and things like that. Smith actually argued that America should rnnot industrialize. England was the industrial power and America should rnfeed England with raw materials. It was Alexander Hamilton that said rn"No, no, no, Smith has it wrong. We can become a great industrial power rnand we should." And there was a big debate with Washington and Hamilton rnkind of on one side of the debate and Jefferson and Franklin on the rnother side. But, the war of 1812 was a war we almost lost because we rndidn’t make shoes, or rifles, or anything that we needed to fight a war.rn And that convinced Jefferson that he had been wrong, and so from that rnpoint forward, the U.S. government engaged in active promotion of the rndevelopment of key industries, of infrastructure, of technology, the rnadvance of science and so forth. So we had the Eerie Canal, the rntelegraph was invented and developed in the basis of government funding;rn a partnership with private industry. 

We had of course the rnnational railroads, the transcontinental railroads. We had... in the rnearly 1900s, Woodrow Wilson saw to the development of an American rnshipping industry, and created the national advisory committee in rnaeronautics to promote U.S. aircraft and aviation industry. So, it’s rnimportant to understand that there was a long partnership between rnindustry and government in the United States that promoted this rndevelopment of wealth-producing capacity. The Homestead Act is a rnbrilliant example. America’s biggest industry in the 19th century was rnagriculture and the Homestead Act provided agricultural land. So, rnessentially factories to the populus at a very low cost from the rngovernment, and the proceeds of that were used to fund the land grant rnuniversities; the big state universities that dominate our scene today rnand to promote agricultural technology. So that was the basis of our rnwealth-producing capacity. 

Question: Why were the rnyears after World War II the beginning of the U.S.’s downfall? 
Clydern Prestowitz: In the early 1950s the United States had a level of rnconsumption that was about 56, 57 percent of GDP, very similar to that rnof many other countries. The great fear of our leaders after World War rnII was that without the war production, the economy would slip back intorn the Great Depression that they had all experienced in the 1930s. And rnthey had 15 million men and women being demobilized from the armed rnforces all coming back looking for jobs, and the question was, “Wow rnwhere are the jobs going to come from?” And with Europe in ashes and rnJapan in ashes, it was obvious that an export-led drive was not likely rnto be successful, and so the focus was on promoting domestic consumptionrn as a way of replacing the wartime production and providing jobs for thern returning demobilized service people. And so, every effort was bent in rnthe G.I. Bill, and G.I.s were given preferential assistance in getting rnmortgages for houses. People were able to deduct the interest on time rnpayments for consumer durables, so all kinds of measures were taken to rnmake it easy to consume. By the mid-1960s, consumption as a percent of rnGDP was up to 62 or 63 percent. By the mid-1970s it was up to about 67 rnpercent. By the mid 1980s, it was approaching 70 percent. Today, it’s rnabout 72 percent. So, there’s been this huge continual increase in rnconsumption and reduction then in savings in the U.S., and in rninvestment, and ultimately of course this is resulted in big rnimbalances.

Recorded on May 10, 2010
Interviewed by Jessica Liebman