BRANDON J. WEICHERT | THE WEICHERT REPORT
The United States is faced with the Age of Disruption. The only counter to living in disruptive times is being innovative and having a willingness to adapt to a constantly changing environment. Today, businesses are living with the effects of disruption in ways that they cannot even imagine. When people in my trade use the term “disruption” they are usually referring to technological innovation and/or fundamentally new ways of operating, whether it be in business or government. In the words of Brookings scholar Peter Singer, the kinds of “disruption” we face today are comparable to the changes from a telephone to a smartphone, rather than from an iPhone 6 to an iPhone 7. In my view, you cannot survive that kind of disruption by living in a country with a government that still operates off of principles from the 1960’s. For innovation to occur, it needs to be championed and allowed to occur–not taxed and regulated. This isn’t only an economic problem, but it is a national security threat.
Earlier this year, KPMG, the consulting firm, released its Innovation Tech Hub Survey to the public. This survey polls 841 of the world’s top tech leaders and asks them to name the cities and countries where the most amount of technological innovation—disruption—is occurring (and which cities would eclipse Silicon Valley and when).
Do you know who topped the list at number one?
If you guessed “Silicon Valley,” you’d be wrong. In fact, number one was Shanghai, China. Indeed, a plurality of those polled in the KPMG survey stated that they believed within four years that not only would Shanghai expand its lead over San Francisco/Silicon Valley, but potentially Shenzhen would be added to the list too. Yes, records are meant to be broken. No, I am not comforted by this one bit. Oh, sure, Boston, New York City, and Chicago were on the list (but in each case they were tied with another foreign city).
How often were we promised that a) globalization and “free trade” would only impact the economic sectors that were no longer competitive and b) these economic forces would buttress America’s overwhelming military dominance it enjoyed following the Cold War? We were also assured that these policies would never negatively impact the higher-paying, white-collar jobs. We were guaranteed that such policies would, in fact, pave the way for higher-paying “knowledge” jobs for all. Just look at the collective nearly $1 trillion student debt that we have in this country–and the 8.6% U6 unemployment rate–to see how silly of a concept that was! And let’s not forget that a weak economy means a weak military force and one that is incapable of exerting the kind of power that American strategists envisaged America exerting in the post-Cold War era indefinitely.
Or, as preeminent University of Chicago economist, Luigi Zingales, points out repeatedly in his work: the rest of the world has a very different view on globalization than we do in the United States and the Chinese in particular never had any intention of only taking our manufacturing, blue collar jobs. That was but the start. They gobbled up as much industry as they could from the West and then, once they got those systems down, they wanted to move up on the development ladder. Now, they are targeting those same white-collar, “knowledge’ jobs that were supposed to be protected.
In every way imaginable (since the end of the Cold War onward) China is the leading force of disruption in the world. That should worry you. Whatever is in China’s future, for the next couple of decades, it is clear that the Chinese will continue on their meteoric rise (at least compared to the United States, which is struggling to maintain 2.6% GDP growth). Meanwhile, America is $20 trillion in debt—that’s larger than our overall economy (in GDP terms). Plus, we have a long-running trade deficit with China (except in the service sector, of course).
We looked at China as the place from whence cheap goods were produced. We never countenanced that China would be unsatisfied being our quasi-slave labor indefinitely. American leaders also never fathomed that China might have been willing to effectively become our slave-labor force for a period of time, as part of a larger, comprehensive national strategy for actually achieving supremacy over the United States. Our leaders never viewed economics and trade as war. China’s leaders did.
What’s wrong with this picture?
Lastly, our politicians certainly never imagined that China would target those industries for annexation which so many Americans prize. This is the essence of disruption: globalization was being used in a way that no one envisioned it. Oh, and good luck “converting” China into a pro-Western state through globalization and “free trade.” All we ended up doing was empowering the Communist Party and, in turn, giving them the resources they needed to continue waging their economic war upon the United States.
Meanwhile, in the United States, our education system is a disaster (a dangerous prospect, given that we’re in the innovation economy); our economy is puttering along; and our foreign policy is listless. We live in an era in which tech companies, such as Google, are sitting atop billions of dollars and yet they refuse to reinvest that money. This has prompted former Pay-Pal cofounder, Peter Thiel, to accuse Google founder, Eric Schmidt, of having turned his company away from an innovative tech company into a glorified bank. Schmidt insists that there are “regulatory burdens” behind his company not reinvesting into the economy. Without such burdens, Schmidt implies, that he and other tech giants would gladly reinvest into the economy.
Virtually every level-headed policy analyst, regardless of party, talks of the need of “comprehensive tax reform” in order to create conditions more favorable to business. Today, the United States has the highest corporate tax rate in the world and we are struggling through federal and state regulations that impose huge operating costs on businesses. Not all regulations are bad, yet the vast majority are painfully redundant and purposefully onerous on specific, high-growth industries.
Meanwhile, in Hong Kong, where the corporate tax rate is 25%, the government is insistent upon slashing corporate taxes. According to Martin Richenhagen, the CEO of AGCO, Tom Fanning of Southern Company, and Mike Karsonovich of ElectroCraft (three leading manufacturing companies in the U.S.), Hong Kong is looking to cut the statutory corporate tax rate on the first HK$2 million of profits from small businesses down from 16.5% to a mere 10%. In the United States, the statutory rate is 35%! There’s a reason that Heritage Foundation has consistently ranked Hong Kong as the most economically free city in the world!
These three CEOs who participated in a National Association of Manufacturers roundtable discussion all concurred that the massive disparity between America’s tax rate and China’s harms America’s economy. When other countries have a more attractive tax system than the United States does, many corporations will opt to invest in those countries, since it maximizes their profits (oh, yeah, and most of these countries, like China or Germany, have some level of protectionist trade barriers, but that’s another topic). By taking capital and employment opportunities out of the country—two things of which America was severely lacking during and after the 2008 Great Recession—the American economy is ill-served and we all are made worse for it.
At every level investment, innovation, and adaptability is being stifled by a federal government that is both antiquated and bloated. It is unresponsive to the rapid changes sweeping across the globe. What’s more, within government, there is no innovation, and it costing us dearly. We have silly political arguments aimed at primetime television news audiences rather than ensuring that the national interest is maintained. In the legitimate concern over reining in the size of an overpowering, inefficient foreign policy establishment, we are presented with the stark choices of either drastically cutting the military or cutting our diplomatic functions. The Trump Administration opted to slash our State Department’s budget by 30%. Capabilities and functions of the State Department are being lost.
Some things need to be forgotten. Yet, institutional memory is an essential aspect of having the capability to respond to the various foreign policy crises that pop up. With so many career foreign service officers fleeing the State Department, with a bizarre hiring freeze in effect for State Department employees, and with an incredible lack of foresight and leadership from the uppermost elements of the White House and the Secretary of State, what’s going to happen when a real foreign policy crisis erupts? Cutting capabilities, as we saw with sequestration during the Obama years, is devastating.
When it comes to innovating our government, things are made doubly more impossible, thanks to the terrible triad of special interests, the bureaucracy, and the elected officials, all of whom benefit mightily from the status quo–and will resist any perceived threat to it vehemently. Encouraging real innovation and adaptation within the federal government was the basis of John Micklethwait and Adrian Wooldridge’s recent 2015 book. “The Fourth Revolution: The Global Race to Reinvent the State.” What they determined was that our government was its own worst enemy and that it was failing to uphold its basic mission: to serve the American people.
America’s problems today are not economic; they are political. We are unable to innovate and adapt because we are still being governed by a government which operates based on antiquated concepts. What’s more, the size of the government has become unmanageable and it has encouraged the worst inefficiencies: corruption, wasteful spending, and unresponsive policies are the result. Only politics can proffer a solution. Unfortunately, most politicians elected are simply unable (and often unwilling) to take the courageous actions needed to reverse course at a national policy level. Unless we fix our politics, we will never innovate.
Without real reform within government (and that only comes with real leadership, not the milquetoast politically correct leaders we have on Capitol Hill and throughout government), the sheer size and inefficiency of our government will in itself become a national security threat. America needs bold and innovative leadership at all political levels. Without it, we are nothing. Moneyed interests should start identifying those leaders who prize innovation and adaptability above the stuffy political arguments of yesteryear, and support such people for office. Our country simply cannot afford to face the Age of Disruption with a government still stuck in the 1960’s.
China is planning for the future (both metaphorically and literally) whereas the United States government wants to keep playing tug-of-war with itself over the most mundane and inconsequential issues because it’s easier than addressing the staggering amount of problems facing us today.