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Greatest threat to U.S. is economic

As American voters contemplate their choices in this presidential campaign year, the world's investors have been voting with their money. The early results are in - and they don't look good for the United States.

Last month, the Organization for Economic Cooperation and Development released figures showing that last year for the first time, China supplanted the United States as the No. 1 destination for foreign direct investment worldwide - that is, money that goes into factories, equipment, real estate or existing companies. And in a blow to fans of ``freedom fries,'' No. 2 was France. Though other major economies also suffered a drop-off in this category, no nation fell as far in percentage terms as the United States.

While such numbers fluctuate and foreign direct investment is just one type of capital flow, this dramatic swing can be seen as further evidence that in the 21st century, America is going to have to fight hard for its piece of the global investment pie - money that translates directly into new jobs and the industries of tomorrow. Clearly, the world economy is shifting around us and our place atop it is being challenged.

Yet the Bush administration's attention has seemingly been elsewhere - which may be natural, given the trauma of the Sept. 11, 2001, attacks and their aftermath. But just as the 9/11 commission report revealed the terrible costs of not attending to looming terrorist threats, so do we need to recognize the danger of focusing so intently on one threat that we are distracted from the others we face.

Even as our efforts to combat terrorism continue - as they must - we need to regain enough perspective to put economic issues back among our list of top priorities. Just as a National Security Strategy is mandated by law, having a National Economic Strategy should be mandated by self-interest and common sense. Failure to view these twin aspects of our security as interlocking pieces of a single whole will hand our enemies around the world the kind of victories they can't achieve on their own; it will erode our strength, deplete our resources and undercut our way of life.

The OECD report included another revealing statistic: Investment flows into emerging economies grew dramatically between 2002 and 2003, with investors pumping more than six times as much into developing markets as they did in the prior year - nearly $200 billion. OECD analysts concluded that the primary reason for this redirection of capital was not simply that countries such as China offer cheap labor; rather it was the size and promise of their markets. This is a big deal, because even when low wages in these countries go up, that will mean increased buying power - so the attractive labor markets of today will gradually become the attractive consumer markets of tomorrow.

At the same time, the image the United States is presenting to global investors is increasingly tainted by our apparent disregard for both economic and diplomatic fundamentals. The message we have conveyed in recent years is that there is no economic problem we confront today - from gigantic deficits to huge under-funded liabilities - that we wouldn't prefer to have our children solve tomorrow. So, it should not be surprising that other important measures of investor interest have also taken a dramatic turn for the worse in recent months.

For example, foreign purchases of Treasury bonds and other government securities are up, because the way the government finances higher budget deficits is by selling more paper. But the percentage of those foreign purchases made by private investors - people with confidence in the U.S. economy - is falling sharply. Instead, foreign governments, which bought only 47 percent of such securities in the first quarter of 2003, bought 86 percent in the first quarter in the same period this year. Almost all the government buyers were Asian, and the effect of their purchases was to prop up the value of the dollar and make U.S. exports less competitive with foreign products. Given their motivation and America's growing dependence on such investors, this is an ominous turn of events.

Yet our economic leadership seems to be looking the other way. Two weeks after the OECD report came out, Treasury Secretary John Snow told a Cleveland audience, ``There is no more serious threat to our economy than the threat of terrorist attacks on our soil.''

It is hard to assess the number of ways in which this statement is wrong, but let's try.

Let's start with the biggest domestic economic problems. Almost any one of them is a greater threat to the economy than virtually any imaginable form of terrorism. There is the record-breaking budget deficit that is likely to amount to $5 trillion over the next decade. Then there's the burgeoning trade deficit. And the $72 trillion in unfunded future retirement and health care obligations to our own citizens. And a record low savings rate, which suggests that we will need even more help with retirement funding. And the hemorrhaging of manufacturing jobs and the cost of fixing our dysfunctional health care and energy systems.

Every one of these is a gigantic problem on its own. Taken together, they represent a series of bombs placed at the foundations of our society, and they are capable of exploding in ways that would touch more Americans than anything even the most sophisticated terrorists could devise.

Let's move on to the global economic threats. One, as I've said, is the erosion of American economic leadership and consequent disaffection of important classes of international investors. Another is our dependence on those investors, and still another is our addiction to foreign oil. Even more important is the growing tension between developed and emerging nations, as a billion new workers from the emerging world compete for their place in the global economy. Emerging economies depend on change. Advanced markets are comforted by the status quo. This is the bipolar reality that has replaced that of the Cold War.

None of this is meant to minimize the potential cost of a terrorist attack, just to put it into perspective. Any economic impact of such an attack on our soil is far more likely to be due to the psychological reaction of consumers and markets than to any physical damage caused by the attacks themselves. So warnings like that of Secretary Snow have the doubly negative effect of saying "stay away" to investors and suggesting to terrorists that we are feeling so vulnerable that the time to strike is now.

While girding ourselves for costly fights in places such as Iraq, we have undertaken what amounts to unilateral economic disarmament by ignoring, exacerbating or failing to adequately address any of the real economic threats cited above. There is an alternative approach to one-note government: We can develop a broader view of national security and in so doing, heed the warnings of markets when they suggest that a change in our policies is in order.

Take the example of Singapore, a relevant choice because it faces smaller-scale versions of the problems that beset the U.S. economy: It has to compete with much cheaper labor and much larger markets available in its Asian neighbors. Every couple of years, Singapore government officials proactively seek the advice of private business leaders and other experts and come up with a National Economic Strategy that reorients public policy - tax laws, worker training, industry regulation - to strengthen competitive industries and shore up weak aspects of the economy. The results of this approach are obvious: Singapore's economy is growing at an annualized rate of 11 percent (about three times that of the United States), a remarkable pace for an economy that is already so advanced.

The United States has no such formal strategy, nor any systematic process for devising one, and this is a mistake. There's little point in producing a National Security Strategy every year if we ignore the wellsprings of that security - the economic might that underlies our military strength, our political clout and our internal stability.

Consider our broken health care system. Americans pay, on average, $4,000 more a year for the same or less adequate health care than citizens of other OECD countries; at General Motors, the cost of employee health care now exceeds the costs of steel. That is the kind of labor cost that drives foreign investors (and domestic companies) overseas. So health care becomes a jobs issue; and the lost jobs are an economic security issue.

This is a cold, hard reality. And every minute we ignore the problem or fail to view it in strategic terms, we are losing ground. In this light, health care should become a top priority in a thoughtful National Economic Strategy, as should education and investment in infrastructure. Addressing these areas would mean creating jobs - and that is a much more positive, proactive approach to protecting workers than reactive, punitive trade strategies that produce tensions with our trading partners.

Meanwhile, we are going to have to do more to successfully promote our investment advantages abroad. The United States has 19 federal agencies that promote exports. We have zero that promote foreign investment here. We have agencies that help insure and support U.S. companies investing overseas. But we don't have any that do the same for companies investing here. Scores of our foreign competitors do have such programs; for them, investment promotion is a top international economic priority. Why should we cede the field to them? It's time to establish a federal entity to make sure we use all available tools to enhance attractiveness to investors.

The process of stopping every two or four years to take a strategic view of our domestic and international economic circumstances would help to restore balance and perspective to our overall policies. It would enable us to better set priorities, minimize risk, seize opportunities and ensure effective action. Of course, as we have painfully seen elsewhere, recognizing threats or even having strategies does not always translate into such action. That requires leadership and political will.

Fortunately, that's where American voters come in - because in the course of their daily lives, they see how these massive economic concerns translate into critical priorities. In fact, for Main Street Americans, economic issues are the leading factors on which their families' security and insecurity will turn. Asking them, even implicitly, to choose between addressing them and combating physical threats is to pose a false choice that increases the danger in every area of our national life.

Editorial Notes: For an even harsher appraisal of the US economic position see The Unraveling by Jim Papluva: www.financialsense.com/stormwatch/oldupdates/2004/0618.html

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