Ignoring Our History
On January 5, 2011, the opening day of the 112th Congress, the House of Representatives began its activities with a reading of the Constitution of the United States. The idea originated with the Tea Party, a grassroots movement whose support for Republican candidates in the 2010 elections had helped sweep them to victory, giving the GOP control of the House. The members of the new majority wanted to drive home the point that they had come to Washington to enforce limits on both the spending and the general powers of the federal government—which they believed had gone far beyond the powers granted to it in the Constitution. Historians said it was the first time the Constitution, completed in 1787, was read in its entirety on the House floor.
The Constitution has served as the framework of American political and economic life for nearly 225 years, a span of time in which the United States has grown from a series of small cities, towns, villages, and farms along the eastern seaboard to a superpower of continental dimensions with the largest economy in the world. For America’s remarkable history, the Constitution deserves a large share of the credit.
But even reverence for the Constitution can be taken too far. Former congressman Bob Inglis, a conservative Republican from South Carolina who lost his party’s 2010 primary to a Tea Party–sponsored opponent, told us about an experience he had speaking to members of that group at the main branch of the Greenville, South Carolina, county library several weeks before the primary. “About halfway into the hour and a half program, a middle-aged fellow stood up to ask his question,” Inglis said. “He identified himself as a night watchman/security guard. Pulling a copy of the Constitution out of his shirt pocket and waving it
in the air, he asked me, ‘yes or no,’ if I would vote to eliminate all case law and go back to just ‘this’—the Constitution.”
“‘No,’ I replied. The crowd hissed and the night watchman shook his head in disgust. ‘Well, think about it.’ Pulling my cell phone out of its holster, I held it up and said, ‘The Constitution says nothing about cell phones, but there are lots of cases and some statutes that govern the use of these things. If we eliminated all case law, we wouldn’t have these cell phones.’ I went on to explain that without Judge Green’s decisions in the AT&T breakup we might not have any cell phones, and we’d still be paying outrageous rates for long-distance calls.” Inglis said that his questioner clearly was not impressed or persuaded.
The Constitution’s framers themselves knew that the document they had produced—through protracted and sometimes bitter negotiation—was necessary but not sufficient to secure the future of the country they had founded. And it certainly hasn’t been the only shaper of America’s destiny. We have always relied on something more: not a single document but a set of practices for prosperity that began with our founding and has been updated and applied over and over again. We call it “the American formula.” Although we think its importance should be obvious, it is not obvious today. America has lost sight of this traditional source of strength precisely when we should have been upgrading it. There is no chance—none—that America can address the great challenges it now faces without renewing, refreshing, and reinvesting in its formula. And yet this formula has been allowed to erode in almost every aspect for the last two decades.
It is in particular jeopardy now because America will have to reduce public expenditure sharply in the years ahead to address the government’s soaring deficits. In an era of retrenchment it will be all too easy to underinvest in our traditional, time-tested formula. We will do this at our peril. A brief history of the American formula makes clear why this is so.
There is a business adage that says, “You win in the turns.” That is, when there are big shifts in the marketplace, the best companies gain market share and put distance between themselves and their competitors because they have the vision and flexibility to spot tectonic change and leap ahead
when it occurs, while others are simply overwhelmed. They have, that is, a formula for success. Countries face similar challenges. If America were a company, Wall Street analysts would say that it has a remarkable track record. It has thrived at every turning point in its history—with every change in technology and social norms. America built the world’s most vibrant economy and democracy precisely because, in every historical turn since its founding, it has applied its own particular formula for prosperity.
That formula consists of five pillars that together constitute the country’s own version of a partnership between the public and private sectors to foster economic growth. The first pillar is providing public education for more and more Americans. As technology has improved, the country has prepared people to exploit new inventions—from cotton gins, to steamships, to assembly lines, to laptops, to the Internet.
The second pillar is the building and continual modernizing of our infrastructure—roads, bridges, ports, airports, bandwidth, fiber-optic lines, and wireless networks—so that American workers and firms can communicate and collaborate effectively and deliver their goods and services swiftly and cheaply to their destinations. Since the building of the Erie Canal between 1817 and 1825, governments at every level in the United States have financed the infrastructure necessary for commerce to flourish.
The third pillar involves, with a few periods of exception, keeping America’s doors to immigration open so that we are constantly adding both the low-skilled but high-aspiring immigrants who keep American society energized and the best minds in the world to enrich our universities, start new companies, and engineer new breakthroughs from medicine to manufacturing.
The fourth pillar is government support for basic research and development, which not only increases the store of human knowledge by pushing out the frontiers of basic chemistry, biology, and physics but also spawns new products and processes that have enriched American entrepreneurs and workers. For the American economy to keep growing in an information age in which innovation will have a greater economic importance than ever before, research on every front will be more vital than ever before.
The fifth pillar is the implementation of necessary regulations on private economic activity. This includes safeguards against financial collapse
and environmental destruction, as well as regulations and incentives that encourage capital to flow to America, lead innovators to flock to this country to lodge their patents and intellectual property—because they know these things will be protected—and inspire small businesses and venture capitalists to start up in America.
Throughout our history, these five pillars have made it possible for Americans to apply their individual energies, their talents, and their entrepreneurial drive to make themselves, and their country, richer and more powerful. Taken together, the five make up a uniquely American formula for prosperity, one in which the government creates the foundations for the risk-taking and innovation delivered by the private sector. This formula has made possible America’s two centuries of increases in living standards. It is what has made America the world’s greatest magnet for dreamers everywhere.
For nearly 235 years, America has managed to produce leaders who could sense that we were in a major turn, frame the challenges involved so that people could understand what was happening, and then rally the public to adopt the policies needed to upgrade the American formula to meet the challenges. Here is a sampler of our leading formula builders.
The father of America’s public-private partnership was the nation’s first secretary of the Treasury, Alexander Hamilton. Hamilton saw the need for a strong and active although limited government. We now reside, as the biographer Ron Chernow, put it, “in the bustling world of trade, industry, stock markets, and banks that Hamilton envisioned.” He established a budget and tax system, a funded debt, a customs service, and a coast guard. He encouraged manufacturing and, out of office, drew up plans for the kind of peacetime army that the United States did not field until after World War II. Although he did not live to see it develop, the five-part formula for a public-private partnership that has evolved in the United States over the years descends directly from Hamilton’s vision, at the end of the eighteenth century, of both the character of the country and the role of its government as an enabler of prosperity.
Starting with the founding fathers, government has supported public
education. Before he died on July 4, 1826, Thomas Jefferson asked that three of his achievements be engraved on his tombstone—that he wrote the Declaration of Independence, that he authored the Virginia Statute for Religious Freedom, and that he was the father of the University of Virginia. Unlike other major industrial countries, though, the federal government in the United States never has had the primary authority over K–12 public education. That has fallen to individual states and local school districts, which are funded through a combination of local property taxes, state tax receipts, and federal dollars. This combination of government support has transformed education in America from an elite privilege to a universal entitlement. In their book The Race Between Education and Technology, Harvard University’s Claudia Goldin and Lawrence Katz noted that thanks to the steady expansion of primary education, then the high school movement, and then the expansion of two- and four-year colleges and universities, “each generation of Americans achieved a level of education that greatly exceeded that of the previous one, with typical adults having considerably more years of schooling than their parents.” As a result, racial and regional differences in educational resources, educational attainment, and economic outcomes had narrowed substantially.
At the dawn of the twentieth century only about 6 percent of teenagers graduated from high school. By the end of the century that was up to 85 percent. At the beginning of the century about 2 percent of Americans age eighteen to twenty-four were enrolled in a two- or four-year college; by the end of the century 63 percent were going right from high school to some postsecondary institution, according to Department of Education statistics. Goldin and Katz argue that this American investment in mass education paid huge dividends: It both reduced income gaps and ensured that American workers could handle each new advance in technology.
Abraham Lincoln is best known, of course, for presiding over the federal government during the Civil War, but during that conflict his administration passed several landmark pieces of legislation that spurred America’s transition from an agrarian to an industrial society. One was the Homestead Act of 1862, which opened up the West for settlement by anyone who had not fought against the Union. Another was the Pacific Railway Acts of 1862 and 1864, which connected the eastern to the
western part of the country and so laid the basis for a truly national economy. A third was the Morrill Act of 1862, which established a system of land-grant colleges, giving rise to institutions of higher education from Georgia to California and from Minnesota to Texas. States received federal land to establish colleges or vocational schools for educating students in agriculture, science, engineering, and other skills the country as a whole needed. Lincoln signed the National Academy of Sciences into being on March 3, 1863, to bring together America’s best researchers to “investigate, examine, experiment, and report upon any subject of science or art” whenever called upon to do so by any department of the government. Remarkably, all of this happened while we were fighting a civil war.
Theodore Roosevelt secured his place on Mount Rushmore chiefly through his contributions to the American formula. His experience as a reformist police commissioner in New York City, leader of the Civil Service Commission, and governor of New York taught him that for business to thrive it required consistent and transparent rules, as well as regulators authorized to prevent abuses and hold businesses accountable. As president, he took on large business monopolies in order to foster the free competition on which economic growth depends. American business was often unhappy with the rules and regulations that Roosevelt championed, but the competition, the transparency, and the public confidence that his handiwork helped to foster probably benefited business and investors more than any other group in the country. His concept of the vital role government had to play to regulate markets, as well as to protect public health and safety, not to mention to safeguard our nation’s wilderness, laid the basis for America’s Progressive era.
In 1907, the next-to-last full year of Roosevelt’s presidency, 1,285,349 people came to the United States from other countries, the largest single annual intake in American history to that point. The United States has always been a nation of immigrants, descended as it is from the earliest European settlements in North America in what became Virginia and Massachusetts. In the first half of the nineteenth century, most immigrants came from northern Europe. In the second half and the early decades of the twentieth, a great many originated in southern and eastern Europe. America became a great industrial power after the Civil War by capitalizing on the rapid population growth due
to immigration. Many of the people who manned the factories that entrepreneurs built and dug the coal that powered these factories came originally from Europe.
Franklin D. Roosevelt’s New Deal built dams, levees, roads, parks, airports, power stations, reservoirs, tunnels, auditoriums, schools, and public libraries. These public investments in infrastructure and education gave a huge boost to the American economy during the Great Depression, during World War II, and in the years that followed. With the Securities Act of 1933, often referred to as the “truth in securities” law, and the re-regulation of the banking system, FDR stabilized the country’s finances, and these measures may well have saved capitalism in the United States. Moreover, with the introduction of the Social Security and unemployment insurance programs in a 1935 Fireside Chat, he founded the American social safety net, which is itself an indirect guarantor of capitalism. The competition that is central to a free-market economy produces losers as well as winners. This process of “creative destruction” so central to capitalism is just that—creative and destructive—and we cannot sustain the destruction without the social safety net that affords some protection to the losers. Without it, they might seek to bring down the very system that has made Americans wealthy. As America enters a necessary debate about how generous unemployment insurance, Social Security, and Medicare should be, it is well to remember that this social safety net ensures the legitimacy and stability of the free-market economy.
While FDR did not significantly expand immigration, which had been curtailed in the 1920s, thousands of Europeans, many of them Jews, made their way to America as refugees from Nazi Germany in the middle to late 1930s. Many were elite scientists, physicists, writers, artists, musicians, historians, and intellectuals. This “brain wave,” epitomized by Albert Einstein, played a critical role in shifting the world’s intellectual leadership from Europe to the United States.
The administration of FDR’s successor, Harry Truman, saw the enactment of the Servicemen’s Readjustment Act of 1944, known as the GI Bill of Rights, which provided college tuition and vocational training to returning World War II veterans. (After World War I, most discharged veterans got little more than a $60 stipend and a train ticket home.) According to the Department of Veterans Affairs website,
Thanks to the GI Bill, millions who would have flooded the job market instead opted for education. In the peak year of 1947, veterans accounted for 49 percent of college admissions. By the time the original GI Bill ended on July 25, 1956, 7.8 million of 16 million World War II veterans had participated in an education or training program. Millions also took advantage of the GI Bill’s home loan guaranty. From 1944 to 1952, VA backed nearly 2.4 million home loans for World War II veterans.
Also in the Truman administration came the establishment of the National Science Foundation, in 1950, through which the federal government distributed, over the years, billions of dollars for scientific research. Truman’s successor, Dwight Eisenhower, is often caricatured as a retired general more interested in golf than in legislation. In fact, he made huge contributions to America’s growth-promoting formula. He built on the government’s partnership with science during World War II, which had produced the first atomic bombs. He also capitalized on the national alarm over the Soviet Union’s launch of the first Earth-orbiting satellite, Sputnik 1, in 1957. We forget today how Sputnik both electrified and challenged Americans and why it prompted us to update our formula so energetically.
Within a year of Sputnik’s launch, Congress passed the National Defense Education Act, which supported the study of science, foreign languages, and the history, politics, and economics of foreign countries. To improve defense research and innovation, the government established the Advanced Research Projects Agency, later the Defense Advanced Research Projects Agency, which over the years made concrete contributions to the Saturn V rocket, the one that propelled the Apollo astronauts to the moon; the world’s first surveillance satellites; the research network that was the precursor to today’s Internet; new materials now used in high-speed integrated circuits; and the computer mouse.
Eisenhower, who had been impressed by the German autobahn system, also made a monumental contribution to America’s infrastructure. He won support for the creation of the interstate highway system on the grounds that it was necessary to move around military equipment, troops, and supplies more efficiently in the event of a war with the Soviet Union. Today there is a ringtone you can download on the Internet
of a song called “Eisenhower Is the Father of the Interstate Highway System.”
Eisenhower was a forceful defender of immigration, more out of a sense of duty to those fleeing oppression than as a strategy to import more brainpower. Nevertheless, it had both effects. In his January 12, 1961, State of the Union speech, he noted that
over 32,000 victims of communist tyranny in Hungary were brought to our shores, and at this time our country is working to assist refugees from tyranny in Cuba. Since 1953, the waiting period for naturalization applicants has been reduced from 18 months to 45 days. The Administration also has made legislative recommendations to liberalize existing restrictions upon immigration while still safeguarding the national interest. It is imperative that our immigration policy be in the finest American tradition of providing a haven for oppressed peoples and fully in accord with our obligation as a leader of the free world.
A few years later, under President Lyndon Johnson, the immigration pillar of our formula was further expanded when Congress liberalized laws that had severely restricted Asian immigration. The Immigration and Nationality Act of 1965 opened the doors for the massive immigration of brainpower from India. Today there are nearly three million Indian immigrants, many of them scientists, doctors, and academics, greatly enriching America’s talent pool. “In the 1970s something on the order of 80 percent of the engineering graduates of the Indian Institutes of Technology (IITs) came to America to do graduate studies and research, and the vast majority of them became permanent residents and citizens,” said Subra Suresh, the current director of the National Science Foundation, who was one of them. A large number of them became leaders in academia, industry, government labs, and start-ups in the United States. In 2009, only about 16 percent of the graduates of the IITs came to the United States for graduate studies and research. “If this trend is sustained from IITs and other similar institutions in other countries, it could have a huge impact for our research enterprise. More than 40 percent of the 375 faculty members in the School of Engineering at the Massachusetts Institute of Technology (MIT) are
foreign-born,” added Suresh, who served previously as MIT’s dean of engineering.
The government has provided three of the five parts of the American formula—education, infrastructure, and research and development—through the use of taxpayers’ money. A fourth, immigration, is governed by laws Congress passes. The fifth part of that formula involves the use not of the government’s money but of its power.
Government regulation of the economy seems to contradict the fundamental principle of free-market economics. Like the social safety net, the proper extent of regulation is the subject of ongoing debate; and just as Social Security and Medicare have grown too expensive in their present form for the country to afford, so regulations have become more complicated than may be good for the health of the American economy.
President Obama admitted as much when he declared in The Wall Street Journal (January 18, 2011) that he was ordering “a government-wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive.” As with the social safety net, however, while it is sensible to prune the thicket of regulations within which American business operates, it would be utterly foolish to do away with government regulation altogether.
Markets are not just wild gardens that can be left untended. They need to be shaped by regulations that promote risk-taking but prevent recklessness on a scale that can harm everyone. The need for regulations arises from an unavoidable feature of any free-market economy, one that economists call “externalities.” These are the costs of free-market activities that are not captured by prices, for which, therefore, nobody pays, and that can injure the society as a whole. To correct this market failure, government has to step in to make sure that something closer to the full costs of the activity do somehow get paid. It can do this either by regulating the activity or by taxing it. A common and familiar externality is the pollution that industrial activity generates and that finds its way into the air that people breathe and the water that they drink. In recognition of the breadth of the problem that pollution presents, an entire federal agency was created to deal with it: the Environmental Protection Agency, established in 1970, during the administration of Richard Nixon.
Intelligent regulations and standards, often drawn up in consultation
with business, also promote innovation and investment. When the U.S. government sets high energy-efficiency standards for air conditioners, for example, and every American manufacturer has to innovate in order to meet them, those companies can then compete effectively in every other market in the world. By contrast, when we lower our standards, we invite competition from every low-cost manufacturer around the world.
At the same time, regulations and regulatory bodies provide the vital foundation of trust that fosters innovation and risk-taking. The creation of the Securities and Exchange Commission in 1934 increased the importance of the New York Stock Exchange by making it a less risky place. The Federal Deposit Insurance Corporation, created by the Banking Act of 1933, substantially reduced the chance of bank runs, and the stability of the FDIC helped attract capital from around the world. The North American Free Trade Agreement, which went into effect in 1994, created a regulatory framework that has triggered massive cross-border investments and trade between the United States and both Mexico and Canada. America’s patent laws, which protect the intellectual property of innovators, encourage even foreigners to register their patents in America, where they know their ideas will not be stolen—unlike in China. In 2010, more than 500,000 patents were filed with the United States Patent and Trademark Office, thousands of them by non-Americans.
The country’s first Patent Act was signed into law by President George Washington, and over the next two hundred years successive presidents enlarged protections for all kinds of intellectual property—in the form of copyrights, trademarks, and patents. Today, the United States Patent and Trademark Office proudly boasts that over the last two hundred years it has granted patents for “Thomas Edison’s electric lamp, Alexander Graham Bell’s telegraphy, Orville and Wilbur Wright’s flying machine, John Deere’s steel plow, George Washington Carver’s use of legume oils to produce cosmetics and paint, and Edwin Land’s Polaroid camera.” America’s patent process has created a huge bank of scientific and technical knowledge in the form of roughly eight million issued patents and more than two million trademarks since its founding.
One reason America became a nation of starter-uppers is that failure
did not carry the permanent stigma that it carried in old Europe. This was a cultural difference, but also one that was enshrined in our formula through steadily evolving regulations that made it possible to get a fresh start.
One of those regulations was the bankruptcy law. Beginning in the nineteenth century, the United States enacted laws to allow companies and individuals to declare bankruptcy and start over relatively easily. The banks could liquidate your assets or force you to reorganize, but then you could try again. Yes, there would be a black mark on your credit record for a few years, but then it would disappear. While no one wants to encourage bankruptcy, there was not a lot of stigma attached to bankruptcy in America—at least compared to Europe, where a single bankruptcy was a mark of Cain that usually meant the end of your business life. American bankruptcy laws emphasized rehabilitating debtors rather than punishing them. Europeans have long marveled at how easy it is for entrepreneurs in Silicon Valley to try something, fail, declare bankruptcy, try again, fail again, try again, and then strike it rich. The easier it is to go under, the easier it is to start over.
All these regulations, notes the Stanford University historian David Kennedy, “were not about creating more state control and less private ownership. They were about creating the right synergy between the two.” When you undergird markets with the right government rules, regulations, and incentives, “you set the stage for more risk-taking,” said Kennedy. “Predictability actually creates the opportunity and more incentives to innovate.”
The country’s economy would scarcely be what it is today without highly motivated risk takers such as Warren Buffett, Bill Gates, and Steve Jobs. But their achievements would not have been possible without the public side of America’s unique public-private partnership for success.
And that is why we are worried.
While it is true that in driver education class one of the first things a student learns is not to pass on the turns, in economic history classes
students learn that turns are where you get passed. So in a high-speed turn, a country has to drive with much more determination than on a straightaway. The end of the Cold War has coincided with the fastest turn America has ever faced. It is driven by the merger of two major trends: globalization and the IT revolution. We need to win in this turn. So we need to upgrade and improve our American formula—now more than ever. Unfortunately, our politics have moved in the opposite direction.
Again, former representative Bob Inglis, the South Carolina Republican, can testify to this. He recalled a vivid example from a town hall meeting on health care that he held in Simpsonville, South Carolina, during the 2010 campaign. “I was talking about health-care issues and an elderly man stands up and says, ‘Keep your government hands off my Medicare.’
“I said to him, ‘Well, sir, of course Medicare is a government program.’ ‘Yes,’ he says, ‘but I am paying for it.’ And I say, ‘Yes, you are. You are paying—25 percent of the premium—and the government is picking up 75 percent’ through Medicare Part B. Now he is threatened, and he says, ‘Yes, but I paid for it while I was working.’ And I say, ‘Yes, 1.45 percent you, and 1.45 percent your employers, paid a Medicare tax on your payroll.’ I was trying to be as diplomatic as I could be. He looked to be about seventy-five years old, a man in okay health. So I added: ‘And I have to say, if you had one or two hospital admissions you have used up all that you and your employer have ever paid in.’ He sat down, angry. That man’s self-conception was that he rode out onto the prairie on his own horse and tamed this country and got what he has entirely by his own effort. Deep down, though, he knew that he had not gotten this on his own. He was dependent on other people and that threatened his identity.
“What I needed to say to win him over and win my election,” Inglis said, “was that ‘I am going to prevent that socialist in the White House, who is probably not even an American citizen and who is illegitimately in the White House, from getting his hands on your Medicare.’ Then I would have been a political hero—but I would have left them in ignorance. What is tragic right now is that we have people—leading people—who choose to leave audiences in ignorance or even encourage stupidity.”
Inglis is certainly right about that—and it’s had an impact. Suzanne
Mettler is a professor of government at Cornell University and the author of The Submerged State: How Invisible Government Policies Undermine American Democracy. In a September 20, 2011, essay in The New York Times summarizing her research, she noted:
Don’t take at face value the claims that Americans dislike government. Sure, a recent ABC News/Washington Post poll found that 56 percent of Americans said they wanted smaller government and fewer services. Tea Party activists, the most vocal citizens of our time, powerfully amplify those demands. Yet the reality is that the vast majority of Americans have at some point relied on government programs—and valued them—even though they often fail to recognize that government is the source of the assistance. A 2008 poll of 1,400 Americans by the Cornell Survey Research Institute found that when people were asked whether they had “ever used a government social program,” 57 percent said they had not. Respondents were then asked whether they had availed themselves of any of 21 different federal policies, including Social Security, unemployment insurance, the home-mortgage-interest deduction and student loans. It turned out that 94 percent of those who had denied using programs had benefited from at least one; the average respondent had used four. Americans often fail to recognize government’s role in society, even if they have experienced it in their own lives. That is because so much of what government does today is largely invisible.
Mettler calls the panoply of government programs, incentives, and subsidies that most of the public is unaware of “the submerged state.” People feel it, benefit from it, but have stopped seeing it and therefore have stopped appreciating what it takes to sustain it. “The threat to democracy today is not the size of government but rather the hidden form that so much of its growth has taken,” she wrote. “If those who assume government has never helped them could see how it has, it might help defuse our polarized political climate and reinvigorate informed citizenship.”
That same ignorance infects sectors of the business community,
where scorn for the government and regulation has become the norm. Who can ever forget Ronald Reagan’s famous campaign line: “The nine most terrifying words in the English language are, ‘I’m from the government and I’m here to help.’” Of course, every businessperson in America wants lower taxes and less regulation. Most Americans do. But every one of us also benefits from, indeed depends upon, the five pillars of the American formula. Failing to recognize that fact endangers one of the major sources of our strength.
Fortunately, at least some of America’s most prominent investors and entrepreneurs do fully appreciate how much our formula enables the American economy to create more wealth from fewer and fewer inputs. “You always have to renew your lead,” Bill Gates remarked to us. “But we have to ask: Where did this lead come from in the first place? It was that we educated more people than the other guys, and we attracted more talent,” and we built better infrastructure. We need to get back to work in “renewing the sources of our advantage,” he said.
Jeffrey Immelt, the chairman and CEO of General Electric, one of the largest private companies in the world, noted the dangers to America of the mistaken belief that the government has no constructive role at all to play in the economy: “We worship false idols in terms of the power of the free market. The U.S. government has been the catalyst for change for generations. The National Institutes of Health shaped a generation of leading-edge health-care technology. And all of the defense spending has spawned the nuclear power industry and the Internet.
“I’m a free-market guy,” Immelt added. “I believe in the endless possibilities of individual choice and private initiative. But there’s a long history in this country of government spending that prepares the way for new industries that thrive for generations.”
Warren Buffett likes to make this point about his own spectacularly successful career, explaining that the billions of dollars he has made as an investor have been due in large part to the fact that his career unfolded in America, with this country’s vibrant institutions, free markets, rule of law, and formula for prosperity.
“I was born in the right country at the right time,” Buffett said in an interview on ABC (November 28, 2010). “Bill Gates has always told me if I had been born, you know, many thousands of years ago, I’d have been some animal’s lunch because I can’t run very fast, I can’t climb
trees, and some animal would be chasing me and I would say, Well, I allocate capital. The animal would say, Those are the kind that taste the best.”
John Doerr, one of America’s premier venture capitalists—an early backer of Netscape, Google, and Amazon.com—puts it this way: “You have to take risks when you are in a high-speed turn. Sometimes you’re going so fast and the turn is so sharp, your car’s riding on only two wheels. But without risk-taking nothing big happens.” It is the American formula, Doerr added, that provides the underpinnings—in support for basic research that spins out new breakthroughs in physics, biology, and chemistry—that have made America’s venture capital firms so productive in these turns.
It is worth noting that the American formula has been, in no small part, a Republican creation, which means that twenty-first-century Republicans who deny any economic role for the federal government are at odds with their own tradition. Alexander Hamilton belonged to the Federalist Party, a distant ancestor of the Republicans and the opponent of Thomas Jefferson’s Democratic-Republicans (they later renamed themselves Democrats), from which the Democratic Party of today is descended. The Republican presidents Abraham Lincoln, Theodore Roosevelt, and Dwight Eisenhower all significantly expanded and updated the formula. The Republican Party has traditionally favored limited government, but also strong and effective government where it is required.
Lincoln, Roosevelt, and Eisenhower, along with their Democratic counterparts, understood that the challenges of the world they were living in compelled the United States to enhance its national strength and prosperity, and at critical moments they articulated a vision of American greatness that persuaded the public to support, and Congress to authorize, measures appropriate for reinvigorating the formula. That is surely a common denominator among our greatest presidents—the ability to summon the nation to renew its traditional formula at each critical turn in our history.
Alas, the historical record also shows that the formula has expanded fastest and farthest in wartime. When a country is engaged in a war, especially a war considered essential to its survival, large numbers of its people will support almost any measure that can help it win. The Civil
War era, for example, was also the occasion for authorizing the first federal income tax.
From Benjamin Franklin and his lightning rod onward, America produced gifted inventors, but government-sponsored research and development only began in a major way during World War II with the Manhattan Project. The effort to build an atomic bomb came about because FDR and his advisers feared that, without it, Nazi Germany would get the bomb first. After the war, as scientific research became crucial for technical advance and the scale and complexity of that research could no longer be adequately sustained by private companies alone, the United States led the way. The low-hanging fruit had already been plucked by tinkerers in garages, and scientific progress now required national laboratories and partnerships between government, universities, and private companies. The programs that Eisenhower added to the nation’s formula for prosperity had the common goal of assisting in the global struggle against the Soviet Union and international communism. Seventy-five years after World War II and two decades after the Cold War, America’s oldest national laboratory, the Argonne National Laboratory in Illinois, is doing basic research into solar energy, the smart electric grid, and electric cars. Examples of this public-private partnership make the news pages every day. For instance, as AOL’s DailyFinance.com noted (January 7, 2011), General Motors has licensed a technology from Argonne “that will boost the performance of lithium-ion battery cells that power electric cars” such as GM’s Volt, creating “safer, cheaper batteries with longer operating lives that can also go further between charges.”
Our big challenges today require the kind of national responses that wars have evoked, but without a major ongoing conflict it will be difficult to mobilize the American people to make the difficult policy choices needed to meet them. In seeking to rally support for such policies when he assumed office, President Obama referred to a “Sputnik moment” for the United States. The original “Sputnik moment” spurred thousands of Americans to take up careers in science and engineering, and related businesses, and galvanized the country as a whole to invest in mathematics, science, and technology, as well as to improve the nation’s infrastructure. The purpose was to avoid falling behind the Soviet Union, but one of the by-products was to update the traditional American formula
for prosperity, which made the American economy even more creative and productive.
Today the United States has no such rival; but we have to find a way to do now what Sputnik spurred us to do then: update our formula to match the needs of the moment. After all, we are driving on roads and bridges built in the 1950s and even the 1930s. We are cutting back on the very universities that were chartered by Lincoln. We are learning from breakthroughs made by scientists who were inspired by Kennedy’s moon shot or who immigrated to America in the 1970s, spurred by Kennedy’s vision. In short, we are living off upgrades to our formula made a long time ago. While the $787 billion economic stimulus package Congress approved in February 2009 included some investments in infrastructure and research and development, much of the spending undertaken to fight the recession went to tax cuts, to unemployment insurance, and to such minuscule improvements as the new lighting on the train platforms in Penn Station in New York City, which makes it easier to see just how grimy, undersized, and outdated they are. The formula has a long lead time; it involves one generation investing on behalf of another. So when we opt for deferring maintenance on the formula rather than making farsighted investments in it, we are denying the next generation the tools it will need to maintain the American dream.
Unfortunately, the political debate in America has strayed absurdly from the virtues of our public-private formula. Liberals blame all of America’s problems on Wall Street and big business while advocating a more equal distribution of an ever shrinking economic pie. Conservatives assert that the key to our economic future is simple: close our eyes, click our heels three times, and say “tax cuts,” and the pie will miraculously grow.
We need to get back to basics, and fast. We need to upgrade and invest in our formula the way that every generation that came before us has done. We are entering a new economic turn, one that America did more to generate than any other country. Now we have to make sure that every American citizen and company has the skills and tools to navigate it.