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America on the Rebound: The Resilience of the U.S. Economy

On Principle, v12n1

April 2004

by Michael G. Oxley

America is on the rebound. No other economy in the history of the world could take the setbacks that we have endured and respond with such amazing resilience. We have overcome the devastation of 9/11, the betrayal of Enron and WorldCom, and the disappointment of the tech bubble, all of this while fighting the war on terrorism. Even with all of that, our economy is showing new life. We have successfully met every challenge presented to us in this new, young century, just as we did in the last.

For nearly one hundred years, there was a battle over which economic system was best—one based on free markets or one based on government control. During the Great Depression, some thought capitalism was fatally flawed. The power of the state was on the rise, with the Soviet Union in the forefront trying to spread communism. Other countries turned to heavy regulation, nationalizing key industries, and creating welfare states. Soviet Premier Nikita Khrushchev actually said, "We will bury you." He wasn’t talking about war. He was convinced that communism would outgun the free market.

But the system built on central planning and oppression was the one that failed. The world didn’t know just how badly the Soviet Union and its satellites had deteriorated until the fall of the Berlin Wall. But the West was suffering from its own problems. The 1970s brought stagflation, a miserable mix of high inflation and unemployment. Nationalized industries were bloated and inefficient. Taxes, subsidies, and overregulation were causing us to slowly sink into an economic swamp. People no longer believed that government had all the answers.

After years on the fringes, a school of free market thought led by economist Milton Friedman gained new credibility. I remember reading Friedman at Miami University in the 1960s and thinking: he’s right.

The powerful ideas of privatization, supply side tax cuts, and free trade would make their comeback, first in Great Britain under Prime Minister Margaret Thatcher and in 1980 in the U.S. with the election of Ronald Reagan as President. Americans were tired of the well-intentioned overspending of the 1970s that had wrecked the economy. They were tired of endless inflation and high interest rates, and they were ready for Ronald Reagan’s tough medicine. The American people stayed the course through a difficult recession because they knew the medicine of less government, less spending, and tax cuts would work. They knew that taxing and over-regulating business simply meant fewer jobs. They knew that too much government spending sapped the nation’s economic strength. And they knew that erecting trade barriers would simply close us out of markets where people wanted to buy American products.

By 1983, the economy had turned toward prosperity. In his Farewell Address to the nation, President Reagan told the story of an economic summit that year, when one of the world leaders turned to him and said, "Tell us about the American miracle." The American miracle is really common sense economics. What’s miraculous, though, is that we actually put those ideas in practice, which is a rarity around the world. As we all know, it’s easy to say but hard to do.

I came to Congress in 1981, just after Ronald Reagan swept in a new class of Republicans in 1980. I cast my first vote proudly—yea from the Fourth District of Ohio in favor of the Reagan tax cut. We were proud to be called Reagan Robots.

President Reagan was also right about the Soviet Union. His defense policies played a huge role in bringing down the Soviet empire…peacefully.

When communism collapsed, countries returned to capitalism, equating it with freedom. During the 1990s, a global economy based on free enterprise and trade blossomed. The U.S. was, and is, the dominant economic power and a beneficiary of open markets. The Dow Jones Average has risen from 800 in the early 1980s to more than 10,000—not a bad investment.

One of the most notable books describing the effects of globalization is The Lexus and the Olive Tree, written by the columnist Tom Friedman. Friedman explains how the whirlwind expansion of free enterprise and open markets is changing the world. Nations that are part of the international trading system generally have higher standards of living. Those that are open tend to be freer.

To bring investment to a country, business demands a stable set of laws, transparent finances, safeguards against corruption, and openness. Democracy and freedom go along with that or aren’t far behind. The Asian Tigers were the first to catch on to this, and the economies of South Korea, Taiwan, Hong Kong, and Singapore took off. Ironically, the financial markets are bringing about reforms in countries that the United Nations never could. Technology has, of course, made a huge difference. The Internet has made this a smaller world, permitting companies to operate virtually anywhere. The proliferation of information sources has made it harder for totalitarian societies to maintain control through censorship.

This hit home for me during the trips I made to China. My first visit came some time after the student uprising at Tiananmen Square, a revolution conducted in part by fax. It was a sobering time. Although China was making progress with economic reforms, it appeared that the hardliners who ordered the crackdown wanted to return to the bad old days. But the reforms had deep roots. During my next visit, I met with the Mayor of Shanghai, who sounded like the world’s biggest capitalist. The entrepreneurial spirit was incredible. China’s explosive growth continues to this day. We have many issues with China, and they’re not where they need to be on human rights. But this is the largest market of the new century: 1.3 billion people. If we ignore it, others will gladly replace us.

Some look at China and ask if the U.S. can compete in the global economy. We can, because we have an innate ability to adapt to new conditions. Our economy is more agile than ever, and I’d offer the following reasons why. Call it my five-part formula for economic resiliency.

A first principle is sound economic policy—having a clear understanding of the proper role between government and the private sector. Tax policy is important. As far back as President John F. Kennedy, tax cuts have created growth. If you look at President Bush’s two tax cuts, the package in 2001 came just in time and prevented the turndown caused by the horrible terrorist attacks of 9/11 from being even more severe. The 2003 tax cuts sparked new growth. There’s a simple reason behind this: individuals will almost inevitably spend a dollar more productively than the federal government. Wise monetary policy fits in here. We’ve been fortunate to have knowledgeable stewards in Federal Reserve Board Chairman Alan Greenspan and, before him, Paul Volcker. They’ve made informed decisions on interest rates that have helped to keep inflation low.

A second principle is deregulation and privatization. The shift from regulation to competition has saved consumers money, promoted innovation, and given rise to entirely new industries. We’ve now had more than two decades of experience with deregulation, starting with airlines, trains, and trucking and moving to energy, telecommunications, and financial services. A joint Brookings Institution/Mercatus Center study found that consumers have saved from 10 to 25 percent from the deregulation of network industries, and the array of new services is astounding.

Perfect markets don’t develop overnight. Sometimes government confounds the problem with poor policy, like the failed electricity restructuring law in California. There are those who long for a return to the days of command-and-control. But I don’t think that consumers really want to give up the services and savings that have come from competition.

A third bedrock of a resilient economy is free trade. I’ve alluded to how it lifts economies and promotes freedom. But because a single plant closing often gets more attention than the diffuse benefits of free trade to the general public, let’s discuss in plain terms why it’s good for the U.S.

First, virtually every other country has higher tariffs than we do. So the U.S. automatically gains in any trade deal by winning more access for our products. Exports are deeply ingrained into our economy. Twenty-five percent of our recent growth has come from exports. One in five jobs in the U.S. is now export-related. And those jobs pay better than the average—wages are typically 13 to 18 percent higher. The choices created by trade save the average consumer as much as $2,000 annually. Until the recent approval of Trade Promotion Authority, the U.S. was in danger of slipping. The Europeans were sealing more trade deals, establishing holds in emerging markets that we might not have been able to break.

It’s interesting to me that after ten years, NAFTA still stirs such emotions. It has a good record. While the rhetoric is all over the map, impartial studies admit that U.S. exports to Mexico have risen substantially, especially in high value products. Mexico is more stable and democratic and a lucrative North American trading zone has formed. In fact, Canada and Mexico are by far the largest export markets for Ohio. The Buckeye State has a big stake in international trade. We’re the sixth-largest exporting state, sending nearly $28 billion in goods to other countries in 2002. Our factories ship cars, rubber, glass products, machinery, plastics, paper, and medical instruments all over the world. You can trace 20 percent of Ohio’s manufacturing jobs to exports; and on the farm, every third row of corn and soybeans is sent overseas.

Ohio has also been the beneficiary of foreign investment that has created 200,000 jobs. Perhaps the most dramatic example is Honda. Governor Jim Rhodes showed great foresight when he traveled to Japan to persuade Honda to build a new automobile plant in Ohio. Approaching its 25th year of manufacturing in the U.S., Honda directly employs 13,000 people in four Ohio facilities and thousands more in its supplier chain of 125 companies. Honda realized it needed a presence in the U.S. in order to succeed in this market. As a result, workers in my congressional district are drawing a good paycheck, and the standard for vehicle manufacturing has been raised substantially.

A fourth factor of resilience is the adaptability and creative spirit of Americans. We’re always willing to experiment with new and more efficient technologies, from the assembly line to e-commerce. Wal-Mart gained its edge by using computers to track inventories. Factories have cut their costs through just-in-time manufacturing. Chairman Greenspan has said that the growth in productivity is one reason why the U.S. sustained a long period of both low inflation and low interest rates. While higher productivity is probably temporarily responsible for a job lag, it’s a must for lasting prosperity.

In the end, we succeed because of the entrepreneurial skills of our people. Maybe the Horatio Alger stories sound corny to some people. But America is a place where great software companies do begin in a garage, and where people are willing to take great risks in order to succeed. It’s not easy to teach innovation like this, but it has always been part of our society. I think it starts with a basic belief in freedom, that people are able to pursue their dreams.

So, when I’m asked about the economy, I am optimistic. We overcome our challenges. But there’s no denying that some of these changes are unsettling. We have gained jobs from globalization, and have also lost them. But the solution isn’t what the WTO protestors did in Seattle, which was to trash the Starbucks coffee shop, or to revert to knee-jerk protectionism. Some forget that the Depression was made even worse by the disastrous Smoot-Hawley tariffs.

There are things immediately under our control, such as improving our own competitiveness. Regulations, lawsuits, outdated work rules, and health and energy expenses add about 22 percent to U.S. manufacturing costs. By passing energy legislation and even modest tort reform, we can start to get a handle on those costs.

Look at the asbestos mess. Legitimate victims deserve compensation, but we now have a system where runaway lawsuits are driving companies into bankruptcy. Owens-Illinois is a major employer in the Toledo area that has been sued 300,000 times. But despite even the urging of the courts, efforts in Congress to come up with an equitable and scientific solution to asbestos compensation have been blocked by the powerful trial lawyers lobby.

We also need to emphasize worker training. Our competitive advantage over developing countries is adding value to the products we make, and it takes a skilled workforce to do that. When companies do move, the workers left behind need access to education and retraining programs. In nearby Mansfield, we were able to get a $100,000 federal grant for technology training at North Central State College.

To compete successfully, our citizens need a more thorough understanding of how the global economy works. The media can do a better job here, because a lack of balance is unfair and even harmful. Why do a few hundred protestors get more coverage than the actual details of an agreement that could benefit millions of poor people? Why is a factory closing front-page news, but stories on companies quietly adding 10, 20, or 50 new jobs due to expanded markets less compelling?

There is a fifth and final principle of economic resiliency: the ability of our system to reform, to move forward, to solve problems, and to become more efficient. An important part of the American miracle is the political will and the ability to adapt to changing circumstances. Over the years that I have been involved in economic and business issues, we have been willing to modernize our markets and remake our economy. We are willing to change, to throw out things that don’t work, even though the future might be uncertain. America would never allow itself to sink in quicksand like the German economy or get bogged down by bad bank loans like Japan.

The principles of democracy and fairness apply to our government, and they also govern our marketplace. People in America wouldn’t stand for zero competition in the telecommunications business; they wanted choice and better service and better prices. So the telecommunications business changed, and the 1996 Telecom Act was passed. Consequently, the amount and accessibility and speed of information have exploded. In spite of the burst bubble that set the industry back, telecommunications is now on a track of sustained growth.

The individual investor looms large in the capital markets as well. The markets are constantly evolving, constantly becoming more democratic. Investors were paying too much in spreads under the old system of fractional pricing, and we were able to prevail upon the exchanges to implement dollars-and-cents decimal pricing. Now, you see your stock price in dollars and cents, and you pay less to Wall Street when you buy or sell.

Investors simply would not stand for fraudulent reporting and accounting in publicly traded corporations that caused livelihoods and retirement accounts to suddenly disintegrate. They wouldn’t stand for rosy scenario analysis that was designed to sell stock shares. And so, Congress passed the Sarbanes-Oxley Act, which has, I hope, contributed to the renewed sense of investor confidence and economic growth.

Sarbanes-Oxley is a classic example of compromise within the legislative process. Senator Paul Sarbanes and I don’t agree on much. He’s a liberal, ivy-league Democrat from the East Coast, and I’m a conservative, pro-business Midwesterner. But guided by the processes outlined in the Constitution, we were able to come together and produce the Sarbanes-Oxley Act.

All of this positive news is not the result of a single economic policy or a single bill. However, the steps taken by the President and by Congress have played an integral role in creating a positive environment for economic recovery.

We are all mindful, of course, that the development of a peaceful and free world economy is threatened by terrorism. Osama bin Laden wanted to destroy the World Trade Center simply because it was the symbol of a new global economy located in the most modern city in the world. In his eye, it was everything that his brand of radical fundamentalism hates. This was an attack on our people, our land, our economic system, and the values of the civilized world. It was, and is, war.

The terrorists, albeit briefly, shut down our stock markets and brought our vast transportation networks to a halt. Perhaps some thought that Americans would panic or cower in the face of such devastation. We responded with heroes—the police and firefighters of New York City and all of the emergency personnel at the Pentagon. We remember the brave passengers of Flight 93, who sacrificed their lives to bring down a hijacked plane that was probably headed for Washington, D.C. I can’t look at the beautiful Capitol dome without thinking that they may have saved my life and the lives of many who work in the Capitol complex. There was the leadership of Mayor Rudolph Giuliani and our President in the wake of the most vicious assault on American soil since Pearl Harbor.

I went to Ground Zero only about three weeks after the attack, with more than 100 of my colleagues under the tightest security imaginable. It was unforgettable. This is a building I knew well, where I had met financial executives who were now dead. It was a hulking, steaming mass of jagged steel and broken concrete. I felt the magnitude of the challenge that day. If the terrorists could get away with this, nothing in our lives and in our world would ever be safe again. And so, once again, we fight for freedom because we will not live any other way.

We find ourselves in a new kind of war in which the battlefield is not defined. It is a war that is being fought on many levels, a war that is not religion against religion, but the ancient age against the modern age. This is as important to the future of our economic system, to say nothing of our freedom, as the Cold War was. And like the Cold War, victory will take time and relentless perseverance.

When President Reagan delivered his Farewell Address as president, he talked about the resurgence of pride and patriotism in the 1980s. Speaking from the Oval Office for the last time, this great leader said, "This national feeling is good, but it won’t count for much and it won’t last unless it’s grounded in thoughtfulness and knowledge. An informed patriotism is what we want."

Surely, our patriotism has been informed since the calendar turned on this amazing century. It has been informed by terrible evil, and yet heroism and sacrifice. We learned of fraud and betrayal, but also of reform and renewal.

These have been hard lessons, but we have learned them well.

Congressman Michael G. Oxley is serving his eleventh term in the United States House of Representatives and is Chairman of the House Committee on Financial Services. This article is excerpted from a speech he gave at the Ashbrook Center on January 27, 2004.

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