U.S. economy: What must happen next

On Friday I had the opportunity to ask Treasury Secretary Henry Paulson about where America was going to get long-term growth in the economy. After all, nations that can't grow their way out of recessions either slip into depression or just move sideways. That isn't exactly the American experience.

Here was my exact question to Mr. Paulson:

"In terms of long-term growth, a lot of people are saying [that] because the manufacturing base is gone, where … in the next two to three years, [do you see] long-term growth?"

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Not an easy question, and I got a long answer. Here's Mr. Paulson's direct response, in part:

"You may not know it, but who is the largest manufacturer in the world? The U.S., by a lot. It's fascinating. When I had looked at the data in 1950, we had about 30 million manufacturing jobs in the U.S. – were about 30 percent of the country then, and there are about 15 million manufacturing jobs, OK? Today we've got the same 15 million manufacturing jobs; they're about 10 percent. But the output has gone up seven times over that period."

Yes, the secretary is right – as far as it goes. Today, largely because of stunning advances in computerization, each manufacturing job that we've managed to retain is far more efficient than could have ever been imagined in 1950. In short, productivity has zoomed.

Think about in your own lives. For many items today, there's no wasting time or gas driving around on fruitless shopping trips. You simply log on, hit send, and you own it. Those same magnitudes of efficiency have been achieved throughout our economy.

But as I listened to Mr. Paulson, I wondered whether or not this is the whole story. First, there is a profound degree of anxiety out there among my fellow citizens about jobs and industry not just going overseas, but long gone overseas. And I began to remember my school days back in the 1950s – how I was taught that America was the "arsenal of democracy" twice in the last century, during both world wars. In those far off days, when Chrysler Corporation (Remember them? They're also in the history books.) made Sherman tanks, they got the steel from Pittsburgh, the electronics from upstate New York and the skilled labor from Detroit.

Does America have that capacity today? I don't think so. My readers know that I'm no fan of wars, but if we had to fight one where our country's existence depended on the outcome, could we make the Humvees, the planes, even the uniforms domestically? (When the Army switched to black berets for all soldiers, I believe that they were made in China.)

Today, I'm not sure that so-called U.S. industry is anything more than a large assembly plant, bolting together parts that are actually made in Brazil, Mexico, Romania or China.

In other words, we've lost control over our industry. And this is mirrored by the fact that our government, the Fed, Paulson and so forth no longer control our economy. Like all the ballyhooed efficiencies, these negatives can also be understood anecdotally.

A friend recently wrote to ask what she could do about the fact that her home was in foreclosure. Her husband had split from the marriage without paying a dime on the mortgage. Twenty years ago, I would have told her to contact the bank from which her spouse borrowed the money and ask for time, terms or understanding. She just might have gotten it, too. But after asking a few questions, it turns out that the mortgage was originated by a "mortgage banker" (now out of business); the loan was then packaged into something called a "CMO" (collateralized mortgage obligation), bonds were issued against the "pool" of mortgages and sold to … to where? Some European pension fund? An offshore investment account with an "address" in the Cayman Islands? It turns out, there's nobody left to call – unless she speaks Swedish, French or Japanese!

Have we been here before? Some scholars point to the half century before World War I. It was a period of internationalism, a global, albeit colonial, economy. There were emerging markets and worldwide investment in new technologies such as railroads, steel production and telephones. Maybe it was the first real globalized economy since the Pax Romana of two millennia earlier.

Britain dominated that globalized economy, in part by keeping the sea lanes open to legitimate international commerce (remember the British contribution not only to ending the slave trade but also to curbing piracy, for example, in Asia.) But then World War I happened, and that ended Britain's ability to enforce open trade and also ended other countries' willingness to trade, period. There was no real superpower during the 1920s and 1930s – and as a result, the worst of humanity bubbled to the surface, in Germany, Italy and Japan.

Since 1945 the U.S. has replaced Britain as the guarantor of the sea lanes and, to a large extent, international commerce. But if you are looking for evidence that our country, like Britain before it, has become overstretched by war (Iraq and Afghanistan), consider two recent incidents that would have been unimaginable 10 years ago and before.

The USS Kitty Hawk was challenged by Chinese vessels when it exercised its right of passage through the Straits of Taiwan – international water. Next, a bunch of Iranian motorboats threatened the passage of another U.S. flotilla through international waters in the Strait of Hormuz. Like the classic '50s movie, "The Mouse that Roared," the un- thinkable has happened, and we have been challenged by lesser powers. This lack of ability to keep international waterways open (critical for trade) is symbolic of the lessening of American influence.

We can't unscramble the egg, and like a Greek tragedy, we know that things will end badly, although we feel powerless to do anything about it. However, there are a few things that our next president can do. First, we must have a peaceful world. Without peace, there will be no growth. We must actively seek peace multi-laterally, and cooperatively – U.S. politicians don't like to admit it, but the time has passed when our country can simply assert its authority abroad or even on economic matters at home. Next, the presidential candidates must level with the American people about our interdependence in this world. The public must understand that markets, including our own, respond to international issues. Next, we must strengthen our alliances and avoid squandering our precious resources fighting quixotic wars in places we can't govern and that can't govern themselves.

Lastly, and most importantly, we must define our security in terms of economics. No mindless flag waving from the conservatives as we march into defense commitments that hurt our economic development. It also means no more saving the world by the sword from every petty dictator who violates human rights just to keep those of us on the liberal side happy. We must not just get our house in order economically; we must be ready to understand that our house is now a part of the neighborhood.