Is US catching the ‘British disease’?

I am sending this article just in case you missed it. It is a confirmation of
what I have been saying all along.

Cheers!

BUSINESS WORLD MONDAY Nov 22 2010

Commentary -- By Barry Eichengreen
Is US catching the ‘British disease’?


BERKELEY -- In the United States, the scent of decline is in the air. Imperial
overreach, political polarization, and a costly financial crisis are weighing on
the economy. Some pundits now worry that America is about to succumb to the
"British disease."

Doomed to slow growth, the US of today, like the exhausted Britain that emerged
from World War II, will be forced to curtail its international commitments. This
will create space for rising powers like China, but it will also expose the
world to a period of heightened geopolitical uncertainty.

In thinking about these prospects, it is important to understand the nature of
the British disease. It was not simply that America and Germany grew faster than
Britain after 1870. After all, it is entirely natural for late-developing
countries to grow rapidly, as is true of China today. The problem was Britain’s
failure in the late 19th century to take its economy to the next level.

Britain was slow to move from the old industries of the first Industrial
Revolution into modern sectors like electrical engineering, which impeded the
adoption of mass-production methods. It also failed to adopt precision machinery
that depended on electricity, which prevented it from producing machined
components for use in assembling typewriters, cash registers, and motor
vehicles. The same story can be told about other new industries like synthetic
chemicals, dyestuffs, and telephony, in all of which Britain failed to establish
a foothold.

The rise of new economic powers with lower costs made employment loss in old
industries like textiles, iron and steel, and shipbuilding inevitable. But
Britain’s signal failure was in not replacing these old 19th-century industries
with new 20th-century successors.

Is America doomed to the same fate? Answering this question requires
understanding the reasons behind Britain’s lack of technological
progressiveness. One popular explanation is a culture that denigrated industry
and entrepreneurship. Over the long course of British modernization, the
industrial classes were absorbed into the establishment. From the mid-19th
century, the best minds went into politics, not business. Enterprise managers
promoted from the shop floor were, it is said, second rate.

Now we supposedly see a similar problem in the US. In the words of David Brooks
of The New York Times: "After decades of affluence, the US has drifted away from
the hardheaded practical mentality that built the nation’s wealth in the first
place.... America’s brightest minds have been abandoning industry and technical
enterprise in favor of more prestigious but less productive fields like law,
finance, consulting, and nonprofit activism."

In fact, this supposed explanation for British decline has not stood the test of
time. There is no systematic evidence that British managers were inferior.
Indeed, expanding the pool of potential managers beyond the children of a firm’s
founders had precisely the opposite effect. It allowed the cream to rise to the
top.

In today’s America, too, it is hard to find evidence of this purported problem.
Silicon Valley companies do not complain of a dearth of talented managers. There
is no shortage of new MBAs establishing start-ups or even going to work for auto
companies.

A second popular explanation for British decline focuses on the educational
system. Oxford and Cambridge, established long before the industrial era,
produced eminent philosophers and historians, but too few scientists and
engineers. It is difficult, however, to see how this argument applies to the US,
whose universities remain world leaders, attracting graduate students in science
and engineering from around the world -- many of whom remain in the country.

Still others explain British decline as a function of the financial system.
British banks, having grown up in the early 19th century, when industry’s
capital needs were modest, specialized in financing foreign trade rather than
domestic investment, thereby starving industry of the capital needed to grow.

In fact, actual evidence of any such British bias in favor of foreign over
domestic investment is weak. And, in any case, that history, too, is irrelevant
to the US today, which is on the receiving, not the sending, end of foreign
investment.

A final explanation for Britain’s failure to keep up makes economic policy the
culprit. Britain failed to put in place an effective competition policy. In
response to the collapse of demand in 1929, it erected high tariff walls.
Sheltered from foreign competition, industry grew fat and lazy. After WWII,
repeated shifts between Labour and Conservative governments led to stop-go
policies that heightened uncertainty and created chronic financial problems.

Herein lies the most convincing explanation for British decline. The country
failed to develop a coherent policy response to the financial crisis of the
1930s.

Its political parties, rather than working together to address pressing economic
problems, remained at each other’s throats. The country turned inward. Its
politics grew fractious, its policies erratic, and its finances increasingly
unstable.

In short, Britain’s was a political, not an economic, failure. And that history,
unfortunately, is all too pertinent to America’s fate.

Barry Eichengreen is professor of Economics and Political Science at the
University of California, Berkeley.

Project Syndicate
www.project-syndicate.org