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The Great Recession is just the beginning

By Matt Miller
Wednesday, July 21, 2010;

Here's a cheery midsummer thought. You know those 15 million unemployed, and that sluggish growth, and the debt hangover and de-leveraging, and those soaring deficits? Well, these woes aren't our biggest economic problems.

The real test for the U.S. economy starts once we get past the fallout from the burst housing and banking bubbles that triggered the Great Recession. And when it comes to that challenge -- which involves preserving U.S. living standards in a world of global competition -- we either (1) don't know what to do, or (2) we do know but seem to have little intention of doing it.

A brief trot through history places this moment in context. After World War II, when the United States was the only economy left standing, we began an unprecedented economic run. "You had a 60-year period where every new industry of huge value-added or breakthrough innovation or high risk -- whether it was pharma, biotech, software, personal computing or semiconductors -- were all totally U.S.-based," Bill Gates said in 2007.

The shared prosperity this dominance made possible built the middle class. But the age of U.S. supremacy had to end sometime, and, starting two decades ago, rising powers such as India and China began the reforms that would make them genuine competitors.

From the point of view of humanity, these nations' rise has been fantastic news. Hundreds of millions of people have been lifted from poverty, with billions hoping to follow. But for workers in advanced countries, the wage strains were inevitable, as it became feasible to locate more work with low-cost (and, increasingly, high-quality) labor anywhere on the planet.

It was at this point in the saga, when research already showed that up to 100 million Americans were living in households earning less than their parents did at a similar age, that -- bam! -- the housing and financial bubbles burst.

Historians may therefore think of the Great Recession as Decline, Interrupted.

The thing to remember is that these are different kinds of events. The bursting bubbles, and the associated market panic and credit freeze, was a heart attack, to which the authorities responded with emergency measures.

But "the fate of the middle class" in a global era is different. It's more like cancer -- a slower yet more profound threat, requiring a fundamental renewal of American competitiveness. And without a galvanizing "emergency."

Broadly speaking, there are two big things we need to do. The first, put well (if not in a sexy slogan) by economist Michael Spence in the Financial Times recently, is "to create capital-intensive jobs that have labor productivity levels consistent with advanced country incomes."

The second big thing is to make sure Americans have the skills to perform these jobs.

How are we doing on this agenda? Dismally. For starters, U.S. elites simply don't think in terms of a national economic strategy of the kind Spence states so simply. To be sure, the stimulus funded some energy technologies with real promise -- advanced storage and lighting technologies, and power conversion devices, for example -- that are poised to lift productivity in these areas dramatically. Such productivity gains can make higher wages sustainable. But we're not yet close to the needed scale of public- and private-sector effort here.

And, in any event, why will firms that can locate work anywhere manufacture these breakthroughs in America? As former Intel CEO Andy Grove argued in Bloomberg Business Week recently, it's not enough to do the product innovation in the United States; we need to do the manufacturing, too. That's the only way, Grove says, to gain the hands-on experience with products that leads to all subsequent innovations. Surrender the manufacturing and you lose this virtuous cycle -- a logic that leads Grove to call for protectionist measures if need be to make sure America keeps this innovation-to-manufacturing-to-good-jobs link here.

On education, meanwhile, the administration's agenda, though "bold" by historic standards, isn't nearly ambitious enough. In terms old SAT-takers can understand, "Race to the Top" is to "needed education reform" as "little seed" is to "giant oak." At this pace we're looking at a decades-long fix.

No politician will talk about the prospect of declining living standards. Business leaders who know what's afoot abroad talk privately about it all the time. The defining question of our era may be this: What do we do if incremental change isn't equal to renewing American competitiveness, but our political system isn't capable of producing more than incremental change?

What if waiting for our "Sputnik moment" turns out to be a lot like waiting for Godot?

Matt Miller, a senior fellow at the Center for American Progress and co-host of public radio's "Left, Right & Center," writes a weekly column for The Post. He can be reached at mattino2@gmail.com.

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