October 17, 2008    Volume 15, No. 18

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U.S. Military Fails To Learn An Ancient Military Lesson: No Industrial Economy Equals No Army

By Richard McCormack

It wasn't long ago that the world watched the collapse of the Soviet Empire. At the time, the USSR had a mighty military force that was overextended throughout the world and was bogged down in Afghanistan. Within a flash in 1989, the Soviet Union came tumbling down, not because it could not produce tanks and nuclear warheads, but because it couldn't produce bread. The collapse happened so rapidly it even surprised the U.S. intelligence community.

The United States is now inexplicably suffering the same fate. The country can produce a stealth bomber, but it can't produce a pair of shoes. Ronald Reagan must be turning in his grave.

If Ronald Reagan knew one thing, he knew that for the United States to win the Cold War, it would have to win the economic war. The United States could win an arms race by turning the Soviet Union's economy into a basket case, but only if the United States economy did not suffer the same fate.

What has happened in the short span of 19 years since the demise of the Soviet Empire? Why did America's strategic military and political leaders not learn the principle lesson of ancient history: "rich country, strong army."

For the past seven years, the U.S. military has been repeatedly warned about the loss of the U.S. industrial base and its high-tech capabilities and its potential to profoundly impact the military. In 2005, a Defense Science Board Task Force on High Performance Microchip Supply said the country was losing its high-tech industrial capability and that "urgent action is recommended." It warned that America's most strategic industries were not in a position to change the competitive dynamics that had emerged globally to shift the balance of production and markets away from the United States. "Addressing this problem is a uniquely government function," said the report. "The task force considers DOD the logical steward to lead, cajole and encourage a national solution to this critical problem regardless of which arm of government must act."

The response from DOD's top political appointees and the White House National Security Council: nothing.

For years, the U.S. military shrugged off similar admonishments from the National Academy of Sciences, the United States-China Economic and Security Review Commission, and the Advisory Group on Electron Devices, which DOD even temporarily shut down in 2003 because it did not like a report it produced describing the wholesale destruction of U.S. innovation capability. Anybody raising such issues has been branded with the pejorative label of being a "protectionist." But without an economy, what is there for the U.S. military to protect?

Over the past 30 years, zealous libertarian free-market economists have won the debate in Washington policy circles. They should be proud: their intellectual prowess has led to the collapse of the American economy, American capitalism and the American empire.

Ever since the end of the Reagan administration, I have watched from a front-row seat in Washington, D.C., as the leadership in the U.S. government sat back and allowed the wholesale outsourcing of key industrial sectors like semiconductors, lithography, printed circuit boards, photomasks, machine tools, computers, consumer electronics, foundries and software; not to mention textiles and apparel, automotive parts, furniture, toys, sporting goods, home furnishings and appliances. The U.S. government did not lift a finger as the United States trade deficit in goods soared to $838 billion in 2006, and as tens of thousands of industrial plants closed and millions of high-paid workers were sent to the streets.

It is obvious that the political appointees in the Pentagon still do not comprehend the implications of the U.S. financial system collapse as millions of Americans lose their jobs, are forced out of their homes and even die because they can't afford health care. If they did, there would be crash meetings with officials at the Commerce Department and USTR with proposals on what must be done immediately to start rebuilding the American industrial base, similar to what is occurring now among Treasury and Federal Reserve officials to salvage the banking system.

The U.S. government did not expect and has not planned for a "worst-case" economic scenario such as the one that is currently unfolding. In fact, the U.S. did whatever was in its power to foster the eventual financial meltdown -- because there was no leadership anywhere to be found in the military/political complex to assure that the United States remains an industrial powerhouse. Five defense "integrators" -- Raytheon, General Dynamics, Boeing, Lockheed Martin and Northrop Grumman -- do not constitute a robust industrial base.

None of this would have been allowed to happen under Ronald Reagan in the 1980s at the height of the Cold War. After much ideological debate over free trade and free markets during the first four years of his presidency, Ronald Reagan adopted a robust industrial policy aimed at competing head-on with both the Soviet Union and Japan. It wasn't easy for him to do so, but he supported important U.S. industries like semiconductors, autos and machine tools, and invested billions of dollars into future U.S. technological capability.

For his defense of U.S. industry and its workers, Reagan transformed the country's political dynamic with legions of Reagan Democrats, who remain to this day committed to the Republican Party despite its subsequent repudiation of Reagan's industrial embrace. Ronald Reagan's industrial legacy -- and the enduring dedication of middle-class workers -- is the reason why George W. Bush is still in office.

It was the Department of Defense during the Reagan presidency that created the Semiconductor Manufacturing Technology (SEMATECH) consortium. The National Center for Manufacturing Sciences (NCMS) was created to foster the development of an advanced machine tool and automation industry. The Defense Advanced Research Projects Agency (DARPA) funded a vast array of important industrial technologies. DOD's top technologists had a long-term vision that was unencumbered by a corporate fixation on quarterly profits, and they pumped billions of dollars into entrepreneurial companies and individuals that were focusing on computational sciences, digital technologies, networking, optics, lasers, advanced materials and global positioning capabilities. There was no place else in the government that could fund this research, even though much of it was commercial in nature. DOD's technologists knew how to get results.

The investments made during the Reagan years resulted in the incredibly prosperous decade of the 1990s. The digital technology revolution that drove the U.S. economy through the 1990s was Ronald Reagan's economic legacy.

What happened to America's strategic military thinkers and leaders? Why did they fall asleep at the helm? Why were they persuaded by free-market economic ideologues that the United States didn't need to produce anything to be a military superpower -- that it was okay to be a "knowledge" economy based on services and consumption? How did they fail to learn the lesson of the economic collapse of the Soviet Union?

It all started changing radically the moment Ronald Reagan left the presidency. As editor of New Technology Week at the time, the biggest and most unexpected shock of the first Bush administration in 1989 was its immediate reversal of Reagan's industrial policies. During Reagan's term, there were passionate and patriotic scientists, engineers and industrialists who were compelled to fight for American industry. Bob Costello in the Office of the Secretary of Defense, started the Defense Manufacturing Board; Craig Fields and his cohorts Arati Prabhakar (who later became director of NIST), Lance Glasser (who helped create the National Electronics Manufacturing Initiative) and dozens of others at DARPA were actively engaged in funding promising commercial technologies; Malcolm Baldrige and Bruce Merrifield at the Commerce Department understood the strategic importance of critical technologies; Sens. Jeff Bingaman, Fritz Hollings, Joe Lieberman and Pete Dominici and their trusted aides Ed McGaffigan, Bill Bonvillian and Pat Windham funded defense technology programs in the Senate. Reps. Mel Levine, Don Ritter and George Brown and aides like Jim Turner in the House of the Representatives pushed an aggressive technology agenda. Dozens of high profile executives worked the issue in Washington, D.C., including Bob Galvin, CEO of Motorola; Robert Noyce, inventor of the integrated circuit and co-founder of Intel; Dick Elkus, inventor of the videocassette recorder; John Young CEO of Hewlett Packard; and Ian Ross, president of AT&T Bell Labs. Among the trade associations, Dick Iverson of the American Electronics Association went out on a limb to ensure the United States remain a viable industrial powerhouse. All of these people sacrificed their careers to put their country first.

Ronald Reagan's management style of allowing people to take big risks with potentially big failures may not have worked in many areas of government -- resulting in the Iran/Contra, HUD, EPA and Interior Department scandals -- but it is exactly the type of management philosophy needed for success in scientific, engineering and technological endeavors.

It all worked until George Herbert Walker Bush took office in 1988, and it came tumbling down, driven by free-market zealots who have put the United States in its current financial bind. A heated and frankly ridiculous debate emerged over "industrial policy, corporate welfare and picking winners and losers." Bush's science advisor Alan Bromley was thrown in the dog house for six months, told not to talk to any member of the press, after he confided to the Wall Street Journal that there was a need for an industrial policy. Bush's Defense Secretary Dick Cheney reflected the "who cares about U.S. industry philosophy" when he told Aerospace Daily on January 23, 1992 that "buy American" and other similar policies favoring U.S. industry "raise questions about my spending money on things I could get cheaper elsewhere, and it raises the specter of having to rely upon less than first-rate technology in certain areas."

Within the George HW Bush administration there was the despised economic "troika" of White House chairman of the Council of Economic Advisors Michael Boskin, OMB director Richard Darman and Bush chief of staff John Sununu working against the long-term technology interests of U.S. industry. Boskin is quoted as saying, "Computer chips, potato chips, what's the difference." Bush's Commerce Secretary Robert Mossbacher had his own famous line when it came to the U.S. government putting in place policies and funding programs to assure U.S. participation in the high-definition television and flat-panel display industries: "Uncle Sam will not be Uncle Sugar."

In a highly symbolic act, Bush's team fired DARPA director Craig Fields, who remains a hero to this day among entrepreneurial technologists. Michael Sekora, a physicist who directed the Defense Intelligence Agency's "Project Socrates," which monitored advanced technologies of U.S. economic competitors, abruptly resigned and his program was eliminated. Bob Costello, former DOD undersecretary of acquisition, said upon the elimination of the Defense Manufacturing Board: "It sends a terrible signal to industry. It's a step backward, a tragedy. I don't know see what we gain by doing away with it."

George HW Bush's ideological economic stridency abruptly ended the Reagan era of industrial engagement, and it assured his loss of the presidency after one term to Arkansas Gov. Bill Clinton in 1992 who touted, "it's the economy, stupid."

Clinton's era started well, but then fizzled. His ambitious Technology Reinvestment Project (TRP) was quashed by the new Republican majority in Congress in 1994. Clinton created the Office of Economic Security in the Defense Department, and the National Economic Council at the White House to parallel the National Security Council. But without the Soviet Union around, Clinton could coast, benefiting from the "peace dividend" that came from cutting the military and plowing the savings into reducing the deficit.

Clinton also hired Robert Rubin from Goldman Sachs and free-trade economist Lawrence Summers from Harvard to be his chief economic advisors and they relentlessly pursued the same ideological concept of trade at the expense of U.S. industry. Rubin and Summers are a good part of the reason Sen. Hillary Clinton did not make it out of this year's presidential primaries -- due to the baggage from her husband's embrace of unfettered "free" trade. Yet, amazingly, both men are now seen standing astride Barack Obama -- making it difficult for an otherwise articulate person to present a viable way out of this economic mess other than through tired ideas of tax cuts and additional spending that will lead to further debt.

John McCain seems just as bad. For the past 10 years, he was the leader in the Senate in opposing any program aimed at ensuring a healthy American industrial base. He was always the first senator to rush to the Senate floor whenever any bill came over from concerned Republican members of the House that included "Buy American" provisions and other proposals that would favor the U.S. industrial base over foreign sources of supply. He killed almost all of them.

The last eight years have been a washout. Bush's tax cuts did nothing to encourage U.S. industrial innovation or high-tech domestic production. The government relentlessly pursued free-trade policies with marginal countries and encouraged outsourcing of virtually every important industrial sector. There has been an unwillingness to aggressively enforce trade laws in favor of remaining U.S. producers. The government has overseen reductions in spending on research and development in the physical sciences and engineering. It has created a despondent government workforce whose work has been doctored by political appointees and has been told to shut up and do nothing and wait for retirement. It has aggressively attacked U.S. companies like Microsoft and it put others like Arthur Anderson out of business. And the political leadership at the Department of Defense both forgot what it takes for a nation to be a military superpower and, like the Soviet Union, got lost in Iraq and Afghanistan.

And yet over the past month as major U.S. financial institutions failed, there has been little discussion about real proposals aimed at extricating the country from what could potentially be an impending economic calamity. There is no articulation of a viable vision of how to right the sinking ship, other than proposing tax cuts or spending more money the country doesn't have to go deeper into debt to cover bad debts that have still not been written off.

Few talking heads have said anything about the importance of reviving the U.S. high-tech manufacturing base and of rebuilding U.S. industrial capacity for the "environmental" era that will demand a new generation of radical innovation and efficiency in product design, production and use. Without a viable industry how is the United States going to pay off even more debt? By selling lollipops to the world's suckers who continue buying America's financial "paper"?

Wall Street needs to have its knuckles rapped publicly by the country's top political leaders -- and rapped incredibly hard -- for its continuing insistence on rewarding companies for laying off Americans and moving production offshore; for placing such undue emphasis on pennies-per-share quarterly profits at the expense of good-paying American jobs and America's continued economic viability.

When Hewlett Packard announced three weeks ago in the midst of the financial crisis that it was laying off 24,000 workers its stock price went up. Then, incredibly, last week Hewlett Packard announced plans to build a new computer plant -- in China! This has to stop. Who will be able to afford HP computers?

The trade numbers released on Friday, October 10 show that the trade deficit did not go down. The deficit in goods remained at a staggering $71 billion for the month of September. Yet there is still happy-talk among America's "leaders" about the marginal growth of U.S. exports. Such talk obfuscates what is a bad situation: combined with the federal budget deficit, America continues to go deeper into debt to the tune of more than $3 billion a day. As Nucor CEO Dan DiMicco said recently: "We'll be indentured to foreign creditors if this madness persists. We have lost our minds."

Without a vibrant industrial sector, America's economy became hollowed out. Americans stopped making enough money to afford all of the things they were buying from overseas producers. They over borrowed. Without a solid industrial economic core the financial sector collapsed. The military structure of the United States will be next.

It took only 19 years for the United States to follow the USSR into an economic ditch.

Ronald Reagan, please come back.

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