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Consider Knowledge. The great economic revolution or modernization of the last 250 years, empowering first Britain, then America and Western Europe with early leadership advantages, has as its most fundamental source mathematical science. Scientific Knowledge, turned to technology and harnessed to production by entrepreneurial energy, then matched with learning how to manage large organizations, created the modern world. Mathematical science began as a monopoly of Europe and America, but now it is fully globalized, the most cosmopolitan of human achievements, where national borders are irrelevant. America has world-leading research universities, but Knowledge is available everywhere and Asia in particular is fully incorporated into the global scientific endeavor.
So we come to Social Infrastructure. The political stability and safety of America has long served to attract investment as a safe haven. By designing a stable political order which continued to work for an extremely large republic, the American Founding Fathers also created an economic competitive advantage. This advantage was augmented when Europe destroyed itself in the First World War, and New York replaced London as the center of world capital concentration and allocation. This advantage continues and helps explain how the U.S. can finance its large trade and budget deficits.
John Makin has instructively written, “The fact that global savers accommodate U.S. consumers…by keeping the dollar stronger than it otherwise would be is simply a manifestation of America’s comparative advantage at supplying wealth storage services.” (“America’s External Balances,” August 2006, emphasis added.) Dr. Makin explains: “The United States offers the largest menu of wealth storage options, not only in terms of variety, but also in terms of liquidity (defined as the ability to move huge sums — tens of billions of dollars worth — with only a small impact on price).”
This advantage in “wealth storage services,” which yields not only economic, but also key political and military benefits, is derived from the advantage in Social Infrastructure. But no competitive advantage, including this one, is automatic or incapable of being lost. The dead weight bureaucracy, cost and accountants rampant unleashed by the Sarbanes-Oxley Act are doing their best to dissipate America’s last international competitive advantage. So are the plaintiffs lawyers, the sometimes abusive enforcement behavior of the SEC staff, the Byzantine complexities and costs of the convoluted accounting rules invented by the Financial Accounting Standards Board, and the actions of manipulative short sellers — all attacking our international competitiveness in Social Infrastructure.
By doing so, they also undermine our ability to maintain high relative wages or a high relative standard of living. The ability to pay more than other countries for the same work with the same level of education depends upon having a competitive advantage in one or more of the other fundamental factors of production. We are down to one— Social Infrastructure — and need to protect it.
It is certainly ironic that the forces undermining America’s competitive advantage in Social Infrastructure all claim to be improving it, when in fact they are doing the opposite. Meanwhile, London sees the chance to reclaim its lost role as the leading global capital market, just as it achieved becoming the capital of the Eurodollar market in the 1960s, when regulations of those days made the U.S. non-competitive. It is certainly instructive that the London Stock Exchange markets itself as a “Sarbanes-Oxley free zone.”
The strongest competitive advantage, with however great a history, cannot support an indefinite amount of political, bureaucratic, legal and accounting economic parasitism. We need to protect our last international competitive advantage. There are numerous anti-competitive factors to work on, as suggested above, but bipartisan reform of the Sarbanes-Oxley Act would be a good place to start.
Alex J. Pollock is a Resident Fellow at the American Enterprise Institute.
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