Government, Political Influence, and Wealth

Technology and the Uncertain Foundations
of Anglo-American Wealth

excerpted from the book

Wealth and Democracy

a political history of the American rich

by Kevin Phillips

Broadway Books, 2002, paper

p230
By 2000, Europe had its own European Central Bank, and together with the Bank of Japan and the U.S. Federal Reserve, the three dominated the global financial system, controlling upwards of 80 percent of growth in the developed world. "Governments have largely ceded to these three institutions the responsibility of controlling world inflation, and to do this they must necessarily influence the near-term path for GDP and unemployment," noted Goldman Sachs economist Gavyn Davies. "Rarely, if ever, can so much power have been wielded by such a small number of institutions sitting outside the direct democratic process."

The International Monetary Fund, in turn, was the global agency to which nations, usually poor or embattled ones, turned for loans and assistance in economic crises. The conditions of those loans usually involved austerity and measures to make the local economy safer for foreign investors. The U.S. Treasury Department was influential in IMF decisions, and one economics professor, Rudiger Dornbusch of MIT, stated simply that the IMF was "a tool of the United States to pursue its policy offshore."

In collaboration with U.S. multinational banks and corporations, the U.S. government, on a bipartisan basis, was indeed closely involved in writing the rules of the new global investor economy, especially through two new frameworks brought into existence in the 1990s: the North American Free Trade Agreement (1993) and the World Trade Organization (1995). The bottom line, from the standpoint of American multinational banks and corporations, was that the U.S. market had lost its old importance. Investment opportunities, production facilities, workers, and markets also had to be sought elsewhere, which would require the creation of a protective international legal and regulatory framework, one able to secure investment by overriding contrary local parochialisms and procedures.

Although criticism had forced the tabling in 1998 of a proposed Multilateral Agreement on Investment, the enactment of the North American Free Trade Agreement and the World Trade Organization included sections authorizing similar protections. Both agreements were pushed through Congress under so-called "fast track" procedures. When fast track was in place, the House and Senate were required to consider major trade legislation on a take-it-or-leave-it basis, with amendments prohibited. Otherwise, amendments-including ones to strike provisions thought to trespass on U.S. sovereignty-might well have passed.

However, new transnational enforcement procedures helped to explain why the World Trade Organization was superseding the General Agreement on Trade and Tariffs. NAFTA, too, had a section that established a system of arbitration under which investors from one of the other two nations could bring claims against the U.S., Canadian, or Mexican governments. Investors were allowed to demand compensation should the profit-making potential of a venture be injured by national, state, or local government decisions. The broader WTO, in standards for members that former director-general Renato Ruggiero called "a new constitution for a single global economy," permitted governments to bring actions against other nations before special WTO tribunals for interfering with the flow of goods and capital.

Several decisions by these three-member panels-routinely operating behind closed doors and generally staffed by former government or corporate trade officials-illustrated the transfer of power. One ruling against the United States required amendment of the Clean Air Act to permit the entry of Venezuelan gasoline that did not meet federal standards. Thailand, for its part, was told to give up manufacturing a cheap AIDS drug after the U.S. threatened a WTO suit on behalf of an American pharmaceutical firm. Critics in the U.S. Congress pointed to the large potential for WTO panels to overturn state and local laws in the United States. Each year, they said, Japan, the European Union, and Canada publish lists of American laws that each considers WTO-illegal. In 1999, according to the Georgetown University Law Center, ninety-five such laws were tentatively identified in California alone.

In terms of procedure, no appeals to other bodies were allowed from tribunal decisions based on criteria that free trade, economic growth, and enhanced financial returns outranked different local values. This fueled critics. Journalist William Greider, a latter-day muckraker, charged that, "The WTO aspires, in effect, to create a Bill of Rights for capital, crafted one case at a time by the corporate lawyers filing their confidential pleadings in Geneva. It is not hyperbole when critics say the system defines property rights and common social concerns as irrelevant to trade."

To the AFL-CIO, the rules of the new global economy were being "created by government muscle, wielded behind closed doors, largely on behalf of the most powerful corporate and financial interests." Democratic U.S. senator Fritz Hollings of South Carolina, who became chairman of the Senate Commerce Committee in 2001, charged that "the WTO puts our social contract in jeopardy; its one-size-fits-all capitalism threatens to destroy America's standard of living."

Even corporations had some second thoughts when a WTO tribunal ruled in 2001 that a $4 billion U.S. tax break for exporters was in violation of the new international rules, and affected U.S. companies howled. By and large, though, the new framework was one that U.S. multinational corporations promoted and favored. So did investors who understood that American wealth principally rested on stock market valuations tied to corporate profits

p244
Radio had its own intertwining with government. During World War the navy took over all radio patents and speeded radio's development. After the war the navy, General Electric, and Westinghouse set up a new company, the Radio Corporation of America, to hold all the patents and steer technological development. An admiral served as an ex officio member of the board of directors and functioned as a liaison with government. In the words of one chronicler, "Every leading technician or official of RCA was a reserve officer of the Army or Navy, and the company was geared to instant conversion to war duty as an arm of the government." At first it was not clear whether radio and the limited electromagnetic spectrum would be publicly or privately owned-one plan was to set aside 25 percent of the spectrum for public service. However, the end result of the Radio Act of 1927 and the Communications Act of 1934 was to give broadcasters the airwaves. The public service strings attached were scarcely more effective than those attached a half century earlier to the public lands given railroads.

p245
By 1943, as wartime mathematicians at Pennsylvania's Army Ballistic Research Laboratory found themselves falling behind in meeting the military's needs for analyzing trajectories and computing artillery firing tables, Army Ordnance funded a crash program to produce the ENIAC (Electronic Numerical Integrator and Computer). Completed in 1945 and generally described as the first electronic computer, the wall-sized ENIAC, with its 18,000 vacuum tubes, spent only a few weeks calculating firing tables before Los Alamos mathematicians were allowed to use it for calculating the hydrodynamics of hydrogen bombs.

Its follow-up, the EDVAC, was the first stored-memory computer, and its details were disseminated so widely that army lawyers ruled that they passed into the public domain. The next group of computers were funded or commissioned as follows: SEAC (1949) for the Bureau of National Standards, IAS (1951) for the army, navy, and RCA; Whirlwind (1949) for the SAGE strategic air-defense system, Univac (1953) by RemingtonRand for the Census Bureau, other government agencies and business buyers, and the IBM 701 (1953) for the Defense Department. By this point commercial demand was catching hold.

The transistor in the meantime had been invented in 1949 at the American Telephone & Telegraph Company's Bell Laboratories, and AT&T, because of a federal antitrust suit filed that same year, was encouraged to disseminate information, spurring development. In 1954 the silicon junction transistor was produced for the U.S. military for use in radar and missile applications. The invention in 1958 of the integrated circuit (IC) - a leap forward that combined a number of transistors on a single silicon chip-had not been undertaken for the armed forces, but federal military and space applications became the IC's market and proving ground.

Technology specialists Nathan Rosenberg and David Mowery have tabulated the importance of the federal procurement. Chart 5.4A, below, shows the growth of semiconductor production, with the Department of Defense taking over one-third of total semiconductor production until 1963. Chart 5.4B shows the huge initial dependence of IC producers on military sales.

Just as U.S. antitrust officials pushed for diffusion of critical technology, Mowery and Rosenberg emphasize that the Department of Defense did so for its own goal of ensuring a "second source" of the technology DOD was buying. Compliance meant that firms had to exchange designs and share enough process knowledge to ensure that the components would match.

The emergence of the microprocessor in 1971, which led to personal computers and work stations, owed less to Washington. Not so the development of software. Antitrust pressure induced IBM to "unbundle" its hardware and software, opening up space for independent software producers. Mowery and Rosenberg also conclude, despite lack of a single time series, that, "Much of the rapid growth in custom software firms during the period from 1969 through 1980 reflected expansion in federal demand, which in turn was dominated by Department of Defense demand."

The Internet, of course, began as a project of the Defense Department's Advanced Research Projects Agency (DARPA). In a 1968 essay, DARPA computer pioneer J. C. R. Licklider discussed how a few weeks earlier he and others "participated in a technical meeting held through a computer." He correctly predicted in that same essay that being "on line" through a network of multi-access computers had the potential to "change the nature and value of communication even more profoundly than did the printing press and the picture tube." By 1969 the idea of a network got a $1 million budget at DARPA, and by the early 1970s, ARPANET was wired to twenty-three sites with some connection to government funded computer research.

Taken over after some years by the National Science Foundation, ARPANET had 100,000 sites when it was shut down in 1989, its sites to become part of other networks. Collectively these networks assumed the name Internet, gaining a new potential in 1993 when Marc Andreessen, a codewriter at the federally-funded National Center for Supercomputing Applications, came up with a vernacular protocol for Web access by the multitudes. That year the number of commercial Web sites jumped from fifty to over ten thousand, and Andreessen and his friends helped found Netscape.

p248
The telecommunications industry, like radio, received spectrum from the government under pledges of public service but at no serious cost. "The free distribution of the public-owned electromagnetic spectrum to U.S. radio and television companies," according to one critic, "has been one of the greatest gifts of public property in history, valued as high as $100 billion." The Telecommunications Act of 1996 alone, which gave each existing television broadcaster an additional six megahertz of spectrum so that they could start broadcasting simultaneously in digital and cable, drew fire for giving away spectrum worth $40-$100 billion in return for a loose promise of public service programming But most politicians were silent, too well aware of the power the major media conglomerates exercised over their careers, another parallel to the influence of the railroads a century earlier.

p269
... the gains of India and China may well represent the early-stage emergence of the two nations and continent most likely to challenge the twenty-first-century technological advantage of the United States.

India boarded the Internet and software express quite successfully in the 1990s, drawing on its 15-30 million-strong English-speaking and well-educated middle class. Even so, one-third of the 900 million population still lived in absolute poverty. Hyderabad, whose Nizam had once been the wealthiest man in British India, led the tech parade, along with nearby Bangalore. Although just 280,000 Indians worked in the technology sector at decade's end, the benefits to India's elite were broader. India's software exports jumped from about $1 billion in 1995 to some $5 billion in 2000, principally to the United States. At the height of the boom, a survey by McKinsey & Company predicted a rise to $50 billion in a decade. John Wall, president of Nasdaq International, enthused that, "There are potentially 100-plus companies in India that could list on the Nasdaq." Indeed, between the start of 1999 and the spring of 2000 the market value of the software sector on the Bombay Stock Exchange rose from $4 billion to a peak of more than $50 billion. Employees of Infosys alone included 270 millionaires in dollar terms, at least before the bubble broke.

India's millions of engineers also became the principal foreign source of skilled technicians for Silicon Valley under the U.S. government's H1-B visa program. In 2000, the total of skilled Indian workers in the U.S. approached 75,000, including more than one-quarter of the workforce at Cisco, the networking giant ... Thousands more Indians, it should be noted, held lucrative niches in the U.S. financial sector, and roughly a score of U.S. computer, Internet, and software firms had Indian-born chief executives. All of these ties greatly assisted India's fledgling software industry. In wealth distribution terms, the result was yet another glamorous digirati, bubbly stock markets, and Western high-rise buildings in a poor and more polarized society.

Still, even though India's software industry and related fortunes suffered from the post-millennial tech crash, few serious observers saw the country as anything but an ascending force in twenty-first-century technology thanks to its large number of English-speaking engineers and low wage rates. Software engineers commanding $75,000 a year in the U.S. could be hired for one-fifth as much in Hyderabad or Bangalore, and by 2001 the Indian government reported nearly one thousand tech firms- several hundred American-with foreign operations in Bangalore.

p278
Comments on the speculative tendencies of Dutch, British, and Americans have been legion. As for the repetitive implosions, doubters can consult economist Charles Kindleberger's book Manias, Panics, and Crashes. Of his twenty-eight major examples between 1720 and 1975, twenty-one originated wholly or partially in the avid stock market cultures of Holland, Britain, and the United States. Initially, of course, close relations between technology and finance produced benefits by enlisting the capital needed to support innovation. The periodic national bane, alas, was the frequent subsequent distress, most prominently in the United States, from the implosion of technologically-fed speculative bubbles.

Chapter 9 will take a larger approach to the culture and politics of speculation in the United States. But the repetition of eighteenth and nineteenth-century technology booms that bubbled and burst is instructive, especially because it has rarely been pursued. There is no need to revisit the small British speculative booms in diving engines, gas lighting, or canals. However, America's three great technologically-nurtured nineteenth-century boom-bust sequences (1857, 1873, and 1893) can be summed up in one fast-speeding, revolutionary word: railroads. None of these matched the opening-round psychological delusion of so many Britons in the Great Railway Mania of 1844-48, but the repetitive damage of the several railroad implosions to the larger U.S. economy was particularly vivid on that side of the Atlantic.

p286
Where elites prosper on a political economy of profitable openness, technology and capital move easily-and when the hour of disappointment or adversity comes, it arrives surprisingly quickly... Spain had little manufacturing to safeguard, but its financial and commercial capacities were further drained in the seventeenth century as Genoese, Frenchmen, Flemings, and Portuguese Jews left for greener pastures. Hollanders should have seen the straws in the wind when some of Amsterdam's foreign moneymen followed William of Orange to London in the 1690s. Capital transfer was close behind, and the migrating skills of Dutch carpenters and engineers only another generation or two.

The essence of the successive Dutch, British, and American internationalisms, intensified in the rentier cosmopolitanism that flourished decades beyond each golden age, has been to oppose restraints on the flow of capital, labor, and trade with an insistence that borders on theology and brooks no argument. The self-interest of the prevailing elites has been obvious, however. Leading powers formerly committed to protection and mercantilism back when that approach profited them-Britain from the sixteenth century to the early nineteenth, the United States from the 1790s to the 1930s-elicit cynicism with their new insistences.

The changes have been well cataloged. In the Dutch case, its industrial decline, especially in textiles, was closely tied to two waves of European protectionism and new or higher duties on imports. The prohibitive tariffs put by England and France on Dutch cloth and finished textiles in the late seventeenth century were followed by similar measures in Russia, Prussia, Denmark, Norway, and Spain in the first quarter of the eighteenth century. These cumulatively devastated the Dutch industry. The British, in turn, lost hope of spreading free trade and laissez-faire in the late nineteenth century as France, Germany, the United States, and Russia imposed or increased duties on imported goods.

Not a few historians have wondered how the British, in particular, could have so misread the ebb and flow of nations as to dismiss warning signals. The example of Holland was only 40 miles across the Channel and just 150 years in the past. Much of the answer probably lay in the hubris, even self-deception, that attends leading world economic power status- the ideological and geopolitical equivalent of technological mania and irrational exuberance.

The British, as they tried to sell the rest of Europe on their new credo of economic openness, infused their insistence with the moral fervor prominent in Victorian society. The Liberal Party became its unswayable upholder, the City of London its principal interest group, and allied intellectuals its theorists. Moreover, in downplaying the economic jeopardies apparent in the 1900s, party leaders like Lord Rosebery, the former prime minister, and future prime ministers H. H. Asquith and Sir Henry Campbell-Bannerman touched on virtually every argument heard again in the United States of the 1980s and 1990s. Demands for reciprocity would provoke foreign countermeasures. Britain's future lay in finance and services (where we have a favorable balance). Official statistics were not clear enough to act on. And perhaps most of all, the real answer was to achieve "better education, better training, better methods, larger outlooks" (Asquith, 1903) and to "fight them [tariffs} by a more scientific and adaptive spirit-by better education" (Rosebery, 1903).

One is tempted to say that the United States, caught up in a somewhat similar situation, has been no better at marking the British lesson than Britons had been in heeding the Dutch. True, there were important differences. A century after the earl of Rosebery urged "a more scientific and adaptive spirit" on his countrymen, Americans-or at least a higher percentage of them-seemed to still display it, witness the role of Silicon Valley as the Mecca of global technology. Early-twentieth-century Britain boasted nothing so cutting-edge. Besides, the Britain of 1900 had two obvious challengers in the United States and Germany. The United States of the millennium had no immediate rival that kept it looking over its shoulder.

p289
The conspicuously limited job creation of the major U.S. technology firms bespoke several warnings. Firm after firm was increasing its reliance on overseas production and software engineers and suppliers, especially, as we have seen, in India, China, Taiwan, and the rest of relatively low-wage East Asia. Even more to the point, many U.S. firms were dependent on foreign nations, mostly Asian, to fill American-based jobs with skilled engineers and programmers unavailable in the U.S. labor pool.

This reliance extended to the highest levels of management. Of the four or five hundred top U.S. Internet, telecom, chip, and networking firms, dozens had Chinese, Indian, or Asian-American chief executives, and Silicon Valley was home to large numbers of Indian, Chinese, and Taiwanese executives and engineers. A group with major representation in the Valley, Indus Entrepreneurs, estimated that 30 percent of the software engineers there were of Indian origin. An economist at the University of California in Berkeley used a Dun & Bradstreet database to count 750 local companies run by Indians. The workforce at Cisco Systems' San Jose headquarters was 45 percent Asian; Santa Clara County as a whole had a nonwhite majority and a 24 percent Asian population.

The Valley, indeed, seemed to foretell Asia as the next leading world economic region. A New York Times profile in 2000 explained that, "The defining character of Silicon Valley today is not the pasty-faced plaid shirt-wearing aerospace engineer, but a young geek from Taipei or Bangalore with an H-1B visa...." American universities, too, were educating hundreds of thousands of foreigners to man rival economies. Others who had come much earlier were going back-thousands of scientists returning to Taiwan alone-drawn by East Asian pride, growth, and prospects. On all counts, partnership arrangements were proliferating.

Moreover, behind the U.S. computer-industry tie to Taiwan, which in 2000 made 39 percent of the world's disk drives, 54 percent of its monitors, and 93 percent of its scanners as well as 5 3 percent of the laptops and 25 percent of the personal computers, lay the unnerving prospect of Taiwan's manufacturing absorption into the fast-growing Goliath of mainland China. More and more Taiwanese firms were moving production there. Labor on the mainland cost only one-quarter to one-third as much as on Taiwan, and China had two other lures: graduation of new engineers at a rate of 145,000 a year and a domestic computer market growing 40 percent annually. The upshot was that of the computers and laptops sold in the United States by such companies as Compaq, Dell, and Gateway, a growing ratio of the components and even final products came from China, not Taiwan, putting the U.S. into what the New York Times described as an "odd position: its main supplier of PC's and other information-technology, or I.T., gear will be its main strategic adversary." Most businessmen just shrugged. Back in the 1990s, the chief executive of Boeing, a major U.S. defense contractor with assembly lines in China, had dismissed technology transfer in aerospace production as something Washington, not Boeing, would have to deal with.

p290
In 2000, Asia was already about to pass the United States in its number of Internet users. Officials talked of China itself pulling ahead by 2005, and one China watcher noted that were China to grow at 7 percent a year, it would surpass a U.S. economy growing at 3 percent some time between 2020 and 2030.

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