Saving Capitalism: Keeping America Strong

What types of meaningful reform can the American government realistically undertake in order to maintain and improve its economic might in an era of increasing global competitiveness? This is the main question that economist Pat Choate, author of Saving Capitalism: Keeping America Strong, addressed during a March 17th book discussion at the Woodrow Wilson Center hosted by the Program on America and the Global Economy (PAGE). PAGE Director Kent Hughes moderated and opened the session by noting a series of economic challenges facing the United States.

Choate began by emphasizing the important role that innovation has played throughout American history. Within thirty days of assuming the presidency, George Washington established the U.S. Patent Office to help ensure that the young nation would be one in which technological innovation would be welcomed and actively encouraged. According to Choate, America's innovation-friendly environment, "has done wondrous things for our society," and has been a key reason for America's continued growth.

Despite the critical importance of innovation, Choate emphasized that public policy support has not always been consistently supportive. Choate claimed that during a number of decades following World War II, there were policies in place that did not encourage innovation among America's top firms nearly as much as they do today. He cited the example of Xerox, which he said was forced to sign an agreement by the Federal Trade Commission to open up the hard copy market it then dominated, resulting in its domestic market share dropping from 95% to 14% within four years. Choate said that this case was indicative of the era, and claimed that America's top companies were forced to give away 45,000 patents. Choate characterized this period as "one in which we were clamping down on innovation and the patent system." Following a brief burst of innovation in the early 1980's, largely due to policies enacted by the Carter administration, Choate argued that we are again going through a downturn in innovation. Furthermore, Choate argued that due to current law, patents can in fact take up to seven years to come to market, a length of time which can in effect dissuade companies from engaging in important innovations.

To spur innovation and growth in America once again, Choate argued that we must think of ways to put the "entrepreneurial spirit to work." According to Choate, one way to do so would be to encourage the success of new firms. He went on to note that "since 1980, 60% of new jobs have been created by firms that were five years old or less." Additionally, Choate advocated a change in the regulatory regime of our financial services industry, citing the need for a modern version of the Glass-Stegall Act which separated commercial and investment banks after the Great Depression and was largely repealed in 1999, as well effective oversight of the financial services industry.

In addition to patent reform and financial regulatory overhaul, Choate claimed that we need to reform our current tax system. He argued that we have approached the end of the usefulness of both the personal and corporate income tax as a policy tool. He cited the efforts of anti-tax special interest groups as an impediment to effective tax policies, which have led to "a gridlocked system." Choate not only argued that the personal and corporate income tax were no longer effective, but favored shifting to a value-added tax or VAT. Consumption based-taxes like a VAT would help put American firms on an equal footing with their Asian and European competitors. Moving to a VAT would also reduce administrative costs and facilitate the closing a many tax loopholes.

Lastly, Choate touched on the staggering unemployment rate. He noted that the unemployment rate for those aged 16 to 19 is 25%, a rate unseen since the Great Depression. The rate for minorities in that age group is even higher as Hispanics are experiencing 31% unemployment while the figure for African-Americans is 42%. In order to combat this problem Choate advocated a resuscitation of a program along the lines of the Civilian Conservation Corps, which employed hundreds of thousands of the unemployed during the depths of the Great Depression.

Choate closed by addressing the disconnect between the federal government and the concerns of the American public. Citing poll numbers in which the economy and jobs were by far the most important issue, Choate claimed that, "the public policy arena in this town is not focusing on what the American people are really concerned about." Choate recognized the sheer size of the challenge posed by the worst recession since the Great Depression, but argued that we must find the political will to respond and thus improve the lives of millions of Americans.

By Caroline Moh
Kent Hughes, Director, Program on America and the Global Economy