Posted by: dstieglitz | November 30, 2009

WORLD WAR THREE

     World War III has already begun. Most people don’t recognize it because World War III isn’t anything like World War I, World War II, or the Cold War. We are fighting to sustain the highest living standard in world, which ultimately will determine our political freedom. Instead of a simple fight between the Allies and the Axis powers, World War III is a struggle among economic super-powers, countries like China, Japan, the European Union (especially Germany), India, and the U.S., of course. The weapons aren’t ships, planes, and tanks; instead today’s weapons are government fiscal and trade policies, industrial innovation, and cyber-intrusions.

     The winners of World War III won’t capture a single square mile of their opponents’ land. Instead, the victors will control their opponents’ governments through debt instruments and own their businesses and infrastructure by producing significantly more than they consume. By that measure, the U.S. is losing the war badly – but it’s traditional for the U.S. to begin a world war far behind its adversaries. We begin World War III with a leaning toward isolationist trade policies and a government deeply in debt.

     For decades, growth in the U.S. economy was driven by consumer spending enabled by rising real estate values and easy credit. We built bigger and bigger houses, and filled them with more and more stuff. That spending spree caused the U.S. balance of trade to fall from a surplus in 1980 to a deficit of 5 percent of GDP – as a nation we consume 5 percent each year more than we produce. But things changed when the recession destroyed $13 trillion in property and stock wealth. The sudden drop in consumer spending was replaced by record government spending. The $700 billion bailout package and $787 billion stimulus bill combined with anemic tax revenues to produce a 2009 federal deficit three times the previous record deficit.

     Once upon a time, American spending fueled global growth – now it is a drag on that growth. The core question is: Can the U.S. switch from a consumer-driven economy to a trade-driven economy? And, if so, can it be done before the federal government goes bankrupt? Historically, the U.S. has been adept at shifting workers and resources from declining industries to growth industries. But so far the government’s economic policies have failed to stimulate growth, increase trade, or create new jobs. China, Germany, and Japan are winning World War III with large trade surpluses, and are using those surpluses to build their infrastructure, expand their overseas investments, and increase their foreign debt holdings.

     Of the three, China is the most ominous threat. Even after growing only 9 percent last year, China’s GDP is still only one-third as large as the U.S. GDP. On a per-capita basis, China’s GDP is less than one-tenth that of the U.S., and the innovation gap between the two countries remains as wide as the Pacific Ocean that separates us. Further, the U.S. defense budget is six times China’s. So how could China overcome the U.S.? Clearly, a bullets-and-bombs war would fail. The U.S. faced a similar challenge from Japan in the 1960s and 1970s. “Made in Japan” was as prevalent then as “Made in China” is today. But today Japan is losing its place as the world’s second largest economy, even though its per-capita GDP is roughly the same as the U.S. The difference is that China, with ten times as many people as Japan and three times as many as the U.S., has enormous untapped growth potential!

     The U.S. and Chinese economies (the world’s largest and fast-growing, respectively) are linked in ways that neither side can afford to break. China depends on the United States as the largest market for its exports. On the other hand, the U.S. depends on China as the largest foreign purchaser of its treasury bills. It is an economic version of the mutually assured destruction (MAD) stalemate between the U.S. and the Soviet Union during the Cold War. Either side could destroy the other’s economy, but at the same time would destroy its own. Nevertheless, the stage is set for economic war on a global scale.

     I grew up with bomb shelters and the fear of a nuclear attack, but today’s threats are very different. Today, I worry about having my identity stolen and my computer hacked. Economic warfare won’t be as lethal as the 20th century’s shooting wars, but it is likely to be more disruptive to the average citizen. Cyber-warfare destroys enemies by attacking the infrastructure that supports the economy: financial systems, communications, computer networks, power grids, and the like. Our economy depends so heavily on sophisticated computer systems that we are more vulnerable to cyber attacks than nuclear attacks. We must defend ourselves against cyber-attacks even as we maintain the conventional warfare capabilities that make the U.S. the world’s police force, the protector of free trade routes.

     The federal government must meet the challenge of cyber-warfare by regulating cyberspace, establishing security standards, defending against threats and attacks, and enforcing the law. Information technology experts in government and industry fight cyber-security battles daily. The threats include penetrations by foreign users, viruses, worms, spyware, Trojan horses, and data thefts. Inappropriate surfing, dangerous downloads, and violations of security policies by employees open the electronic kimono to these cyber-threats.

     World War III has huge implications for the world of business. Every business, from Fortune-100 companies to mom-and-pop shops, must protect itself from cyber intrusions. On the other hand, cyber-warfare also presents business opportunities on the offensive as well as the defensive side. But the biggest opportunities lie in creating products and services that the world will buy in large quantities. It’s time to reduce the focus on consumers and embrace a focus on trade – even if the leap from the old to the new is uncomfortable. To be successful in times of like these, we must anticipate what the changes will be, embrace the changes, and use them to gain new successes. On a national level, we are at war with ourselves as much as with other countries. Hopefully, Congress and the President will do their part by reversing anti-business policies, making it easy for businesses to compete internationally, and investing in cyber-security.

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