Three Billion New Capitalists

THREE BILLION NEW CAPITALISTS: The Great Shift of Wealth

and Power to the East. By Clyde Prestowitz. Basic.

321 pp. $26.95

Economist Clyde Prestowitz has reasons to be pessimistic about the future of the U.S. economy—three billion reasons, in fact. With the rapid entry of China, India, and the former Soviet bloc nations into the international economy, three billion “new capitalists” have emerged to compete with Americans on the world stage. Prestowitz worries that the United States has no strategy to deal with these new competitors—and that the ultimate losers will be America’s workers.

Drawing on an impressive command of economic trends, as well as countless interviews with political and business leaders worldwide, Prestowitz highlights two problems that he sees facing the United States and the global economy. First, America’s de facto economic strategy is to ship key industries overseas. It was bad enough when manufacturing industries began leaving, but now the service sector and even high-tech and R&D are going too, enticed by the East’s low wages, high levels of education, tax breaks, and huge potential markets. To his credit, Prestowitz doesn’t begrudge India and China their growth and progress—he just wonders what jobs and wages his grandchildren will find in an increasingly “hollowed out” America.

The second problem Prestowitz identifies is that China and India are rising at a time of a simple yet fundamental imbalance in the global economy: “Americans consume too much and save too little while Asians save too much and consume too little.” The deep trade and budget deficits reflect and exacerbate these conditions. “The nightmare scenario—the economic 9/11—is a sudden, massive sell-off of dollars,” Prestowitz warns, “a world financial panic whose trigger might be as minor, relatively speaking, as the assassination of a second-rate archduke in a third-rate European city.” Yes, 9/11 meets World War I in a single sentence! At times, Prestowitz can be positively Thomas Friedmanesque in his overheated metaphors, but while Friedman has made his mark as globalization’s Pangloss, Prestowitz is more like its gloomy Eeyore.

His evidence is sometimes shaky—for instance, he uncritically accepts rosy growth projections for India and China but embraces the direst forecasts for the U.S. economy—and his policy proposals range from daring to goofy. In a time-honored Washington tradition, he calls for blue-ribbon commissions and international conferences to do everything from boosting America’s “competitive potential” to eliminating the dollar in favor of a new international currency. He argues that the United States must eliminate the mortgage interest deduction on second homes, drop income taxes in favor of consumption taxes, slash defense spending, and introduce national health insurance. He encourages Japan and India to join the North American Free Trade Agreement, and he wants Japan to adopt the U.S. dollar as its currency—though it’s unclear how his new international currency would fit into that scheme. Running throughout is a call for greater government intervention in the U.S. economy, particularly in the realm of industrial policy, which Prestowitz thinks gets a bad rap in Washington. For American business, his overriding recommendation is “Sell things no one else makes,” and he chastises narrow-minded corporate leaders for not considering the national economic interest.

Prestowitz has sounded such alarms before. In his 1988 book Trading Places, he argued that Japan had become a juggernaut, a “kind of automatic wealth machine” that could topple the United States from the world’s top economic perch. History has not been kind to that prediction. For America’s sake, one can only hope that Prestowitz’s latest forecast will prove similarly off the mark.

—Carlos Lozada