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Never before in American politics have so few offered so little to so many. I refer to the prospective Republican candidates for next year’s presidential elections, not a single one of whom elicits a response that might be mistaken for enthusiasm from the voters, the pundits, or the party’s elder statesmen.
There are a couple of generic governor types like Tim Pawlenty of Minnesota or Mitch Daniels of Indiana, and a long list of has-beens and never was’s. But the Republicans despair of finding the man or woman who can define an alternative to a weak and waffling President Barack Obama.
Something deeper is at work than the luck of the draw. Former president Ronald Reagan defined his part for a quarter a century, and it is worth remembering how he did so. During the 1979 primaries when Reagan trounced his establishment competitors – Texas governor John Connally and the elder George Bush – he was told during a strategy session that not one Fortune 500 chief executive officer had endorsed him. America’s big corporations, the pillars of the party during the Dwight D. Eisenhower and Richard Nixon administrations, backed Connally or Bush.
“Then I will be the candidate of the small businessman, the farmer, and the entrepreneur,” Reagan told his staff. The late Jude Wanniski, who preached what became Reaganonomics from the Wall Street Journal editorial page through the 1970s, told me this story 10 years later, when I became his partner in an economic consulting firm.
Reagan unleashed a wave of entrepreneurship such as post-depression America had never seen, and transformed the Republicans from a party of country-club conservatism to the party of boot-strapping creative destruction.
Where are the entrepreneurs?
Judging from recent economic data they are an endangered species. The stock market has recovered, but not the commitment of new venture capital.
Venture capitalists were investing nearly $40 billion a quarter back in 2001, the year the Internet bubble burst. Commitments in the last quarter of 2010 were barely over half that number. And that, as I have argued for two years (at the Inner Workings blog and elsewhere) explains why employment recovery has remained so sluggish.
If the entrepreneurs are not there, then who shall be the constituency of the Republican Party? The Tea Party forms an important constituency, but not broad enough to govern. It is above all a savers’ and pensioners’ party; the glue that holds it together is the rational fear that free-spending governments will cause inflation, which transfers wealth from creditors to debtors. Its constituency of reasonably affluent middle-aged Americans is important, but it has only a proscription, not a real program, as I wrote in this space last December. (See Longevity gives life to Tea Party December 7, 2010.)
Without entrepreneurs, the Republicans face an enduring identity crisis. Republicans are wont to say that they won the economic battle but lost the cultural war. That is true, but as it turns out, one cannot win the economic battle for long without winning the cultural war as well. One explanation for the absence of entrepreneurs is the fact that the last wave of entrepreneurship went wrong. The high-tech investments of the 1990s still remain underwater.
Although the S&P Index has struggled above its December 2000 close, the computer sub-index of the NASDAQ remains at a third of its bubble valuation. There are a few success stories in the tech world, for example Apple, but its achievement stem from style and marketing rather than any groundbreaking changes in technology.
S&P 500 vs NASDAQ computer sub-index
In retrospect it is hard to characterize the Internet bubble as anything but a mass delusion, or what we would otherwise call a “cultural phenomenon.” As the bubble burst in 2000, I wrote in this space, “If Internet stocks were indeed fairly valued, we would have to conclude that the population of the world would have to spend the next century buying pornography, popular music and sundry items on line. Underlying the (then) generous valuations of technology stock was a futuristic vision of a world of mental insects drawn helplessly to the cyberspheric beacon, and plunging into the flames of a globalized youth culture.” (See Internet stocks and the failure of youth culture, August 31, 2001)
The most successful Internet entrepreneurs of the 1990s came from the youth culture, which explains why so much of the new money funded liberal causes and candidates. If not for the collapse of Internet stock prices in 2000, then Vice President Al Gore almost certainly would have raised sufficient funds to beat George Bush in an improbably close election.
The bubble that replaced the Internet was in home prices. In retrospect, again, America seems the victim of a mass delusion, in this case the belief that unlimited amounts of global capital would provide unlimited cheap financing for an unlimited extension of loans to dodgy borrowers. Because the beneficiaries were older Americans who owned homes, and because the whole apparatus of the federal government under George W. Bush supported it, the home-price bubble benefited the Republicans. The shopping-mall developer in the exurbs and the small business owner whose modest commercial building suddenly acquired a seven-figure price tag were the stalwarts of the Republican organization.
Yesterday’s creation becomes tomorrow’s destruction. After the 2008 financial crisis and the collapse of the mortgage-backed securities market, it almost seems indecent to point out that the Reagan financial reforms three decades earlier set the quarter-century expansion in motion. Cash-rich banks in Florida could use the savings of retirees to buy mortgages in Arizona or Georgia. The collapse of the savings and loan industry shifted deposits from crony lenders in the provinces to the emerging national banks. American small businesses could use their home equity for business expansion. The enormous virtue of the real estate boom is that it allowed individuals with no particular skill except for salesmanship (and sometimes political lobbying) to become very rich very quickly.
S&P Case Schiller home price index
There wasn’t any home price bubble during the Reagan years, nor indeed until the early 2000s, when home prices doubled in just six years.
Out of the Reagan years came a host of universally adopted technologies: personal computing, cable television, cellular communications, and so forth. The Fortune 500 as it was constituted in 1980 shed jobs during the 1980s and 1990s, but startups created a vast number of new jobs. More than two-thirds of all new jobs created between 1970 and 2010 came from new businesses – not necessarily small businesses, but new businesses that started small and got big.
Where will the new businesses of the next century emerge? Probably where the cleverest and best-trained individuals are, which means Asia. The chart below shows the number of doctoral degrees earned at American versus Asian universities (including China, India, Japan, South Korea and Taiwan). The Asian number is an underestimated due to fragmentary data (it does not include doctorates in computer science from Indian universities, for example). There are a billion people in Asia who have leapt from destitution to prosperity in a single generation, and another two billion poised to do so. This has to be one of history’s great wells of profitability.
PhD degrees award in quantitative subjects, US vs Asia
Even this comparison understates the Asian advantage. In 1985, American citizens earned 70% of all science and engineering doctorates against just over half today.
Part of explanation for the absent entrepreneur is that it is easier to get a high-tech education and find financing overseas than it used to be, and it is harder for a bright foreign student to enter the US and find capital than it used to be. Immigrants played a decisive role in America’s high-tech boom. According to a recent paper by VivekWadhwa, Ben Rissing and Gary Gereffi of Duke University, “There was at least one immigrant key founder in 25.3% of all engineering and technology companies established in the US between 1995 and 2005 inclusive. We estimate that together, this pool of immigrant-founded companies was responsible for generating more than $52 billion in 2005 sales and creating just under 450,000 jobs as of 2005.” (See America’s New Immigrant Entrepreneurs: Part I.)
The youth-culture delusion won’t easily return; we have learned to tell a slacker from a silver mine. The housing bubble won’t return. Demographics are against it. As the baby boomers retire, the excess supply of large-lot single family homes may rise to 40% of the total stock in the next dozen years.
America needs to change its culture; it requires fewer bond salesmen and mortgage brokers, and more chemical engineers. Even if federal mandates could change the educational system today, the impact would be felt a generation from now. Americans are not prepared to compete with Asian teenagers who spent their afternoons at cram schools or practicing piano instead of playing sports or hanging out.
America has lost its monopoly as the prime venue for entrepreneurship. As Reuven Brenner of McGill University writes, “Until the 1990s the large industrial democracies enjoyed a monopoly on both kinds of capital. Money and top talent, the latter often nurtured in the global south, had only the industrial north as a prospective destination, and the Unites States stood out as having the most democratized capital markets.”
To get entrepreneurs, America will have to get talented immigrants. That is hard to sell politically in hard times, for two reasons. One is that Hispanics are gaining rapidly as a percentage of the voters, and a shift in immigration policy towards Asians with PhDs must come at the expense of poor Hispanics. Unlike Canada and Australia, which favor skills and wealth, American immigration policy favors family members, even if they are indigent. The second reason is the residual American belief that merely because they have taken the trouble to be born in this country, they deserve a higher living standard than the rest of the world.
Americans have become the wrong sort of people. That is easy to remedy, at least in principle, for Americans are an immigration nation, and it is possible to dissolve the people and elect a new one, as Bertolt Brecht quipped during the East German workers’ revolt of 1951.
The bumptious and ambitious 20-to-30-year-olds of the Reagan era have become the cramped and fearful 50-to-60-year-olds of today’s Tea Party. As long as Americans remain wrong-footed as a people, the Republican Party will search in vain for a charismatic candidate. There are several prospective contenders who could emulate Ronald Reagan with a fair degree of credibility – Mike Huckabee, Newt Gingrich and Rick Santorum all come to mind. Unlike Reagan, they cannot simply turn the tax switch and unleash the latent entrepreneurial energies of the world’s lone venue for creative capitalism.
Americans are older, the competition is tougher, and America’s home advantage is long since gone. The message Americans need to hear – study harder, save more, and bring in foreign talent – is a harder sell. No wonder that it’s hard to find the right salesman.