A Declaration of Dependence : SELLING OUR SECURITY: The Erosion of America’s Assets, <i> By Martin and Susan Tolchin</i> (Alfred A. Knopf: $25; 427 pp.)
The 1980s began with the greatest peacetime military buildup in our history. The Department of Defense budget was doubled, reaching the levels of the Vietnam war. The Administration launched a Star Wars program of ballistic-missile defense that was to be the last word in exotic advanced technologies. But as the ‘80s turned into the ‘90s, it became clear that America’s defense industrial base, the world’s arsenal of democracy, had been decimated by foreign competition and takeovers.
In the last decade, the United States has lost dozens of cutting-edge technologies vital to our defense, many of which were developed at the expense of the American taxpayer. Foreign firms bought 100 computer companies, 45 semiconductor companies, 35 advanced-materials manufacturers and 20 aerospace firms. The last American maker of silicon wafers has fallen into foreign hands, and the only producer of gases needed to manufacture semiconductors has been bought by a Japanese firm.
Americans are justifiably proud of the performance of their high-tech weapons in the Persian Gulf War, but few know of the desperate scramble to get critical parts that were no longer available in the United States. The Pentagon had to ask Paris and Tokyo for special battery packs for their command-and-control computers. French diplomats expedited orders for one of the most critical items in Desert Storm--transponders that could distinguish friend from foe. And the Japanese embassy had to intervene to get us crucial parts for intelligence-display terminals.
Despite the unprecedented effort and sacrifice on the part of the American people in spending trillions of dollars on defense in the 1980s, the Gulf War demonstrated that “America was being outclassed by Japanese and European competitors in key technologies--robotics, silicon manufacture, liquid-crystal displays, structural ceramics and memory chips.”
This dramatic decline in industries vital to America’s defense is meticulously documented in “Selling Our Security” by Martin and Susan Tolchin. He is a prize-winning reporter in the Washington bureau of the New York Times, and she is a professor of public administration at George Washington University. Their book describes how the policy of a weak dollar, a view of national security that ignored economic strength, and a slavish devotion to laissez-faire economics created a fire sale of America’s most advanced industrial assets.
As the authors point out, even Adam Smith was a protectionist when it came to the critical defense industries of his day, like gunpowder and sailcloth. But when Nikon was trying to buy key semiconductor-equipment producer Perkin-Elmer, President Bush’s senior economist reportedly said that the White House saw “no difference between computer chips and potato chips.”
The Tolchins point out that the United States is the only nation in the world without a policy on foreign investment and acquisition of its domestic industry. They report a senior executive at Intel marveling that “We can’t sell a 486 chip without all kinds of export licenses, but we can sell all of Intel with no clearance at all!”
“Selling Our Security” is a top-to-bottom indictment of the Reagan and Bush Administrations’ failure to safeguard America’s economic security. CIFUS, the Committee on Foreign Investment in the United States, which is supposed to scrutinize foreign takeovers, is reported never to have blocked a sale for national-security reasons. Not surprisingly, the U.S. government allowed Saddam Hussein to invest $1 billion in high-tech assets such as Matrix Churchill, which, with the approval of the Commerce Department, sent to Iraq equipment capable of making material for missile casings.
The book does a fine job of explaining how overall economic policies during the Reagan Administration brought on the wave of foreign takeovers. To deal with Reagan’s ballooning deficit, James Baker, then Secretary of the Treasury, met at the Plaza in New York with the world’s leading finance ministers. They all agreed to drop the value of the dollar so that American goods would be cheaper in world markets and we could better pay for our imports and the interest on the deficit.
Unfortunately, it also meant that American companies became dirt-cheap to foreigners. It was a bad strategy for dealing with the deficit, like selling the farm to pay for your credit cards. The Tolchins’ book cites prominent investment banker Felix Rohatyn, writing in Foreign Affairs: “If the U.S. sells $1 billion in 10-year bonds to pay for $1 billion in imports, we can ultimately repay the bonds for $1 billion plus interest. . . . If a U.S. company is bought by foreign interests to pay for the same $1 billion in imports . . . 10 years from now (the company) may be worth $5 billion or $10 billion; it is creating permanent and growing remittance of profits, dividends and technology abroad. The cost in terms of national wealth is ultimately much greater.”
While much of the book’s criticism is aimed at the executive branch of the government for failing to see the danger to America’s security and economic health, the Tolchins do not spare the private sector, particularly Wall Street. In one telling anecdote, Norman Augustine, CEO of Martin Marietta, describes how six years ago the company went to New York to tell the investment community of the wonderful technological opportunities they had and how they had decided to invest heavily in research and development to realize the firm’s potential.
“The analysts literally ran out of the room and pulled their stock,” Augustine is quoted as saying. “We went down eleven and a half points in five days. The decline continued for two years. They didn’t want us to spend on R&D.; (They) hoped we would be broken up and sold to the Japanese.”
Fortunately, Martin Marietta stuck to its guns, pouring over a billion dollars into technology. As a result, today the company has a backlog of $12 billion. But their experience with Wall Street is not unusual. In 1980, the institutions (pension funds, insurance companies, mutual funds) on average held shares for almost eight years. Now, the average share is held for only 18 months. Shareholders don’t want to wait five years for an investment in R&D; to pay off.
The book argues persuasively that any realistic definition of national security must include a strong economy based on a realization that in the modern world “technology is destiny.” The Tolchins’ recommendations gratefully avoid the trap of protectionism, while making clear the naivete of allowing the nation’s fate to be determined solely by “the invisible hand” of a global marketplace dominated by nations that are organized and have a strategy for international competition.
“Selling Our Security” is a timely and penetrating book, full of provocative insights and proposals for action. By making clear the cost of America’s present course in terms of vanishing jobs, lost national income, a crushing trade deficit and dangerous dependence on foreign sources of critical technology, Martin and Susan Tolchin are essential reading for anyone concerned with the direction our nation will take after the November election.
