Why the Republicans can't find a candidate
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
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
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
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
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.
Spengler is channeled by David P Goldman. Comment on this article in
Spengler's Expat Bar
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