Remarks by the Honorable Lloyd Bentsen, Recipient of the Tax Foundation’s 1989 Distinguished Service Award for the Public Sector
In a recent issue of Fortune there’s a picture of a smiling lawyer standing in a Houston McDonald’s with his lunch order. He didn’t phone the order in. He faxed it over. He’s standing beside the store’s fax machine, in front of the register set up just for faxed orders.
The article itself talks about how the fax is revolutionizing business and it’s pretty convincing. But then Fortune comes to the real point. “Like the TV or VCR,” it says, “the fax is another western invention the U.S. surrendered to Japan.” Xerox invented it. But now, it turns out, Xerox makes it only in Japan through a joint venture.
What’s happened with the fax is not an isolated incident. Most of us learned in grade school about the geniuses of American industry who invented things, then made a fortune selling them: Eli Whitney assembling those first cotton gins; Henry Ford, watching those Model-Ts roll off the assembly lines in Dearborn.
Americans are still inventing things. But these days, the fortunes are often made by others. Just look around your own home. American scientists at Raytheon developed that microwave in your kitchen. But Japanese and Korean companies make 90 percent of them. American scientists at RCA invented that color TV in your living room – but European and East Asian companies make 97 percent. American scientists at AMPEX invented the VCR next to your TV. Japan and Korea make almost all of them.
How significant is all of this?
There are those who would argue any time the United States loses market share, or that other countries beat us to the punch, that’s cause for alarm. I don’t agree. In a very real way, the success of the economies of countries like Japan – or Germany or Korea – are the result of policies carefully designed by us after World War 11. We wanted them to succeed. We got our way.
And could there be any more triumphant vindication of the American approach than events of the last few months in Beijing and Berlin and Prague? And, yes, in Moscow. The Berlin Wall, it has been said, is now a speed bump between East and West; the iron in the Iron Curtain has rusted away.
It’s been incredibly quick. In the 1970s I was in Yugoslavia with Senator Schweiker, talking to Marshal Tito. Senator Schweiker asked: ‘What’s going to happen to this country when you are gone?”
Tito glared at him. “Do I look like I’m going somewhere?”
In those days -in fact only last year – it looked like none of those eastern European rulers was going anywhere. It looked like erosion of the Iron Curtain might take centuries. Now Hungarians are pulling pieces of barbed wire fences from the ground for souvenirs. Sections of the Berlin Wall are being brought to the United States to be cut up and sold for Christmas presents. We have contested elections in the Kremlin. And in Poland, the Fiats that used to sit outside Lech Walesa’s house with government spies are still there. But they’ve been pulled back a few blocks to give him privacy – and they contain his bodyguards.
But whatever the success of our goals in the years after World War 11, today we have a brand new problem. Many Americans are convinced we cannot compete abroad. Fifty-eight percent of Americans believe Japan is the leading economic power in the world today. They think the West Germans and the South Koreans and the Japanese are tough cookies. They’re right.
Will we self-destruct? No. I’m talking about erosion.
The rest of the world believes that the main confrontations of the next few decades will be economic, not military. They believe it in the Soviet Union. That is the meaning of Perestroika. They believe it in the 12 European countries integrating their economies in what will become the world’s largest market and a more challenging economic force known as EC 92. They are prepared for it in Japan and along the Pacific Rim.
But in this country it hasn’t sunk in. Not yet. We haven’t come to grips with the realities of a world where 70 percent of our products have to compete against tough foreign competition; where suddenly we are threatened not by tanks but by assembly line workers making slab steel in Korea, or airbuses in Toulouse – or by bankers putting together that recent merger between Taiyo Kobe and Mitsui to create the second largest bank in the world.
Our economy has eroded. We need to rebuild it. We need to keep America number one. And that’s what I want to talk about tonight.
There’s no question about the erosion. Look at the indicators.
Debt: Our national debt has nearly tripled over the last decade – just the interest payments on it last year took the personal taxes of all taxpayers west of the Mississippi. Our foreign debt has tripled. In just three short years, we went from the world’s largest creditor to its largest debtor nation.
Interest Rates: Real interest rates – the rates once we subtract inflation – have soared to record levels in the ’80s. As a result the amount America invests in its economy dropped 25 percent in this decade.
Productivity: It’s averaged a bare 1 percent – half or even a third of rates in countries like Germany and Japan.
Why can’t we do better? One key is capital accumulation. Having enough money to invest is what has sparked the U.S. standard of living – and helped spur the success of western democracy. Now, we don’t have enough. And the main reason is our emergence as the world’s leading debtor economy.
When Perkin-Elmer Corporation put its semiconductor unit up for sale earlier this year, no one expected them to have trouble finding an American buyer. Everybody wanted that chip-making ability to stay in American hands.
There’s a $5 billion world tooling market. A $25 billion world semiconductor market. A $500 billion world market for final electronic products. We need equipment companies in order to compete.
That’s why it was so disappointing to open up The Nao York Times on Monday and see this headline: “Key Technology Might Be Sold to the Japanese.”
The leading bidder for Perkin-Elmer’s semiconductor equipment? Nikon.
In the weeks ahead, President Bush may have no choice but to permit Nikon to buy them, leaving us, in the words of the Times, “almost wholly dependent on Japan for the chief tools used to produce computer chips.”
How did this happen? Too much debt. Too little capital.
Some scoff at the alarm over our debt, over the manufacturing losses, the decline in productivity growth.
They argue that the national debt isn’t so bad, that we owe to ourselves – though we owe more and more of it to foreign investors. They argue that foreigners will cover our trade and budget deficits. And they will, but only as long as our interest rates remain sky high.
We now have a 10.5 percent prime compared to 9 percent in Germany – and 4.875 percent in Japan.
Some call that foreign investment a source of strength. It could be. In the 19th century English investment helped build much of the railroad that first connected the east and west coasts. But today that foreign investment is not being used to finance America’s future.
It’s being used to buy Rockefeller Center. And to finance consumption: Nissans and Mercedes. Look at those interest rates. Does anybody think we can compete abroad with countries whose cost of capital is less than half the American rate?
Is there no way America can better compete abroad? In fact, there is.
The key is to accumulate investment capital – and then use that capital to restore our manufacturing base from the 21 percent of GNP it is today to about 25 percent. We can’t ignore that. We must do a better job encouraging savings and investment in this country.
As Chairman of the Finance Committee, I will ask the Finance Committee to take a serious, comprehensive look at how we can go about doing so. My goal would be to develop a bipartisan package of cost effective savings and investment incentives.
Will capital gains be on the table? No doubt. I don’t want to approach negotiations on this issue with an inflexible posture. But any effort to enact a capital gains tax cut next year will have to answer a number of questions that were left unanswered this year.
You’ve heard a lot of sharply partisan rhetoric this year about capital gains and IRAs. Well, Congress is a rough place.
It reminds me of that comment by Mark Twain when he visited Virginia City, Nevada, in its wildest days. “It was no place for a Presbyterian,” Twain said. “And I did not long remain one.”
Sometimes the argument gets pretty rough, But actually, both the IRA and the capital gains proposals are rooted in the same question: How do we get Americans to save and invest more?
I believe that creating a savings incentive in the tax code would help. It would stimulate the economy and drive interest rates down.
For a while, people doubted that the IRAs worked. Three years ago, when Congress curtailed them, there was considerable argument about whether the IRA makes people save more.
The new studies show that it does. One study cites numbers showing that for every dollar of revenue lost through IRA deductions, you get an increase of savings of three dollars. And those figures were for the old IRA rules, which allowed a 100 percent deduction for IRA contributions by all taxpayers. I believe that the figures would be even better for the IRA proposal I put forth this year, which allows a 50 percent rather than 100 percent deduction.
Canada is a good case study of the effect of an IRA on savings. The savings rates of the U.S. and Canada tracked each other closely until the mid-seventies. At that point, the Canadian rate jumped and the U.S. rate declined to less than one-half the Canadian rate this decade.
What accounts for this sudden divergence? Some economists believe it can be attributed to broader eligibility and higher limits for IRA plans in Canada. In short, the IRA is a retirement plan that never should have been retired.
Now, what about capital gains? Can’t a cut in the capital gains tax also influence behavior in a constructive way?
Yes. That’s why I have argued for a capital gains reduction for years – though I must admit, I thought it was more important when the top income tax rate was 90 percent – or 70, or 50.
My problem this year wasn’t with capital gains in theory. My problem was with the particular proposals that we saw, the particular context, and the particular way that their supporters tried to pay for them. We saw a proposal in the House that cut the capital gains rate for a little over two years, and then raised the rate back up. Under the accounting conventions we follow, that proposal showed up as a revenue-raiser for the early years, by moving sales of capital assets into the two-year window period. After that, it began to lose enormous amounts of revenue.
That House proposal was so fiscally irresponsible it was laughed off the table in the Senate. But the fact that the House proposal – along with other proposals based on budget gimmickry – failed this year, does not mean that there is no room for discussion of a wide-ranging set of responsible proposals next year.
The biggest problem for capital gains relief is the one that proponents of a capital gains tax cut refused to face this year: how do you pay for it?
I don’t know the answer to that question. Not right now. We would have to answer the virtually unanimous verdict of economists that after that first year such a cut drains the Treasury. We would have to make such a cut revenue neutral. Most important, it would have to contribute to a comprehensive solution- one that has bipartisan support – to our problems with savings and investment.
You know, back in World War II, I remember taking off on one of my first missions as a bomber pilot. As we entered Yugoslavian airspace, the navigator reached over and tapped me on the shoulder. He said “Lloyd, see those black puffs of smoke?”
And with that he pulled out two big flak jackets, hunched down, put the flak jackets over his head – and that was the last we saw of him until we were almost back to base.
Well, a pilot doesn’t have the luxury of hiding – either piloting a plane or helping plot a course for this country.
To keep America strong, we have to make the tough choices when it comes to economic policy – even when we have to take some flak.
At this watershed moment in history, lets make those tough choices. Let’s continue our moral leadership with an economy that’s in the lead as well. We can revitalize the American example. The steps are small – as small as the few dollars more each American should save every week. As small as the semiconductors made by Perkin-Elmer. As small as a McDonalds owner in Houston making a change with equipment invented in America – and made in America.
If we can do that, then we will make sure America remains the example it has been in the past. And that the final and most inspirational chapters in the history of this country remain to be written.