NOT FIRST…JUST ONE AMONG MANY

What Happens When Other Countries Have the Money

It is amazing what you can pack into 170 pages without ever seeming to pack. Stephen Cohen and J. Bradford DeLong, both professors at Berkeley, make their erudition and their prose seem effortless. In the process, they tell you what happened to the global economy and why, where the money went and who’s got it, what will happen next and when to start really worrying. They also manage to be ironic every now and then—something you seldom find in business books— and give this slim volume a personality lacking in most of the hand-wringing and blame-laying out there.

The book starts with a stark, simple statement. After 60 years of economic dominance, the United States has seen the money on which that was based begin “to drain away. Soon it will be gone.” The reader and the U.S. economy both will have to take a big gulp and go on. We will have to learn to be one nation among many, not the dominant one, just as post-imperial Britain did.

The authors’ point is that the neoliberal prescription of free markets with as little government intervention as possible has run its course. To be clear, neoliberalism exists on both the right and the left. Barry Goldwater was a neoliberal, so were Margaret Thatcher, Jimmy Carter and Bill Clinton—strange bedfellows but sharing the belief that you should “free up the market and let it rip.”

Several things have happened to bring that chapter to a close.

First, other countries managed their economies while we let ours rip. “America doesn’t ‘do’ industrial policy,” the authors write. “We don’t like it. We don’t approve of others doing it. We think that when they do, it hurts us and usually ends up hurting them as well. Furthermore, we’re just not set up to do it.” But as Japan built its steel and shipping industries and Brazil built Embraer into a national champion in regional jets, the United States lost its manufacturing sector and its dominance in the oil industry. Those that have implemented industrial policies most successfully have what Thorstein Veblen called “the advantage of backwardness.” They didn’t have to reinvent themselves; they just had to catch up with us. And we became easier to catch as we lost ground over time.

Second, the juggernaut that is China has put together “the fastest, biggest economic success in world history.” We do not actually import from China. We import from “an integrated trans-Asian production network” that includes high-end components from countries like Japan and raw materials from Australia, all of it feeding into and out of production in China. In addition, a lot of China’s growth comes from innovation’s overflow into the rest of its industrial ecosystem, propped up by an undervalued currency. We squandered the opportunity to move into higher-value exports. Instead, the Chinese bought dollars and plowed them back into our financial system. As manufacturing declined, finance grew in exact inverse proportion— from 21% of GDP to 14% for manufacturing and the exact opposite for finance.

Finally, we borrowed our way out of dominance. As a nation and as individuals, we owe more than we earn. We have, as they say, negative equity. Our economy is under water and, like Britain at the end of the First World War, we don’t have the money to do anything about it.

The recession recovery plans currently underway will buy us time, say Cohen and Bradford, but they can’t put Humpty Dumpty back together again. “After all,” they conclude, “Humpty was an egg.”

Cold Steel

If you’re ever in a position to take over the second-largest steel company in the world, here’s your roadmap. The minute-by-minute, blow-by-blow chronology of the Mittal Steel takeover of Arcelor will teach you more about how to handle a major acquisition than most MBA M&A classes—and what not to do about a hostile bidder. The writers, both British journalists, interviewed more than 60 of the people—six billionaires, hundreds of international lawyers, seven heads of state and many of the world’s top investment bankers—involved in the contentious deal that restructured the global metals industry.

The language is rather stilted, especially the quotes (we all sound better after the fact, especially if we know we’re going to be quoted), but this masterful reporting job manages to develop Lakshmi Mittal and Guy Dollé like two characters in a novel. Before we even get to the merger offer—only eight days after Mittal decides to pursue it—we feel we know them, the animosity of Dollé for Mittal and Mittal’s calm self-assurance.

I can’t go as far as The Economist in saying that the book “reads like a thriller,” but the minute reconstruction of events provides an anatomy of a deal like few others you will read: who was called and in what order, what was said, the code names, the interviews, the war rooms, the missteps and the advantages they create. Arcelor’s CEO Guy Dollé was obviously on the defensive, startled by the audacity and the speed of Mittal’s offer, but he certainly saw it coming. He had put Project Tiger in place to protect against any bidder, especially Mittal. He let his hatred, his pride and his underestimation of his opponent get the better of him, and all Mittal had to do was play the game with more sang froid to execute his plan while taking full advantage of every time Dollé stepped in the bucket. Early on Dollé went on French radio and, first, called Mittal a liar, then referred to his bid as monnaie de singe, literally “monkey money.” Admittedly, the meaning in French is “funny money” but the racial slur began the painful, six-month slide toward victory for a man Dollé clearly thought was an upstart not to be taken seriously.