Peeling back the veneer on American decline

For many years it has been the conventional wisdom that the U.S. economy is the world’s most dynamic with the world’s most flexible work force, most entrepreneurial ethic, most new start-ups, and most innovative management and with the most benefits from globalization. Declinism was not only out of vogue. It had an air of illegitimacy about it. Now, suddenly, declinism is in fashion and it is the conventional wisdom that America is headed in the wrong direction on the wrong track.

A new conventional wisdom is evolving to explain the causes of the decline and how to address them. Among the key elements of this new orthodoxy are the notions that the U.S. is lagging badly in innovation and education. This diagnosis, of course, leads directly to prescriptions for greater spending on and government support of R&D and much greater emphasis on getting students not only into and out of college but into advanced and professional degrees.

Of course, it is true that U.S. spending on R&D as a percent of GDP has fallen and stagnated in comparison with the glory days of yesteryear and the recent reports on SAT scores certainly seem to confirm that there are problems with U.S. education. And yet, as I consider Germany, I wonder.

Germany has higher wages, higher taxes, higher welfare costs, a lower percentage of college and professional graduates, and lower spending as a percent of GDP on R&D than the United States. Yet, in contrast to America’s chronically large trade deficit and high unemployment rate, Germany has a huge trade surplus and a low unemployment rate. What’s going on?

One thing is a misperception about high tech, R&D, and innovation. Consider a recent conversation I had with a CEO of an American office furniture manufacturer. Just making small talk at a conference, I asked him how business was. " Pretty good," he said. "What’s selling?" I asked. "We have a line of Cherry office furniture that’s just flying out of the showroom," he replied. "Where do you make it," I asked. "Well," he said, "we cut the cherry trees in West Virginia. They have the best cherry trees in West Virginia. Then we ship the logs to Germany where they peel the veneer. Then we ship the veneer to China where it is glued to the frame and then they ship the finished furniture to us in Wisconsin where we market and sell it." Astonished, I asked in a tone of disbelief, "You ship the logs to Germany? Is there no one who can peel veneer in America?" "Yes," he admitted, but went on to emphasize that "the Germans do it far better than the Americans."

Veneer peeling never shows up on the lists of high-tech industries and is never discussed when there is talk of the need for more Silicon Valley style start-ups and innovation. Nor do veneer peelers need advanced college degrees. Yet veneer peeling in Germany is so high-tech and so innovative that furniture makers are shipping logs and veneer around the world to get something done in Germany that one would expect to be easily done in the United States. Innovation and high tech doesn’t have to be Google or Silicon Valley. It may not necessarily take a lot of basic Research spending (although certainly some D spending) or advanced formal education.

What Germany has is a lot of family owned, medium sized businesses and a government and society that are committed to the long term and to keeping German-based production competitive in as many sectors as possible. It also has a system of training and maintaining skills that doesn’t turn out PhDs, but does turn out supremely qualified workers. And, of course, to gain full advantage from those skills, it strives through cooperation between industry, government, and labor to keep producers competitive from a German production base.

Of course, I do not mean to oppose further support of education and R&D in the United States. The more the better. But perhaps we should also try to learn from the Germans.