This is part of a series on AUKUS. Click here to read the full series.
The dominant AUKUS narrative of Australia being under threat from an aggressive China has driven Australia’s political and media response — yet it obscures a whole other story, just as relevant, of a profound failure at the heart of modern America.
The story, barely told, casts Australia’s involvement in a new light: in its simplest terms Australian taxpayers are paying for the failure of US capitalism.
Does that sound like a rant from the far left?
In this case the argument — essentially that greed is bad and has led to a fatal loss of American power — has been made by a former Wall Street banker, Eric Chewning. As Crikey has reported, Chewning has had an extraordinary career. Having begun in banking, he joined the US Army after the 9/11 attacks and helped run intelligence operations in Iraq. From there he worked as a consultant with McKinsey & Company before ascending to the apex of the American military-industrial machine as chief of staff for Trump defence secretary Mark Esper and is now a top executive at Huntington Ingalls Industries, which builds nuclear submarines for the US Navy.
Back in his Trump government days, Chewning was the joint author of a US Brookings Institution paper that examines what the US needs to do in relation to China. One co-author, Michael Brown, was the director of the defense innovation unit in the US Department of Defense. Another was Pavneet Singh, a consultant with the defense innovation unit.
They argue that there is an urgent need for the US to prepare for what they call a “superpower marathon”, defined as an economic and technological race “likely to last multiple generations”. (Scott Morrison had his own version of this with his description of AUKUS as Australia’s “forever” partnership.)
Greed is not good
So how did the US get itself into this position? The short answer, argued the paper, is greed. While China was working long-term to transform its economy and its role in the world, the US and its private sector were fixated on short-term profits.
“Since the shareholder revolution of the 1980s, companies have increasingly focused on return on capital at the expense of long-term R&D and technology development,” the paper said.
“With the increase in institutional ownership of companies, corporate focus shifted to financial returns and away from balancing stakeholders of employees, shareholders and communities. Capital markets reinforced this in rewarding efficiency of capital in stock price performance.”
On top of this, “activist investors” added to the pressure for short-term profits because their business model relied on boosting returns to create a subsequent sale or “liquidity event” to reward investors. CEOs were also likely to switch jobs more quickly, taking their profit-linked bonuses with them.
Corporate share buybacks, where companies use capital to repurchase shares, artificially boosted the value of shares but did nothing to improve long-term capabilities.
The pursuit of higher returns also came at the expense of US manufacturing. Many types of manufacturing were not seen as being as profitable as activities such as design, marketing and sales. This led US business to cut manufacturing investment by sending manufacture offshore and outsourcing the making of things to places with lower costs and fewer regulations.
“One little understood consequence has been that as manufacturing expertise moves offshore, so do design skills and design-for-manufacturability expertise,” the paper said. “In turn, this loss of manufacturing expertise also reduces the innovation that accrues from understanding the manufacturing process, the supplier base, and their interactions.”
The US tax system, too, had provided an incentive for offshore manufacturing (until 2017), making it possible for a 40% improvement in after-tax earnings for US business income that could be sheltered offshore.
Last, but by no means least, companies boosted financial returns by shedding their hardware businesses. What remains are software and services firms.
“IBM is an iconic example among many that followed this trend selling its PC business to Lenovo. With the loss of hardware businesses, entire ecosystems of suppliers have now moved such that the US does not, for example, build printed circuit boards or flex circuits — integral components of all electronic devices — in any volume nor does it package or fabricate semiconductor wafers at global scale.
“From a national security standpoint, this is acceptable as long as the US has access among our allies. However, since we rely on China in so many instances, even in military supply chains, we have inadvertently created a glaring national security risk. The Department of Defense’s 2018 analysis of supplier risk states: ‘China is the single or sole supplier for a number of [components] … used in munitions and missiles … A sudden and catastrophic loss of supply would disrupt DOD missile, satellite, space launch, and other defense manufacturing programs. In many cases, there are no substitutes readily available.'”
Quoting the American Conservative magazine, the authors said the focus on short-term gains had led to “the destruction of America’s once vibrant military and commercial industrial capacity in many sectors [that] has become the single biggest unacknowledged threat to our national security. Because of … policies focused on finance instead of production, the United States increasingly cannot produce or maintain vital systems upon which our economy, our military and our allies rely.”
There was more besides, including the failure of the US education system to provide a pipeline of science, technology, engineering, and mathematics (STEM) graduates.
What’s the answer?
Ultimately Chewning and his co-authors argue for the US to compete economically with China over the long haul. They quote influential Republican congressman Mike Gallagher, a China neocon, who asserts that “prominent CCP members and Chinese industrialists promote surveillance technology as a means of not only ensuring obedience to the party, but also succeeding where every other Marxist experiment has failed”.
One part of winning the “geoeconomic competition” with China would be to develop a whole-of-government strategy such that government organisations could act in concert rather than through a fragmented structure which often created competing priorities.
Another key was to increase investment in science and technology.
Fixing that other fundamental American problem — greed and the state of US capitalism — was seen as something for the too-hard basket. Better, it seems, to boost defence, build more nuclear submarines — and hoover up money from allies like Australia.
