Some books are fun. Others are entertaining, educational, or informative.  A few are just plain scary. Clyde Prestowitz’s new book, “The Betrayal of American Prosperity: Free Market Delusions, America’s Decline and How We Must Compete in the Post-Dollar Era” – is scary.

It recounts in painful detail how America, with sweat, brains and imagination, rose  from 1800 to 1950 to become the world’s wealthiest nation −and how since then, American political leaders have betrayed that prosperity with massive folly.  It is scary, because Israel may be blindly marching down the same footpath of folly based on “free market delusion”.

The book opens by describing how indolent Romans imported carts full of goods from the Empire, while slaves did their labor.  The carts left Rome − carrying dung.  The fat and lazy Romans were easy prey for barbarians.

Cut to Long Beach, California, today.  Containers from China carrying sophisticated electronic goods are unloaded.  They return to China carrying waste paper for recycling.  The comparison is intentional.

Prestowitz knows what he is talking about.  He speaks fluent Japanese, Dutch, German and French, worked as a global manager for Scott Paper long before the word “globalization” was invented and served  as President Reagan’s chief trade negotiator.  He is also a friend of Israel. I worked with him on the Israel 2028 project, which created a long-term strategic plan for Israel.

Recently I asked him: How Israel can learn from America’s mistakes?

Last week, in one of your many interviews, you said:  “Think about the U.S. like Greece, the only difference being, we print the world’s money and Greece doesn’t. Like Greece we really don’t have much to sell.” America doesn’t have much to sell, because it has sent its manufacturing off-shore.  You note that Wal-Mart imports $30 b. worth of goods from China yearly.  Wal-Mart jobs are close to minimum-wage jobs, while the jobs lost by American manufacturers who used to supply Wal-Mart paid twice as much or more.

Why, and when, did America give away such wealth creation to China?   What are the lessons Israel should learn from this?

Prestowitz: “This transfer of wealth began a long time ago and it has not been only to China. It began in the 1950s with Japan and has continued with the Asian “Tigers” in the 1980s and 1990s and now, of course with the Chinese Dragon. There are two main “why’s”:

First, the U.S. main priority is geopolitics. The U.S. wanted to rebuild Japan as a bulwark against the Soviet Union and wanted to maintain a forward military position around the world, necessitating bases and all kinds of diplomatic arrangements. To obtain these   the U.S. has been willing to make economic concessions.  So it opened its markets even when those in Asia were closed.  And it agreed to all kinds of requirements for technology transfer as a condition of obtaining access to foreign markets or for obtaining base use.”

“But the second ‘why’ is even more important because it rationalized the first ‘why’.  The second ‘why’ is that the U.S. embraced the simplistic Ricardian/ Hecksher-Olin concept of free trade and comparative advantage under which free trade is understood always to be a winning proposition even if it is unilateral. This concept was and is based on the assumption of the absence of economies of scale and of cross border flows of capital and technology. Obviously, this is a ridiculous assumption in this age of globalization.

Nevertheless that is the theory and the doctrine that has driven U.S. international economic policy for the last sixty years. It is a doctrine that holds foreign industrial policies and export promotion policies to be of no consequence to U.S. industry and something to which the U.S. should not bother to have a policy response.

It is a doctrine that holds that currency manipulation and undervaluation is nothing to be concerned about and not something to which the U.S. should respond. So we haven’t responded and we have seen a steady erosion of U.S. wealth producing capacity over a period of thirty or forty years −   mainly due to the embrace of a catastrophically false doctrine that has been made into a sacred orthodoxy by our high priesthood of economists.”

“The lesson Israel should draw is not to imitate U.S. economic policy under any circumstances.“

Israel’s economy is closely linked to the U.S.   Last year, of Israel’s $47.9 b. in total exports, $16.8 b. went to the U.S., and $12.4 b. to the European Union.    In other words, 61 per cent of Israel’s exports go to two major markets that are each in deep trouble. Israel’s economic growth is export-driven.  As a trade strategist and negotiator and as a new member of Israel’s Ministry of Industry and Trade’s advisory board —   what would you advise the Government of Israel?

Prestowitz: “I would say two things. One is that Israel has a big difference between the income of the top 20 percent of the population and that of the bottom 50 percent. I believe there is a lot Israel can do to develop what the late C.K. Prahalad called the “Fortunes at the Bottom of the Pyramid” by fostering the economic development of those not fully participating in the economy.   Second, a small country like Israel can cultivate relatively small, high-value specialty markets that tend to remain fairly strong under all circumstances. This is the Singapore strategy. And really, it is the Germany strategy.   German exports are not price sensitive because few if any make the things the Germans make in a wide range of specialty markets.”

Your new book recounts how in 1950 America’s GDP (Gross Domestic Product) accounted for nearly three-fourths of world GDP, and then, mainly from the 1980’s, implemented bad policies that ruined this prosperity.   You also note that America has fundamental long-run problems that go far beyond the 2007-9 global recession and financial collapse — it is about far more than sub-prime mortgages. As a small country, Israel has much less margin for error than the U.S. How can Israel avoid the mistakes that America made?   How can we correct the long-term mistakes we have already made?

Prestowitz: “Luckily, in some ways Israel has more margins for error; it can turn the boat around much more quickly to avoid making the same error twice.  The U.S. has become hooked on debt, both at the consumer level and at the federal government and international level.  Israel would do well to avoid excess debt. The U.S. became enamored of the notion that making things was no longer important and that we were moving to a services economy.

Also we told ourselves that off-shoring production was not a problem because we would move to the “higher ground” of high tech, sophisticated investment banking, fancy design, etc.   This thinking was all wrong. It is important to maintain a vibrant manufacturing and high-value services provision base and to maintain it across as wide a range of industries as possible. The more things you do the more you will know and the more you know the more you will innovate and create whole new industries.“

There is a Hebrew saying:  Wise nations avoid crises from which smart

nations can extricate themselves. From which wise small open economies are ones Israel can learn?  How can Israel be wise, rather than smart, or just dumb ?

Prestowitz: “I think Singapore has proven very wise, so to Sweden, and Finland. I think Singapore is especially pertinent for Israel because of the hostile neighborhood it lives in and because of the great variety of its population.”

Since 1995, Israel has failed to grow even one sizeable new global

company. Successful startups do early ‘exits’ and their brains, technology and

knowledge migrate abroad. How important are these global giants to a nation’s economy?  And how important is it for them to produce goods at home, rather than abroad?

Prestowitz: “Obviously, the success of its start-up ethos has been very good for Israel. Yet, I do believe there are limits to how far you can go solely with start-ups. I believe it is important for Israel to pay a lot of attention to why the start-ups in Israel don’t develop into Israeli Intel’s or Google’s or Apple’s. I know that a lot of start-ups are done on the basis of knowledge and financing that has government support.

Maybe there should be some requirement for local development attached to that along with tax incentives for local development mixed with disincentives for companies that merely serve as a funnel to take Israeli technology abroad.”

Special credit to Jerusalem Report