Q. America's trade deficits signify strength not weakness, right? After all if other countries keep lending to us at the rate of $1.4 million per minute (based on last year's $723 billion trade deficit), they clearly regard our economy as one of the world's foremost.

A. This is absolutely false. The trade deficit represents the cost of living beyond our means. A nation with a large trade deficit is not that different from a person spending above his means. If you have had a successful career but suddenly lose your job, you still have a lot of credit available to you on your credit cards. Thus you can continue to enjoy a fine lifestyle for some time after your income stops. But if you do not find a new job in the end you will hit your credit limit and life will then change dramatically. This is not the equivalent of an individual having a perennial "trade deficit" with their local grocer while maintaining a surplus with their other employment and income accounts. The true analog would be as noted - an unemployed individual continuing to spend freely sustained temporarily with nothing but credit based on past worth.

Just as a person cannot continue running up credit forever, no nation can either. The key difference between a nation and a person is that a nation can print money and thus can delay the day of reckoning. Eventually, however, other countries will tire of accepting mere pieces of paper in exchange for their goods.

Since we have not been producing enough goods or services to make up for our ever rising consumption of foreign goods, other countries have bought our government's bond or used our own dollars to buy US industries, land, and natural resources. No other country in history has had a trade deficit as large as the US as a percentage of GDP or in total dollar terms without suffering a major collapse. Other countries seem to be content to continue this financing until we have absolutely nothing left to sell - no industries, no real estate, and no resources. Our currency has not lost much value yet because other countries are actively engaged in propping it up while they continue to hollow out our industries. This prop creates a false sense of economic health thereby making it difficult to rally public support for desperately needed painful corrections.

In the ten years to 2004, foreign countries acquired US assets totaling $8 trillion. By our count this includes majority control of 8,000 US companies at a total cost of at least $1.2 trillion. It also includes vast holdings of US government securities, huge tracts of land, and countless factories - plus the influence and other intangible benefits that go along with such investments.

The United States likewise invested $6 trillion in foreign countries during this period, for a net deficit to the US of $2 trillion. But, as far as our long-term security is concerned, the key thing is the sell-off of our productive and irreplaceable assets. We cannot hope to replace our lost industries or security by purchasing assets overseas. Most Americans work in this country. Most of what we need to protect this country should be produced in this country.

In the ten years to 2004, the proportion of US corporate equities owned by foreigners increased from 6 percent to 12 percent. In the case of US corporate bonds the proportion increased from 12 percent to 24 percent and in the case of US Treasury bonds from 18 percent to 43 percent. As if all this was not alarming enough, here is a further fact to consider: in the case of many of their corporate investments, foreigners have clearly been intent on gaining global control of key "chokepoint" technologies, such as those needed to produce advanced weapons, airplanes, and computers. In the past, America's control of such technologies has been its defining advantage in leading the world community.

Under the harsh light of objective reality, the recent massive acquisition of US core industrial assets by foreign companies and foreign governments cannot be dismissed as mere xenophobic reactionism. Without critical domestically controlled industry to generate opportunity and wealth and provide security for its citizens, it is difficult to imagine how any country could call itself a "superpower."

Q. Real GDP has grown on average by 3.1 percent a year over the last 20 years. The trade deficit is still only 6 percent of our GDP. How can anything be wrong with our economy?

A. The methods we use to calculate our GDP growth are a matter of great controversy among the world's economic analysts. Just as the accounting of Enron differs from that of General Electric, the procedures our leaders use to calculate America's economic growth are different from those used in Germany, Switzerland, or Japan. If we used the more conservative accounting methods of most other advanced nations, our growth would not look so good. American workers instinctively know this because they are acutely aware that living standards for ordinary Americans have not improved much in thirty years.

In any case, more and more of the country is becoming owned and controlled by foreign interests. Critical chokepoint industries are being taken over, and our government is ever more beholden to foreign lenders.

The cumulative trade deficit (that is the extent to which total imports have exceeded exports) amounted to $4.6 trillion in current dollars over the last 20 years and this is equal to $5.4 trillion after adjusting for inflation. The average annual growth rate in real dollars for the trade deficit has been 24 percent over the past 10 years. Even if we take our government's calculations of GDP growth at face value, this means our trade deficit increased nearly seven times faster than our GDP.

Since more and more of our consumer spending goes to imported goods, the higher our GDP goes, the higher our trade deficit goes. In the ten years to 2005, for instance, the trade deficit went from just 1 percent of our GDP to more than 6 percent. This deterioration reflects in part the fact that the share of our GDP that goes to consumer spending has increased from 67 percent to 70 percent.

The US is already losing more than $700 billion a year to foreign countries through its trade deficit and the trend worsens by the year. Many people argue that even though the trade deficit is large in dollar terms, it is small compared to the overall American economy. But this is a dangerously misleading argument.

A more meaningful way to understand the trade deficit is by comparison with America's total national assets. The net worth of American households has increased from $28 trillion to $52 trillion in the last ten years, representing a gain of $24 trillion. This sounds tremendous but even so, at $3.6 trillion over that period, the trade deficits represented fully 15 percent of the gain. It should be pointed out moreover that much of the increase in household net worth came from unrealized gains in real estate and stocks. To say the least such gains are windfalls and they are unlikely to be matched in the next ten years. Indeed we may never be able to realize them.

A much more meaningful comparison is with America's rate of economic growth. The cumulative year-to-year growth in GDP in current dollars excluding foreign trade came to $5.7 trillion over the past 10 years. By comparison the trade deficits totaled $3.6 trillion - 63% of the cumulative GDP growth excluding foreign trade.

These trends show no sign of abating and are hardly even mentioned by politicians or the media. Our trade deficit last year was a record 6% percent of GDP and increased 16% over 2004. By comparison, our overall economy grew by a mere 3.5 percent in real (inflation-adjusted) dollars. After taking out net gains in residential real estate and adjusting for inflation, the growth in net worth in 2005 was merely the 24th highest of the last 50 years. Moreover households lost net worth in three of the last 10 years (the three years following the "dot-com" collapse that began in 2000). In 2005, the gains in financial assets were well below median percentage gains over the past 50 years, while the increases in liabilities were well above their median. Personal savings as a percentage of disposable personal income was actually negative in 2005 for the first time since the great depression.

As suggested by our growing GDP, we continue to build net worth, but actual figures show we are not creating much of meaning. Popular media continues to publish the sanitized headlines of government statistics news without any real investigation. By contrast, the facts in this document and the concerns of a growing minority of well-informed citizens demonstrate that there is cause for tremendous alarm - and as we would say, an immediate nationwide decree calling for resolution to the present US economic crisis.

Q. Productivity has increased on average 2.2 percent per year in the non-farm business sector over the last 20 years. This is a cumulative increase of 56 percent. What could be wrong with this?

A. Productivity figures like these are misleading and incomplete. In theory productivity increases should generate higher paying jobs and a lower cost of living as technology, capital, and process improvements are employed to make labor more efficient. But this applies only if the work is done in American factories by American workers. In reality, much of the recent productivity improvement reported by American corporations stems from shifting work abroad, often to low-wage nations. Intuitively, if a corporation fires most of its workers at home and outsources most of its manufacturing, it can dramatically increase its reported output per American worker. The downside is that it has done so at the expense of American jobs. Thus the American economy as a whole is not better off and probably on balance is considerably worse off. This applies in spades where corporations transfer vital American production secrets abroad, thus helping other nations boost their worker productivity on America's dime.

That official productivity figures greatly exaggerate the rate of true productivity improvement is surely obvious from the fact that over the past 20 years, both hourly and weekly average earnings have experienced essentially zero real growth after accounting for inflation.

Thanks to the loss of 3.7 million manufacturing jobs in the last 20 years, we now have fewer people employed in manufacturing than we did in 1955. This is truly remarkable when you realize that America's population has risen by 77 percent in the interim (from an estimated 167 million in 1955 to 296 million today). Manufacturing jobs pay above-average wages because they typically involve sophisticated machinery that leverages each worker's productivity. The average manufacturing employee earns almost 32 percent more than the average service-industry employee. Thus the fact that manufacturing jobs have fallen while service jobs have ballooned merely means we have been replacing high-paying jobs with low-paying ones.

Q. Net worth among American households has never been higher at over $52 trillion. This clearly demonstrates that our economic policies are working, doesn't it?

A. The gains made in net worth among American households mask a truly alarming shift over the past 20 years. At the core, American household liabilities have risen from 16 percent of net worth to 23 percent, while the personal savings rate has gone from 10.8 percent of disposable personal income to minus 0.4 percent. A dramatic wealth shift from productive assets into nonproductive assets like residential real estate has taken place. Prices for residential real estate are now clearly in a bubble phase, given that, as measured by the Federal Reserve, they are running at 1.6 times replacement cost (versus 1.3 times 20 years ago). The house price boom has been made possible by ever more profligate mortgage lending, as is reflected in the fact that the average equity that American householders have in their homes has fallen from 69 percent 20 years ago to 56 percent today. Household wealth in a nutshell has shifted from productive assets to highly illiquid unproductive ones, namely houses heavily encumbered by debt. We are much more financially vulnerable today than we have been for many years and much of our apparent wealth exists only on paper.

Q. It doesn't matter who owns the factories or the corporations. If foreign companies buy our factories or build new ones here (and thus generate U.S.-based foreign-controlled production known as "insourcing"), surely this creates plenty of jobs for Americans. What's wrong with that?

A. The benefits of insourcing have been greatly exaggerated and the costs almost completely overlooked. Here are some problems with insourcing:

1) Foreign corporations operating in America typically pay far less tax than their American counterparts. Operating from nations where corporate accounting standards are much lower than in the United States, they rig their bookkeeping to pretend that they make no profits in the United States. As reported by the General Accounting Office, one typical gambit is "transfer pricing." This typically involves a foreign parent company charging its American subsidiary exorbitant prices for key inputs. A variant on this technique is for the foreign parent to pay artificially low prices for the American subsidiary's output. Either way the impression created is that the American subsidiary is unprofitable and thus no tax is payable in the United States. Among other paper games that can be played are the rigging of interest rates on loans or the creation of artificial deductions.

2) Insourcing creates few jobs. Typically foreign manufacturers' US subsidiaries are engaged merely in final assembly. They rely on the foreign parent and its home-country affiliates and partners for supplies of most of the key components. Take, for instance, Toyota's new San Antonio plant, which will produce 150,000 trucks per year with just 2,000 people. The reason the staffing is so low is because most of the serious manufacturing will be done elsewhere, typically overseas.

3) In most cases, foreign corporations are careful to reserve the most advanced manufacturing activities for their workers at home. Their assembly plants in the United States are "snap-together" operations which provide the United States with little in the way of valuable new technologies or production know-how.

4) Many insourcing operations use unfair tactics to drive US competitors out of business and thereby inflict untold damage on the overall American economy. The opportunity for such tactics arises in many cases because the home markets in which foreign corporations are based are heavily protected. Such corporations use their huge profits in their sheltered home markets to fund their expansion in the United States. They can afford to sell to US consumers at cost or even below it. In the long run they win a huge share of the American market and, in the fullness of time, after their American competitors have been driven to the wall, they can hope to recoup their losses by dramatically raising their American prices. The unbalanced nature of insourcing is particularly apparent in the car industry. For example, although the Japanese auto market is second only to the US in overall size, imported goods account for only 10 percent of the country's auto consumption (measuring both complete cars and the key inputs used in making them) compared to probably more than 70 percent for the United States. US auto exports to Japan account for less than 1 percent of total Japanese auto consumption.

5) Many insourcing operations benefit from huge subsidies offered by state and local governments. Benefits include not only big tax breaks but funding for training. The net effect of these subsidies is to drive existing domestic producers out of business.

6) We are beholden to the whims of other nations for key products. Thanks to the insourcing trend, many key industrial subsectors, such as the manufacture of advanced materials and high-tech components for the United States defense industry, are now between 50 and 90 percent owned by foreign corporations.

Q. Outsourcing is inevitable. It is just commonsense that countries that have inherent advantages should produce according to those advantages (such as cheaper labor) and those that don't should not. Outsourcing by corporate America means that we will be able to take advantage of cheap labor, while reserving high quality jobs for our own people. This is a net benefit, right? Won't our services industries more than compensate for the closing of our factories?

A. This is not about cheap labor. Cheap-labor nations have always existed and the United States has never in the past had had any trouble competing with them. When American corporations decide to outsource they are often admitting that they are no longer competitive. In the past our corporations were so productive (thanks to much better machines and more advanced production know-how) that they did not have to worry about foreign competition. They did their serious manufacturing at home because cheap wages alone were not much of a benefit in the sort of highly-capital intensive production they were mainly engaged in.

As so-called "globalization" began, these capital-intensive processes were the first to go (because corporations preferred to source their most advanced components and materials from their Japanese or German competitors rather than make the large investment needed to go to the next stage of their industry's production technology). The confluence of American policies encouraging outsourcing, importing, and deincentivizing American capital investment and research (e.g. through long depreciation schedules) has provided the catalyst for transfer of entire industries overseas.

As American corporations became increasingly hollowed out, all that remained in the United States was final assembly. It is typically final-assembly work that is now being outsourced to low-wage nations like Mexico and China. These days we export only our money and import finished products.

Every economy needs services like finance, education, healthcare, and consulting, but these are no substitute for the advanced manufacturing we used to rely on for our economic leadership. The problem is that service businesses generally do not export. Countries with huge trade surpluses like Japan have been generating their advantage in capital- and knowledge-intensive industries.

Even in the minority of service industries where serious exporting is theoretically possible - computer software, for instance - the result in practice is disappointing. This is because, like other service industries, software is labor-intensive, rather than capital-intensive, and thus it provides no big opportunities for a rich nation like the United States to leverage expensive production processes to achieve an enduring productivity edge. Moreover like other sophisticated service industries, the software industry generally recruits mainly from the most educated sector of our labor force. It therefore provides few jobs for the majority of workers who do not have a doctorate or other top qualification. The futility of relying on services for our future prosperity is clearly apparent in America's international trade figures. Our services surplus with the rest of the world is equal to a mere 10 percent of our goods deficit.

In any case we are not better trained, harder working, or more innovative than our foreign competitors. We have no "comparative advantage" in services, let alone a monopoly on the ability to create innovative new services or goods. Assuming we are inherently more creative than our foreign competitors is both arrogant and naive.

Indeed far from boosting our exports of service work, we are now increasingly importing such work. Many high-paying jobs in services are now being outsourced to nations like India. The jobs involved include those for doctors, mathematicians, accountants, financial analysts, engineers, programmers, architects, physicists, chemists, and biologists.

The result is increasing unemployment in many service fields in the United States (in, for instance, the computer software industry). Loss of jobs reduces the tax base, creates high unemployment benefit costs, and raises the cost of government retraining programs. The true cost of outsourcing is borne most directly by displaced, unemployed workers now experiencing higher rates of child and spousal abuse, alcoholism, bankruptcy, divorce, etc.

Q. If foreigners want to put their money in US Treasury bonds, surely this means the United States is regarded as the best place in the world to invest. Why do we need to finance our government ourselves if other countries are happy to it for us?

A. Foreign countries now finance 47 percent of our total outstanding federal deficit and they fund nearly 100 percent of net new debt issued annually by the US Government. This means we are highly dependent on foreign countries to finance our government. Foreign lending now funds our social programs, our public works programs, and even our national defense. Just like a bank that holds a mortgage over a homeowner, our country is beholden to these foreign creditors to keep constantly refinancing this debt. If at any point, these countries decided that they were not satisfied with our policies or practices, they could elect to shed this debt. In effect the US Government would go bankrupt overnight. Our government is now borrowing nearly $300 billion per year from foreign sources. If these sources were to stop lending or even merely cut back a bit, how would we bridge the gap? We would have to resort to printing money and thereby risk hyperinflation.

While some argue foreign countries are buying US government debt for the yield and safety, this clearly makes little sense. The world's financial people can easily see how precarious our position really is given our absolute dependence on the goodwill of foreign creditors. The real reason they lend us so much is because they want to have a say in our policies. We can no longer refuse foreigners' requests to buy our key assets as they are our bankers. Nor can we stand up to them when they want us to enter into lopsided and unreasonable trade agreements. How weak we have become is clearly apparent in the record of the Committee on Foreign Investment in the United States (CFIUS), which is charged with overseeing acquisitions of American companies by foreign investors. CFIUS is part of the US Treasury - the same department that is charged with raising debt to finance the government. Of all the thousands of proposed foreign acquisitions CFIUS has reviewed in the last 18 years, it has overturned just one.

Under the Exon-Florio provision as amended in 1993, CFIUS is required to study the national security implications of all proposed foreign purchases of US assets when the acquirer is controlled by or is an agent of a foreign government.

Even when foreigners have proposed particularly controversial acquisitions, CFIUS has proved unwilling or impotent to stop them. CFIUS stood idly by, for instance, when in 2005 a state-owned Chinese corporation tried to get control of Unocal, a major American oil company. In the end the deal was stopped but only because the deal met a firestorm of criticism in the American media and among our elected representatives. Similarly CFIUS felt unable to act when the Dubai Ports World company in 2006 offered to buy six US ports. Although CFIUS was mandated by Congress to stop such an acquisition, it did not feel that it needed even to investigate the Dubai Ports World deal let alone raise any objection. Unfortunately, thousands of other critical but lower-profile acquisitions escape the headlines.

Q. Low inflation over the recent past is evidence that our economic and monetary policies are working. Why should we change now?

A. Despite the common perception that the US Federal Reserve has deftly guided this country through the rising waters of inflation, in reality, two specific factors are principally responsible for low inflation in recent years: (1) declining import prices; (2) declining labor costs at home due to pressures from low import prices. Neither of these factors can be expected to control inflation forever. In reality they have merely postponed an inevitable outbreak of inflation. Interest rate and money supply management will not be enough to compensate for the structural imbalances and massive debts that have been accumulated.

By shifting our consumption from domestic to foreign-produced goods, we have shifted wealth-producing industries abroad and dropped our savings rate from double digits to negative digits. So-called globalization and "free trade" have taken our labor force with its world-leading standard of living and pitted it against the bottom of the world in terms of labor rates and standards of living. There is no way our labor force can compete with this. If these trends continue, the massive wealth transfer that is now taking place will dramatically erode the standard of living of our labor force. Already real wages have stopped growing, and we will eventually face severe inflation as our dollar falls on foreign exchange markets and foreign suppliers take advantage of the collapse of our manufacturing base.

For example, import prices for consumer goods (excluding autos) over the last 20 years have increased on average less than 2% per year while overall domestic inflation (consumer price index) has increased over 3% per year. Furthermore, over the past 10 years, consumer import prices (excluding autos) have actually decreased. In fact, the index of prices for all imports excluding oil has decreased over the last 10 years.

The conclusion is that if import prices were to rise (which we would have no control of), it would have a substantial impact on our inflation and therefore our standard of living. We have taken the bait. The cheap imports have lured us to substitute them for our domestic production. Our idled factories have then been purchased on the cheap or shut down completely. As other countries come up, and as our negotiating position and dollar weakens, we have every reason to assume that import prices will rise and our domestic inflation will likewise rise. Coupled with the immense pressure on our US dollar by virtue of trillions of dollars of cumulative trade deficits, it seems much more likely than not that our pace of inflation is set to dramatically increase.

Q. The fact that $1 in every $4 we spend on manufactured goods goes to buy imports isn't a bad thing. Why should we worry about making these simple goods when they can be made more cheaply overseas?

A. Most of what we spend on imports goes on sophisticated products like cars and computers. But even when we are buying simple things like foreign-made Christmas lights and teddy bears our money goes to build up someone's else industrial base at the expense of our own. In the final analysis, as demonstrated in this document, we cannot afford cheap foreign goods any more than we can afford expensive ones.

Q. The American dream is to start an innovative company and perhaps one day sell it for as much as the market will bear. What could be wrong with this?

A. America was built by putting this country first. Millions of people sacrificed to create a powerful sovereign nation for the benefit of a hardworking and enterprising society. Imagine how this country would have turned out if in the early days our founding fathers had sold our domestic defense companies to the British government? No doubt the British would have paid handsomely for such national treasures. Today, no one intervenes even where the sale of a company can be expected to undermine our long-term defense. We can hardly blame the directors of companies for selling out. It is hardly the role of the corporation to set policies for the nation - this should be the role of the government.

Q. Millions of new jobs are being created each year so clearly we are on track to recovery and growth, right?

A. Yes, many new jobs are being created but what the media generally fail to report is that most new jobs are in non-tradable service industries or in government. Even when jobs are created in manufacturing, these tend to be in industries like building materials which do little exporting. Total manufacturing employment has plummeted to the levels of the 1950s. In any case, overall job creation is not keeping pace with the rise in our nation's population.

The following few paragraphs detailing the true job picture come from Paul Craig Roberts, former Assistant Secretary of the Treasury in the Reagan administration.

Job growth over the last five years is the weakest on record. The US economy came up more than 7 million jobs short of keeping up with population growth. Over the past five years the US economy experienced a net job loss in goods producing activities. The entire job growth was in service-providing activities--primarily credit intermediation, health care and social assistance, waiters, waitresses and bartenders, and state and local government. US manufacturing lost 3 million jobs, almost 17 percent of the manufacturing work force. The wipeout is across the board. Not a single manufacturing payroll classification created a single new job.

The declines in some manufacturing sectors have more in common with a country undergoing saturation bombing during war than with a super-economy that is "the envy of the world." Communications equipment lost 43 percent of its workforce. Semiconductors and electronic components lost 37 percent of its workforce. The workforce in computers and electronic products declined 30 percent. Electrical equipment and appliances lost 25 percent of its employees. The workforce in motor vehicles and parts declined 12 percent. Furniture and related products lost 17 percent of its jobs. Apparel manufacturers lost almost half of the work force. Employment in textile mills declined 43 percent. Paper and paper products lost one-fifth of its jobs. The work force in plastics and rubber products declined by 15 percent. Even manufacturers of beverages and tobacco products experienced a 7 percent shrinkage in jobs.

The knowledge jobs that were supposed to take the place of lost manufacturing jobs in the globalized "new economy" never appeared. The information sector lost 17 percent of its jobs, with the telecommunications work force declining by 25 percent. Even wholesale and retail trade lost jobs. Despite massive new accounting burdens imposed by Sarbanes-Oxley, accounting and bookkeeping employment shrank by 4 percent. Computer systems design and related lost 9 percent of its jobs. Today there are 209,000 fewer managerial and supervisory jobs than 5 years ago.

In five years the US economy only created 70,000 jobs in architecture and engineering, many of which are clerical. Little wonder engineering enrollments are shrinking. There are no jobs for graduates. The talk about engineering shortages is absolute ignorance. There are several hundred thousand American engineers who are unemployed and have been for years. No student wants a degree that is nothing but a ticket to a soup line. Many engineers have written to me that they cannot even get Wal-Mart jobs because their education makes them over-qualified.

Offshore outsourcing and offshore production have left the US awash with unemployment among the highly educated. The low measured rate of unemployment does not include discouraged workers. Labor arbitrage has made the unemployment rate less and less a meaningful indicator. In the past unemployment resulted mainly from turnover in the labor force and recession. Recoveries pulled people back into jobs.

Unemployment benefits were intended to help people over the down time in the cycle when workers were laid off. Today the unemployment is permanent as entire occupations and industries are wiped out by labor arbitrage as corporations replace their American employees with foreign ones.

Most economists refuse to acknowledge the facts, because they endorsed globalization. It was a win-win situation, they said. No sane economist can possibly maintain that a deplorable record of merely 1,054,000 net new private sector jobs over five years is an indication of a healthy economy. On February 10 the Commerce Department released a record US trade deficit in goods and services for 2005--$723 billion. The US deficit in Advanced Technology Products reached a new high. Offshore production for home markets and jobs outsourcing has made the US highly dependent on foreign provided goods and services, while simultaneously reducing the export capability of the US economy.

Q. Isn't it true that protectionism interferes with the free market and therefore ultimately harms the nation?

A. It is possible to have both protectionism and free markets. We have - or at least until recently we had - plenty of domestic producers prepared to compete hard for the dollars of American consumers. Given the unfair way that world markets are currently structured, protectionism simply means that we are leveling the field of competition between countries.

There is nothing surprising about all this. This country was actually built on protectionism. Although the knee-jerk globalists in our media and in our universities would rather you did not know this, in America's years of fastest growth in the late nineteenth century our markets were protected by a wall of tariffs that sometimes reached as high as 50 percent. Indeed up to 1913 we had no need for a federal income tax because the revenues from our tariffs were so high that they met all our public spending needs. We protected our markets also for a different reason: we recognized that certain key industries were critical to our national security and thus could not under any circumstances be allowed to decline. Today this notion has been completely forgotten.

In many cases companies operating abroad have the advantage of sweat-shop labor, government subsidies, a tightly protected home market, foreign stock ownership restrictions, technology transfer requirements, currency manipulation, and other practices which form an unfair competitive advantage over the US. The National Association of Manufacturers has concluded that American factories face a 22 percent unit labor cost disadvantage relative to their major foreign competitors through taxes, health and pension benefits, tort litigation, regulation and rising energy prices - nearly $5 per hour worked. This excess cost burden is almost as large as Chinese industry's total raw materials costs.

Other countries operate as one big business, marshalling the resources of nations to compete against our individual companies. In other words, we have thousands of small companies competing against massive predatory foreign competition orchestrated by national governments.

In Japan, for instance, a tightly managed national industrial policy strongly promotes Japanese industries at the expense of ours. This system, originally crafted by a government agency then known as the Ministry of International Trade and Industry (MITI), has now been copied by many other governments throughout East Asia. This is how the Federation of American Scientists has described the genesis of Japan's industrial policy:

MITI served as an architect of industrial policy, an arbiter on industrial problems and disputes, and a regulator. A major objective of the ministry was to strengthen the country's industrial base. It did not manage Japanese trade and industry along the lines of a centrally planned economy, but it did provide industries with administrative guidance and other direction, both formal and informal, on modernization, technology, investments in new plants and equipment, and domestic and foreign competition.

MITI was responsible not only in the areas of exports and imports but also for all domestic industries and businesses not specifically covered by other ministries in the areas of investment in plant and equipment, pollution control, energy and power, some aspects of foreign economic assistance, and consumer complaints. This span has allowed MITI to integrate conflicting policies, such as those on pollution control and export competitiveness, to minimize damage to export industries.

The close relationship between MITI and Japanese industry led to foreign trade policy that often complemented the ministry's efforts to strengthen domestic manufacturing interests. MITI facilitated the early development of nearly all major industries by providing protection from import competition, technological intelligence, help in licensing foreign technology, access to foreign exchange, and assistance in mergers.

Q. How have our economic policies really affected the ownership and strength of US industries?

A. The United States now no longer controls many of its domestic industries. Over the last 10 years alone foreigners have spent $1.2 trillion to acquire more than 8,000 key US companies. Already as of 2002, foreigners owned fully 20 percent of American manufacturing. In many high-tech and defense-related industries, the proportion is far higher. Such US industries as mining, cement, publishing, engine and power transmission equipment, rubber and plastics, and sound recording and motion pictures are now largely foreign owned. Even in industries like pharmaceuticals, chemicals, industrial machinery, transportation equipment, electronics, metal industries, and coal and petroleum industries, foreign ownership has recently become very high.

Increasingly therefore profits and technological secrets in such industries accrue to foreign owners. Moreover many of the key jobs (in research and development, for instance) go to foreign workers, while the profits that accrue to foreign holding companies boost the tax revenues of foreign governments. We are no longer capable of producing many critical components needed in our high-tech and defense industries.

Q. How are other countries doing compared to the United States?

A. Other countries are coming up quickly. Take Japan. Although the American press has reported that the Japanese economy is a perennial basket case, the reality is very different. In the 60 years since the end of World War II, Japan has leveraged its meager resources (it has virtually no minerals and boasts just 4 percent of our land area) to pass almost every other nation in industrial productivity. So successful has its strategy been that as of 2004 it earned a current account surplus of $172 billion. This was the highest of any nation in history and three times that of China! And it contrasted with a current account deficit in the United States of $668 billion.

Although it is sometimes reported that Japan's national debt is very high, the true position is a lot less serious than it appears. This is partly because Japan's government debt numbers include an enormous amount of double-counting. In any case virtually all Japanese government debt is funded by Japanese citizens (whereas foreigners hold 47 percent of US government bonds, they account for just 4 percent of Japanese government bonds). Basically the Japanese are borrowing from themselves. So long as the Japanese nation has plenty of savings to fund the government's spending, there is no issue. In any case much of Japan's national debt goes to fund not Japanese government spending but rather US government spending! This is reflected in the fact as of February 2006, the Japanese government boasted official foreign currency reserves of $833 billion. These reserves are invested largely in US government bonds. The real problem is not in Japan but in the United States.

Furthermore, wages in Japan are extremely high and ordinary workers enjoy some of the highest living standards in the world. As of 2004, average wages for a production worker were 21 percent higher in Japan than in the United States, according to the OECD. Japan focuses on building global leadership in knowhow-intensive and capital-intensive industries. It has outsourced much of its labor-intensive work to China. This works for both sides because Japan sells huge amounts of capital equipment to China, creating a win-win trade relationship in which Japan enjoys actually a small overall surplus.

Other countries like China, India, Singapore, Taiwan, Hong Kong, Germany, and France have copied the Japanese approach in key respects and in particular treat their export industries as national treasures. The erstwhile motto, "as goes General Motors, so does the United States," has been taken as sacred in these other countries. In our country, we hardly raise an eyebrow when entire industries are sold, outsourced, or driven to the wall by imports.