Misperceptions that Matter

04/03/2011—Individuals often have misperceptions. For example, when I persuaded my family to move from Southern California to New Jersey five years ago so I could accept the deanship at SMLR, I knew we’d have less sunshine, but assumed it wouldn’t still be snowing in April.

Sometimes, though, the consequences of misperceptions are serious. For example, the average American – to the extent it is possible to talk about him or her in today’s diverse and polarized society – has an understanding of what constitutes a “safe and effective drug” that is radically different from the standard that the FDA applies when approving or rejecting a new drug application -- for the FDA “effectiveness” is judged by statistical probabilities, and “safety” recognizes that almost all drugs can have serious side effects.

Likewise, a majority of Americans (60-80%) oppose inheritance or estate taxes in spite of these facts: almost none of them will ever have to pay it; it is one of the most straightforward ways to address the sharp growth in inequalities in wealth in the US; the money it raises for the US Treasury is ten times what the Government is spending on retraining all US workers to provide them with new skills to cope with the challenges they face in a rapidly changing global economy. (For a good article that uses the estate tax as an example to show how US public opinion can be shaped by how an issue is framed, go to  The Political Uses of Public Opinion: Lessons from the Estate Tax Repeal).

This week I took part in the inaugural workshop of a new “Getting to Know Europe Business Forum” hosted by the Rutgers’ Center for European Studies (www. europe.rutgers.edu). The keynote speaker, Dr. Dan Hamilton, Executive Director of the Center for Transatlantic Relations at Johns Hopkins University, shared the latest data from his Center’s research that shed light on two important misconceptions about the US’s global economic relationships: (The Transatlantic Economy 2011
Executive Summary
).

First was that, while we tend to focus on the size of the US trade deficit, a far larger and more significant part of today’s global economy is foreign direct investment and sales of foreign affiliates. And second, that while a lot of media attention is focused on rapidly growing US trade and investment with China and India, the scale of our current economic relationship with Europe dwarfs that of our relationships with these emerging economic powers. A few data points help illustrate this:

  • US investment in the Netherlands is 9 times greater than its investment in China;
  • The value of US investment in Belgium is greater than its investment in India and China combined;
  • The EU invests more in New Jersey alone than the US invests in the whole of China, and this investment is responsible for the direct creation of 145,000 jobs and, indirectly, many more. 

At least two key lessons can be drawn from understanding these realities:

  • The US public has a vital economic interest in doing all we can afford to help avoid the collapse of the EU as it struggles with the sovereign debt crises of nations like Greece and Portugal, and, more worryingly their much larger neighbors, Italy and Spain.
  • When the US and EU can work together on an issue – whether it is military intervention in Libya or avoiding the collapse of the global financial system – then things tend to happen; where they don’t (like the failed talks on climate change in Copenhagen), then there is usually no progress.

America's Major Commercial Arteries

Source: Center for Transatlantic Relations, The Transatlantic Economy 2011; Executive Summary

So it is vital that the US and EU, along with Japan as it recovers from the earthquake and tsunami, recognize their collective power, and come together to cooperate in ways that support their joint interests. To name just three good places to start:

  • restart the stalled Doha round of discussions on reform of the WTO and rules governing trade, investment, and labor standards;
  • reach a global accord on reducing greenhouse emissions;
  • introduce real reforms to avoid a repeat of the recent global financial crisis.