American Headwinds
September 23, 2010
The start of the 21st century has been a difficult period for the United States. Analysts would not be calling this an age of uncertainty if risks were skewed mostly to the upside. Even before the onset of the subprime crisis in 2007 and its escalation into a full-blown financial and world economic recession, U.S. growth in real GDP and jobs were under-performing their long-term norms. The big worry about America is the possibility that a transition away from its hegemonic days may have begun. Such is not an outlandish possibility. That kind of theme has recurred again and again in history. Ancient Egypt and Greece are no more. The Persian, Roman, Mongol, Ottoman and British empires all came and went. So have Chinese dynasties, Napoleonic France and the Soviet Union. Some commanded the spotlight for centuries, others for much shorter periods.
- America is challenged not by numerous headwinds, not just one. Could this be a perfect storm of adversity, too broad and complex for mere human beings to master? Breaking on through to the other side is going to be difficult and take a long time. Here’s one list of the core sources of stress. The order of them is not intended to indicate either increasing or diminishing importance.
- The U.S. no longer has the world’s most effective system of primary and secondary education. It held that distinction for a century, but standardized test results indicate a significant drop in ranking in recent decades. Higher education is meanwhile becoming unaffordable for many students.
- The United States has long experienced greater job mobility than other countries. Structural barriers in the labor market have nonetheless increased. The plunge in housing prices and proliferation of properties mortgaged for more than their worth is one barrier. Another is related to the proliferation of applied technologies, which has outstripped the ability to train workers to fill current job needs.
- Globalization may have passed a tipping point in the balance between benefits and costs. One problem is that the succession of multilateral reductions in trade barriers stalled last decade. Another is that the United States remains stuck mostly in the first half of the process of creative destruction. Too many displaced factory workers and people with careers in now-dead industries aren’t finding work in new industries either because they have the wrong skills or because more jobs are being destroyed than created by globalization. Globalization helps less developed nations more than advanced ones.
- From the days of the Revolution, America has prided itself in being ruled by laws, not people. The truth now is that the United States is overly litigated to a far greater extent than other countries. More criminals are jailed than elsewhere, and business is drowning in civil law legislation. The risk and costs of getting sued is ever-present. Entrepreneurs are oriented toward doing and making. Attorneys are oriented differently, telling business what cannot be done and combing through regulations to exploit loopholes that serve management but not the public good.
- Income inequality has become substantially more pronounced. It’s important to avoid both the extremes of socialist-imposed equal income for all and the excessive concentration of economic reward in the hands of too few. Tea Party supporters fear the country is heading for the first extreme, but statistics suggest that the second danger is the one more prevalent. When incomes are extremely unequal and widening, the American dream is smothered that each new generation will enjoy a better living standard than the last one. People with high incomes and abundant wealth spend a smaller ratio of their earnings than others, so mounting income inequality also leaves us with a deficit in aggregate demand and employment.
- A sense of shared national identity is fading. This problem is descended from the earliest strains between the thirteen colonies: how much political authority to vest at the national level versus the state level. The Articles of Confederation put states first and proved dysfunctional. A civil war was fought because some states treated national authority on a take-it-or-leave-it basis. The federal government continues to be considered by many people as always the problem rather than an effective tool for resolving some issues. Americans no longer share a common history, language, and set of values, nor for the most part are they raised to respect the differences of sub-cultures in the country that are different from their own.
- The old infrastructure of roads, bridges and power grids has not been maintained properly. Modern forms of infrastructure are overly exposed to cyberterrorism.
- In the blame game, guilt can be assigned to all because few things work right. Government and business have each failed the country, and consuming households have planned budgets poorly. The greed of business leadership, politicians, and households led to shoddy accounting practices and excessive debt across the board, and massive deleveraging followed when unsustainable asset bubbles burst. Long-term planning has been all too meager because business and governments are judged on short-term results. That’s the way it was and still is. All kinds of political experiments didn’t deliver promised results. After the Bush tax cuts, for example, a decade of slower economic growth and worsening public finances ensued. Likewise, Team Obama grossly misjudged the size of the problems and how best to deploy resources to fix them. That team is now dispersing even before the administration’s midpoint.
- A technological revolution focused on the areas of communication and information processing challenges the business of democracy, not just in the United States but in all advanced industrialized economies. We live in an era of very rapid change, but the nature of the inventiveness, unlike the industrial revolution, lends itself to political demagoguery and polarization. Decisions all too often are not made on strict cost-benefit comparisons.
- As the only geopolitical superpower, America finds itself in a permanent state of war, providing most of the financial resources, physical capital and manpower for the defense of the free world. Constant military engagement is a regular theme in the decline of prior great civilizations.
- Climate change and scary projections of the U.S. fiscal debt ten, twenty-five or fifty years from now add immensely to the stress of these times. The totality of the list can be paralyzing.
All of the above has great relevance for the dollar. Exchange rates at one basic level embody a sense of national well-being. They are an expected value of nation’s future possibilities in a sense that transcends strict economic concepts like per capita real GDP growth. A mix of tight monetary policy, loose fiscal policy, high real interest rates, and falling inflation lifted the dollar sharply in the first half of the 1980s, but so did a rebirth of U.S. self-confidence that had been declining over the prior 15 years. The dollar since the late 1960s has on balance lost 75% of its value against the yen and more than 60% against the synthetic German mark. That depreciation did not sap dollar leadership among all reserve currencies, and that resilient currency appeal endows the U.S. economy with unique advantages, for example the paralleled ability to borrow abroad in one’s own currency and to invoice trade in local currency. If these abilities ever disappear, the dollar will depreciate a whole lot more. Just look at what happened to sterling during the twentieth century.
Copyright Larry Greenberg 2010. All rights reserved. No secondary distribution without express permission.
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