GDP Uber Alles & the Unsustainability Factor

This is part 1 in a series of America's economic decline and useful policy alternatives for the future.

Hijacking America

In light of the growing concerns that plague the future stability as a nation, Alexander Hamilton’s “Report on Manufactures” is a fitting for an introduction. The wisdom in these words should strike a tone to our ears even more so then they did when they were read for the first time to the House of Representatives in 1791.

“If one nation were in a condition to supply manufactured articles on better terms than another, that other might find an abundant indemnification in a superior capacity…And a free exchange, mutually beneficial, of the commodities which each was able to supply, on the best terms, might be carried on between them, supporting, in full vigor, the industry of each... But the system which has been mentioned is far from characterizing the general policy of nations. The prevalent one has been regulated by an opposite spirit. The consequence of it is, that the United States are, to a certain extent, in the situation of a country precluded from foreign commerce.”

According Leslie Gelb, president emeritus of the Council on Foreign Relations wrote, “No nation with a massive debt has ever remained a great power.”

What nation was she referring to? The United States of America. US heavy industry has largely disappeared, having moved to foreign competitors, which has cut deeply into its ability to be independent in times of peril. Its public school students trail their peers in other industrialized countries in math and science. Not because American kids are born more ignorant, it is because of our education system, our fractured politics, bilingual and multiethnic classrooms, which slow progress and advancement. Nonetheless, we are losing our ability to compete in the global economy. Entire generations of Americans read barely at a grade school level, know almost no history, basic science, and next to nothing in geography.

Political Science professor, Robert Cape, of the University of Chicago, ads an equally bleak diagnosis, “America’s relative decline since 2000 of some 30 percent represents a far greater loss of relative power in a shorter time than any power shift among European great powers from roughly the end of the Napoleonic Wars to World War II. Indeed in the first decade of the Second American Century, a net zero new jobs were created. The average American household earned less at the end of this decade than at the beginning. American savings and investment accounts are lower and the dollar is worth less, unemployment is higher, and 50,000 plants and factories shut down (Meyerson, Washington Post, 2010).

We now buy abroad, what we used to produce here at home, for nearly all of our daily items, this includes critical technology for infrastructure and defense (termed Advanced Technology Products). Reason we routinely run a half trillion-dollar trade deficit, causing James Buchanan to quip, “China today has the trade profile of an industrial and technological power while the manifest of U.S. exports to China, aircraft excepted, reads like the exports of the Jamestown Colony to the Mother country” (Suicide of a Super Power).  

Vincent Law nails this point perfectly.

The entire free trade theory willingly recognizes that there will be winners and losers. But the net benefits we are told, will clearly outweigh any costs. But the costs are there, and often times will not be counted as easily as units of coal exported and units of cheap chinese junk imported. Unemployment leads to depression, destruction of the nuclear family unit, mass relocation, ghost cities, and disproportionate strain on different sectors of our society. And only the elites and (the token scholarship minority) who get the top tier education can get their foot in the door of the lucrative booming “services” sector of the economy (read: consulting, finance.) It is precisely these folks who are told all throughout school that international trade is GREAT, outsourcing is SUPER, and that a rising tide lifts all boats.

Mark Drajem for Bloomberg ticks off a depressing list of lost jobs in semiconductor and electronic components (42%), communications equipment (48%), and textile lost an astonishing 62%. These depressing figures caused Auggie Tantillo, executive director of the American Manufacturing Trade Action Committee to say, “Running a trade deficit for natural resources that the United States lacks is something that cannot be helped, but running a massive trade deficit in man-made products that America can easily produce itself is a choice—a poor choice that is bankrupting the country and responsible for the loss of millions of jobs.”

Who did this to us? We did this—The American voter through ignorance, the American politician from the influence of lobbyists. We believed in the new creed: “plenty for today, wait and see about tomorrow.” And we have invited the whole world to the party, promising welfare and entitlements for life, mortgaging it all for a future generation to pay, arrogantly thinking the paradigm of consuming more than we can produce will forever be sustainable.

Unless you are a part of the tiny fraction of Americans at the top of the food chain, you have no economic freedom in which to speak. Do not confuse the recent American capitalist creed that because you have freedom to spend along with consumer choice, you have economic ability. You do not. You are a surplus commodity.

Since1970, the American economic way of life changed forever. Our economy altered at light speed from industry and production to services and the financilization of everything. The short analyses reveal during this time that the greater majority of Americans have become serfs. The dollar does not spend the same as it once did, we don’t make as much relative to our parents and grandparents, yet tax revenues set newer and newer records each year. It now takes two working parents to afford a household where once it took just one. Homes were paid off sooner and people once could work their way through college. 

Now Americans are deeper in debt and so is the country. Our so-called freedoms to spend and economic choices to make are illusions, a product of psychology and consumer-driven marketing ploys. The truth of the matter is these so-called economic freedoms and choices have been made compulsory in order to live. The “financializaiton” and government involvement in the economy has produced regulatory capture for the consumer.

In a short synopsis what does this all mean? Well, let first me first mention this point: Our national debt roughly stands at $14 trillion. However, that is not our structural debt, which is what our legislators have promised to fund. Programs like Social Security, Medicare, government pensions, etc.  If we go by the General Accounting Office, that number is anywhere between 60 and 80 trillion.

Government’s involvement in the economy has widened and caused a series of bubbles in its wake. Total government spending amounts to more than 40 percent of gross domestic product, equal to what the economy actually produces in a year [1].

How does this affect the US globally? Other economic giants such as China, Japan, Persian Gulf governments and sovereign wealth funds are suspecting, and rightfully so, that they are holding worthless papers. The fear being, of course, the US will default on the massive debt or cheapen the hold by inflation. As these fears grow a few things will happen. These countries, which are essentially our creditors, will stop buying US debt or start selling it or force a higher interest rate to offset the risks associated in holding it.

The Fed will have no choice but to raise rates to attract borrows, which will greatly increase the chances for recession. Once this comes to pass, as many have stated, the US debt will be largest single item in the federal budget. Eerily Lenin supposedly once said that the surest way to bring down capitalism and ruin its institutions was to debauch the currency, whereby through process of inflation, governments can confiscate secretly. In essence, government will swallow the economy and the interest of one is no longer separate from the other. So, what once cost 25 cents now cost $5 or 10. For example, gas today cost 14 to 16 times as much as it did in the 1950s. The point is that dollar has lost anywhere between 75 to 90% of its purchasing power.

Different Course and Social Implications.

There is, of course, an alternative: A nationalistic economy secures the domestic interests, first. When farmers need more workers they should raise wages to attract workers, not import cheap, low-skilled laborers who will require welfare assistance for the duration of their lives. If manufactures, such as car manufactures for example, wish to produce quality goods, suited toward their main consumer, the American people, then perhaps the best way is to allow American workers to manufacture those products. 

If American car manufactures are falling behind Europe and Asia, then time is of the essence to turn ship and take a correct course. Corporations should hire more engineers, invest in human capital by sponsoring advanced degrees for aspiring design engineers, and reform corporate management by putting senior engineers in chief managerial roles as the Germans and Italians do.

America, during the 1950s and ’60s, owned the world market in car manufacturing. Now American auto manufacturing capability is merely a drop in the pacific. Since 1970, Japan has purchased less than a million U.S. cars, while selling us over 50 million [2].

Free traders suggest this is a good thing: Japan makes a superior product, and Japanese consumers, just like American consumers, choose to buy Japanese made cars. However, the deluge of imports and the flood of outsourcing have created, in spite of increased wealth and access to every widget and gadget under the sun, an economic system of diminished returns. College graduates can’t find work and are forced to move back in with their parents. Children are raised in daycare because mothers are forced to find a job and help support the family.

Ernest Hemmingway wrote, “the first principle of a mismanaged nation is inflation of the currency, the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.”

It is impossible to deny that free trade works, when it works. In the same breath, it is important to identify and then realize the areas it has failed. For starters take a stroll through the Mon Valley of Pennsylvania; book a tour through a travel guide and take in the sights of the shrinking, gutted city of Detroit—once America’s Great Arsenal of Democracy, its forges now rusts in obscurity, cold and forgotten inside an empty factory.

There is reason why the majority of Americans feel the country is headed in the wrong direction. We should listen to them even if most cannot give in detail the source of their anxiety. However, instinctively most Americans, on some level, are economic nationalist. The differences come out when they bump up against a hard advocate for absolute free trade. One issue in particular is the understanding of one word, “need.” For example, free traders will say, “we need immigrants to do the jobs American won’t do.” Or “we need to outsource some jobs that can be done cheaper and more efficient so that Americans can have more for less.” 

These are understandable motivations on a superficial level, but the logic isn’t quite as sound as assumed.

While there are “needs” in one’s life, from an economic standpoint, rarely can a need be objectively and quantifiably determined. In fact, the former is really a wish. Comparing needs and wishes are not semantics but a real idea. Farmers may wish for more farm workers, American manufactures may wish for better profits by reducing production costs. Anyone is entitled to wish for anything they happen to imagine, but the object desired is rarely a need. Even worse is allowing powers at the top to determine for the rest of us what our needs are. 

Bringing in more foreign workers is not without costs to society. Outsourcing jobs to foreign countries is not without costs to the American economy. Our elites inform us we have access to plenty of goods. We have more than we can otherwise produce on our own. However, we also have a long-running trade deficit and a permanent unemployed/underemployed class.

Our nation enjoys its place as the world’s oldest constitutional republic, and is still the model to which other nations aspire. However, if the American people and the politicians they elect cannot standup and prevent the coming calamity, the devaluation or default of our currency, can we continue to say democracy is the pinnacle of human society?

Will we have to concede that John Adams was correct when he dimly reflected, “Remember, that democracy never lasts long. It soon wastes, exhausts, and murders itself. There never was a democracy yet that did not commit suicide.” 

Notes

1. “Substantial expansion in the size and scope of government, including through new and costly regulations in areas like finance and health care, has contributed significantly to the erosion of U.S. economic freedom” (online source: http://www.heritage.org/research/commentary/ 2014/1/why-is-america-losing-its-economic-freedom). 

2. Gary Hoffman, (2009). AOL Autos.com

3. Read Patrick J. Buchanan’s Suicide of a Super Power