What's happened to America? Over half a century of war and the conservative movement.

What’s gone wrong with the American economy? The Cold War, excessive military spending, and a refusal to invest in the most important economic resource America has, its work force. This has been concealed by the free market fantasies of the Reagan Revolution, which has destroyed more of the economy than it has built. This has been shown by the failure of real middle class wages to increase since 1970. The economy has been pumped up by first getting housewives out of the home and into the work force, followed by an economy pumped up by making credit easier to get, then during the 90’s the Federal Reserve has manipulated the interest rates to be lower to give the illusion of a healthy economy. This has resulted in the two most recent bubbles in the financial economy, but the manipulations of the financial economy have primarily redistributed income away from the real economy and productive workers to people in positions of control of financial products. Unfortunately, financial products have little or no effect on real economic productivity. All these financial manipulations have had the effect for the last three or more decades of exporting our real economy to the rest of the world.

Charles W. McMillion has written an article, first published in "Manufacturing and Technology News" January 24, 2008, that shows the current state of the American economy.

In just the past seven years, US household debt almost doubled and federal debt soared by near two-thirds, rocketing by a combined $10.5 Trillion. The total combined debt of households ($14.4 Trillion) and the federal government ($9.2 Trillion) is now 168% of GDP, far higher even than in the brief spike during World War II. All other levels and ratios of debt also have soared far beyond any past precedent.

Yet, this record-shattering explosion of debt stimulus created the weakest seven year job growth (4.4%) and one of the weakest periods of real GDP growth (18.1%) since the Depression: less than 6 million new jobs ($1.8 million of debt per job) and a mere $4 Trillion increase in GDP.
This period began with the collapse of Wall Street's stock market bubble from the late 1990s and ends now with the collapse of Wall Street's housing and other debt bubbles. That such massive mortgage and consumer borrowing, tax cuts and war spending produced such remarkably weak real economic results suggests the months and years ahead could be quite difficult.

Yet, along with Fed rate cuts for cheaper debt, the only policies seriously considered by this year's crop of Wall Street-funded political candidates is more short-term household and federal debt "stimulus." Locked into a failed, 30-year-old ideology of deregulation and debt, there is no option to compete with the remarkably effective industrial and trade policies pursued by China and others.

2008 will be the ninth consecutive year the US economy grows slower than the world's growth while China grows more than three times faster. In the past seven years of sluggish growth, the US accumulated Manufacturing trade deficits (production shortfalls) of over -$3 Trillion with full Current Account trade losses of -$4.3 Trillion; more than the entire nominal growth of GDP.

At the same time, now in the third year of their remarkable 11th 5-Year Development Plan, China's accumulated Current Account surplus soared by nearly $1 Trillion since 2001, near 13% of GDP in 2007. These surpluses are funding China's now $1.5 Trillion war chest of foreign currency reserves.
Record US trade losses have accelerated the hollowing-out of the once dynamic US economy. For the first time on record, in 2002 the US lost its historic global trade surplus in Advanced Technology Products. Worsening sharply, since 2004 the ATP deficit became larger than the US trade surplus for Intellectual Property services, royalties and fees. That is, for the past four years the US has a worsening combined deficit in technology goods and services. Technology no longer pays any part of the US import bills for oil, cars, electronics and clothing, etc. China now accounts for half the US Manufacturing trade deficit and more than the entire deficit in technology.
Reflecting the production shortfall from the trade deficits, BLS data show output growth since 2001 is among the weakest since the Depression and the gain in total hours worked (just 0.5%) is, by far, the weakest. This is why productivity growth has appeared misleadingly healthy; productivity is a measure of output per hour of labor.

Another powerful measure of the hollowing out in the economy is the radical shift in the job market. Of the 5.92 million total new jobs in last seven years, only 4.32 million were in the private sector while 1.66 million were in state/local governments, mostly for public education, health and prisons. The federal government cut jobs in the Postal Service.

More than all of the new jobs added by the private sector since 2001 are in private education and health care bureaucracies (3.34 million new jobs) and in bars and restaurants (1.53 million new jobs.) Uniquely, all net new jobs added fall in the non-supervisory/production category -- half a million supervisory jobs were lost. Manufacturing lost -3.28 million jobs (-19.1%) and now provides fewer jobs than in July 1942 -- seven months after the attack on Pearl Harbor.

Despite concerns about illegal immigration, since 2001 the labor force has grown more slowly (7.4%) than during any seven-year period since 1955 and participation rate of those in the labor force, those working or looking for work, also fell sharply -- from 67% to 66%. This is the reason that the un-employment rate, now 5.0%, is not much higher.

The average weekly wage for non-supervisory jobs buys 2.0% more now than seven years ago and the average real salary and benefits for all workers is up by 9.0%. These real increases are down from the bubble period of the late 1990s but they are far better than the declines of the previous 20 years. Unfortunately, these recent increases in "average" wages appear to be a product of the latest financial bubbles, the widening use of stock options and very large bonuses in compensation, particularly on Wall Street.

Median real wages have continued to decline, including by -1.4% over the past year. Median household real incomes fell -2.0% from 2000 to 2006 (latest data available) and even the average income fell -0.5% with inequality now the worst on records back to the 1960s. The total current savings of ALL households over the past three years is virtually nothing; by far the worst since the 1933.

The foolishness of powerful, self-interested claims of a "new paradigm" is again exposed. The fantasy is that soaring debt and the loss of production through trade deficits are good things and the lack of current savings irrelevant. As a long forgotten advertisement once proclaimed: "If you don't have yourself an oil well, get one!" We can all live well from royalties and asset appreciation.

Soaring debt and debt schemes did drive up many asset prices, creating a borrowed illusion of general prosperity along with enormous actual wealth and power for a few. But now, unprecedented debt and soaring inventories of unsold homes are driving down the inflated prices for homes and other assets. For at least the next several years, most households will now be forced to cut spending and earn, not borrow, their living standard.

Another short-term debt stimulus may take the edge off the difficult economic conditions of the next few months. But trading away our once unique economic strengths while borrowing against the future has failed. Making even minimum interest payments on these massive, soaring debts will be increasingly difficult as the success of thoughtful industrial and trade policies in China and elsewhere continues.

That tells us where we are right now.

How did we get here, after America had the most powerful and productive economy in the world following WW II? The short answer is “the Cold War.”

We put our investments into military forces and international military expansionism instead of economic growth, mass education and universal health care. While containment of the USSR was worth it, it drained America’s economy as much as it did that of the USSR. America “won” the Cold War by outlasting the Soviet Union in a test of who could waste more money on military spending, something that always detracts from economic growth.

The Reagan Revolution has been a three-decade effort to avoid admitting that what America was doing economically was not working. Fred Kaplan is right to state that conservatism is based on the myth that America gained strength during the Cold War. The truth is the exact opposite. Both the Soviet Union and America squandered their national strength, and America just outlasted the Soviet Union. But the destruction of the American economy lasted throughout the Cold War. The Conservative movement was a panicky set of actions attempted to forestall the clear decline of the American economy. (The invasion of Iraq was a similar conservative panic in which an attack on a small and relatively defenseless Middle Eastern nation was to have been a demonstration of the folly of threatening the American Superpower. The Iraq War and Occupation has been another failed conservative idea.)

The conservative free market policies and the anti-union policies have been designed to compensate for the poor economic performance by substituting the magic of well-finances and highly rewarded entrepreneurs for a lack of economic investment. But intelligent people resort to magical solutions when they cannot see a realistic solution to the problems they face. That this magical solution (“The Invisible Hand”) has not been working has been concealed behind a combination of Federal Reserve manipulation of the monetary economy and interest rates, together with massive international borrowing by the federal government. The borrowing drove America from a creditor nation to a debtor nation during the Nixon administration and the Vietnam War, and sharply accelerated during the Reagan/Bush41 administrations. The government activities have all been ways of papering over the basic economic failure of massive military spending combined with the refusal to invest in workforce education and healthcare.

So now America is facing economic exhaustion. For half a century we have hollowed out our productive economy, shipping it to the rest of the world, and replaced it with a paper-based financial economy that is internationally dependent on the good will of the rest of the world to continue to operate. Yet the 300 million plus American people are still a powerful economic resource, and with investment, the economic infrastructure still exists. The challenges of the increased cost of energy, global warming, and polluted environments will require a great deal of effort to deal with, an effort that paying the massive American military force and for the war of the occupation of Iraq will detract from.

The challenge is facing us, and Rambo is not going to meet that challenge. American workers are. It’s time to put them back to work in real productive jobs. We'll see an indicator that America has turned back in the correct direction when we start graduating more American-born engineers than MBAs and Lawyers. But that will not happen without coordination. Remember - government is not the enemy. The American government is us. Reagan and the conservatives got that wrong, too.

It's time to stop blaming others for the failure to meet the challenges facing us and get down to work to build and fix things instead of bombing every imagined threat.