America's slow economic decline

Every once in a while Thomas Friedman discovers something that matters. The first part of his 08/07/2011 editorial is spot on. He is writing about America's decline in comparison with the other industrial nations in the world. And how does he characterize that decline?

...our country is now finding itself in the worst kind of decline — a slow decline, just slow enough for us to keep deluding ourselves that nothing really fundamental needs to change if our future is to match our past.

Our slow decline is a product of two inter-related problems. First, we’ve let our five basic pillars of growth erode since the end of the cold war — education, infrastructure, immigration of high-I.Q. innovators and entrepreneurs, rules to incentivize risk-taking and start-ups, and government-funded research to spur science and technology.

We mistakenly treated the end of the cold war as a victory that allowed us to put our feet up — when it was actually the onset of one of the greatest challenges we’ve ever faced. We helped to unleash two billion people just like us — in China, India and Eastern Europe. For us to effectively compete and collaborate with them — to maintain the American dream — required studying harder, investing wiser, innovating faster, upgrading our infrastructure quicker and working smarter.

Instead of doing that at the scale we needed — that is, building muscle — we injected ourselves with massive amounts of credit steroids (just like our baseball players). This enabled millions of people to buy homes they could not afford and to fill jobs in construction and retail that did not require that much education. Our European friends went on a similar binge.

All this debt blew up in 2008 in the U.S. and Europe, and that led to the second problem: Homeowners, firms, banks and governments are all now “deleveraging” or trying to — meaning that they are saving more, shopping less, paying off debts and trying to dig out from mortgages that are under water.

No one better explains the implications of this than Kenneth Rogoff, a professor of economics at Harvard, who argued in an essay last week for Project Syndicate that we are not in a Great Recession but in a Great (Credit) Contraction: “Why is everyone still referring to the recent financial crisis as the ‘Great Recession?’ ” asked Rogoff. “The phrase ‘Great Recession’ creates the impression that the economy is following the contours of a typical recession, only more severe — something like a really bad cold. ... But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation. ...

“In a conventional recession,” Rogoff noted, “the resumption of growth implies a reasonably brisk return to normalcy. The economy not only regains its lost ground, but, within a year, it typically catches up to its rising long-run trend. The aftermath of a typical deep financial crisis is something completely different. ... It typically takes an economy more than four years just to reach the same per capita income level that it had attained at its pre-crisis peak. ... Many commentators have argued that fiscal stimulus has largely failed not because it was misguided, but because it was not large enough to fight a ‘Great Recession.’ But, in a ‘Great Contraction,’ problem No. 1 is too much debt.” Until we find ways to restructure and forgive some of these debts from consumers, firms, banks and governments, spending to drive growth is not going to come back at the scale we need.

Our challenge now, therefore, is to deleverage the economy as fast as possible, while, at the same time, getting back to investing as much as possible in our real pillars of growth so our recovery is built on sustainable businesses and real jobs and not just on another round of credit injections.

Go back and look at the paragraph I highlighted. What characterizes the five basic pillars of growth? They are again

1. education,
2. infrastructure,
3. immigration of high-I.Q. innovators and entrepreneurs,
4. rules to incentivize risk-taking and start-ups, and
5. government-funded research to spur science and technology.

All require either government funding or government action. education, infrastructure and government-funded research were largely funded through the Pentagon or because of the Cold War.

We could fund those things because of the cold war, but not destroy the results in a hot war. The idiocy of the unnecessary invasion of Iraq led to a total waste of American government funds that otherwise would have been better used on education and infrastructure.

Today we live with the results of the tax cuts for billionaires and two unnecessary and poorly fought wars without taxes to support them. This is the libertarian "starve the beast program."

Instead of unleashing American productivity what is happening is that the American conservatives, led by the libertarians, is causing America's slow economic decline in comparison with the rest of the industrial world. This is what Thomas Friedman has caught on to.

The worldwide debt "binge" that Friedman whines about further on comes because the entire world is trapped in the libertarian fantasy that if governments just cut back enough then productivity will be unleashed. But what is actually happening is that the educated workers supported by needed infrastructure aren't there to be productive.

Instead we have big businesses (inherently not sources of increased productivity - that comes from small businesses) sucking up as much money as they can as profits and stashing it on their books as they search for places to invest it. (See the mortgage crisis.)

Until governments start increasing the spending on education and infrastructure and quit penalizing small businesses so that big businesses can make more profits then the world economy is going to continue to decline - with America slowly leading the way.