bonddad wrote a thought provoking piece on how to transform the US from a debt to an equity economy, and came up with a four point plan:
- Balance budget
- Educate the population
- Focus on growth industry
- Open up Alaskan and Coastal resources to a gold rush
However, none of these are likely to take the US Economy out of its long term depression. Even combined, they do not address the underlying economic realities:
- We have more people (globally) than can be integrated into the economy
- Our current energy sources can not sustain continued growth
- The design of American society is not conducive to sustainability
- All long term economic projections are fundamentally unsound
America's government debt as a percentage of GDP is once again what it was at the end of the Reagan/Bush years, and has soaked up the gains made during the run up to the Dot Com bubble. Foreign investors place their money in the US Market as a hedge against the collapse of the domestic markets of the fast growing economies of the world. Europe has seen a similar boon in their financial markets, and the power of the Euro is largely due to increased demand for a stable market in which to hedge.
The failure of American economic policy is not in a failure to grow the economy, or even effectively manage its debt. Rather, America's economic insecurity is a failure of planning coming out of the Eisenhower years, when America used its access to cheap energy to decentralize its industry and population in order to better weather an possible Soviet aggression. The resulting boom in construction of roads, housing, business parks, etc, produced the sustained post war economic growth and the eventual crisis of the 1970s. During the 1970s, our society became painfully aware of how dependent it was on a constant supply of cheap energy.
Now, a generation later, we're being bit by the energy bug again. This time, the growing economies of Asia are putting a squeeze on the limited energy supply. The capitalistic growth in China, especially, has created a need for energy which propelled our Administration into war in Iraq in Afghanistan. When John McCain says we'll stay in Iraq for 100 years, he means that we will attempt to control those energy resources for as long as necessary, to keep the spice (I mean oil) flowing into China.
This foreign policy of trade with China goes back to before the founding of the US remember, it is not new. The US has always looked west to China in our foreign policy. US involvement in WWII was spurred not because of any particular interest in European adventure, but because of the failure of Japan to recognize our mutual agreement to divy up China. The US was willing to sacrifice Eastern Europe to the Soviet bloc, but went to war twice in Korea and Vietnam, to ensure our access to the Asian markets.
This historical back drop underscores why bonddad's suggested solutions are red-herrings:
- Debt Reduction - While it makes sense in terms of your credit cards and monthly payments, in real terms debt means we possess the asset, and the rest of the world possess a promise. Our debt cuts both ways, as foreign investors hedge their bets against the growth in Asia through US bonds, they become equally entwined with our future. Rather than focusing on reducing debt, we should focus on how those assets are re-invested.
- Education - Simply put, India and China have more people quantitatively who have the chops to become engineers and scientists. As their wealth increases, they will develop a critical mass of R&D might that will wipe the floor with US high tech. We would be better served by opening up our borders to educated immigrants. People schooled outside the US, should be encouraged to move here, granted automatic permanent residence, and an accelerated path to citizenship.
- Focus on Growth Industry - Rather than focusing on growth industries of today, we should invest more heavily in infrastructure and designing a sustainable society. The growth industries of Asia will be the same technologies we will need most in our society anyways. Rather than focusing our limited resources on competition with the rest of the world, we'd be better served by reducing waste and improving the efficiency of our public infrastructure. By focusing on environmental remediation, recycling, sustainable energy, public transit, new-urbanism, and sustainable land use, we can reduce our per-capita energy consumption and reduce our dependency on cheap foreign oil and material resources. At the same time, we can maximize the value of our country's greatest asset, the land itself, for future generations. The rebuilding of America as a green society will produce vastly more economic activity, and reduce our dependency on consumerism to drive our economy.
- Alaska and coastal drilling would destroy long term value for a short term gain. We'd "produce" more oil at lower cost simply by legislating Detroit and all American drivers switch to carbon-fiber composite vehicles. Having strategic reserves of petroleum will become increasingly important the longer it takes us to transition our energy consumption to other sources. As such, Alaska is currently more viable as a hedge against a green transition of US society. If we are able to transition to alternative energy sources, the value of these oil reserves will decline to the point where economically, the unpolluted land itself will be of greater value.
We are living in an interesting time, when like Europe after WWII, we find ourselves forced to confront the grim reality that we need to rebuild our society. A century of sprawl and growth has left us dependent on foreign resources, with a crumbling infrastructure, and an unmaintainable mess. Much of the rest of the world is now engaged in a foolhardy attempt to replicate our mistakes, in pursuit of a higher standard of living.
However, with the ever increasing rate of change in technology, the relevance of any one individual is declining in an ever more connected world. As more people are educated around the world, the relative value of that education is diminished. Scarcity of skilled workers is diminishing, as can be seen by US wage stagnation and increased individual productivity. Currently technologists are projecting that within 20 years, regenerative medicine will be capable of replacing most faulty body parts like we fix cars, computer processing power will approach the 1 human brain / $1000 in price performance ratio, and commercial space flight will be common place.
Attempting to project the US GDP in 20 years time in the face of such transformative technologies is currently impossible. When combined with effects of environmental pollution and climate change on the world's population, it becomes increasingly difficult to judge the global political climate in 20 years time as well. In the face of these uncertainties, it is in America's interests to obtain as much capital as possible, and invest it in mitigating these risks by fixing its systemic problems in energy, infrastructure, and environmental engineering.
Our current levels of indebtedness are not a problem, if we manage our economic activity properly. By leveraging our relative stability, we have gained access to incredible amounts of capital. Unfortunately, our current Administration has squandered it largely on maintaining a failed foreign policy for the benefit of a select few. This does not mean, however, that the next Administration should make the opposite mistake by attempting to address this symptom, while ignoring the core mandate of government, the protection and promotion of "public goods".