Thursday, November 11, 2010

Why America Is Slouching Toward Third World Status

America's infrastructure, education and work ethic are all eroding as a result of rapacious financialization and the culture's relentless obsession with consumption and entitlement.

Please read this excerpt from the book The Endangered American Dream:

Follow a traveler to New York from Tokyo. After leaving the taxi at Tokyo's City Air Terminal--a perfectly ordinary taxi and therefore shiny clean, in perfect condition, its neatly dressed driver in white gloves--our traveler will find himself in an equally spotless airport bus in 5 minutes flat, with baggage already checked in, boarding card issued and passport stamped by the seemingly effortless teamwork of quick, careful porters who refuse tips, airline clerks, passport officers and bus crews....

After an hour's bus ride over the expressway to the gleaming halls of Tokyo's Narita International Airport, after the long trans-Pacific flight, when our traveler arrives he will be confronted by sights and sounds that would not be out of place in Lagos or Bombay.

He has arrived at New York's JFK Airport.

Instead of the spotless elegance of Narita or Frankfurt or Amsterdam or Singapore, arriving travelers at one of the several terminals belonging to near-bankrupt airlines will find themselves walking down corridors in need of paint, over-frayed carpets, often struggling up and down narrow stairways alongside out-of-order escalators.

These are JFK's substitutes for the constantly updated facilities of First World Airports. The rough, cheap remodeling of sadly outdated buildings with naked plywood and unfinished gypsum board proclaim the shortage of money to build with, patient capital available for long-term investment--though there was plenty of money for "leveraged buyouts" and other quick deals in New York during the years that JFK decayed into a Third World airport.

But even where there is no visible sign of one Third World trait--the sheer lack of invested capital--another is very much in evidence, even in the most shiny-new U.S. airports: the lack of skill and, even more, of diligence in the labor force, the will to work well, not for a tip or under supervision, but out of respect for the work itself, and for self-respect of course.

Perhaps you find this unfair, or troubling; I find it true. If you disagree, please ride the BART train system in the San Francisco Bay Area and examine its stained, dirty cars and the $130,000+ salaries of many of its employees. Then ride the new subway in Shanghai or Bangkok and see how it compares.

I also find this to be largely true:

This is not the inevitable consequence of "globalization," as some seem to believe, but rather because of the failure to control and offset the process in the interests of the vast majority of Americans; and that failure has been of great benefit to a small minority.

The reduction in trade barriers, the diminishing incidence of transport costs, and the global diffusion of mass production methods--the three agencies of "globalization"-- could have been or should have been, offset by addedinvestment, both in people by way of education and training, and in the overall working environment: public infrastructure, plant, machinery and technology actually applied.

If more were invested, the U.S. economy would not be competing by cheapening the value of its labor.

There is one ideology that grips the American mind--the ideology of free trade. Elite Americans are no longer seriously churchgoing but their unquestioning faith in the ideology of free trade is intact.

What is especially remarkable about these excerpts is that they come from a book published in 1993, 17 years ago-- long before the spectacular rise of China as the "world's manufacturer."

I cannot summarize the author's entire argument, but readers will quickly spot the parallels with my own Survival+ critique: that a Central State/Power Elite partnership relentlessly pushes ideologies that in practice only benefit the few at the expense of the many.

You may also find parallels with other themes often presented here: the perverse consequences of heavily propagandized "populist" policies, and the way in which feedback loops can strengthen the perversity over time.

I think it is fair to say the U.S. economy and its Central State are completely devoted to consumption over investment. The vast majority of the Central State's budget is devoted to "transfer payments" to individuals (funds used for consumption) or the maintenance of the Global Empire (an investment of sorts but not one with many returns for the home citizenry).

When this book was written in 1993, the U.S. savings rates was 12%--a figure that was rather ordinary among nations.

In the credit-dependent bubble economy of the 1990s and 2000s, the U.S. savings rate sank below zero to a negative rate.

Since then, it has blipped up above zero, but as with all other official statistics, the savings rate is less than meets the eye: the Federal statisticians count reduction in debt as "savings." That is not the equivalent of accumulated capital/cash, so the statistic is misleading.

There is another theme presented here that is shared by this site: that the financialization of the U.S. economy has been its undoing. The "creation" of new financial "industries" based on essentially fraudulent "innovations" has undermined the real economy while concentrating wealth, profiteering and political power on Wall Street (which now includes the biggest banks).

The point being made here is that the rot--the short-cut zeitgeist of quick wealth via financialized fraud--began decades ago. The U.S. economy and indeed its culture have both been hollowed out by this rot and the accompanying diseases of complacency, entitlement and a manic obsession with consumption over investment. The incentives were perverse then, and they have only grown more perverse: the brass ring of wealth is best reached by either moving the business offshore and skimming the net (which is concentrated in a tiny Elite of managers and share owners) or by misrepresenting and masking risk via a "financial product" whose only intent is to mislead the buyer.

This is how you widen the divide between the Power Elites and their political cronies and the citizenry at large.

The solutions are rather obvious, aren't they?

1. Incentivize investment and penalize consumption. Eliminate corporate taxes and the entire corporate welfare system, eliminate the Social Security tax which weighs most heavily on lower-income workers, and replace both with a consumption tax and a flat income tax on those earning more than (say) $100,000. Those fortunate enough to be earning above $1 million annually would pay a higher income tax; that would capture the relative handful of households who garner a full third of the nation's income (the top 1%).

There are some who demand a pound of flesh from corporations, regardless of the costs to the nation, for ideological reasons. Please examine how Google and other global companies game the system to pay 3% corporate tax instead of the 35% nominal rate. Is this is a system which actually benefits the nation?

If corporate taxes disappear, then the wealth of the corporation flows to individuals, who then pay taxes on that income. That is simple, direct, and free of the churn and waste of corporate tax accounting and various corporate welfare tax breaks.

Set the tax rate on income above $100,000 generated by churn, speculation and financialization at 75%. Set the tax on income generated by patient, real investment at 10%. In doing so, you immediately offer disincentives to gaming, financialization and fraud and incentivize real investment in the real world.

Require the banks to pay 5% on all savings account, or 4% above inflation, whichever is higher. This was once the law of the land, and it should be so once again. This incentivizes patient capital.

2. Dispense with the artifice of "free trade," which is never free. (If we ask cui bono (to whose benefit?) of "free trade," we are always told "the shoppers at Wal-Mart," as if that answers everything.) Pursue what Luttwak (author of the book excerpted) called geo-economic policy. That's what openly mercantilist economies do, and it's what the U.S. pursues haphazardly (Export Bank, agricultural subsidies, weapons deals, tax breaks and subsidies for various favored industries, etc.) and without any coherence.

"Free Trade," as Luttwak discerns, a close cousin of Marxism: an idealistic ideology with "true believers" that delivers a system which enriches and empowers an Elite at the expense of the masses.

Free-trade proponents fear a "trade war." I have news for the free-traders: we are already in a trade war, and have been for 220 years. It is a low-intensity conflict but a conflict nonetheless, in which every nation and trading bloc is jockeying to protect its home industries and increase its export markets.

If you believe the U.S. is a "free trade" nation, please ask for the point of view of our trading partners such as Brazil. From their POV, the U.S. is a tangle of intentionally protectionist barriers and regulations.

Free trade fanatics would do well to study Germany and South Korea, two blatantly mercantilist export giants. German wages are among the highest in the world, yet their industry has not been boxed up and shipped to China; why?

Germany made a series of political and cultural trade-offs. Please examine their apprenticeship programs, the manner in which their unions accepted cuts in pay, benefits and working hours in order to sustain their own jobs, and that nation's political balancing of issues around jobs, trade, currency and security. Please educate yourself about the trade-offs made by South Korea.

To believe that an open market would solve everything is akin to believing in a Marxist paradise: all trade is deeply, fundamentally political. Free trade, like Marxism, promises an emotionally appealing perfection but in the real world, it is a tangled series of trade-offs that are guided by those Elites with the most to gain from one "trade" or another.

3. Incentivize real education (as opposed to supporting existing bureacracies) and real work as opposed to entitlement, gaming, lying and misrepresentation.

4. Require the posting on the Web of every political donor's name, paid positions and official affiliations; though we have a Supreme Court which has surrendered the rights of citizens to those of corporations, we can at least force all donors to stipulate their donations, titles and affiliations.

If a corporation or wealthy clique sets out to purchase the best congressman that money can buy, at least we will know who is doing the buying.

People respond to structural incentives. If the system rewards gaming the bureaucracy, an unhealthy obsession with entitlement/consumption and financialized speculation and fraud, then we should not be surprised that those are precisely what we get in abundance.

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