For many decades, Labor Day was a holiday on which Americans celebrated (and maybe even felt a bit smug about) our nation’s economic prowess. This year, not so much. In our current economy, many people are suffering grievously. Moreover, an increasing number believe that the problems are permanent. Surveys show a significant proportion of the population believes that their own living standards will continue to decline, and that their children’s generation will live less-well than their own. In other words, the feeling is growing that what we face in not a normal cyclical downturn, but a sea change for the worse.
The proximate cause of the current situation was the housing bubble and bust, and more generally the excessive and irresponsible use/deployment of credit in both the public and private sectors. However, there is every reason to believe that there are structural problems with the economy that go well beyond the sort of things that are usually portrayed on graphs in economic discussion.
Politicians, economists, analysts, and bloggers have asserted numerous and sometimes conflicting factors as primary causes for our economic problems. This post will summarize some of the explanations most commonly proposed plus a few more. I don’t necessarily agree with all of these, and today I’m focusing on simply stating the proposed causal factors, leaving detailed analysis/assessment for a future post.
The possible causes of the economic decline:
1)The low-hanging fruit has already been eaten. Economist Tyler Cowen, for example, argues that America’s historical prosperity has been driven largely by: (i)the availability of free land, (ii)a sequence of key technological breakthroughs, and (iii)the high return on investment offered by providing schooling to motivated but uneducated immigrants. He further argues that the free land is gone, that today’s technological improvements are not comparable to those introduced in the period 1880-1940 (electricity, automobiles, airplanes, radio, mass production, pharmaceuticals, etc), and that the high % of the population already attending college makes additional improvements from this source difficult. (Tyler’s recent book includes a graph attempting to measure the “rate of global innovation” since medieval times; it shows innovation peaking over the period 1850-1905, and having now returned to the level where it was in the early 1700s.)
2)Technological unemployment. The argument here is that the advances in technology that have already occurred, and those that are likely in the near future, reduce the need for labor so radically that full employment will never again be possible. This assertion is basically the opposite of the low-hanging-fruit argument, at least the technological aspect thereof.
3)Globalization/offshoring. The reduction in tariff barriers, coupled with the fall in physical barriers driven by telecommunications, air freight, and container shipping, puts American labor in competition with cheap labor around the world, and drives wages to the lowest common denominator. Some advocates of this viewpoint argue that David Ricardo’s elegant and well-accepted theory of comparative advantage does not adequately account for the dynamics of the modern era–that, for example, offshoring of a manufacturing operation may inexorably drive the later offshoring of production engineering and later of design engineering and product management.
4)Uncontrolled immigration. This is similar to the globalization/offshoring argument, with the exception that the competitive labor is physically resident in the U.S.
5)The hypertrophy of the legal and financial industries. Advocates of this viewpoint would argue that while law and finance are key to the operation of the economy, the numbers of people involved in these industries, and the corresponding resources allocated to them, have become greatly excessive. See my post about sticky governors. In addition to the direct financial costs, the excessive growth of these industries has siphoned off considerable human talent which could be more productively employed elsewhere.
6)Excessive regulation. Excessive and unwise government regulation slows down the rate of business creation and expansion of existing businesses; moreover, it tends to politicize business and hence to result in the deployment of the nation’s capital to enterprises and projects which have good political sponsorship rather than those which are economically sound. It also further drives that expansion of the legal and lobbying industries, as companies strive to protect themselves from the political process, to exploit it at the expense of their competitors, or both.
7)Rising energy costs and declining availability. The creation of a large and affluent middle class had a great deal to do with the substitution of mechanical for human energy. The increasing costs of oil, and potentially of electricity, directly threaten this broad-based affluence. (Obviously this point is closely related to point 6, “excessive regulation.”)
8)Runaway credentialism. Excessive emphasis on degrees and on “elite” universities wastes human resources by putting barriers in the way of talented but uncredentialed individuals, and also wastes resources by steering vast amount of human time and effort into education which is really pro-forma rather than truly valuable from either an economic or an intellectual-development perspective. Vast amounts of financial resources have been poured into universities; much of it has been expended on buildings, overgrown athletic programs, and administrative salaries. Whereas the expansion of university education might have once helped social mobility and full use of society’s talents, excessive credentialism tends to set class barriers in stone.
9)The failure of the public schools. Large numbers of kids never learn to read and understand documents of any complexity, to write coherently, or to perform simple calculations. (Several manufacturers have commented about the difficulty of finding employees who can read a ruler or who even understand fractions well enough to be able to learn how to read a ruler; I was talking the other day with a guy who teaches landscaping at a community college and who made the same comment. The economic consequences of this should be obvious.) For families that lack the resources to escape them, bad public schools lead to multigenerational economic crippling…for those that do have such resources, the cost of escape-reflected in either private-school tuitions or in additional housing costs required to move to neighborhoods where the public schools are at least somewhat less-bad…often takes a very significant portion of their overall incomes.
10)Increasing size and cost of government. Todd Zywicki, drawing on data from Elizabeth Warren and Amelia Tyagi, compares two middle-class families, one in 1970 and one in the present era. In the 1970s case, only the father works outside the home; in the present-day case, both parents do. While the (inflation-adjusted) income of the present-day family is 75% higher than the 1970s one, the dollar value of their tax obligations is increased by 140%. (The Zywicki link comes via this Ricochet post, which is very relevant to the current topic.)
11)Cultural factors. A society’s economic growth is very largely a function of its culture. And for roughly that last 100 years, the bourgeois values that lead to wealth production have been increasingly disrespected and even mocked, throughout the western world. The excesses of the “self-esteem” movement, resulting in people who feel entitled to success and recognition without effort/accomplishment, represent one manifestation of this. Closely related is the increasing emphasis on fame rather than accomplishment, and on the short-term lucky win versus long-term creation of something worthwhile.
Aristocracies have always tended to value wealth forcibly extracted from others, directly or indirectly, over wealth earned through work. We have a lot of would-be aristocrats in this country.
One cultural factor which has been particularly harmful is the hostility toward manufacturing; I discussed this at length in my post faux manufacturing nostalgia.
12)Excessive reverence for theory-based knowledge at the expense of experience and tacit knowledge. Obviously, this is closely related to point 7, “runaway credentialism.” See my posts the dictatorship of theory and management mentalities. Attempts to force the real world into a theory-based Procrustean bed can lead to the widespread misdirection and waste of resources; also, excessive focus on theory-based knowledge acts, like the credentialism to which it is closely related, as an inhibitor of social mobility.
For discussion: Which of the above factors, if any, do you believe have played the most important role in our current economic pain? What additional factors would you suggest as causative?
30 thoughts on “The Decline of American Prosperity–Causes and Cures”
The increasing size and cost of government is far and away the most important factor. If government involvement in the economy could be curtailed and even eliminated in some cases, it would make an enormous difference and would diminish the importance of some of the other factors.
I think it’s mostly a combo of excessive regulation/taxation/cost of govt and the corruption of the educational system.
I don’t think the low-hanging fruit have been picked or that technological advances have diminished opportunity. The Internet is the great counterargument. Tremendous discoveries and wealth creation lie ahead if we can unshackle ourselves.
My hunch is that much of the current malaise is based on gloomy reporting from media people whose outlook is overly influenced by the decline of old business models in their own industry.
We may be in a period analogous to the mid-1970s. Great times lie ahead if we succeed in restructuring our dysfunctional institutions. (If we don’t succeed, things could remain bad here for a long time.)
The only thing that is hopeless is continuing current policies growing the size of govt, increasing regulation (possibly the worst), increasing public debt, increasing the stultifying economic effect of unions, etc. Shrink the size of the federal govt, transfer power back to the states!
Not being an economist, I have a question: following the depression of 1920-21 (deeper than a decade later), President Harding drastically reduced government spending and taxation (ignoring pleas for counter-cyclical intervention from his commerce secretary Herbert Hoover). Tne economy quickly sprang to life, and after Harding’s untimely death Coolidge stayed the course, shepherding what became known as the Roaring 20’s. Why did this work as a remedy then? Would something similar work now?
I wish this were a part of the national conversation about the economy…..why is it not?
Mark Steyn on culture and economics.
Left Coast Red:
Why did this work as a remedy then?
There’s probably more than one answer but the one I’d give is that a free market is self-correcting when it’s left alone by the government. If the government increases spending and/or taxes, as Hoover and FDR did in the 1930’s, that drains resources from the private economy and has the government, rather than the free market, re-allocating those resources. The government does not possess the knowledge that is collectively gathered and acted upon by a free market (nor does any individual or group) so the decisions the government makes will likely be wrong, and if they are right it’s by chance. Since the government pays no price for its bad decisions, unlike private actors, it cannot learn from its mistakes and will go on making all the wrong choices. The free market, on the other hand, hands out rewards and punishments for good and bad decisions by market players making their own choices in what they perceive to be in their best interests. We can succeed only if we can also fail, depending on the wisdom of our choices.
Would something similar work now?
Absolutely! Free market principles are universal and timeless. The only reason the Harding/Coolidge type of market recovery can’t take place today is because we no longer have Harding/Coolidge type politicians. Our politicians have no interest in allowing something to happen that they cannot take credit for, even if it works. Imagine a politician, such as Obama, bragging about how he wisely did nothing at all (or maybe lowered taxes and spending) and that’s why the economy bounced back to recovery. The liberal media would brand him a do-nothing president and the American people would see him as a colossal failure.
But it is a mistake to think Obama is the problem. He is a symptom. The people chose him. That’s what should worry us. If the people would choose a modern Calvin Coolidge we’d be singing happy days are here again. But that won’t happen. The people no longer want a government that leaves them alone. The people want a government that gives them free stuff. They don’t realize the terrible price they are paying for that free stuff.
Greed pure and simple. It’s a sin for a reason. Your corporate overlords who control your country are the cause.
Karma is a stone bitch.
President Obama, speaking before a partisan and sympathetic Labor Day audience, called upon the House Republicans to put country first ahead of political considerations.
In response, House Speaker John Boehner announced, “Good idea Mr. President, we will change our ways and put country first. We are placing impeachment proceedings on the House agenda and will focus on the Inspector General firing, the GM and Chrysler bailouts, the undeclared war in Libya, the Mexican gun smuggling law enforcement fiasco, and the Solyndra bankruptcy.”
I think that if our President does the right things to turn the economy around, he/she will most definitely reap the gratitude of the people. You’re right about the character of the people being sullied by the demand for more free stuff handed out by the govt.
Are we really too far gone to be able to save ourselves as a nation? I don’t think so, and I hope that our current difficulties provide the crucible for a significant change in our national character. That’s my version of hope and change.
This is the most important election in my lifetime. I hope as well that the Harding/Coolidge example will have a significant place in that conversation.
I would add a factor that wasn’t directly mentioned. The reason for credentialism being the drag that it is has its origin in the ban on intelligence testing. Any kind of testing is forbidden as seen in the Supreme Court case of the firefighters whose test was thrown out because not enough blacks passed. The country is being choked by affirmative action, which is not a safe subject for discussion.
My brother-in-law was a Chicago cop for 20 some years. He has a BS and a masters in public administration. In spite of that, he could not make sergeant because the quota for minorities dominated the test. He should have kept at it anyway but he gave up. I tried to talk him into applying for a small town administrator job but he just wasn’t that ambitious, I guess. He wanted to be a cop. The days of police families, like Frank Flanagan’s are gone.
Amity Schlaes is writing a book on Coolidge due out next year and I hope she goes through the 1920-21 depression in the detail she did on the 1929-41 depression. A lot of that recovery was due to the dismantling of the Wilson corporate state. A new president in 2013 could decree that all regulations written since January 20, 2009 are null and void. That would be a big start. Repealing Sarbanes-Oxley and Dodd-Frank would be a big step.
What about the counter-argument that spending cuts just further contract the economy, creating more unemployed?
1)The low-hanging fruit has already been eaten.
I don’t think so. The biggest technological boost we got out of the last couple of decades has been from digital technology. We haven’t really exploited a marvelous technology that originated around the same time — nuclear power. Point the finger for the first time at the greenies.
Never was a factor before — through the much larger technological changes of the late 19th and early 20th centuries.
There are losses from trade, but the gains always far exceed the losses.
Undoubtedly hurts the lower end of American workers, those with less than high school education especially. Making sure that illegals don’t get hired would be a real blow against unemployment.
5)The hypertrophy of the legal and financial industries.
Lawyers are an enormous deadweight loss on the economy. They could be put back in their place by a clever legislative package that would put procedural fixes in the system, such as: loser pays, abolition of the common questions class action, dramatic tightening of the punitive damage rules, etc.
Finance — not since 2008. They have not gotten their mojo back. And Dodd Frank may cripple them to the point where they never will.
Ho Boy. Bingo. EPA is by far the worst. They have positively destroyed sectors of the economy. But NLRB has been bad, as have a number of other agencies.
7)Rising energy costs and declining availability.
Not so much a problem as an opportunity. 1. Accelerate development of nuclear power. 2. Drill, baby, drill! open up all offshore waters to drilling, especially, off of Malibu, Nantucket, and Martha’s Vineyard.
Not good, but seeing as how we now have enough college grads to make up a substantial portion of the bartenders in the country. I don’t think it holds us back.
9)The failure of the public schools.
Yes, but they have been failing for years. The only fix I can think of is to get the Federal government away from it. They very clearly have not helped.
10)Increasing size and cost of government.
Before 2001, it seemed to be under control. In that year we had a recession and a war began. Even so, revenue and expenses were re converging and seemed to be in good shape in 2007. Since then revenue plunged and expenses have grown out of control. We can, we must, get them back under control.
The culture has been disintegrating for years.
12)Excessive reverence for theory-based knowledge at the expense of experience and tacit knowledge.
Here are is a couple I think you missed:
The necessity of deleveraging. Ken Rogoff thinks, and I agree, that we are over-borrowed, and we need to deleverage at all levels.
His recommendation of raising the rate of inflation to 4% — 6% annually is not only economically excessively risky (it might be very hard to stop when we want to), but it is perverse in that it rewards the profligate and punishes the prudent.
My idea is to repeal the Bankruptcy code amendments of 2005, which made relief expensive and difficult. We also need to make student loans fully dischargeable, and make foreclosures cheaper and faster. We should then push for people to use the bankruptcy courts to pay off debts, and conduct short sales of their underwater houses.
For the Federal government, there can be no bankruptcy relief. It must cut its spending dramatically and quickly. It needs to refinance as much debt as it can on-shore in slow hands. To that end we need two new types of savings bonds, both inflation indexed, and both paying 3%, one an accumulation bond, and the second an annuity payout bond for people age 65 and older. They should sold on every street corner. They should be purchasable with small IRAs, life insurance cash balances, tax refunds, and the other flotsam and jetsam of financial life. We might even want to make people purchase them as a form of tax.
Second, wind down the Afghanistan war. The enemy is Pakistan. We need to get our troops out of Afghanistan ASAP, and turn Pakistan over to India. It is also time to end NATO.
I agree that Afghanistan is a wasted effort now. Pakistan is the enemy.
Another area of technological promise is bio-engineering. The stuff that Craig Venter is doing will revolutionize energy production and many other areas in the future. Most of it is about 25 years ahead but it is mind boggling and many are only dimly aware of the potential. One small example, by 2030 we should be able to pump bacteria into coal deposits which will convert the coal to oil or natural gas. There will be no need to dig up the coal.
Excess regulation begets credentialism and excess credentialism begets regulation.
I have always wondered if I could take a really good Biology undergrad and train him or her to practice my medical specialty after a two or three year hardcore apprenticeship with me? Who would let me do such a controlled experiment? We have far less supervision in med school than one might think.
Madhu, a friend of mine, a professor of medical education at USC, once took the Pathology written boards and passed. He had no medical education.
Left Coast Red Says:
What about the counter-argument that spending cuts just further contract the economy, creating more unemployed?
We’d want to know what is being cut. If spending cuts are for things that we think we can get more efficiently from government than from private providers, then maybe it would be a net loss to have it cut. There are not very many such things. Government spends so much on stuff that benefits no one other than the people on the receiving end of the spending. There are always ways to cut government spending that will have a net positive effect on the economy by leaving more money in the hands of the people to spend, save or invest and create the production of more goods and services. It’s the production of goods and services that stimulates the economy, not money itself.
Milton Friedman called the notion that government spending stimulates the economy the most persistent economic fallacy of all time. If spending does not stimulate, cutting spending is not likely to contract the economy. In fact, just the opposite. Milton Friedman explains in this video
Link didn’t work, try this one:
Milton Friedman video
Try again, the href tag is correct I don’t know why it wouldn’t work.
milton friedman video
Adam Smith said it best: “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.”
Oh, and one more cause: the central bank. I can do no better than quote the latest Weekly Market Comment from hedge fund manager John Hussman (who in turn quotes James Grant):
Out here in California it is easy to see what excessive regulations and taxes have done for business. They are leaving.
A further thought, on factor #10. It’s not just the increasing size and cost of government in the abstract, but IMHO in large measure regulation. We’ve simply got too many laws, too much paperwork to show compliance with those laws, and too many restrictions on capitalist acts among consenting adults. We need to sunset the vast majority of these regulations in a hurry if we’re to uncork the latent entrepreneurial energies of the American people.
Per the Penguin comment about “greed” and “corporate overlords”…
Greed is an aspect of human nature; it can be found in all societies. Yet some societies develop economically and some do not.
One determining factor is the degree to which *the pursuit of wealth” is coupled to *the pursuit of political power*. The early-medieval baron who wanted more wealth got it by grabbing someone else’s land and serfs. And basically the same thing was true of the Soviet commissar.
Benjamin Franklin specifically cautioned against such coupling: “There are two passions which have a powerful influence in the affairs of men. These are ambition and avarice—the love of power and the love of money. Separately, each of these has great force in prompting men to action; but, when united in view of the same object, they have, in many minds, the most violent effects.”
For the most part, the United States has made it possible to pursue wealth independently from political power, and this has been a major factor in the country’s success. This separation is threatened by the policies of the Obama administration, which are not either capitalist or classically socialist, but are more related to corporatism/economic fascism. Increasingly, the most important single factor affecting the success or failure of any business is the government’s attitude toward it. In this environment, businesses…surviving ones, at least…will devote an increasing % of their energy to political matters.
If this administration and its policies are allowed to continue, you will see what “corporate overlords” are really like.
David, I think it is nice of you to respond seriously to Penguin’s comment although I don’t believe it is a serious comment. Ironically, Canada has weathered the current storm much better than we have because they elected a more conservative parliament and prime minister and have taken steps that we should be taking but we are hobbled by a present administration that agrees with Penguin rather than with his own country’s government.
Which of the above factors, if any, do you believe have played the most important role in our current economic pain?
I suggest this is the biggest problem
All of the other problems can be worked around, ignored, obsoleted .. but not if the government gets in the way.
California is crumbling…an analysis of the policies behind the state’s economic debacle.
Michael kennedy said, “Ironically, Canada has weathered the current storm much better than we have because they elected a more conservative parliament and prime minister and have taken steps that we should be taking but we are hobbled by a present administration that agrees with Penguin rather than with his own country’s government.”
My take on this is somewhat different. I just returned from a visit to B.C.
It is a “nanny state” if I ever saw one. Yet, it is more conservative than the eastern provinces. They have rules and regulations about everything a citizen does – but there is light enforcement. As a result, most Canadians seem to ignore most of the rules. Absolutely no one pays attention to the speed limits. (Mostly, IMO, because they are set absurdly low.)
Canada’s better performance in this down turn is due to two things, IMHO:
1. Their economy is based on producing real wealth – Oil, gas, lumber, minerals, and wheat(lots of wheat!). Commodity prices have been strong through most of the downturn – thus, the Loonie is at par with the dollar. When the commodity cycle turns, the Loonie and our Canadian friends will suffer too.
2. They have a real estate bubble, (residential prices are very high)but their lending practices have been more conservative than ours. Their banks, for the most part, didn’t get caught up the over leveraging of their real estate loans (MBSs). As a result the bubble has not burst as ours did.
There are many issues involved in our economic problems, as set out by David. I would name four as most influential.
1. We no longer produce as much wealth as we used to. (Oil, gas, minerals, lumber, and manufactures.) Our great wealth creators are agriculture and technology. Lawyers make it harder for us to produce wealth and the financial industry has become more about schemes for producing big fees rather than aiding the creation of wealth.
2. The law most damaging to wealth creation ever passed in this country is the Endangered Species Act. Passed under Nixon with all good intentions, it has provided the activist Greens with a tool to gradually strangle oil and gas, mining, logging, manufacturing, and most recently, agriculture. Repealing or rewriting this law to make it less of a tool for strangling economic activity would be a huge gain for our economy.
3. Federal government involvement in K-12 education has been a disaster. Trillions spent with declining results.
Getting rid of the Dept. of education would be a boon to education.
4. Big government spending and too generous government promises (Medicaid, Medicare, SS, SSI, cushy pensions, etc.) have created deficits as far as the eye can see. The government needs to go through an unofficial bankruptcy as to these financial promises. It would be better to deal with it now. 10-15% cuts all around now with no or more restrained escalation (raises, COLAs)and more means testing is the only way to get control. As Sarah Palin said a couple of days ago, (paraphrasing here) “Either we do it now or the international financial markets will do it for us at a much steeper penalty.”
The road to economic perdition, by Richard Epstein
I’ll add one more to Mr. Schwarz’s additions: hubris.
By that I mean so much in the original list is based on arrogance that America and Americans are/were somehow a “chosen people”. While this is somewhat true, it is completely based on the fact that the US was probably the least corrupt of all the other nations for so long and therefore had a comparative advantage. Over time, as we added regulation, reduced actual education, and made every other mistake in David’s list, we ignored the actual economic reality of the rest of the globe.
While so many other nations had no system of property rights, entrenched aristocracy, etc., the US had a huge comparative advantage. But rather than realize we had a comparative economic advantage with our social structure, we instead chalked up our success to being, for lack of a better term, chosen by God. The arrogance reached its height post WWII – while it took a few years for many nations to recover, the bigger advantage for the US came when half the globe turned to communism/socialism and basically stopped competing.
So we were able to grow while so many other nations opted out of the global marketplace, and we had a leg up on actual individual liberty and property rights. We’ve completely ignored the fact that we used to compete against a lot fewer competitors AND we’ve slowly compromised all of the social advantages we had in the name of “equality of outcome” rather than “equality of opportunity”.
The amazing thing to me is that we seem to have completely screwed up at the exact time we could have become so much better. The civil rights movement was a perfect time for the US to take advantage of a whole subset of citizens previously denied opportunity who could now take opportunity and grow with it like so many Americans that came before them; instead we wanted to shortcut around “opportunity” and just give those people the equality of outcome we thought they deserved. After decades of this, most of the rest of the globe realized the failure of their communist experiments and actually started giving us more competition while we’ve poisoned three generations with an entitlement mindset.
While this isn’t a uniquely American phenomenon, the US certainly discarded more advantages than any other nation.
At the risk of over-simplification, we have leaders who do not understand the global economy
Daily, we are imposing new costs on employers that cannot be recovered in a competitive marketplace…and we wonder why US economy continues to suffer
It is easy to impose costs on third parties if you are the government; it is hard to think through the unintended consequences of new regulations, taxes, and laws, e.g., ObamaCare, payroll taxes imposed on investments, NLRB recent rulings, Dodd-Frank, outdated Davis-Bacon wage laws, bans on domestic energy exploration, light bulb bans, toilet bans, EPA arbitrary rulemaking at enormous cost and dubious benefit, out-of-control public pension benefits, etc.
This has been going on for years, but tipping point has been passed as evidence of employment levels still lower than 4 years ago
We have the wrong leadership for the issues we face
I have not lost faith in US inventiveness and risk-taking; I have lost faith in our elected institutions
The problem isn’t economic as much as it is cultural. Economics operates within a culture and the decisions with regard to where money is spent is strongly influenced by the cultural matrix in which the economic culture subsists. The social atomisation which has arisen from the cult of individuality means that economic decisions primarily made with the “what’s in it for me mindset”. As an outside observer, American culture has become remarkably superficial, trivialised, and in essence, childish. I don’t say this with malice, rather regret.
In a democracy, no matter how you cut it, the government is a reflection of popular will. A childish people will therefore elect a childish government which will effect infantile policy. The government may have facilitated the property bubble, but it was American Individuals en masse that decided to go along with the scheme. The ponzi scheme was a popular sport. There were lots of individuals who saw dangers yet no one wanted to listen.
Theodore Dalrymple explains this far more eloquently than I can. .
The article is worth the read.
Comments are closed.