Tuesday, November 16, 2010

The Great American Decline: How and Why (1)

A section of the Minneapolis Bridge which collapsed several years ago.

Of course, most Americans - so inebriated with the myth of exceptionalism - will never ever concede their nation is in decline, but the sad facts and statistics speak for themselves. Also, decline is a phenomenon that has been assessed historically, mainly applied to empires, such as the Dutch, the British and Spanish., so we have pre-existing knowledge of the identifiable criteria. The classic decline was that for the Roman Empire, and it has been the most studied.

In the case of the Romans, as well as the British, the killer ingredient was military overstretch. In both cases the bleed down of the empire was fairly similar. On account of threats perceived (the Barbarians by the Romans, the French and Revolutionary Americans by the British) enormous military defenses were amassed then distributed across the globe. All these outposts had to be maintained, supplied and the troops replenished. All of that cost money.

At the peak of the Roman Empire it stretched from Britain, all the way to Judea in the east and Egypt in the south. All this mass of territory had to be protected against incursions – from the Galls, the Huns, the Visigoths…you name them. The British Empire meanwhile extended from Canada all the way to the Indian Raj, and Malayasia and the Caribbean. Even today, in Barbados, the remnant battlements of the old Empire can be seen in the Garrison, just a mile from Bridgetown, the capital. Meanwhile, near the site of the Hilton Hotel the old cannon remain, pointed toward the sea to face the possible invasion of French (from the French Antilles) or the Spanish.

In each case, British and Roman Empire, taxes had to be steadily increased to pay for the military commitments. As those respective military expansions grew, with more and more distant outposts to be defended and maintained, the taxes to pay for them had to be increased. In general there were two ways to do this – directly increase the taxes on more and more of the lesser classes (as the Romans did to their farmers, triggering internal revolt) or using leverage to postpone the payment to future generations – which was largely the British solution. (As it is today with the U.S.A. whereby tax cuts are an effective postponement of payment to future generations).

Eventually, no more overstretch and debt could be supported, with the result that both empires declined- the Roman rapidly, and the British more like a slow death of a thousand cuts – a grinding loss of power as others took the global stage.

How far U.S. decline has gone can be measured in a number of ways. However done, we understand that wealth capital is first contingent on natural resources, as Eco-economist Herman Daly has shown. The more this natural wealth is depleted, given a finite planet and extent, the less remaining natural capital remains. If this capital is apportioned to weaponry and sustaining a military, then that means less can be available for other needs – such as infrastructure maintenance, schools, health care to maintain a population and social insurance.

Bearing that in mind, we can look first at the total capital designated for nuclear bombs, warheads, and missiles since ca. 1950. That total is $14 TRILLION. That is $14 trillion (in today’s dollars) that can’t go to any other purposes. Even if one argues that amount was needed to stave off the Soviet threat in the last century, it still doesn’t hold water. The reason is that more than 17,000 warheads and 20,000 bombs were manufactured with over 22,000 missiles and delivery systems – enough to blow up the planet eight times over. Thus, it can be cogently argued that seven-eighths of that amount was waste, not needed. That’s money that could have gone to sustaining our civil infrastructure – roads, bridges, sewer and water systems – which are now in massive disrepair. (The American Society of Civil Engineers has estimated $2.2 trillion to bring it back to a state of effective use).

Thus, the first major marker for decline is in the natural and wealth capital squandered on weapons which can only be used for total annihilation. If never used, these weapons must be destroyed. So no use, no effect, no purpose….all the monetary and resource investment wasted. (Not that I’m advocating nuclear weapons be used to ‘get one’s money back’ – only to point out the money could have been used for positive purposes elsewhere).

The deflection of such wealth effectively impoverished the nation, and translated into an ongoing deficit enhancement that yet bleeds away our capital today, passing off debt to future generations that will be less able to repay it.

The second major marker of decline is the decaying infrastructure, as noted above. Indeed, in some parts of the U.S. the blight of crumbling bridges, roads and broken water and sewer lines rivals what one beholds in some third world nations. It’s a disgrace that the supposed “richest nation on Earth” could allow its basic support systems to erode to such an extent and now threatens our future welfare. As more bridges and roads crumble transport of goods will become more difficult and costly, and in some cases, impossible. As water and sewer systems are compromised, public health itself will be threatened.

A third major marker is mounting economic inequality. An inequality, by the way, which will be exacerbated if the Bush tax cuts for the wealthiest are not allowed to expire. To give an example, the top 0.1 % will receive an additional $326,000 annual benefit in tax cut income if these cuts pass. (And the Repukes wish to make them permanent!) These cuts aren’t free, but will have to be subsidized by the taxes of the lower economic quintiles. By comparison, similar inequality to support an oligarchic elite has been seen in many third world nations: Haiti – under the Duvalier regime, Nicaragua under Somoza, and the Philippines under Ferdinand and Imelda Marcos.

More on this will appear in my next blog.

Probably the fourth marker, which in many ways is tied to the 3rd, is the rise of financial speculation as an alternative to manufacturing and development. Right now, in the U.S., nearly 36 cents of each dollar is earned via speculative operations, in investment banks, hedge funds and other players. This compares to barely 4 cents of every dollar so earned in the 1950s when manufacturing was at its peak. As Kevin Phillips had noted in his book ‘Arrogant Capital’ one of the first indicators of an empire's decline is the rise of financial speculation and its substitution for actual productive work.

This same speculation in the form of a speculative frenzy that created risky derivatives (in credit default swaps) then marketed under the aegis of safe (AAA) bonds, is what brought us to the 2008 financial meltdown and the ensuing recession which has been the longest ever with the highest sustained long term unemployment rate.

The particulars of this meltdown will not be examined here, as I’ve dealt with it in many previous blogs, e.g.




Connected with the rise of financial speculation has been the rise of leveraging to pay for things, coupled with tax cuts (started in earnest in the Reagan years) and the shipping of more than 14 million jobs overseas. (Outsourcing).

Leveraging was done via the rise of securities in the 1980s, including "junk bonds" and normal bond funds into which collateralized mortgage obligations (CMOs) were bundled and sold to investors as "secure investments". Other refuse included mortgage-back securities called 'interest only strips' (or 'IOs') and 'inverse floaters' - otherwise known in the business as "toxic waste". The last two especially kept large commissions coming through the pipeline all the while sinking the poor beneficiary into poverty with ensured NEGATIVE returns YEARLY!

Leveraging created the illusion that debt could be an asset, which hasn’t changed much since (otherwise credit default swaps would not have attained the popularity they did)

Meanwhile, the Reagan tax cuts initiated in 1981 coupled with his massive military spending (over $2.2 trillion) began the spiral that would end with the U.S. as the world’s foremost debtor nation by 1988. For a marker here, the national debt near the beginning of Reagan's first term was $907 billion, and by the end of his term, over $2.6 trillion- or nearly three times larger. Reagan’s era of massive deficit spending coupled with tax cuts also initiated the supply side bunkum that cutting revenues (tax cuts) could actually increase them! Thus, the tax cut mantra has barely receded since, driving the country further into massive deficits.

The tax cut paradigm, especially, has sped the nation's pell mell rush to third world status by exploding the economic inequality chasm even as it starves government of the capacity to do simple things like repair the infrastructure, or put people to work. In the bogus "free market" pathology (that's been ensconced since Reagan) government doing or attempting anything for the common good has all but been rendered anathema. Interested readers can find much more in Garry Wills book, A Necessary Evil-A History Of American Distrust Of Government, Simon & Schuster, 1999.

At the same time, or nearly, jobs began being sent to other nations, to increase profits for companies and enhance Wall Street share value. Americans, more distracted by political circuses and the cult of personalities, seem unable to intellectually process or register what's going on before their very eyes. Often, it takes outsiders to hold a large mirror up and show them how fast their country's stock is falling.

In The Economist (November 6, p. 82) for example we find this highlight in Schumpeter's column:

"India is producing a legion of new global giants that are competing head to head with established American companies. Look at Arcelor Mittal and Tata Steel in steel making, Bharat Forge and Sundram Fasteners in car parts, Hinalco in aluminum rolling....

(Meanwhile) American companies are also setting up shop in India. Bangalore and Hyderabad have "electronic cities" crowded with America's leading companies. In Bangalore, Cisco spent $1 billion on its Globalisation Center East and GE opened a swanky research center. IBM now employs more people in India than in the United States

For American workers, the most worrying thing about all this is the flight of brain intensive jobs to India. Americans reconciled themselves to the loss of manufacturing jobs with the thought they'd keep the smart jobs. But they reckoned without two things: the power of the internet, and the hunger of emerging market companies."

As one Indian told me when I visited Barbados: "Americans would crap sideways if they had any idea how many jobs and how much capital had already gone to India, not to mention China, or Mexico".

Do Americans even care? I doubt it! One need only examine some of the dense, fortified idiocy of some of the tea party commentators on this blog (which is one reason I had to restrict comment access), such as offered here:


Here, the TP commentator "james b"(I don't know what else he is) obviously is in denial, as he refuses to accept there is a dearth of jobs and opportunities (because of outsourcing as described above) that is in no way akin to anything he experienced in the 80s. Recall in the 80s that the outsource concept was just gearing up. It really didn't acquire jet burners until 1996, when "Chainsaw" Al Dunlap got rid of the last American workers at Sunbeam Corp. and dispatched all their jobs to Mexico. So, this guy "james b" never really felt the true wrath of joblessness that the many millions of prolonged unemployed are experiencing now. His easy retort that "anyone can find work" if they just try hard enough is disproven by the statistics, in particular the ratio of available jobs to number of unemployed still looking for work (about 1:5).

Of course, this is not to say some equilibrium in jobs will not eventually be forthcoming. But that will not occur until most of the smart or "brain jobs" that can be transferred are actually moved - and that means an estimated two and a half million more leaving this country in the next three years. Bear in mind, the average Indian smart worker only earns a maximum of $13 an hour, and virtually no benefits, compared to a minimum of $26/hour plus generous benefits for an American counterpart at IBM, or Dell. Thus, a company saves an enormous amount by farming jobs to India, hence the eagerness of Cisco, GE etc. to set up new digs there: much higher profit margins, which means higher Wall Street shares!

But what kind of equilibrium will we see? It seems obvious that it will redound to only those essential jobs that can't be outsourced: janitorial and sanitation services, hospital orderlies, prison guards, caretakers in old age homes and sanatariums, crime scene cleaners, and service workers in all fields and permutations....from burger flippers, to retail clerks, to pizza delivery boys. Even here, despite the degeneration in wages and benefits, there won't be enough to go around, and a core of maybe 40% of those seeking full time work, won't get it. Sure, they can become entrepeneurs, but the stats for successful ventures are not awe inspiring. Most such folks (85%) don't even break even after three years, and most people can't afford to plow capital-savings into a venture for that long.

If one also examines the residual job profile (i.e. left over after all or most possible outsourcing) such as seen above, it closely resembles that seen in many third world nations (e.g. Barbados) that still haven't gotten onto the fast ramp like India has, or China! We are, in other words, displaying all the hallmarks of a once great nation - but now in permanent decline.

Next: Is the Tea Party movement the inevitable effect of the U.S.'s decline as the rest of the world gains in capital inflows, assets?

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