Looking under the rock: Why America’s economy is the next looming global crisis
By Dr. John C. Hulsman
Introduction: The reasons for analytical failure
I have always been a dangerous man in the world of foreign policy analysis, for the simple reason that I believe wholeheartedly in the ‘plumber’s code.’ Simply put, I don’t think my colleagues at the Council on Foreign Relations–bejewelled though their credentials often are—should be hired or even taken seriously if they are as wrong as they so often seem to be. Instead, I employ the plumber’s code. If my plumber does a good job, I re-hire next time there is trouble with the pipes. If he does a bad job, I do not. By this simple but exacting standard many of my colleagues would be hard pressed to find work of any kind.
Beyond mine, how many consulting firms called Brexit correctly? Not many, as my colleagues were too busy listening to each other and their friends in Brussels, all of whom shared the same incorrect opinion. How many saw the inherent fragility of the seemingly powerful Turkish state? Again, not a lot as it is easier to merely go with largely worthless government talking points, than to investigate a complicated country for themselves.
For that matter, how many at the time of Iraq assessed that the post-war chaos would create a vacuum leading to a serious rise in radicalism, characterised by the hideous ascent of ISIS? Far easier on the nerves to merely parrot the nonsense the White House was then peddling. No, my profession has not covered itself in glory recently, and the plumbers code would consign well more than half of the pundits I know to the unemployment line.
Particularly analytically egregious has been our propensity to be constantly shocked when obvious problems, long metastasising, burst into public view. Like fruit flies, foreign policy analysts tend to only see the stimuli in front of them—whatever the crisis of the week is—rather than looking at longer-term, and often far more dangerous, risks just over the horizon.
At present, for all the talk of ISIS and terrorism, Brexit, and the Turkish coup, the single greatest threat to global stability in many ways is the wholly neglected subject of the weakness of the American economy, and all the vicissitudes this will lead to. It doesn’t make headlines but the simple fact remains if the economy of the greatest force for global stability in world is in serious, if hidden, trouble, the rest of the planet had better start worrying now, rather than being surprised later.
The scary facts
But, you protest, the American economy is in relatively good shape, certainly compared with the basket case that is European growth numbers, Japan’s failure to make Abenomics work, the collapse of much of the Emerging Market world, and China’s herculean efforts to manage a soft landing as it moves up the supply chain. Instead of parroting the very received wisdom which has proven so wrong so often lately, let’s look under the rock and the real numbers.
Overall, post-Lehman crisis US economic growth has been merely adequate, with GDP increasing by 2.4% of GDP in both 2014 and 2015. Since 2009, growth has never exceeded 2.5%, whereas the pre-crisis trend rate was more like 2.5%-3.5%. It appears the Great Recession has permanently knocked some of the stuffing out of the potential American growth rate, the rate at which the economy can grow without triggering inflation.
If this is correct, the endless, boundless concept of the American Dream itself is a thing of the past, as mediocre growth—rather than obtaining a better life than one’s parents had—is all that awaits today’s Americans. Such a diminution in potential living standards will have obvious and highly negative political and social consequences.
If potential growth isn’t what it once was, even the seemingly sunny unemployment figures in the US are cause for hidden gloom, for it all depends on what is being measured. The current headline unemployment rate is a measly 4.9%, a number that is the envy of America’s competitors.
But hold on a minute. US underemployment is a massive problem, largely masking long-term American economic peril. According to the US Bureau of Labor Statistics, were more stringent European metrics used to measure the jobless rate, American unemployment would be a far more worrying 10.1%, or roughly similar to those sclerotic European economies. Such a ‘real’ number makes it eminently clear that many Americans have been left behind, even by the feeble recovery from the Lehman crisis.
A flurry of economic statistics bolsters this doleful conclusion. Housing prices–long the traditional store of much of American wealth—have been underwater for the Working and Middle classes since 2009, meaning homeowners owe more in mortgage payments than their houses are presently worth. The piggy-bank is empty. Perhaps most arrestingly, since 1980, the wages of fully 90% of the American working population have stagnated or declined. On its own, this one number completely explains the rise of Bernie Sanders and the populist left and Donald Trump and the populist right.
And if most Americans have been left behind by the bursts of overall prosperity for almost two generations, they are woefully unprepared for the twilight of their years. The National Institute on Retirement Security calculates that as many as 45% of US households made up of adults of working age don’t have any retirement savings at all. Further, it notes that a whopping 92% of households are financially unprepared retirement and that nation-wide there is an insurmountable savings gap of between $6.8 trillion and $14 trillion between what individuals have saved and what they will actually need in order to retire.
A major part of the problem is that, while Americans are living ever longer (a good thing), the present average age of retirement in America is 64, lower than it was in the 1960s. As is true for the rest of the west, Americans have utterly unrealistic economic expectations of what is owed to them, compared with how long they must work for it. Such unmet–even if economically illiterate—expectations, fuel rage, and the feeling that the American economic system as a whole has let the American Middle and Working Classes down. Political instability is the logical next step in this decline, a process we can now see every day.
So by analytically looking under the rock–rather than putting America out of our minds as a rare success story in these troubled times—we see a Middle Class denied the American dream of endless relative advancement, a country largely left behind by growth over the past two generations, and a people woefully unprepared for retirement, placing great strain on the country’s creaking safety net. More than even all this, the psychological malaise this is causing is eating steadily away at the American political system, as an out-of-touch elite has little understanding of these facts of life which for most Americans characterise their daily existence.
It’s the politics, stupid
It has not helped that both major American political parties have been cynically peddling wholly unrealistic bedtime stories to the people, who then are predictably enraged when these painless fairy tales fail to come to pass. Former Speaker of the House Nancy Pelosi is famous for literally being enraged if spending cuts are mentioned in her presence. This abhorrence of simple math does not bode well for the future of the most dynamic economy in the world.
On the other hand, the Republicans never met a tax cut they didn’t like, but are far more reticent to ever talk about the corresponding spending cuts that would render such a policy revenue neutral. As a consequence, in practice both parties have for a generation wholly abdicated their responsibility to their countrymen, with the Democrats spending money the country doesn’t have like drunken sailors, while the Republicans peddle the daft notion that tax cuts invariably pay for themselves, all evidence to the contrary.
Perhaps the low point in this tale of gross irresponsibility is the demise of the Bowles-Simpson report, the result of a bipartisan commission President Obama tasked with finally coming to grips with the intractable budget deficit. Headed by a former Democratic Chief of Staff and a respected Republican Senator, the report called for a sensible mix of moderate tax hikes and quite stiff spending cuts, a grown-up economic policy that would finally have brought the public debt to manageable levels. Rather than bravely adopting the proposals, the President meekly thanked the Commission for its work, and put the report in a drawer from which it has never been seen again.
This is the ultimate sign of politically how far gone America is, that any policy that prescribes pain now for gain later—any effort for the country to eat its vegetables—is seen as utterly unfeasible. Instead, it is far easier, and politically less risky, to peddle fairy tales that have absolutely no economic chance of real world success. Welcome to the age of populism.
Conclusion: There is not much time left to right the ship
On the surface, it is quite likely that the ever-wrong chattering classes will relax in January 2017, as uber-establishment figure Hillary Clinton is safely sworn in as President of the United States. Such a view, if Middle Class concerns are not immediately dealt with, could not be more wrong.
Think of it this way. An aging, deeply uncharismatic Senator from a very small (and wholly demographically unrepresentative) state with almost no legislative accomplishments to his credit just ran one of the world’s most formidable campaign machines to a near draw. The only issue anyone can remember Senator Sanders discussing is inequality, which skilfully gets at the heart of the economic malaise we have assessed, and the deep Middle Class anxiety flowing from it.
If anything the Republican Party, post election, will find itself in even worse shape, with its self-satisfied elite lying in ruins. The establishment shibboleths that have gone unquestioned for at least a generation: the obvious benefits of free trade, support for immigration, the primacy of social issues, all lie in tatters, gleefully deconstructed by the right-wing populist nativism of Donald Trump. An elite who ceased bothering to explain itself to its base has woken up to find itself superseded by its followers, who after a generation of falling economically behind are more than ready to tear the old establishment and its ideas down, to try something new.
Therein lies the danger for both parties. For while Sanders and Trump have been very good at spotlighting a gormless elite that has lost touch with America’s hard-pressed Middle and Working Classes, what they are offering to rectify the problem is pure snake oil. Globalisation cannot be ordered out like the tide, in reality it will persist whatever populists might prefer to be the case. Indeed, it is hard to think of more self-harming policies than starting a trade war with China as Trump seems to advocate or doing away with the Trans-Pacific Partnership as Secretary Clinton has cynically been forced to propose, in order to see off the Sanders’ challenge.
If the weak-kneed establishment caves into the rising populist challenge, advocating some its dafter economic polices which stand no chance of success—then the real danger will arise. As is the case for Europe, another few years of ignoring the vast economic pain that many in the west have endured for years is bound to lead to ever more virulent forms of populism. This is a call to arms; it is time to right the ship, for an FDR to emerge who gains support and popularity by telling Americans things have indeed come to a difficult pass, but that they have a real grown-up plan for helping the floundering Middle Class. It is time for a new age of the grown-ups.
Published in Aspenia, September 2016