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The End of the American Dream:
Selected Macro Indicators
By
Thomas J. Courchene
[email protected]
School of Policy Studies, Queen’s
and
Senior Scholar
Institute for Research on Public Policy
Montreal
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The Informatics Era: Unfettered Capitalism
The Reagan-Thatcher Transform
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Fordism could not deliver on the potential of the IE. Too much gov’t
Need to recapitalize capitalism. Reagan-Thatcher transform = crushed
organized labour politically, cut income taxes for rich and corporations
and ushered in the “Washington Consensus” (deregulation,
liberalization, privatization and free markets)
This was “unfettered global capitalism.” Global capitalism recovered
its dynamism, and it increased profits, investment and growth.
Reagan policy = introduced “military Keynesianism” i.e., defence
build-up and tax cuts (Reagan cut PIT taxes from 70% to 28%, and rest
of world followed in varying degrees).
However, this led to increasing the debt from 700 billion to 3 trillion
over his time in office. Beginning of US “fiscalamity” . More later
Societal Challenge. in early postwar era the social envelope increased
apace with internationalization, e.g., Sweden was most open economy
yet had the most expansive welfare state. The challenge under
Unfettered Global Capitalism was: How do we ensure that international
economic integration does not lead to domestic social disintegration?
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The Informatics Era: Unfettered Capitalism
Offshoring and Out-Sourcing
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Unfettered global capitalism within a networking framework (e.g.,
global supply chains) means that firms can now search the globe for
the most cost-effective location from which to source inputs into the
production process.
The first and foremost implication of this is that while work becomes
mobile, workers do not!
Thus, the earlier reality of America creating a middle class by
competing with the lower end of its labour force is in most cases no
longer competitively viable. Unskilled or low-skilled labour can no
longer be protected because there will always be an economically
accessible lower bottom elsewhere where this work can be
outsourced.
Any routinized activity can become a candidate for outsourcing. This
typically gets captured under the rubric of disappearing manufacturing
jobs or “hollowing out.”
Implication = Moving toward a global wage for unskilled work
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The Informatics Era: Unfettered Global Capitalism:
Offshoring and Out-Sourcing: II
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Lester Thurow’s well-known assessment seems appropriate
 1.
If capital is borrowable, raw materials are buyable and technology is copyable, what
are you left with if you want to run a high wage economy? Only skills, there isn’t
anything else.
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In this context, now consider the emerging Asian economies. With 1.5
billion new workers appearing in the world economy over the recent
time frame, the global labour market is experiencing a decline in wages
that caught the West totally by surprise. This new reality is that Brazil,
Russia, India, and China have 45% of the world’s labour supply
compared with only 19% for the OECD. And in the presence of global
supply chains, unfettered capital will obviously move to take
advantage of any wage differentials.
70% of Walmart’s American sales were produced in China: It became
China’s 5th largest export market!
This was the beginning of the end of the AD.
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How did China displace US as workshop of the world?
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THE CHINESE ASCENDANCY
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China recognized that it lacked the internal capital markets to allocate
domestic and foreign investment toward their most productive uses.
Brilliantly, and wholly unprecedented, China invited the global capital
markets and global enterprises to do this internal allocation for it. In
other words, China’s production was, at the outset, driven by global
prices and by international comparative advantage working in tandem
with the inexpensive and inexhaustible Chinese labour force.
The corresponding requirement on these foreign enterprises was to
link up with a Chinese partner on the one hand and to share
technology and industrial secrets with this partner.
The West’s capitalists accepted this because they wanted to be more
competitive internationally and to access the huge Chinese market.
To provide these foreign enterprises with economic security China
pegged its Yuan to the US$ and began to accumulate its $3 trillion of
US$ foreign exchange/debt from both the growing US current account
deficits with China (ie from US off-shoring and re-importing as
depicted in the following slide).
U.S. Trade with China: Exports, Imports, and Trade Deficit
350
300
$ Billions U.S.
250
200
150
100
50
0
Year
U.S. Exports
U.S. Imports
U.S. Trade Deficit
Source: "Foreign Trade Statistics." U.S. Census Bureau. Foreign Trade Division. Data Dissemination Branch: Washington, D.C. 12 January 2010.
address: http://www.census.gov/foreign-trade/balance/c5700.html
The Informatics Era: Unfettered Capitalism
Winner- Take-All Capitalism: I
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The lower classes are suffering, what about the upper classes?
Robert Reich (The Work of Nations) notes that routine workers and
service workers will perform poorly relative to what he calls “symbolic
analysts.” Their networks and markets are international, they
congregate geographically (Silicon Valley, Route 128) and they are
“seceding from America”, i.e., their social and political bonds to
America will tend to unravel as their economic bonds unravel.
Christopher Lasch (The Revolt of the Elites: Have they Cancelled their
Allegiance to America?”) expands:
The elites possess most of the wealth. They are becoming
increasingly independent from crumbling industrial cities and
crumbling public services because they have their own private
schools, private health care, private security etc. Their market is
international and their loyalties are international rather than
...national or local.
The following data suggest that there is indirect evidence of this, and it
is an example of the individualistic capitalist ethic in action.
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The Informatics Era: Unfettered Capitalism
Winner- Take-All Capitalism: I I
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Table I presents data on CEO pay relative to the average worker pay.
Setting aside Mexico and Venezuela because they are developing
nations, as one would expect the CC countries have lower ratios than
the IC countries. However, towering all countries is the US with a ratio
of 475:1.
And from Table 2 the top 1% got 65% of the real growth over the 20002007 George W Bush expansion. And even more recently
This is winner-take-all capitalism .
The middle class is disappearing -- some moving up, some down
Then came the mortgage debacle and the global financial collapse
associated with fraudulent mortgage backed securities and
unregulated investment bankers. Despite our close ties to the US, we
were almost alone among OECD countries to escape the collapse
Happy to address this in question period/
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Winner Take All Capitalism: 2
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Winner Take All Capitalism: 3
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WHERE HAS ALL THE GREATNESS GONE?
Living Off Future Generations – Debt Explosion
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Figure 12 presents the growth in the US gov’t debt since the war.
From 1980 on, except for Clinton , the debt/GDP ratio has increased.
Reagan’s “military Keynesianism” -- tax cuts and military spending – is
fully in line with the Republican ideals (tax cuts on the economic side
and defence spending on the moral “policeman” (international) front .
Arguably, this has been true for all Republican regimes , in or out of
office. Even though some of the Republican times were good growth
years, they were the ones who ran up the national debt (until Obama).
The debt tripled under Reagan -- $900 billion to $2.6 trillion – and then
increased to $4 trillion under Bush 41.
While the absolute debt increased to $5.6 during the Clinton
administration, the debt-to-GDP actually fell, thanks in part to the
“peace dividend” associated with the end of the cold war, the
cessation of activities in the 1st Iraq war, and because he rode the
revenue escalator associated with the high-tech boom.
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Federal Government Debt History
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FISCALAMITY:
Kotlikoff: “The US is Bankrupt”
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The IMF argues that closing the fiscal gap in the US requires a
permanent annual fiscal adjustment equal to 14% of GDP.
From Lawrence Kotlikoff (National Post, August 12, 2010) :
To put 14% of gross domestic product in perspective, current federal
revenue totals about 14.9% of GDP. So the IMF is saying that closing
the U.S. fiscal gap from the revenue side requires, roughly speaking,
an immediate and permanent doubling of our personal-income,
corporate and federal taxes as well as the payroll levy set down in the
Federal Insurance Contribution Act [social security].
A major part of the reason for this is that the social security
entitlements are not sustainable. Again Kotlikoff:
 The US has 78 million Baby Boomers who, when fully retired, will
collect benefits from Social Security, Medicare and Medicaid that, on
average exceed per capita GDP. The annual cost in today’s dollars of
these entitlements will total about US$4 trillion.
US social security is not targeted. Canada income tests OAS/GIS, and
our CPP is funded for next half century.
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In Praise of a Value-Added Tax for the US
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US taxes (all levels) are 28% of GDP (CA=33%, Germany=41%, UK(39)
France=47%. As the following chart reveals, If US had EU tax rates, it
would have a surplus
US is only major country without a VAT.
VAT is X/M neutral, unlike most other taxes. Hence it is all the more
surprisingly that the US does not have a VAT. For example, the
Marginal Effective Tax Rate (METR) on new US business investment
was 34.2% compared with OECD=20.7% and Canada =16.7%. (from
Flaherty’s 2010 budget) . Therefore US might want to raise even more
money with a VAT in order to reduce these corporate taxes to become
more competitive, as Canada did.
I would guess that a 5% US VAT in a high employment environment
would yield in the neighbourhood of a half trillion dollars, which is of
course why it may never be implemented. As one Congressman said:
“VAT is French for big government”
Nonetheless, a VAT would seem a natural option for the US,
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Figure 10
US Revenue Deficit
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How did the US get so Indebted?
Original Sin
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Coined by Eichengreen and Hausmann, Original Sin is defined as the
inherent inability of a country to borrow abroad in its own currency.
Not only is the US the only country that has been fully absolved of OS,
but US can operate globally in its own currency. Because other
countries hold US dollars, the result is a “soft” budget constraint.
Moreover, since the Chinese want the Yuan to remain fixed to the US
dollar and since there is upward pressure on the Yuan because of
China’s current account surpluses, China effectively dons the role as
the purchaser of last resort for any and all US Treasuries. In turn, this
essentially means that there is no budget constraint at all for the US,
at least until US international indebtedness reaches a tipping point.
Note that the Washington Consensus railed against soft budget
constraints, yet the US is the worst offender. Note also that the Euro
allowed Greece, etc. to be absolved from OS. If there was no Euro,
Greece would have had to borrow in drachma: there is no way that
foreign borrowers would have let it get so indebted.
Ditto for the US if it had to borrow in a foreign currency.
Twin Deficits: Fiscal and Current Account
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The Dysfunctional US Political System:
US has the Best Government that Money Can Buy!
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Democrats are social and moral libertarians and economic protectionists –
favour social spending and are pro-labour. Republicans are social and moral
protectionists (religious right and defending liberty abroad (pro-military) and
are economic libertarians, i.e., small government and lower taxes.
In most FPTP systems the parties try to occupy the centre. There is no middle
ground in US politics.
System is dysfunctional in that 41 Senators from 21 states representing a tenth
the population can block a bill.
Recently, the SC ruled (Citizens United) that free speech under the First
Amendment allowed corporations to engage in partisan political activities.
Gives whole new perspective on “corporate governance”
Spending in the 2010 mid-term election was in the $4 billion range, 50% higher
than the $2.6 billion spent in the 2006 mid-term elections
In 2006 in Canada aspiring MPs could spend (after the writ is dropped) from
$60 to $101 thousand depending on the number of electors in their riding.
Parties could spend just over $20 million nationally if they had a full slate of
candidates. Overall total for an election is less than a major Senate race in US
With House and ⅓ of Senate elected every two years campaigning never stops,
so focus on long-term issues is difficult.
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Is the US Losing its Innovation Edge?
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From the Economist’s April 17, 2010 “Innovation” Special Report:
“The emerging world, long a source of cheap labour, now rivals the
rich countries for business innovation.” and
“Emerging countries in general and China and India in particular,
boast a huge number of relatively cheap brainworkers. Between them
these two countries produce twice as many people with advanced
degrees in engineering or computer science as the United States every
year (more if you allow for the fact that 50% of American engineering
degrees are awarded to foreigners, most of them Indians or Chinese).
This is one of the main reasons why Western companies have started
to move their R&D activities to the emerging world” (ibid, 12).
When the US reduced its foreign student intake after 9/11, Australia in
particular moved in. As of 2008, it had 543,000 foreign student – 97,000
from India and 127,000 from China. They are also given preference for
Aussie citizenship.
The Americans need to try to ensure that the best and the brightest are
welcomed.
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The Road Back -- Economic
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Tom Friedman’s perception of the problem, and therefore of the
solution, is more succinct: “[America let its] five basic pillars of growth
erode since the end of the cold war – education, infrastructure,
immigration of high-I.Q. innovators and entrepreneurs, rules to
incentivize risk-taking and start-ups, and government-funded research
to spur science and technology.” (2011, 14)
Managing Director of the IMF, Christine Lagarde called on America and
Europe to abandon short-term fiscal austerity and to switch to stimulus
measures, warning that the global economy faces a threatening
downward spiral. In other words, measures to achieve longer-term
fiscal sustainability need to be accompanied by shorter-term fiscal
stimulus.
This dual approach is my preferred way forward; long-term debt
reduction cannot be sustained within the context of shorter-term
stagnation nor can deficit-financed short-term stimulus be viewed as
viable unless there are credible plans in place for longer-term fiscal
sustainability.
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Can US inflate it way into Sustainability?
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Since debt is in own currency, this is in principle possible
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value of debt would fall, $ would depreciate, but interest rates
would rise and so would debt servicing. Other countries would view
this as a violation of the implicit contract associated with the dollar
as the global currency and presumably dump $US on global
markets. At this point anything could happen, none of it good.
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If this scenario is so bad, why mention it?
 Because
a continuation of the US spend-and-borrow policy could
generate the same result, i.e., others lose faith in US and dump US
treasuries on world markets. Etc. In other words a policy of drift on
the part of the US is inviting an economic future that could spin out
of control.
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Thus, US needs to rein in its fiscal profligacy and grow its
economy and exports. Will the Chinese help by
unpegging the Yuan and appreciating?
An Appreciation of the Chinese Yuan
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Cost to China would be a decrease in the Yuan value of its $2.85 trillion
in US securities and in global competitiveness.
But I think that an appreciation is possible because:
 Western
nations are pressing for this, and are increasingly willing to invoke
protectionist measures
 China is incurring some major wage increases that led to re-shoring. It might prefer to
take some of this out via an appreciation rather than an increase in domestic prices.
 China wants to play a larger role on the world’s stage and an appreciation would be a
signal that it accepts a corresponding level of responsibility for global sustainability
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While the financial cold war seems stable – US won’t embark on
protectionism because China would dump US$ and China won’t cease
to be the buyer of last resort for treasuries because the US would close
its market to Chinese imports – the new reality is that the US is
becoming more beholden to China in terms of financing US fiscal
profligacy whereas China is becoming less dependent on the US
market both internationally and because its own market is increasing
Larry Summers: “How long can the world’s largest borrower remain
the world’s superpower?”
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The Road Back -- Political
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BUT US HAS SOFT POWER --- OR DOES IT?
In a networked world, the United States has the potential to be the
most connected country; it will also be connected to other power
centres that are themselves widely connected. If it pursues the right
policies, the United States has the capacity and the cultural capital to
reinvent itself. It need not see itself as locked in a global struggle with
other great powers; rather, it should view itself as a central player in an
integrated world. In the twenty-first century, the United States’
exceptional capacity for connection, rather than splendid isolation or
hegemonic domination, will renew its power and restore its global
purpose. (Slaughter 2009, 113)
However, this was before Assange, Snowden, etc. Is the US now losing
its moral leadership of the world?
Russia is taking over Middle East, China in East Asia and Africa, etc,
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Regaining the “shining city on the hill” will be a long and steep climb!
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Canada vs US Federal Budget Balances
Power Point and IRPP Essay are available from:
[email protected]
Thank you for your attention
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