This morning’s essay is sent in by a long time reader.
What Makes You Think We Can Grow Out of This?
Donald B. Halcom
As I sit here pondering the current status of the USA, I am struck by the conclusion that all of the politicians, business men, and economist have reached. They all believe that the only solution to the current economic mess of the USA is growth. Only growth will solve our problems. In fact only sustained growth will do it. When all these people believe the same thing then I suspect that something is wrong. The mechanism by which the growth is to be obtained differs with respect to political persuasions, but it is always growth that will perform the miracle. The question then occurred to me —– Is sustained growth over decades even possible? Is such an assumption even valid?
The last time the world was in this predicament was after WWII. All of Europe and the Orient were in shambles. The USA had a national debt of more than its GDP like it does now. The USA had one advantage. It was the only economy left whose manufacturing base was still viable. The USA had essentially financed WWII for the allies by selling bonds.
In 1945 the national debt as a percent of the gross domestic product (GDP) was 109%. Over the next 35 years the debt was paid down by the government represented by all the presidents (Democrat and Republican) from Truman to Carter until the debt as a percent of the GDP was 33%. When Reagan was elected president things changed. The debt began to rise almost continuously till in 2012 it was 102 percent of the GDP. The last four years have given the most precipitous rise. The next graph shows the recent history. In about 31 years we have accrued a debt as a percent of GDP almost equal to the debt of WWII.
Since WWII the USA has become a different country. We now have a world full of economic competitors. Our old monopoly is gone. Europe, parts of South America, the Middle East, the Far East and a few countries in Africa have all become major rivals for resources and trade.
The above data indicates that politics have been a major factor in the increase of the National Debt but that alone was not the problem. The demands of Banks, Wall Street and Hedge Funds have been major factors in increasing our economic woes. The debt from 2007 to the present, indicate these factors. Some claim that had we used the proper governmental legislation, then the debt crisis from 2007 onward could have been avoided. This is true, but that is water over the dam. Mankind has never been omniscient and will not be so in the future.
A balanced economy is like a see-saw, if you put too much weight on one end, it stops working. This is not rocket science. Our economy became unbalanced when too much money flowed to one end. How did this happen? Here goes.
When the Stock Market began it was supposed to raise capital for businesses to build new facilities to expand their operations. The reward for buying the stock was to be a share in the profits of the company i.e. dividends. This practice has essentially stopped. Very few dividends are paid anymore. Instead the stock market operates almost completely on speculation. If you buy a stock today it will go up in price tomorrow. The stock analysts tell the corporate executives of the stock financed companies that their company rating will go up if (and only if) their company grows in sales and profits every financial quarter, forever. If the companies do not comply, the analysts will lower their ratings and their company stock price will drop.
The corporate executives care very deeply about this. They care because they have Stock Options in the company. The stock analysts have a ring in the nose of the corporate executives and lead them around like a bull. The corporate executives will do anything to keep the analysts from pulling that ring and hurting their noses. The companies get essentially “free” money this way, when they issue their stock through the stock brokers, since they will not pay dividends and never repay the principal. The person left holding the stock (or option) will make money purely on the “speculative” value of the stock. The only person taking a true risk is the stock holder. The stock holder is supposed to own a part of the company but what he or she really owns is a ticket on a horse race. If they can sell their tickets to someone else at a profit they win, otherwise they lose. Does all of this also sound like the “Housing Bubble”? You can bet on it (pardon the pun).
Now what does all of this have to do with the cash flow shifting to one end of the see-saw and producing an un-balanced economy? The simple answer is everything. The corporate executive will do virtually anything to keep their stock options above water. That includes shutting down facilities in the USA and moving them to cheaper labor markets in order that their profits continuously grow. This is great for the company and the stock holders, FOR A WHILE. Eventually it turns around and bites them.
The companies run out of customers in their own domestic markets because there are not enough people working with enough income to buy the products they make. The companies claim that if these un-employed people would just re-educate themselves then they could find jobs that require more skill. Even if they did, they could not all be re-employed because higher skilled jobs run computerized machinery which create even more unskilled workers. It is a dog chasing its tail. Even highly technical work is currently being exported to lower labor markets. Jobs requiring professional degrees are exported to India, Malaysia and China, as examples. The cash flow is to the richest and the see-saw becomes unbalanced.
There are more reasons why growth may be a problem. We are a nation of about 350 million people. The world has a population of seven billion. The USA has about five percent of the world’s population and is by far the largest consumer on the planet. We do not even manufacture our own clothes, shoes, electronics and appliances. Even when we do manufacture stuff, we tend to have the minor share of the world market. Examples are motorized vehicles and oil products. We do lead the world in selling food products and military equipment. The see-saw is not just shifted by cash flow to the rich but also by cash flow out of the country. In a competitive world economy, the rest of the world is not going to stand still while the USA “grows” out of its financial problems. The rest of the world justifiably wants its share of the pie. They were forced by circumstances to stand still after WWII, but not now. It took the USA about 35 years to grow out of the WWII debt and that was when the game was mostly biased. The game has changed. All the political subterfuge in the world will not alter this.
I guess that the USA could emulate the Weimar Republic formed in Germany in 1919. The Weimar Republic hyper-inflated the Deutsch Mark, for their own obscure reasons. By 1923 the Deutsch Mark was literally worthless. This eventually led to a Fascist German state and we all know that outcome. This could happen to the USA if we do not pay our debts while maintaining a balanced budget.
Here is one more arpeggio for this opus. The Great Depression of the 1930’s was a “financial system” collapse just like our current situation. This depression began in 1929 during the Herbert Hoover administration and ended in the FDR administration. Employment was not fully recovered until about 1941 when WWII began. We did not grow out of that depression. It took a war to produce full employment again. This is not a solution that I condone.
Balance, balance, balance —– it’s all about balance. Balance the internal cash flow between the rich and the poor; balance the trade deficit with other countries; balance the value of the dollar; balance the US federal budget while paying off the US debt; keep the climate in balance. All of this is like balancing a pea on your nose while juggling eight bowling balls. A simple sounding solution like “Sustained Growth” appeals to politicians and the public. Unlimited growth is stymied by the competition for finite resources and finite world markets. Cheap labor is only one of the finite resources. The world will eventually run out of cheap labor as well as other resources. Then what do we do?
Like Roulette, it is round and round and round she goes, where she stops nobody knows. We will just have another war to kill off the competitors and we will then give another spin to the wheel. We have been doing this for all of recorded time. “It is a tale told by an idiot, full of sound and fury, signifying nothing.” I am very sad about this but I can visualize no other outcome. The earth is reaching its capacity to support mankind in the style to which we have become accustomed. Relentless growth is not a solution, in fact, it is the problem.
Erie, PA, August 2012
Don Halcom has a Ph.D in Chemical Engineering. He is 74 years old and retired. He is available to respond to any follow up questions you may have. You can reach him here: drdon (dot) halcom (at) verizon (dot) net
You can read an earlier essay of his posted here in October 2011: The Return to Feudalism