"A Final Chance?: The Economic Crisis and the Future of the USA." Text of the talk given to the Arizona Council on Economic Education, 16Oct2011

Mr Chairman, many thanks for that very kind introduction, and I am grateful to you President Bill Hicks, to Executive Director Debbie Henney, and to your Board Member Dr Bill Weldon for your kind invitation for me to speak here this evening. May I say how delighted I am to see so many people taking time of a weekend evening to be here. I guess that shows that the subject is close to your concerns at the moment.

Allow me to start by mentioning that I am a Hindu but I was partly educated at a Christian school, and always regarded the Bible as being Incredible, unbelievable, and even silly, because it said things such as “People are like sheep”, and “all human beings are morally flawed, sinful, imperfect”.

Flawed? Imperfect? Some people no doubt, but most people I knew were most of the time generous and kind and truthful. And people like sheep, mindless, herding, I thought?! Maybe, some people, but not intelligent, university types like us!

Well, the more I have lived, the more I have experienced the varieties of human nature, and got to know more specifically my own nature, the more I have realized that that old book has much more wisdom than I had given it credit. I became, in fact, a follower of Jesus the Lord - but that is by the by, the point I want to start with is the record in the Bible of the behavior of a small group of Jews in an otherwise unknown place called Berea - when the famous, great Saul of Tarsus, who had by this time been renamed Paul, came to Berea, you know the guy who wrote more than half the NT– when he came with new information which was completely outside their understanding of the world and even their worldview, these Bereans checked it out – they were not willing to simply go along with one of the best-educated and most famous and stimulating rabbis of their age, in fact they were not willing to accept anyone’s say-so, they were interested in the facts – and for that reason, the Bible calls these Jews from the small insignificant town of Berea, the Bible calls these Berean Jews, and I quote, it calls them “more noble” than the Jews in the previous place where Paul had just given his lectures, the large and sophisticated city of Thessalonica.

Why does the Bible call the obscure Bereans more noble than the sophisticated Thessalonians? Because the Bereans didn’t simply reject things that offended their prejudices and preconceived notions, nor did they simply accept the say-so of the great Saul of Tarsus – no, no, unlike the Thessalonians, the Bereans were committed to checking the facts, however uncomfortable they might be - and from however great or however unlikely a source they might come.

So, dear colleagues, my first point: I am unlikely source for any information or ideas about the USA because I am not American, I do not specialize professionally in the USA, I was not educated here, I have even visited fewer places your great country and spent less time here than many tourists. So you will notice huge gaps in my understanding of the USA, and I probably have lots of things wrong! As I say, a most unlikely source of information on anything to do with the USA. And what I do have to say will most likely cut clean across your prejudices and even your views about your own country. But I would ask you to consider the facts, and nothing but the facts, with an open heart and mind, because it could be, it could just be, that an outsider with all the deficiencies that he has in terms of detail, MAY, just MAY, see some things that you don’t because you are too close to the detail. And it could also be that cultural or political taboos, and perhaps self-interest, prevent your own people from expressing some of the truths they see.

I think it was Churchill, Winston Churchill, who said that courage is the first of all human qualities, because courage is the quality which guarantees all the other qualities. Courage to tell the truth, to say what is possible, and what is not possible.

So my first point: please have the generosity to overlook, for your own sakes, the gaps, the holes in what I am about to tell you – even if there were no gaps, no holes in what I am about to tell you, limitations of time mean that I cannot cover everything, so please ignore the gaps, the holes, and focus on the substance of what I am about to say.

My second point is that American discourse and discussion is conflicted because America itself has become a deeply conflicted society, and it is now extremely difficult to have a civilized discussion about anything to do with US politics or economics, because each American is convinced not only about the “truth” of her or his own opinion (that is only natural) but is also convinced that any person holding another point of view must be not only wrong but an idiot!

Moreover, people tend to move in self-contained social circles which reinforce their own opinions. Channels of public information tend to be owned by one party or the other – and where they allow debate, tend to put forward polarized opposites for dramatic and entertainment value, which are designed to generate, and do generate, more heat than light.

Kindly extend to me the generosity of accepting that I am not an entertainer, and more important, that I have no political axe to grind, I am neither a Republican nor a Democrat, and if I sometimes seem to take a position close to either Republican or Democrat, it is only because that position seems to me to be true.

*I* am, and I hope we are ALL willing to be, like the Bereans, after the facts, the truth.

So to the substance of what we have to discuss.

Let me summarise, characterize and perhaps caricature each of five interesting perspectives on the economic situation.

One view focuses on three key words: entitlements, unsustainability, and uncertainty.

In the area of entitlements, this view focuses, for example on pensions – and on pension expectations. This view draws attention to the fact that many Americans don’t understand that there needs to be a relation between what was paid in and what can be received. People who hold this view like to debate who should be covered by what kind and level of healthcare. They like to point out that Medicare (for retired people), Medicaid (for poor people), Pensions and Social Security commitments cost a whopping $1.3 trillion a year now, and the commitments already made in these areas are just starting to ramp up! Where will the money come from? Who should pay for all that? The uncomfortable fact is that no one wants to pay for it, and everyone wants to benefit, say the proponents of this view.

Of course, Medicare, Medicaid, Pensions and Social Security are not the only areas where there is an entitlement mentality. One could look at R&D subsidies, industrial subsidies, and farming subsidies (whether for conservation or for avoiding undesirable production), and so on – but I think the point is sufficiently made for the moment. The first watchword in this view is Entitlements.

The second key word in this view is unsustainability. We should look at what is happening to America’s national debt, they say. If one looks at the national debt as a percentage of GDP, in 2010 it was already 93%, by the end of June 2011 it was estimated to be $15.003 trillion, which was 99% of GDP, and is expected to go up to 120% by 2020 and, unless something drastic happens, is projected to be 200% by 2035. National debt growth as a percent of GDP has shot up 35% in the last two years. As certain entitlements that are baked into Federal expenditures, the servicing the national debt alone could take up to $1 Trillion per year.

It is not just the debt that is unsustainable, say the proponents of this view, even US defense expenditure is unsustainable. The official score for national defense expenditure is $692 billion (but, when all the defense-related expenditures are factored in that should be factored in and are not due to the way facts are fudged nowadays in the US, the real expenditure on defense is actually, all in, $1 Trillion per year). Now, you can of course regard that as the cost of being a global peacekeeper and therefore the necessary cost of being a superpower, but the proponents of this first view, think that it is not necessary or even useful to be a superpower or a global peacekeeper, and would like to cut down defense expenditure because it is – you got it – unsustainable.

In any case, in this view, the current government consumption is 25% of GDP, and should return to the historic norm since WWII of 18-19%, so the 45% increase in the last two years needs to be trimmed back, by something like 4-6 billion per year.

So we come to the third key word in the first view that I am presenting: Uncertainty.

The uncertainty is caused by the flood of new laws, regulations, policies, and short-term spoon-feeding. They are particularly disturbed by attempts to reform the financial system through the Dodd-Frank Act, through Obamacare, and through new regulations emanating from e.g. the Environmental Protection Agency.

The U.S. Small Business Administration estimates that the cost of all these is $1.4 Trillion or 10% of GDP at Federal level alone. When you add the cost of the regulatory burden at state, regional, and local level, it is simply too much. Ken Langone, the co-founder of The Home Depot published an OpEd in the Wall Street Journal about a year ago, in which he said that if he and his partners, Bernie Marcus, Arthur Blank, Pat Farrah, tried to start Home Depot today, “it's a stone cold certainty that our business would never get off the ground, much less thrive”.

However, I think it is fair to say, that in this view, regulation is regulation, and if there is heavy regulation, it applies to everyone, so we may not like it, but it becomes simply the cost of doing business. If it reduces profits, it reduces profits for the whole of that industry, and investors can decide whether to be in that industry or not.

But what’s most paralyzing is uncertainty. That is what is the enemy of investment. I am told by a Member of the Board of one of the five largest banks in the US, that there is $2 trillion of cash available in the banking system in the US, which is not being drawn upon by companies, but they don’t want to invest at present because of the confusion and uncertainty regarding legislation, regulation, policies and the rest.

What is being offered by the current Administration is short-term spoonfeeds: reducing employment tax for six months or a year doesn’t address the huge problem of unemployment but merely confuses the situation (the current official unemployment rate is around 9%, but that only includes people who have applied for a job within the previous four weeks. the Department of Labor's "U-6" number of 16.5% that has received increasing attention lately because it includes people who have given up looking for work within the past year, plus people who have been cut back from full-time employees to part-timers. When you also consider the labor-force participation rate and the so-called "birth-death series" that measures business starts and failures, the real U.S. unemployment rate is now 20%).

So let me sum up the first view. What we need to solve America’s problems are: withdrawal from theatres of war where we have no chance of winning, reduction of unnecessary expenditures on every kind of entitlement, a return to small government, and tax cuts to stimulate growth.

That is the essence of the first view. Another view responds to that view by asserting that there is no correlation between tax and growth (there is only one thing that real growth correlates with, and that is innovation). So far as tax and growth is concerned: Sweden has been a high tax country for something over a century, and that does very well thank you, while Switzerland has historically been a low tax country and also does very well thank you. So we should not focus on taxation, we should focus on innovation, which is what leads to growth – though of course taxation OR subsidies can help or hinder that, but let’s focus on innovation, not on raw tax rates for the general population.

If you want to do that, say proponents of this second view, the tax laws dealing with private pools of capital, such as hedge funds, gives tax breaks to the already wealthy while the poorer people in society are not granted such luxuries. (If the amount of tax revenue lost to private equity firm managers is equivalent to that lost with hedge funds, then the combined amount would be $12.6 billion per year).

In this view, far more important than tax or subsidies is the flight of manufacturing capital as well as of knowledge that has taken place from the US since NAFTA was signed and the WTO was created – the elite benefited at the expense of jobs and prosperity in the USA, so that the middle class inside the US has been decimated, while enriching the elite and growing something of a middle class in other countries such as China and my own country India.

So a key question for the US is the return of manufacturing capital, and more important, the return of manufacturing to the USA.

In this second view, a godless, intelligent, sophisticated and amoral Ayn Rand-ist post-WWII elite delinked the dollar from gold, struck down the Glass-Steagall Act, licensed uncontrolled speculation through the legislation which replaced Glass-Steagall (that is, the Gramm-Leach-Bliley Act of 1999) and which enabled unprecedented amounts of money to be made available for theoretically unlimited and, in practice, unprecedented leverage, to usher in the most high-growth period in world history, at the cost of volatility, vulnerability, a huge and fast-growing gap between rich and poor, and enormous environmental damage. That is why BOTH political parties have talked fiscal responsibility, but have spent and spent.

Now, as I say, you can agree or disagree with parts or whole of that second view, but it does seem to me to be the second view of the US in the context of the current crisis.

The third view, and I want to put it briefly in the interests of time, though we can pick it up during our Q&A if you wish, is what might be called the international view of the US at present: to outsiders, the US seems to be exhausted and paralyzed, widely if imperfectly copied (or at least aspired to) in its good points, but without any fresh ideas with which to resuscitate itself. Of course, that is not true, there may be some exhaustion and paralysis - and we will certainly come back to that in a moment – but, while it is true that the gap between the US and other countries has been reduced by other countries copying (or at least aspiring to copy) the best features of the US, it is clearly not the case that there are no new ideas – rather, it is the case that such new ideas as are around have not yet garnered sufficient public support to be policy options that are widely debated or considered.

So we move from the first view I presented (that of small government) to the second view that I presented (that of moving the discussion to growth) to the international view, and now to the Tea Party view.

The Tea Party is mocked in certain quarters, but I take it quite seriously. It is of course a heterogeneous party, but its single focus is on balancing the books. In this, it is quite close to the small government or first view that I presented, but we may take it as a more extreme form of that view, and held by a larger number of ordinary people – that is, people outside the political elite that usually discusses such matters.

The counter to the Tea Party is of course the recent Occupy Wall Street movement, which also tends to be mocked, just as the Tea Party does. Occupy Wall Street is a bit of fun and games, we are told. These guys are enjoying free pizza as long as the sun is shining, but just wait till the weather turns cold, these guys will beat a retreat and disappear. Occupy Wall Street is just about class envy, coveting the riches of others, these guys don’t realize that entrepreneurship is hard, and they are in any case economically illiterate.

The riposte to that is of course that it was the economically LITERATE that created the global crisis, starting with Fed Chairman Alan Greenspan, and not excluding the top executives of the world’s largest financial institutions and corporations, most of which are based in the US, but many of which are also based in Europe and China and India and the Middle East.

It is not clear to most observers why the US resists financial sector reform, wanting to undo the Dodd-Frank regulations and the Volcker Rule. Does the US really not want to get back to capitalism from the sort of casino-ism that the US has created in the last few decades?

In my view, the Occupy Wall Street movement has only just begun, and we should expect it to spread more. Is it here in Phoenix or Arizona yet? I’m afraid as I’ve been chairing another conference, please excuse the fact that I haven’t been able to keep up with your local news. The Occupy Wall Street movement is in over 100 cities in the US, and you can see it from London to Frankfurt to Sarajevo in Bosnia, to the Philippines, Australia and even usually conservative and shy Japan! Just yesterday, the demonstrations in Rome became violent, just as they had earlier, in the summer, in the UK.

So much for the five views that I wanted to portray.

Meanwhile, the US is deadlocked politically, and no one with whom I have spoken expects any resolution of that before the next national elections.

My own view is different. I sympathize with aspects of each of these five views, but am probably the most optimistic person in the world that I know about the US economy and its prospects in the next year or so.

Can the US really grow? Can it really create the 20 million new jobs that it needs by 2020? That cannot happen unless manufacturing returns to the US, so: can and will manufacturing return to the US?

The first reason I am optimistic is because the free trade agreements with Colombia, Panama, and South Korea have just been passed by Congress. You may wish to argue the merits of these treaties, you may think some or many or most or even all of the provisions are right or wrong, but my point is beyond all that. My point is that your political process is not totally stalled! Of course it is true that the US is not even at the table for 160 free trade negotiations, and the suspicion is that this is due to the fact that President Obama’s election campaign cost $700 million, of which $453 million was from the trade unions, so it is the trade union type of mentality that is preventing the US from going into these negotiations. Well if trade union type jobs are to be preserved, that is a good strategy, but the question the US needs to ask itself is whether those sorts of jobs should be preserved or whether real jobs need to be created or preserved. And if you are after the creation and preservation of real jobs, the US cannot accomplish that if it does not embed environmental and social concerns into these treaties, whether they are bilateral or global. Why will lack of attention to environmental and social considerations in such treaties continue to take jobs out of the US? Because, without those, you are not competing on a level playing field. Investment decisions, whether about manufacturing or about innovation, will continue to take more and more jobs to other countries which have lower wages, lower costs of real estate, and lower investment costs because they ignore human rights, exploit workers, do not provide for pensions, and abuse the environment. Anyway, the first reason I am optimistic about the US is that your political process is not stalled, and because I think that you will soon begin to move on free trade treaties that do integrate environmental and social concerns.

The second reason I am optimistic is that I think you will soon complete export reforms and the transpacific transportation agreement which will provide an enormous boost to your economy.

The third reason I am optimistic is that you have an intellectual property protection regime that is better than that of most countries, and that superiority will continue to draw innovations from around the globe to the US. I should make it clear that I am not a proponent of the current sort of intellectual property regime that we have in the world, I think it is in need of fundamental reform as I argue in more detail in a moment, but as long as we have the current sort of intellectual property protection, it will continue to advantage the US.

Next, I am optimistic because I think you are going to move on energy policy. The Gulf spill caused not merely a cutback in domestic production but a reassessment of the whole of energy policy in the US. You are blessed with good quality coal and new coal technologies will I think give you a huge advantage, as will the new possibilities in oil (including shale) and renewable energies and, particularly, energy-efficient technologies. By the way, the US seems to me to still not have discovered the existence of an ancient technology for energy efficiency. It is called the OFF switch. I do not understand why you have a national addiction to cold water and to ice (which by the way have health disadvantages, and may contribute to some of your national diseases). And I do not understand why you need air conditioning when you have relatively clean air available in so many parts of the US for free, for example here in Arizona. Of course you need to keep your homes and offices cool here, but that could be achieved much more cheaply by the use of proper insulation and by introducing a new taboo on suits and jackets!

Anyway, the next reason I am optimistic is because your Judeo-Christian tradition teaches you that self-control is essential to free enterprise - and gives you the advantage of the work ethic, the punctuality ethic, the sensible lifestyle ethic, and so on. Though the influence of the Judeo-Christian traditions has been massively eroded since World War II leading to widespread succumbing to self-indulgence, consumerism and the debt culture, I believe that Judeo-Christian influence will revive as Americans come to understand, for example through books such as Dr Vishal Mangalwadi’s THE BOOK THAT MADE YOUR WORLD: HOW THE BIBLE CREATED THE SOUL OF WESTERN CIVILISATION, that the economic and political advantages you have enjoyed come only from that tradition and that, if you want national reconstruction, that can only be done if you rediscover the Bible and explore how its teachings on economics, politics, society, family and individual life apply in and to a globalizing world. If you are interested in exploring that, I recommend to you Dr Mangalwadi’s website (www.revelationmovement.com), my Blog (www.prabhuguptara.blogspot.com) and the website of Relationships Global (http://www.relationshipsglobal.net). The question for the US is the following: Since the Second World War, you have increasingly abandoned your historic path, will you now discontinue that abandonment and return to your historic path? As I have indicated, I believe you will return to it.

The next reason I am optimistic about the US is that you still have the largest middle class in the world. I know that you have attacked and decimated it in the last 30 or 40 years, but you can easily build it back – and, even if you don’t build it back, if you simply stop demolishing it, you will continue to have an advantage due to it for several decades till other countries catch up with your middle class in terms of quantity and quality.

The seventh reason that I am optimistic about the US is that you are still a largely mobile society. I don’t mean geographical mobility, too much of which I think is rather a disadvantage, but I mean economic mobility – across classes – that is, someone who is rich today can easily become poor in the US because of unrealistic investments, and someone who is poor today, can become rich because he or she brings some useful innovation to the table which can be much more easily funded and brought to market in the US than in any other country in the world. So the fact that people can and do move in and out of poverty and wealth is a huge advantage to the US.

But all the reasons that I have mentioned above could also have been mentioned before the start of the crisis in 2007. Is there any new reason to be optimistic about the US right now?

I believe there is. A renewed flight to safety in currency markets is helping the dollar gain ground against a broad range of currencies. The euro as well as emerging market currencies are declining because nervous investors, including hedge funds and real money accounts, are withdrawing from them. I expect more gains for the dollar as the environment will continue to be risk-averse. The Swiss authorities have effectively closed the Swiss franc as a safe-haven at least for the present, so the dollar has become the last refuge for risk-averse investors seeking to exit slowing global growth and the social and political challenges that are resulting and will result. The Economist points out that, for the last couple of weeks, there have been positive developments, for example in industrial production, consumer sentiment, and employment growth. American equities are up over 10% since October 4th, which is a remarkable recovery – major indices have climbed from the depths of near bear-market conditions to enter positive territory for the year. Major indexes have climbed from the depths of near-bear-market despair to positive territory for the year. Government bond yields are rising from record lows, indicating an appetite for risk and greater expectations for growth in the US. The trade deficit and unemployment already show improvements. The overall gains are of course modest at present, and will go back and forth, but I expect there to be a continued trend to improvement in the foreseeable future, unless some disaster happens or the US does something extremely stupid. Euro-area concerns will be sorted out by the end of this month, and though few will believe they will be effective, you will see them taking effect and improving things in the medium term. And, in the medium term that will also be good for the US economy.

May I, however, return to an important point for the future of the US and remind you that you need to focus on innovation and investment. In the past, when it was much easier to identify the winning infrastructural and other technologies, it was Federal investment that led to the development of the railroads under Abraham Lincoln and to the federal highway system under Dwight D. Eisenhower. Nuclear technologies, leading to the wide-scale use of nuclear power, were developed in government labs and initially deployed by the U.S. Navy and the Atomic Energy Commission. Investments in education, computer science, and infrastructure through programs like the GI Bill, National Defense Education Act, and Apollo space program laid the foundation for the emergence of whole industries such as aerospace, computing, and information technology. The United States Department of Defense (DOD) initially funded, and was an early adopter of key technologies - radios, semiconductors, computers, software and, most importantly, the Internet. It was Federal investments in health research through the National Institutes of Health that enabled scientists to map the entire human genome, making way for path-breaking advances in biotechnology – with all the pros and cons of those.
The point to keep in mind is that all these investments were not simply “sunk”. In education and technology, federal investments have been repaid many times over in greater economic growth, increased tax revenues, and high-paying domestic jobs. According to a Congressional report, every dollar invested in education by the GI Bill following World War II produced just over $5 in greater economic growth and $1.83 in greater tax revenues over the following 35 years alone. Economist Robert Solow received a Nobel Prize in economics in part for demonstrating that over 80 percent of economic growth in the first half of the 20th century was driven by advances in technology, and later economists confirmed that technology innovation played a similarly outsized role in economic progress in the latter half of the century. For these reasons, I believe that all research, globally, should be publicly funded (note: I said “publicly funded” not “government funded”) and therefore publicly owned – but with much greater competition in applications and products than we have now (no patents and intellectual property protection for products). However, as long as that model is not globally adopted, my view is that governments should pull out of research entirely as it is more and more difficult for governments to identify “essential” or “winning” technologies. Instead, 100% of research funding should be written-off from tax. In cases where R&D expenditure exceeds the income of the organization concerned, they should be able to reach arrangements whereby other entities can co-fund the expenses in exchange for tax write-offs. This will ensure healthy and non-monopolistic competition in research, while keeping in line with the American genius, spirit and tradition – which has been called “the idea of the US” – small government, creativity, innovation, a “can do” attitude, entrepreneurialism, and a chance for anyone and everyone to make it – which is the last and most important reason that I am optimistic about the immediate future of the US. Sixty five per cent of parents want their children to be entrepreneurs, and the recent Gallup Student Poll found that, in grades five through twelve, forty-five percent said they intended to start their own businesses.

Let me sum up: the US needs to stop the debilitating debate on tax cuts (you do need them, but get on with them and get them out of the way as soon as possible – a few billions here or there really do not make any difference to the US economy as a whole). Alongside cutting costs, you do need to at least temporarily raise taxes on the rich – it won’t kill them and it won’t kill your economy. Get that done as quickly as possible, and switch attention instead on what will produce more wealth for everyone (rich and poor), which is renewed economic growth. Encourage science and technology investment specifically to get clean technologies manufacturing going in the country, primarily through small and medium-sized businesses (from whom comes 70% of job creation, while employment in the large companies is declining and will probably continue to decline). The US needs to do that alongside getting the right kind (not the wrong kind) of free trade agreements whether bilateral or global, and putting tremendous emphasis on modernising your infrastructure (not merely financing the municipal unions) and, of course, the cultural key: education. A discussion of that quickly takes one to the heart of the malaise in the US, which can only be addressed by returning to a philosophical commitment to truth, and to an ethic of probity and public service. Your healthcare system needs to be thoroughly reviewed with a focus not merely on providing basic care for everyone but primarily on reducing its quite incredible costs. Finally, you need to consider whether your political system is still serving you well. From my outsider’s perspective, the key to the future health of the US is political reform: ban union funding as well as corporate funding of political parties, move to proportional representation so that you have more than two political parties, and encourage devolution of decision-making by discouraging centralized tax collection systems and giving more responsibility to the local, regional and state levels.

So I come to my conclusion: my subject has been the current economic crisis and the future of the USA, but the title of my talk asks whether the US has only “A Final Chance”. Frankly, I do not know. What I do know is that what the US is being given right now is the chance of at least a generation. As far as I can see, the US is being given this chance, not as a result of anything great or even right that it has done. The US is getting this chance because other countries have been even more stupid and wrong than the USA. You could say that the chance that the US has now is a supernatural chance, a gift of grace. If you miss this chance, as I say, that will be the end of any possibility of the return of US economic growth for at least a generation. The question is whether the US – that is to say, YOU - will grab that chance and run with it.

Thank you. Sphere: Related Content