Tuesday, March 17, 2009

The American Decline?

Possibly one of the most depressing takes on the current state of the United States and some of the underlying forces that aim to shape the US economy in years to come comes courtesy of Philip Greenspun, an MIT prof, reviewing the Rise and Decline of Nations by Mancur Olson, or as he summarizes it - "How Rich Countries Die". Greenspun's conclusion?

Olson showed back in 1982 that modern macroeconomic theory was basically worthless in developed stable countries. Macroeconomics posits a free market in which wages and prices adjust dynamically. That applies to an ever-smaller sector of the U.S. economy. We have a rapidly growing governnment that directly or indirectly employs more than one third of our workers, many of whom are unionized. We have a health care system that consumes 16 percent of GDP and is staffed with doctors who restrict entry into the profession via their licensing cartel. The financial services sector is about 10 percent of the economy and they now tap into taxpayer money to keep their bonuses flowing in bad times. The automotive industry kept itself profitable over the years by successfully lobbying for import tariffs. When the profits turned to losses, they successfully lobbied to have taxpayers pick up those losses. A university-trained macroeconomist might be able to predict what will happen to babysitters in a depression, but not the price of cereal, the wage of a manufacturing worker, or the fate of those Americans who collect most of our national income (e.g., Wall Street, medical doctors, government workers).

A cashflow approach is much more effective for figuring out where we’re headed. Money flows out to the folks on Wall Street who bankrupted their firms, to schoolteachers who’ve failed to teach their students, to government workers who feel that simply showing up to work is a heroic achievement, to executives and union workers in America’s oldest and least competitive industries. If times are tough and money is tight, that means almost nothing is left over for productive investment. What would have been a short recession will turn into a long depression and decades of higher taxes and slow growth to pay for all of the cash ladled out. Special interest groups will continue to gain in power.
Read the whole thing. Of course, as he also notes in an earlier post, that America's leadership is attempting to move the US towards a more European model won't help. Personally, I'm not as pessimistic but the initiatives being championed by the US in recent weeks give me doubts.

I think that there's still hope given the average American's dislike of government and the continued decentralization of power because of technology (Reason). Suppressing the ingenuity and independence of the American entrepreneur - and more importantly, the culture of entrepreneurship will be no easy task. Unfortunately, with the current outlook on taxes, regulation and spending crowding out private capital, the short term does not look good.

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