[lit-ideas] Re: Priorities ??

  • From: "Steven G. Cameron" <stevecam@xxxxxxxxxxxx>
  • To: lit-ideas@xxxxxxxxxxxxx
  • Date: Wed, 29 Dec 2004 16:05:16 -0500

**Now free from grading and able to participate -- this economic warning 
from this morning's editorials...


/Steve Cameron, NJ


The Next Economy


By Robert J. Samuelson
Wednesday, December 29, 2004; Page A19

We are undergoing a profound economic transformation that is barely 
recognized. This quiet upheaval does not originate in some breathtaking 
technology but rather in the fading power of forces that have shaped 
American prosperity for decades and, in some cases, since World War II. 
As their influence diminishes, the economy will depend increasingly on 
new patterns of spending and investment that are still only dimly 
apparent. It is unclear whether these will deliver superior increases in 
living standards and personal security. What is clear is that the old 
economic order is passing.

By any historical standard, the record of these decades -- despite flaws 
-- is remarkable. Per capita income (average income per person) is now 
$40,000, triple the level of 60 years ago. Only a few of the 10 
recessions since 1945 have been deep. In the same period, unemployment 
averaged 5.9 percent. The worst year was 9.7 percent in 1982. There was 
nothing like the 18 percent of the 1930s. Prosperity has become the 
norm. Poverty and unemployment are the exceptions.

But the old order is slowly crumbling. Here are four decisive changes:

• The economy is bound to lose the stimulus of rising consumer debt. 
Household debt -- everything from home mortgages to credit cards -- now 
totals about $10 trillion, or roughly 115 percent of personal disposable 
income. In 1945, debt was about 20 percent of disposable income. For six 
decades, consumer debt and spending have risen faster than income. Home 
mortgages, auto loans and store credit all became more available. In 
1940, the homeownership rate was 44 percent; now it's 69 percent. But 
debt can't permanently rise faster than income, and we're approaching a 
turning point. As aging baby boomers repay mortgages and save for 
retirement, debt burdens may drop. The implication: weaker consumer 

• The benefits from defeating double-digit inflation are fading. 
Remember, in 1979, inflation peaked at 13 percent; now it's 1 to 3 
percent, depending on the measure. The steep decline led to big drops in 
interest rates and big increases in stock prices (as interest rates 
fell, money shifted to stocks). Stocks are 12 times their 1982 level. 
Lower interest rates and higher stock prices encouraged borrowing and 
spending. But these are one-time stimulants. Mortgage rates can't again 
fall from 15 percent (1982) to today's 5.7 percent. Nor will stocks soon 
rise twelvefold. The implication: again, weaker consumer spending.

• The welfare state is growing costlier. Since the 1930s, it has 
expanded rapidly -- for the elderly (Social Security, Medicare), the 
poor (Medicaid, food stamps) and students (Pell grants). In 2003, 
federal welfare spending totaled $1.4 trillion. But all these benefits 
didn't raise taxes significantly, because lower defense spending covered 
most costs. In 1954, defense accounted for 70 percent of federal 
spending and "human resources" (aka welfare), 19 percent. By 2003, 
defense was 19 percent and human resources took 66 percent. Aging baby 
boomers and higher defense spending now doom this pleasant substitution. 
Paying for future benefits will require higher taxes, bigger budget 
deficits or deep cuts in other programs. All could hurt economic growth.

• The global trading system has become less cohesive and more 
threatening. Until 15 years ago, the major trading partners (the United 
States, Europe and Japan) were political and military allies. The end of 
the Cold War and the addition of China, India and the former Soviet 
Union to the trading system have changed that. India, China and the 
former Soviet bloc have also effectively doubled the global labor force, 
from 1.5 billion to 3 billion workers, estimates Harvard economist 
Richard Freeman. Global markets are more competitive; the Internet -- 
all modern telecommunications -- means some service jobs can be 
"outsourced" abroad. China and other Asian countries target the U.S. 
market with their exports by fixing their exchange rates.

Taken at face value, these are sobering developments. The great 
workhorse of the U.S. economy -- consumer spending -- will slow. Foreign 
competition will intensify. Trade agreements, with more countries and 
fewer alliances, will be harder to reach. And the costs of government 
will mount.

There are also global implications. The slow-growing European and 
Japanese economies depend critically on exports. Until now, that demand 
has come heavily from the United States, which will run an estimated 
current account deficit of $660 billion in 2004. But if American 
consumers become less spendthrift -- because debts are high, taxes rise 
or benefits are cut -- there will be an ominous collision. Diminished 
demand from Europe, Japan and the United States will meet rising supply 
from China, India and other developing countries. This would be a 
formula for downward pressure on prices, wages and profits -- and upward 
pressure on unemployment and protectionism.

It need not be. China and India are not just export platforms. Billions 
of people remain to be lifted out of poverty in these countries and in 
Latin America and Africa. Ideally, their demands -- for raw materials, 
for technology -- could strengthen world trade and reduce reliance on 
America's outsize deficits. If so, exports (and manufacturing) could 
become the U.S. economy's next great growth sector. Already, the dollar 
has depreciated 15 percent since early 2002; that makes U.S. exports 
more price-competitive.

What's at issue is the next decade, not the next year. We know that the 
U.S. economy is resilient and innovative -- and that Americans are 
generally optimistic. People seek out new opportunities; they adapt to 
change. These qualities are enduring engines for growth. But they will 
also increasingly have to contend with new and powerful forces that may 
hold us back.

Robert Paul wrote:

> Lawrence writes:
>>Bush-Bashers should slow down a bit and wait for the facts.<
> (I had pointed out that as of last night, the US had pledged--not given,
> pledged--$35 million in relief funds, and that Bush's inauguration will cost
> _more than_  $40 million to stage.)
> Lawrence sees this as 'Bush-Bashing.' He is welcome to. But one might wonder
> whether seeing these juxtaposed facts in this way does not itself constitute
> some unthinking flexing of the knees.
> Robert Paul
> The Reed Institute
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