Stagnant Real Income Caused by Stagnant Human Capital

The inevitable, painful march of developed economies and emerging markets to equalize standards of living.

Paul Kennedy’s “The Rise and Fall of Great Powers” that’s central premise was every empire in history fell due to economic weakness and an over burdened military. The fact is this country is still the only super power (despite media hype, China is two countries: the cities on the coast are basically a colony of the US, with the other 90% of people living in the third world, and a military more suited for mid-20th century warfare). America’s biggest challenge is getting its economy to grow at a rate that will allow the public sector to de-leverage – it’s already been happening in the private sector, as the debt run up in the bubble years is being paid off along with growing corporate and household savings.  The problem is the government’s tally, which is really everyone’s problem (meaning the entire world).

As of 2010, this is a $15 trillion economy with $14 trillion in Federal debt, but if you count $5 trillion for Fannie Mae, Freddie Mac, FHFA, and $2.8 trillion for municipal debt, government has totaled-up almost $23 trillion in debt. That’s 153% of GDP, and we should all remember that debt represents future tax, tariffs, fees and other receipts.  Currently, governments collect $4.5 trillion in revenue but overspent by $1.5 trillion, so unless the US economy is going to grow rapidly in the next 10 years, there is no way to maintain US Treasuries as a AAA credit and the dollar as the reserve currency unless the US gets its fiscal house in order. This is not even getting to ‘off balance sheet’ liabilities from state employee pensions and the massive future demands of entitlement programs (Medicare and Social Security).

There is no escaping this. Chicago Fog is pleased to see the debt and deficits have everyone’s attention, yet the political discourse in this country is a joke, with two parties that are almost ideologically identical, and a media that caters to this ‘red/blue state’ nonsense in order to sell commercial time. It feels like we are listening to debates from the last century, full of cliche, rife with labeling, and based on simplistic reasoning. The Republicans think low taxes solve everything while the Democrats justify a status quo with outdated Keynesian policies. The Tea Party movement is a shallow mask for angry, white suburban rage that seems to think the only problems are ‘bailouts, welfare and high taxes” and not our bloated defense spending to maintain an empire no one seems to want, and transfer payments from Social Security and Medicare going to a generation of recipients who have taken the most and given the least (i.e., the Baby Boomers).  Time to ask the Baby Boomers, “ask not what the country can do for you …”

Liberals and conservatives are going to be forced to go beyond this idiotic rhetoric in the next few years. History is happening, and Chicago Fog would not be surprised if the bi-party hegemony ends in the next 10 years. There is no question entitlements must be cut down to safety net levels, income taxes will have to go up, and defense spending has to get cut. President Obama is right in that we have to invest in the future but Chicago Fog would argue against letting the government make industrial policy. It would be far better for government to lay off corporate taxes and regulation across all industries (and, of course, eliminating corporate welfare to industries like oil, coal, agriculture, and banking). Investment has to flow toward what’s demanded by the global economy; not to what we think we want to supply to the global economy.

Alas, and the end of the day, what is needed is a better investment in human capital. In short, the economy needs to grow more rapidly in order to cash the checks the government needs to write in the next 100 years, and to date a huge portion of the US workforce has not been up to the task. It is certainly not their fault; the structurally unemployed and underemployed, and the mortgaged poor, have all been perfectly rational in their decision making.

Ultimately, the US got into this mess because primary and secondary education slipped and rates of college grads have not increased in 30 years, leading to stagnant real income growth for the bottom 90% of taxpayers. As of 2011, the US has 9%+ unemployment because people do not have the skills the global economy demands. One can try to can blame companies for exporting jobs until learning (1) the US does more manufacturing than ever and most of it is due to technological advancement, and (2) the national appetite for blue collar jobs has waned; in reality, the US also outsources huge portions of its farm labor, domestic services, and basic labor services to ‘foreigners’ as well, the only difference is they travel to America to perform the work.

Cheap home ownership has been a way to palliate the masses who have watched the rich get richer (as an alternative, Chicago Fog suggests the US government follow the Roman example: sponsorship of quasi-gladiatorial games and week-long festivals and orgies, which will be far less expensive and much more fun).  Since the late ‘90s, Federal programs encouraging home ownership have caused a misallocation of capital and labor toward an unsustainable industry (residential housing) and away from higher, better uses. The fact capital has been malinvested is an enormous blunder in itself, but there was also a severe misallocation of human resources. Housing was subsidized and demand was enhanced above its market equilibrium, and people took jobs and built careers in meeting that demand.  In making those decisions people were being perfectly rational, responding to incentives and acting in their self-interest.  Little did they know the system was built on flimsy ground, and with the collapse of the residential real state market millions of people were out of work, causing a wave of lowered consumption impacting other industries.  But the core of the problem is stagnant real wage growth. Government just had the wrong solution; it wasn’t making housing cheap; it should have been allowing human capital to be enhanced.

Of course, it is easier to give things away than to fix something, so any solution has to start with the fact the US system of primary and secondary education is broken, and the US is losing future potential artists, teachers, engineers, scientists, doctors, entrepreneurs and professionals. If the US desires more human capital, that means its schools have to be improved. Chicago Fog contends that it is utter nonsense to try to pin the lack of growth in college graduation rates on cultural/societal issues like broken families, video games, overweight kids, and uncaring parents. Tough childhoods have been with us since the dawn of the human race and, if anything, lives of children have gotten markedly better over the last 100 years. Chicago Fog argues schools have failed due to too much federal control, the dominance of teachers’ unions, and the general lack of competition among schools.

In summary, the failure of government-dominated education to equip people to operate in a global economy leads to vast portions of the populace looking at stagnant wages, so the government tinkers in the housing market to make for cheap homes and creating an asset bubble which employs millions of people, which then pops causing a recession that puts even more people out of work, leading to the US government stimulus that takes it up to 25% of GDP and running a massive deficit, further bloating long term debt, and leading to … well, Chicago Fog suspects another financial crisis due to these accumulating failures of government.

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