The Wasted Opportunity

I thoroughly enjoyed reading The End of Influence by Stephen Cohen and Brad DeLong.* For one thing, it’s not specifically about the financial crisis (although that does play a role), so you don’t have to read the nineteenth explanation of how a CDO works or what a NINJA loan is. For another, it’s short–only 150 pages, and small pages at that–and easy to read, so it will probably jump your queue of books to read and you can cross it off your list in just a couple of hours.

Despite being a short book, it’s about a lot of things. The most obvious is the much-bemoaned fact that the U.S. is now a huge debtor nation and is unlikely to maintain its status as the world’s importer of last resort indefinitely, and what that all means. The most central, however, is probably the global shift away economic neoliberalism–the idea that governments should withdraw from the economic sphere and allow free market forces to work their magic, symbolized by the recent effort to convince sovereign wealth funds to behave like ordinary, return-seeking institutional investors (see pages 85-89). Cohen and DeLong show that the last few decades of neoliberalism are really just a historical blip and that most of history–including most of the post-World War II–saw plenty of government intervention, even industrial policy, in countries like France (TGV, Airbus, etc.) and the United States (via the Pentagon). They see a resurgence of industrial policy all around the world (although it never really went away–see China, for example), and even if it often ends badly, it is something we will have to reckon with.

If the book isn’t centrally about the financial sector and the financial crisis, though, they still have a minor starring role. In their account, the recent period in which developing countries wanted to lend us their dollar surpluses gave us a great opportunity: “It gave America the opportunity, while absorbing more and more routine manufacturing from Asia at the expense of those same industries at home,” to shift its own economy into what should have been the ‘sectors of the future.’” Instead, though we shifted our economy into finance. “The freedom of action that the United States enjoyed because it had the money was squandered” (pp. 12-13).

Cohen and DeLong recount (in admirably condensed form) the charges generally leveled against the financial sector, but they also point out something that often is overlooked:

“[Finance] had achieved the cultural dominance that so often goes hand-in-hand with economic dominance: its gigantism and ubiquity, its tonic impact on the entire economy, its fabulous success, the sheer gushing of money, its generous funding fo elected politicians, its seconding of its top executives to top posts throughout the regulatory apparatus of government, and its simple and powerful message of ‘let the market work its magic.’ It was so easy” (pp. 112-13).

Cohen and DeLong do not make the financial sector the sole villain in their story. Another one is inequality: “Faced with stagnant incomes, seeing themselves falling behind those above them on the income scale, and spending their evenings watching Lifestyles of the Rich and Famous, what did the average American family do?” (p. 107). They worked more, and they borrowed more.

So where do we go from here? Although their book is all about the decline of U.S. financial power, Cohen and DeLong are far from prophets of doom. America simply needs to become a little bit more like a normal country–only a little, because we are still the world’s largest economy and its only superpower. “A drop in the value of the dollar, even a big drop, is not the end of the American economy” (p. 100). We don’t have as much weight to throw around in international meetings. I agree.

This is me talking now, not Cohen and DeLong: There is a lot of hand-wringing over global imbalances, but the answer is quite simple: the dollar needs to fall. Imported goods will get more expensive, but domestic goods won’t, and we’ll adapt. We won’t be able to dictate to the world as much as we used to, but frankly that’s a good thing, given how many other parts of the world we have messed up in our history and how wrong our extreme free market ideas turned out to be. In the long, long, long term, maybe the United States will become just another country–a larger, somewhat richer version of Canada, or Belgium, or Denmark, or something like that. We could do a lot worse.

* Which I bought myself, two days before someone offered me a free copy.

By James Kwak

18 responses to “The Wasted Opportunity

  1. Cohen and DeLong do not make the financial sector the sole villain in their story. Another one is inequality: “Faced with stagnant incomes, seeing themselves falling behind those above them on the income scale, and spending their evenings watching Lifestyles of the Rich and Famous, what did the average American family do?” (p. 107). They worked more, and they borrowed more.

    That’s still the same villain. It’s monopoly-finance capitalism (and its water carrying government) which simultaneously drove down wages, indoctrinated America out of a citizenship mindset and into a sociopathic consumer mindset, and paved the way for these inhabitants to run up consumer debt even as their wages declined as they worked longer and harder.

    I do agree that one can’t pluck out one aspect, the finance sector, blame everything upon it, say “reform it and everything will be fine”.

    The problem is far more fundamental.

    So where do we go from here? Although their book is all about the decline of U.S. financial power, Cohen and DeLong are far from prophets of doom. America simply needs to become a little bit more like a normal country–only a little, because we are still the world’s largest economy and its only superpower.

    Yup. That’s fascism lite talking all right. Just a little tinkering, a little “reform”, and everything will be fine. Our lifestyles are sustainable, they just need some fine-tuning.

    Never mind that this myth, every bit as much as the trickle-down myth with which it’s almost invariably accompanied, has been proven wrong a thousand times over.

    As long as there’s money in peddling it, flacks will peddle it.

    In the long, long, long term, maybe the United States will become just another country–a larger, somewhat richer version of Canada, or Belgium, or Denmark, or something like that. We could do a lot worse.

    I don’t think there’s any doubt at all America’s going to do A LOT worse than that. (Of course those countries as well seem intent on destroying themselves also.)

    I’d love to hear some contrary evidence, a contrary trend. But according to the SOTU, for example, it’s hunkering in the bunker until the dead end, all the way across the board.

  2. Imported goods will get more expensive, but domestic goods won’t, and we’ll adapt.

    Wait, you mean we still make domestic goods?

  3. A very good post.

    The only thing I will add is that, in my opinion, most of our problems have occurred since our political ship began taking on water after the fall of the Nixon administration and Roe v. Wade.

  4. “a larger, somewhat richer version of Canada, or Belgium, or Denmark” – So that’s your plan is it, annex a few uninhabited bits from the neighbors to the north in order to finance the next bubble! Expand Alaska south east a bit and that’s all it’ll take to get a bit bigger than Canada.

  5. But can we ever become a “normal” country as long as we take on the world’s military burden? We forget that hand-in-glove with the growth of the finance sector, the military sector has achieved a similar economic and to some extent cultural dominance as well. With the necessary decline in the dollar, will we be still be able to afford our military supremacy (if we ever could)? And what other implications will our decline in relative military power have? Will other Western nations be forced to increase their defense spending? Will the international balance of power shift? Will their be a greater likelihood of symmetric warfare between nations as opposed to asymmetric warfare with non-state actors, with the resulting catastrophic economic results?

  6. It is more fundamental, I agree! Two Micro examples
    !. Hospitalstay of 1 & 1/2 days for pacemaker. private Insurance Company states Medicare is primary and Medica is secondary. End results I write a check for $2,900.00 after all the jocking around.
    !. Just refinaced a home at the end of Dec. for a 2.25 drop in APR. Mortgage has been sold 4 times. Check for Feb 1st payment sent to third service provider on 1/21/10 (early), no record of check clearing was told payment received but not posted. Mortgage sold again: Wells Fargo. Nothing positive is happening.

  7. It is more fundamental, I agree! Two Micro examples
    !. Hospitalstay of 1 & 1/2 days for pacemaker. private Insurance Company states Medicare is primary and Medica is secondary. End results I write a check for $2,900.00 after all the jocking around.
    !. Just refinaced a home at the end of Dec. for a 2.25 drop in APR. Mortgage has been sold 4 times. Check for Feb 1st payment sent to third service provider on 1/21/10 (early), no record of check clearing was told payment received but not posted. Mortgage sold again: Wells Fargo. Nothing positive is happening at the customer end.
    3. My employer has stop bargening after 6 hours of proceedural manuvering on both side a requested mediation claining they have no money. That clain has been used for over ten years. My employer (I’m 73 years old) is the Minneapolis Board of Education.

  8. I don’t understand how a consumer driven economy can grow with consumers income declining. We are out of debt space, and are left with financial shenanigans that lead as we’ve experienced to unintended or rather unanticipated consequences.

  9. “In their account, the recent period in which developing countries wanted to lend us their dollar surpluses gave us a great opportunity: “It gave America the opportunity, while absorbing more and more routine manufacturing from Asia at the expense of those same industries at home,” to shift its own economy into what should have been the ’sectors of the future.’” Instead, though we shifted our economy into finance. “The freedom of action that the United States enjoyed because it had the money was squandered” (pp. 12-13).”

    Squandered? How is that possible? I mean, the free market allocates goods and services for the best, right? Right?

    Oh, so sorry, wrong universe. Beam me up, Scotty.

  10. James-

    Thanks for the review. Much appreciated.

    Tim Sullivan

  11. James — I do hope you’ll comment on Dan’s question above. Our entrenched militarism is the other half of the equation. Canada, Belgium and Denmark don’t try to guarantee continued dominance of the whole world by normalizing (and diverting resources to) permanent projection of overwhelming force. It’s a big difference.

  12. The US economy faces 4 stiff long-term problems dragging it down. The first two are also unique to it:

    (1) The excessive cost of health care (employer-provided and individually-purchased to at least the same extent as government-provided). 4% more of GDP is spent on health care in the US (despite all the uninsured) than in any other major industrial nation with less to show for it in outcomes. (The Swiss spend 12% of GDP, we spend 16%; all of the EU, Canada, Australia, & Japan have a GDP health care % less than 12%.)

    (2) The huge military budget, now at its highest inflation-adjusted level since WWII and representing in excess of 4% of GDP, is a drain that no other country faces. Indeed, it exceeds the military budgets of the rest of the world combined. Historically, no empire has ever been maintained as a pure onus on the builder (the longest lived regimes, ancient Rome and Persia, considered such building to be a profit-making enterprise). We may not like believing that we are maintaining an empire–let freedom ring etc.–but functionally, though perhaps not morally, we are. Military Keynesianism may work for stabilization but definitely not for long-term growth.

    (3) The 3rd economic drag we have is common to the EU but not to the BRICs and other emerging markets: We have a huge, privately profitable, yet extremely unproductive–witness the events of late 2008–financial sector that is eating up our brain power, mis-allocating enormous resources–and doing as a part of what it considers to be its raison detre–and devouring the nation’s real wealth to little, no, or negative productive purpose.

    (4) The fourth economic drag we face with Europe and BIC (not BRIC) but not with some emerging markets: energy dependence on foreign imports.

    Neither (1) nor (2) were especially difficult for US growth vs. Europe/Japan when those economies were rebuilding from WWII and when US excess costs on health care as a % GDP were much smaller (Canada & US %ages were about the same early Nixon years, e.g.). Due to (1) & (2), however, the US may count itself lucky 20 years from now to be a large Denmark. Due to (3) in addition to (1) and (2) we are severely disadvantaged relative to the BIC for long-term growth. On (4) we never learned any lessons from the 70s, so we’re stuck with it.

  13. UnnaturalIntelligence

    An optimistic choice of countries that the US could look like in the future.

    In nominal, per capita terms, Denmark is already substantially richer, and Canada is about equal and pulling ahead quickly. With USD on the way down in the medium to long term, and the burden of the $1T deficits retarding economic growth, this gap will only widen.

  14. I agree and nice post

  15. Mr Kwak
    If you were advising developing countries on what they ought to do with their “surplus dollars”, what would you tell them to do?

    Keep in mind that there are only four options.

    1. Buy US goods & services
    2. Buy US debt
    3. Buy US equity
    4. Stuff it in their mattress

    If only developing countries chose #4, boy, would we have it made. But they’re not that stupid, are they? Though they have been stupid enough to overwhelmingly buy debt, and that is what drove risk premiums down to nothing & enabled banks to lend to all those people who couldn’t pay them back. How easily people forget that debt is a two-way street. And that, in the end, US dollars are only good in the United States, so if we ship em overseas for goods, they have to come back here eventually. All this crap about influence, blah blah, blah, where does it get you? In the old days, tenure. But now that the universities are broke, maybe more eggheads will have to find jobs in the real world and see how it works.

    Until then, vive la resistance!

  16. Yes, the world might be quite a better place with Chinese military and economic hegemony.

    “In the long, long, long term, maybe the United States will become just another country–a larger, somewhat richer version of Canada, or Belgium, or Denmark, or something like that. We could do a lot worse.”

    Though we’ll likely do a lot better. I assume you are familiar with Fukuyama …

  17. “Faced with stagnant incomes, seeing themselves falling behind those above them on the income scale, and spending their evenings watching Lifestyles of the Rich and Famous, what did the average American family do?”

    This is something that I think isn’t discussed enough. So many in the middle class were willing to indebt themselves, not only because they thought they were wealthy via their homes, but because the idea of what it means to be middle class meant a certain lifestyle that the middle class can no longer afford. We beggared ourselves, our culture and society, with the idea that we would all be “rich,” while still giving tax cuts to the real rich. For decades. And you can’t get that wealth and investment back.

  18. …and it seems to me that we need to develop a culture where people are happier with less. Because they will have less. It seems to me that this is a huge risk for the US given our cultural reliance on the fast and easy.