During a recent meeting I was asked by my Chinese hosts to give a brief synopsis of America’s direction during and after the financial crisis. I gave a brief speech, which has been shortened for this article.
The Federal Reserve has been putting out a Survey of Consumer Finances every three years since 1989. The last one should have been completed in 2007 but was not due to be released until early this year. Apart from some consternation as to why it’s taking so long, it is clear that when it comes out, it will reveal that America’s individuals, businesses and a nation took a 15- to 20-percent haircut over the last year.
Is it time to panic? Probably not. The U.S. is still the largest economy in the world. California, by itself, is the fifth-largest economy in the world and even the GDP of our smallest states dwarfs the output of most African nations. There is time, but the reverse economic spiral caused by lost wealth, jobs and confidence, left unchecked, could cause irreparable harm to us and the rest of the world.
President Barack Obama’s Keynesian response is the right medicine and it will do much to help our aging ailing infrastructure which is in serious need of revamping. When I chaired the Milwaukee City Debt Commission in the 1990s, it was clear that the city, like the country as a whole, was cannibalizing its capital infrastructure programs by diverting funding to emergency maintenance rather than capital replacement. At the time, it was one of the political magic tricks used to make government seem more efficient, but unfortunately the magic tends to run out as time passes.
In the long run, an efficient infrastructure will save money and make the U.S. more competitive. In the short run, it will provide the jobs and business we need to jolt our demand-driven economy back onto the tracks. But, the cost will be high; trillions in debt will be racked up. How we deal with the debt and the dynamics of a changing world economic order will be crucial to the development of our economic interests in the next business cycle.
The next business cycle
At the moment, we are consumed by the problems in front of us, but as business people we need to focus not only on staying alive but the next opportunity and what it will take to realize it.
Over the last 15 to 20 years we have been sustaining our economy on sales of consumer goods often manufactured in cheaper overseas markets, which enhanced the bottom line of the corporations whose stocks we eagerly bought. The rising value of real estate and stocks created a sense of economic euphoria which resulted in lower savings (in 2005 we actually spent more than we saved) and a willingness to take on the highest levels of debt in our history.
We borrowed on our houses, rewarded ourselves with new cars, second homes, professional landscaping, vacations and comfortable lifestyles. There were warning signs: a shrinking middle class; median housing prices that were higher than median income earners could afford; run-amok real estate development; declining savings rates; stocks and investments that were valued using short-term historical assumptions; low interest rates and rosy projected values; massive trade balance deficits; colossal government borrowing; costly foreign adventures and a general economic euphoria about our invincibility as an economic power.
The reckoning came in the form of a financial tsunami that wiped out our supposedly invincible investment banks and shattered our and the world’s major credit markets. The grim reality was a nation which owed 17.5 percent of its outstanding debt to China, which was drowning in personal debt and facing an uncertain economic reality. Using the power of hindsight, we can see it was more of a slow-motion train wreck than a bolt of lightning.
What does the future hold?
We are a nation premised on growth and the idea that tomorrow holds new and better opportunities for those who can discover and take advantage of them. While new opportunities are and will be ever-present, the idea that they will be the same exact opportunities as in the past is not probable. To the extent we are able to provide the basic necessities and perpetuate demand and economic growth based on consumerism, we will have an economy, but as can be seen with the growth of Europe and the United States, the profitability of selling things to each other is not as great unless you have low cost places to make or source them from. One could argue that much of the growth of Western profits over the last 20 years was based on using India and China as our manufacturing sources.
Given we are a mature market, once we get back on track, assuming we do not want to repeat our past mistakes, we need to find areas we can continue to grow, and that means finding new markets where our technological and process advantages give us the ability to sell goods and services. To reduce the balance of trade, build wealth and provide employment at home, we need to have competitive advantages in areas which are crucial to the next economy. Time has sailed on the notion that we can compete head-to-head on per-hour labor rates with emerging and developing nations. The ideological social/economic/political purity of post World War II has been shattered.
So what is left?
Ironically, we have many opportunities to sell goods and services in those areas where we have developed expertise as our economy matured. Efficient, clean manufacturing is what the emerging world needs and what we can supply. For China and India, it is not an issue of choice, but necessity. The last 30 years have seen impressive economic gains but the cost has been an ecological disaster. The developed world is right to take a look at its own efficiency and ecological issues, but we need to sell these solutions to those abroad who are willing to pay for them. It is time for the United States, in particular, to find ways of selling the machinery and processes we developed to solve our own problems. The economic stimulus packages which are being put into place around the world have specified “green” solutions, and we have them, but we need to start selling before the market is taken by our competitors in Europe. Will this be the next economy? It is hard to say, but it certainly presents one of the best methods of increasing productivity in a sustainable way and making profits doing it.
