The future of the United States

The Outstanding U.S. Public Debt as of 15 July 2008. The National Debt has continued to increase an average of $1.72 billion per day, since 28 September 2007.

(This article is not necessarily the opinion of the Blog Administrator.)

14 July 2008

By Doron Tsur

In recent years, I have often written critical opinions about processes and economic events happening in the United States, and in its society, too. Indeed, the facts cannot be denied. Whether the issue at stake is accounting scandals that shook the markets such as stock option pricing, or energy policies such as the mass production of ethanol as a biofuel, my tone has often been critical.

There are two reasons for that. The first is that many of these events have been worthy of criticism - a lot of the developments we are seeing now result from seeds sown in the past. The second has to do with your faithful author's problematic personality: faced with unthinking anthems and blind admiration, I feel the urge to ruin the party with a hefty dose of skepticism.

Last week, for example, I wrote about the terrible decade the American economy has undergone, and described how Americans face problems and crises that 10 years ago were the province of other countries. Today I shall break my habit of criticizing past or present events and try to guess what the next 10 years have in store for the biggest economy in the world.

When we look back at the year 2018, will we be able to say that the years were good ones despite the troubles, or are we in for another decade of travail?

Let me preface this by saying that based on my humble prophetic abilities, I think the state of the U.S. economy will be a lot better in 10 years than it is today. That doesn't mean a thing about the next year or two, though. In the short run, I think things will get worse before they get better. But the short-term pain is a necessary stepping-stone to curing the U.S. economy.

Nor does this analysis say a thing about the capital market in the next year or two. The capital market may behave very differently from the economy at large, based on expectations and mass psychology. Even if I'm right about the bigger picture, don't leap to conclusions about the timing of getting into the market.

When a new man comes into the White House

The point of origin for the upswing, which I believe will come sooner or later, is the growing acknowledgment that the U.S. economy has been walking down the wrong path for years. Anybody reading the American business press or listening to the spokesmen in Washington must have noticed the solid wall of denial repressing the problems. Take the soothing statements by Alan Greenspan, former chairman of the Fed, about the flexibility and resilience of the U.S. economy.

That tune was also sung by the various secretaries of the treasury, by the president in the White House, by strategists on Wall Street, and business leaders, too. Few dared buck the consensus that everything was just fine.

Here and there, noted economists such as Joseph Stiglitz or Paul Krugman did sound a critical note. Even Paul Volcker, Greenspan's predecessor, waxed severe here or there. But they were in the minority.

Steven Roach, for instance, the Morgan Stanley strategist who coldly and realistically analyzed the ills of America's economy for years, was publicly excoriated once a year at the World Economic Conference in Davos. Roach today can celebrate the fact that he was right, but it's a tad late.

The same group of opinion-shapers and policy makers have begun in recent months to change their tune. They understand that the road to recovery will be a hard one. We call it soul-searching.

Now we're hearing them wonder, "Where did we go wrong?" or, "What happened to the American dream?" Americans have started to ask how to make it right, and no longer expect things to just work out by themselves. That's good news. Change does not happen before the need for it is accepted.

Next January a new president will enter the White House, and he'll be the one who has to institute the changes. It doesn't matter if it's the Democrat, Barack Obama, making change willingly, or John McCain making change reluctantly: change will come.

How to cure the U.S.

The U.S. can overcome its troubles. Here are some of the changes that could start its long process of recovery.

1 Reducing the defense budget. The U.S. cannot continue to police the world. The burden is too heavy. It will leave Iraq and slash its defense budget. The tendency to invest in the next generation of jet fighters or the latest submarines while maintaining vast troops overseas is in conflict with the economic situation at home. It won't happen overnight because there are projects in the pipeline, but it has happened before, in the U.S. and elsewhere, and will happen this time too.

2 Reduce the budget deficit and the inequality in income distribution. The growing gap between rich and poor in the U.S. carries a social cost, and an economic one too. The eroding middle class is the driver of the economy. After years of mounting inequality, in the years to come it will diminish. How? By the same basic method as elsewhere in the world: increasing the tax burden on the rich.

The budget deficit also has to drop, by cutting budgets and imposing new taxes.

The present president's legacy of reducing taxes for the rich will disappear. That will happen even if McCain, who vows to cut tax, will be elected. It happened to George Bush Sr., who was forced to recant his famous statement - "Read my lips: no new taxes."

Over time, each Explorer reduced to waste metal can be used to make two Ford Focuses. Processes like that will depress the price of oil, of raw materials and America's trade deficit, too. Those are three very welcome outcomes. Americans will have to learn to make do with less, and will discover that it pays.

The above are, in a nutshell, points that can improve the American economy. Improvement is based on taking advantage of America's strong points: innovation, entrepreneurial spirit, hard work, and high scientific and technological abilities, not to mention America's wealth of natural resources, organizational ability, physical infrastructure created during the decades of wealth, and the legal and governing systems - all of which will still be there in 10 years' time.

True, right now the state of America's economy looks bad, even very bad. The U.S. has many obstacles to overcome, economic and political too, as well as ideological and psychological, before true recovery can begin. Yet I think there's a good chance that in the summer of 2018, we can look back and say, this is where change for the better began.

The author is chief executive of Compass Investments.