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Looking Back To Move Forward: Resuscitating The Ailing U.s. Economy

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Numerous books have been written in the aftermath of the 2007 great recession that examined its causes and suggested possible remedies, but none has captured the essence of what went wrong and why America was so oblivious to the changing world than the Thomas Friedman and Michael Mandelbaum book entitled That Used to Be Us. Although frustrated with our dwindling political and economic power, the authors assure us repeatedly throughout this book that they are optimistic and believe there is a light at the end of the tunnel. However, reaching the end may not be smooth sailing. The United States has experienced economic turmoil before, but it has been able to come out triumphantly and recuperate even from the worst downfalls. This economic downturn is not an exception as long as we have a correct understanding of its root causes and are willing to consciously make the tough decisions that will certainly entail sacrifices. The authors believe five factors have contributed to the current abysmal economic conditions in the United States. First, our leaders ignored the fact that the world they were used to was, and still is, structurally changing. Second, the U.S. has not paid serious attention to some of our fundamental problems such as lagging public education, the national debt and deficit, energy and climate change. Third, we stopped investing in the formula that has guaranteed our success for many decades.   Fourth, we have failed to uphold our core values and confront, or even acknowledge, our weaknesses. And finally, our political system has been polarized to the point of unproductive stalemate.

According to Friedman and Mandelbaum, we seem to have become too obsessed with the world we invented and the "pride of authorship has bred complacency" for our country (p. 29). We are now confronted with new realities that require sacrifice, something we are reluctant to experience. For example, the increasing monetary as well as social costs of using conventional energy will eventually persuade us to switch to renewable sources, and the sacrifice of doing so is imminent and may be costly. We had created much wealth throughout 1980--1999, much greater wealth than any other period in our history. The five-part American formula for this success was: public education, especially in math and science; accommodating infrastructures; an open-door immigration policy; support for life-enhancing research and development; and a modern regulatory system.

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The New Flat World

Freidman and Mandelbaum analyze in detail how, under the new world paradigm, the way business firms do business is changing, how values become universal, and how demand for democracy is spreading. People, even those living under tyrannical regimes, are demanding democracy and restoration of their citizenship rights. The new flat world, "flat world 2" as they call it, is hyper-connected, creating new opportunities as well as challenges for business firms and governments. The authors seem to suggest that the benefits of a hyper-connected world are not automatic and evenly spread, what kind of progress this hyper-connected world brings to a nation depends on institutional settings that either facilitate or impede the use of modern resources. They include the extent of socioeconomic freedom, regulation systems, tax policies, respect for private properties and contracts, and protecting human rights and dignity, In the meantime, widespread progressive technology and automation have changed the nature and the availability of jobs. The merger of globalization with information technology has influenced the various segments of the job market differently. How we benefit from this alliance of globalization and IT depends on the types of jobs we have or will create. We have no option but to revamp our education system and bringing it up to par with nations currently at the top of the echelon and train our workers to empower them to assume the challenges of this hyper-connected world. The authors offer three mindsets that will help us accomplish this. First and foremost, we all need to think like new immigrants who have no one to rely on except themselves and so must earn their way up in the complicated world inch by inch, often under adversarial conditions. Immigrants understand that the secret to their success is only one thing, education. They take nothing for granted. Second, we need to think as "artisans" who succeed by creating distinctiveness and creating products worthy of putting their initials on them with pride and confidence. Personal touch and a constant striving for perfection are the secrets to their prosperity. And finally, we need to give something extra to our customers so they appreciate us and keep returning. The authors tell the story about a waitress who received from them a fifty percent increase in her tip just because she gave them "extra fruit" with their order.

What we need to become is the "creative creators" in the hyper-connected world which requires critical thinking, collaboration, and good communication, what the authors call the three Cs of success.

National Debt and Deficit

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When President George W. Bush came into office, our national debt was $5.6 trillion; it then surged to a whopping $14 trillion at the end of his presidency, almost 100% of our GDP. We disregarded the law of mathematics when it came to dealing with debt and deficit, the authors maintain. Politicians fooled themselves, and many of us, into believing that cutting taxes on the rich and increasing government spending have no effect on debt! Republicans thought that "raising spending means that one and one makes two. But in the case of lowering taxes without lowering spending, one and one makes one, there is no effect on the deficit" (p. 156). Unless our government plays a more active role in dealing with our debt and deficit and global warming, we leave ourselves at the mercy of the two "merciless, unemotional, and unrelenting forces of the planet: the market and Mother Nature" (p. 158).

There is not, of course, any objective answer to the question of what the optimal level of debt and deficit is, and when the U.S. debt limit is reached. However, we can have an intuitive understanding about how much debt is too much. The authors carefully examine the reasons why we fell into the trap of chronic debt and deficit and how we can get out of it. They argue: "Although we have passed the point at which we could correct our fiscal errors in a pain-free manner, the sooner we adopt the third option [the combination of cutting spending and increasing taxes], the less economic pain we have to suffer" (p. 169).

The authors blame both Republicans and Democrats for the run-away debt and deficit. Republicans, understandably, should assume the lion's share of the blame for giving tax breaks to the rich and fooling us into believing that the rich are "job creators" and investors in productive projects, and thus, the benefits of such tax cuts will trickle down to the rest of us. Likewise, Democrats are culpable as well.   They are guilty of refusing to cut government spending, and especially, they "fell into the habit of granting pay and pension increases to public employee unions--police, firemen, teachers, and civic servants--which were based on wildly optimistic assumption about future tax revenues and future market returns for pension funds" (p. 169). Unless both parties come to their senses and accept the simple rule of mathematics that one plus one cannot be zero or one, we will not see any sustainable relief.

Friedman and Mandelbaum believe that successful efforts to alleviate the debt and deficit should following guidelines. First, oratories will not solve our debt and deficit problems; we need to get serious. Second, we need to generate sustainable sources of economic growth--jobs and incomes--to alleviate the deficit gradually. Third, we need across the board cuts in government spending, both discretionary and non-discretionary spending. Government should not, however, try to save money by cutting spending on programs that are essential to long-term economic prosperity. "To destroy them to save money would be akin to trying to lose weight by cutting off two of your figures" (p. 177).

Polarized Political System

Both political parties need to set aside their ideological battle and seek a common ground. They both have some right ideas: Democrats' prescription of higher taxes for the wealthy and advocating investment in the country's infrastructures, and Republicans' emphasis on the private sector and minimizing the regulatory burden on business firms. "But both parties are [however] wrong to assure Americans that taxes will never rise, as Republicans do, and benefits promised will never be cut, as Democrats do" (p. 332). We should assemble a system that combines the good ideas of the two parties. Voters' dissatisfaction, as indicated by recent polls, is compelling evidence that strife between Republicans and Democrats has created backlash and loss of faith in the two-party system. There is a historical juncture now for a third-party presidential candidate who may gain support of many voters in the next election. Third-party candidates will undoubtedly bring to the public purview many important issues that may otherwise remain dormant. "A vote for a third-party presidential candidate can be an effective way to change the direction of American National policy--and that is the strategy we are advocating" (p. 335). The authors present the historical examples of the candidacies of H. Ross Perot and George Wallace which left a lasting influence on the American political system and brought a new perspective into public focus. Continuing with the current political system, they say, is a sure trajectory to our demise.  

Equally, they accuse politicians of ignoring the law of physics by playing down the effects of climate change. The authors argue: "America will not thrive in the twenty-first century without a different energy policy, one better adapted than the policy we have now to the realities of the flatter world in which we live" (p. 188). Even if we are not 100% sure about the effects of climate change, it is exactly this uncertainty that should prompt us to act and formulate a sensible energy policy. We should do this for the same reason we purchase car insurance to protect us against the costly consequences of an accident even though we are not certain an accident will ever occur. "Even if global warming did not exist at all, the fact that the planet in on track to move from 6.8 billion people today to 9.2 billion by 2050, and more and more of these people will indeed live in American-size homes, drive American-size cars, and eat American-size Big Macs, will mean that global energy demand for oil, coal, and gas will surge" (p. 196). This should give us a sense of urgency to think about a national energy plan. As well, we need to raise the bar and set high standards for the buildings we build, automobiles we manufacture, and power plants we construct. Without such standards, there is no accountability, improvement, and no well-regimented business conducts.

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A Decade Lost

Friedman and Mandelbaum believe that the first decades of 21st century formed the historical turn in which we got economically surpassed simply because we were immersed in our conceited attitude. Since the Bush administration "devoted more attention, political capital, and resources than were warranted to the threat of terrorism, serious though it was and is, while pursuing the worthy but not vital goals of nation building in Afghanistan and Iraq, we recklessly pumped up our annual deficit and cumulated national debt to new and dangerous heights, and pumped out more and more greenhouse gases, heedless of potentially serious consequences" (p. 354). The authors compare the reckless policies of the Bush administration during his terms in office to baseball players injecting steroids just to improve their performance superficially. They write that "our government injected steroid into the economy in the form of cheap credit so Wall Street could do more gambling and Main Street could do more home buying and unskilled workers could do more home-building" (p, 217). Less attention was paid to the plight of industries that would create real value; they did not grow or grew scantly. After the effects of financial steroids dissipated and the economic tide subsided, we found out that many of these financial institutions that created a false sense of value for a massive number of investors were, in fact, "swinging naked".  

The authors compare the first decade of the twenty-first century to the "Terrible Twos" scenario in a child's life, "the development stage beginning sometime after the child turns two, when the child becomes cranky, moody, and willful about almost everything" (p. 218). Although our economy was contaminated by reckless behavior in both the public and private sectors during this decade, politicians looked the other way and assured us that everything was okay. Because of preoccupation with other things, "We failed to upgrade our five-part formula for greatness--education, infrastructures, immigration, research and development, and appropriate regulation--just at the time when changes in the world, especially expansion of globalization and the IT revolution, made adapting that formula to new circumstances as important as it had ever been" (p. 218).

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Reza Varjavand (Ph.D., University of Oklahoma) is associate professor of economics and finance at the Graham School of management, Saint Xavier University, of Chicago. He has been an avid participant in many professional organizations and active in (more...)
 

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