A New "American System"

Over the past couple decades, "globalization" in the United States has meant the rise of the Finance, Insurance, and Real Estate (FIRE) sector.  Meanwhile, many other parts of the American economy have been hollowed out.  Manufacturing jobs have been slashed in part due to automation but also due to a global trade system in which various international players are afforded many opportunities to subsidize their industries while the US undermines its own domestic manufacturing sector.  The technology sector has witnessed its own share of outsourcing and offshoring, and job opportunities for US-born workers are also undercut by many companies' use of temporary worker visas (such as the H1B visa).  Further undercutting domestic labor, a flood of illegal workers has placed more pressure on the wages and employment opportunities of low- and semi-skilled workers.  Under these conditions, the US growth rate has substantially declined since 2000; even the high point of the business cycle during the Bush years was well below that of any cycle since World War II, and the economic policies of the Obama administration have proven disappointing by the administration's own standards.  So where to go from here?

In 1791, facing a debt-burdened new nation with relatively little domestic industry, Alexander Hamilton prepared his "Report on Manufactures," which proposed a system of tariffs, subsidies, and domestic investments as a way of ensuring future economic vitality and industrial independence for the United States.  The first Secretary of the Treasury's report provided in many respects the originating germ for the economic policies of the Whig and later Republican parties of the nineteenth century.  Politicians like Henry Clay and Abraham Lincoln and economists like Henry Carey advocated for an "American System" that encouraged the development of a skilled population with economic opportunity and industrial development.  Some variant of the "American System" drove US economic policy throughout much of the nineteenth century until the middle of the twentieth.  During this period, the United States accumulated massive wealth.  This wealth in turn provided the financing for many of the social programs of the twentieth century.

The "American System" has the following insight: the American economy cannot flourish over the long term with merely the financial and resource extraction sectors.  Resource extraction can fuel economic growth, and a sophisticated financial system also seems necessary for a modern economy to work at peak levels.  But the best gasoline and top-notch engine oil will not make a rusty jalopy into a vehicle fit for the Indy 500.  Hamilton and many of his allies were favorable to banking interests but also realized that an economy based solely upon banking would eventually harm those very financial interests.

We might restate this insight and instead note that the greatest form of capital is not simple currency or resources but human capital.  This human capital includes both various social institutions (such as a system of laws, cultural values, etc.) and the accumulated knowledge and talents of individuals.  It depends upon the belief that one's efforts will likely lead to some fruition.

American prosperity was built upon the nurturing of human capital within the "American System."  The evolving system of US laws encouraged prosperity by allowing innovators and producers to reap the rewards of success.  The social safety net of private charity and government institutions helped ensure that a person born into unlucky circumstances could still enrich his or her talents.  Universal education and literacy presented the young with the tools to train their minds and discover the world of learning.  Investment in infrastructure---from roads to canals to railways to highways---allowed for a more efficient transfer of capital, commodities, products, and knowledge.  Tariffs gave an incentive for American residents to try new manufacturing experiments.  The close proximity of manufacturing helped spur on new innovations: working with day-to-day production, Americans were more likely to realize how to do things better, smarter, and faster.  Moreover, the growing cost of labor encouraged further innovation in technology.

It is precisely now that we need a return to the investment in human capital.  As Andy Grove, former head of Intel, has argued in recent years, top innovation often goes hand in hand with direct involvement in production.  Whether the United States can over the long term remain a world leader in innovation after having exported industrial production remains to be seen.  We need to defend forthrightly American interests abroad.  It may no longer be enough to let foreign countries discriminate against American products and violate intellectual property laws even as the US opens itself completely to their products.  (And encomiums about the virtues of "free trade" miss the point that the current trade order is nothing like free trade or the free market.)  Trade policy must move beyond cheap imports uber alles.

We need an education system centered on skills and real learning---not on meaningless test scores.  We need to inspire hope in our youth, creating opportunity for both those with and without college degrees.  Throughout the 1980s and 1990s, many opportunities for workers with only a high school degree declined.  The 2000s have witnessed the closing off of opportunities for many with college degrees.  If young Americans will see no profit from developing certain skills, these skills are less likely to be cultivated.  As a recent Council on Foreign Relations study has shown, almost all the increase in the number of jobs from 1990 to 2008 occurred in non-tradable jobs, which often pay lower wages than tradable jobs.  So one could argue that, in some ways, the current flavor of globalization has made the US economy less competitive, as it encourages the growth of lower-paying, and often lower-skilled, jobs.

We need a sensible policy for infrastructure investment.  Energy policy is a key aspect of this investment.  The easy transfer of goods and people has proven especially valuable in a nation as vast as the United States, and the new ease of transporting information has unleashed the potential for considerable innovation.

I do not here intend to lay out a complete menu of policies that are necessary for the restoration of American economic growth.  Yet it is important to think about the overall contours of a public policy aim.  The precise policy mechanisms of the Hamiltonian "American System" might be outdated, but its basic notion is one with some merit.  We must shift from privileging extraction to rewarding talent, effort, and innovation.  The combination of market rewards and public investment created an economic order of profound vitality, opportunity, and prosperity.  As the American economic engine continues to sputter, it is time to engage in a thoroughgoing renewal---in part, by examining the wisdom of the past.

Pethokoukis: Break Up the Big Banks

James Pethokoukis makes a conservative case for breaking up megabanks:

But America doesn’t need 20 banks with combined assets equal to nearly 90 percent of the U.S. economy, or five mega-banks​—​JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs​—​with combined assets equal to almost 60 percent of national output, three times what they were in the 1990s. That amount of complexity and financial concentration​—​which has grown worse since the passage of Dodd-Frank​—​is a current and continuing threat to the health of the U.S. economy. Now don’t blame market failure or unintended results of deregulation. Banks that big and complex and interconnected are both the unsurprising outcome of Washington’s 30-year expansion of the federal safety net and the cause of its ongoing existence. When you combine a “too big to fail” guarantee from Uncle Sam with the natural human tendency toward irrational exuberance, you have the key elements in place for another unaffordable financial crisis....

So how do you (a) make the financial system more shockproof when the next economic earthquake hits, (b) reduce the likelihood of expensive taxpayer bailouts, and (c) ensure the banks themselves don’t cause the next crisis? Hoenig, for one, would only allow banks to engage in traditional activities that are well understood and are based on long-term customer relationships so borrowers and lenders are on the same page: commercial banking, underwriting securities, and asset management services. Banks would be barred from broker-dealer activities, making markets in derivatives or securities, trading securities or derivatives for their own accounts or for customers, and sponsoring hedge funds or private equity funds. The result would be banks that are smaller, simpler, safer. Not only would they be less likely to spark financial crisis because management would know government might let them fail, the cost of failure to taxpayers would be less.

Of course, some will argue that we need large, complex financial institutions and that their very existence is proof of that. Who are the know-it-all breaker-uppers to say we don’t? But that size and complexity is itself more a result of crony capitalism than of market forces. It’s little wonder, then, that the preponderance of the evidence is that all the supposed benefits from supersized banks and their economies of scale are outweighed by the risks of disaster they generate. Take this 2011 study from the University of Minnesota: “Our calculations indicate that the cost to the economy as a whole due to increased systemic risk is of an order of magnitude larger than the potential benefits due to any economies of scale when banks are allowed to be large. .  .  . This suggests that the link between TBTF banks and financial crises needs to be broken. One way to achieve that is to break the largest banks into much smaller pieces.”

Romney Ahead in Florida

A new Quinnipiac poll of registered Florida voters, which had Romney tied with Obama at the beginning of May, now has Romney ahead by six points: 47-41.  Romney leads with independents 44-36.

This could be troubling news for the president's reelection plans.  Florida is a very incumbent-friendly state.  No president since Calvin Coolidge has won reelection without winning Florida, too.

Deductions v. Credits

Ramesh Ponnuru warns Mitt Romney's campaign to offer a tax credit for buying health-care rather than a tax deduction:

In 2007, George W. Bush’s administration proposed to start treating individually purchased and employer-provided coverage the same. People who got insurance either way would get a “standard deduction” of $15,000 off their taxable income -- and they would get the same deduction whether they bought cheap or expensive insurance, restoring the incentive to economize. Romney is considering reviving Bush’s idea...

Like today’s tax break for employer coverage, the standard deduction would be most valuable to people in the highest tax brackets. The uninsured typically aren’t in those brackets. As a result, Bush’s proposal would have done little to increase rates of insurance coverage. At the high end of estimates, 9 million additional people would have gotten coverage. (About 50 million Americans lack insurance.)
That’s why other Republican health proposals have offered a tax credit instead of a deduction. A credit is worth the same amount of money in all tax brackets. When Senator John McCain ran for president, he proposed a $5,000 tax-credit plan for families. Representative Paul Ryan and Senator Tom Coburn have also introduced tax-credit plans. Compared with a deduction, a credit would increase the number of people with insurance much more for the same amount of money.

New Opportunity

Yuval Levin has a new piece worth a read in the Weekly Standard.  Levin hits a point I've been hammering for a while:

There are many ways to describe what appears to be worrying these voters, but if we were to sum up the danger in one word it would be stagnation. After decades of galloping growth, America now faces the prospect of a harsh and sustained deceleration, and therefore of falling behind in the world economy.
In the 60 years following World War II, the American economy grew at an average rate of 3.4 percent per year—a truly astounding persistent pace of expansion. This growth brought with it sustained improvements in income and standards of living—improvements that we have come to regard not as miraculous advances but as the normal course of American life. Our sense of the nation’s overall standard of living takes such growth for granted, so that a period of significantly slower growth feels like a real step down.
We have been living through such a period lately. Annual economic growth averaged 3.5 percent between 1960 and 1999, but only 1.7 percent between 2000 and 2009. In the Obama years, we have averaged 0.6 percent growth. 

I don't agree with all of Levin's diagnosis, and I'm not sure about some of his policy recommendations (for example, it's not clear to me how getting rid of "our 19th-century system of school districts and local boards of education" is really going to lead to renewed economic growth).  But he does raise some interesting points.

China Rising?

Some interesting thoughts by Reihan Salam in the National Review:

Last year, the economists Barry Eichengreen, Donghyun Park, and Kwanho Shin published a fascinating survey of growth slowdowns. They found that fast-growing emerging economies tend to see a downshift in average annual growth rates around the time they reach a GDP per capita of $17,000, which China is expected to reach by 2015, and when 23 percent of the work force is in the manufacturing sector, a level China should reach around the same time. Other factors that are correlated with growth slowdowns are higher ratios of retirees to those of working age (a ratio that in China is expected to go from 11.6 percent in 2010 to 38.8 percent in 2050 — higher than the 37 percent the U.S. is expected to reach that same year), undervalued currencies (check), and volatile inflation rates (another problem looming on the horizon). Though Eichengreen, Park, and Shin are careful to note that there is nothing inevitable about growth slowdowns, experience strongly suggests that China is due for one in the very near future. Given that the Chinese Communist Party depends on high growth rates for its legitimacy, this is a profound challenge.
Even in the unlikely event that China does the right thing — if it addresses capital misallocation by placing more of the economy in private hands, if it allows Chinese households to retain more of the wealth they create — the country will still struggle with the bad debts it has accumulated over the last 20 years. Pettis anticipates that China will grow at an average annual rate of 3.5 percent, yet he argues that if China does not address the systematic misallocation of capital, growth could come to a halt. The real threat from China is not that it will grow so economically strong that it will bestride the world like a colossus. Rather, it is that it will become so weak and vulnerable as to collapse, or to lash out at its neighbors.

Rasmussen: Romney leads Obama by 7 points (50-43).  This is Romney's strongest showing in Rasmussen.

Not All Sunny in Wisconsin

Some are celebrating the announcement on behalf of Wisconsin Governor Scott Walker, who is facing Democrat Tom Barrett in a recall election, that Wisconsin will post a budget surplus over the next two years of $154 million:

Gov. Scott Walker's administration released improved budget projections Thursday that would leave the state with a $154.5 million surplus a year from now.
Coming less than four weeks before Walker's June 5 recall election, the projections take the state from a previously estimated $143 million budget deficit in its main account through June 2013 to the surplus.
A large chunk of the surplus is realized by delaying payments that will ultimately cost taxpayers more in interest.
The budget numbers released Thursday do not account for a sizable shortfall in the state's health programs for the poor that Walker's administration says it will deal with through increased efficiencies and spending cuts.

 Compared to the deficits faced earlier, that number seems an improvement, despite all the caveats (of loan restructuring and the health-program shortfall).

However, if one looks at the details of Walker's budget projections, one might notice something troubling for FY2013.  Here are the relevant numbers:

Opening balance (in thousands): $229,718
Tax and other revenue (in thousands): $14,280,843
Expenditures (in thousands): $14,356,088

As these numbers show, Walker's team is projecting that Wisconsin will run a budget deficit in FY2013 of about $75 million; any surplus at the end of FY2013 would come from carrying over the surplus from the end of FY2012.  Indeed, this report shows the general fund surplus shrinking considerably from FY2012 to FY2013.

I'm not sure what the methodology is for the FY2013 budget projection; it may overestimate or underestimate revenue.

It would be far from the worst result for a state to toggle between budget deficits and surpluses every other year but always ends up in the black after a two-year cycle.

But one hopes that FY2013 is not a projection of further deficits to come for Wisconsin.  While the state doesn't have the worst unemployment rate (at 6.8%, it's below the national average), job growth was sluggish in 2011: Wisconsin added only 13,500 private-sector jobs that year, its 0.6% private-sector growth rate the 44th in the nation.  And the state lost a few thousand private-sector jobs in March, hinting perhaps at further economic vulnerability.

Review: David Frum's Patriots

David Frum's new political satire, Patriots, is an entertaining and at times dispiriting read.  Taking a look at partisanship and ideology in the current millennium, Patriots draws from Frum's experiences in the Beltway.

Briefly, Patriots is set in an alternate Washington.  9/11 never happened, but the US has been involved in a decade-long military conflict in Mexico.  It is also suffering through a long-term depression/recession.  Rather than Republicans and Democrats, we have Constitutionalists and Nationalists, respectively.  A moderate Constitutionalist, General George Pulaski has recently beaten Nationalist President Monroe Williams, the nation's first African-American president.  Washington is divided, angry, and feverish with partisan intensity (sound familiar?).  Pulaski comes forward with a series of sweeping reforms to help tackle runaway deficit-spending and restore the economy.  However, he plans to do so by appealing to moderates and Nationalists, and he thus enrages the right wing of his own party.  Enter the protagonist, Walter Schotzke, the spoiled heir of a mustard fortune who is sent to work in the office of the last moderate Constitutionalist senator from New England.  Hijinks ensue.

A lot of public attention has focused on the "Where's Waldo" aspect of Patriots, as readers and critics attempt to connect certain aspects of Frum's fictional universe to our real one.  Does Fox News really run like Patriot News?  Wait---is that Rush Limbaugh?  No, Mark Levin?  I think I've seen that---yes, Grover Norquist! I'd like to leave that sight-seeing concern to the side for the moment.  As Patriots is in part meant to be a satire, I doubt its main task is to offer 100%-accurate portraits of Washingtonians.  (It perhaps ought to be said that some of the personality sketches are very harsh indeed.)

Instead, its purpose is to reveal by its comic distortions.  Frum might have some scores to settle in this book, but it seems to me that fundamentally Patriots is not a Washington revenge fantasy.  It instead casts light on some of the grimmest tendencies of contemporary American politics.  Patriots, however, is not a plea for "extremists" to reach across their rigid ideological lines and work together in a spirit of moderate compromise.  The kumbaya imperative is a standard trope in political novels, but Frum's point is more sophisticated that that.  The Washington of Patriots is peopled not by individuals of radically pure principle who never compromise their ideals.  Instead, it is filled with careerist operators who use the language of purist principle as a marketing tactic.  Much of the political intrigue of the book is in part motivated by the fact that one Constitutionalist activist does not get the job he was aiming for in the new Pulaski administration, which causes his ideological allies to rally together to break the new president.  Once this activist does receive his chosen job, however, the ideological dogs are called off.  Overnight, the organs of Constitutionalist thought, which had been attacking Pulaski as a matter of principle, suddenly switch to his defense.  Once Pulaski kisses the ring of the right interest-group power structure, all principled objections disappear.  The sincerity of an ideologue might be refreshing in the Washington of Patriots.

Walter Schotzke provides an apt narrator for this dysfunctional capital.  Cynical, soft, and inconstant, Walter comes to DC without any fixed political principles or commitment to Constitutionalist thought, so many of the mantras of the think tanks and political operatives he comes across seem bewilderingly foreign.  An official at a top right-wing think tank, for example, poses the following question to Walter: "And do you think that if your family were allowed to keep more of their own money, you might start new businesses and create new jobs?"  Unused to the movement line on "wealth creators," Walter thinks to himself that any extra money he got from a tax cut would not go to investing in a new business but instead to extending his foreign vacation.

Walter seems a sympathetic character, if not an entirely admirable one.  On the downside: he seems more interested in Xbox, fine wines, and self-indulgence than anything else, at least at the beginning of the novel.  On the upside: unlike much of the rest of the Washington elite, he is not self-righteous about his privilege and shows at least a trace of real concern about the economic pain inflicted upon average Americans by failed Washington policies.  Even as the country has grown poorer in Patriots, Washington has flourished (one of the more striking parallels with today).  And rather than focusing on helping the country or standing for high principles, many of Patriots's Washington insiders focus on beating their opponents of the moment and enriching themselves, all the while wrapping themselves in the language of absolute rectitude.  One of the more troubling moments in the novel occurs when an uber-lobbyist pats himself on the back for being a moral crusader by enriching himself through influence peddling even as he actively works to impoverish his fellow American citizens.

Without giving too much away, I'll note that Walter finds himself a bit by the end of Patriots and seems to have exchanged the wastrel life of a playboy for responsibility, duty, and some kind of civil engagement.  Though this is a personal victory for Walter, I can't help shaking the feeling that there's something more broadly depressing at the end of the novel.

By the end of Patriots, the United States of Frum's fictional universe seems to have settled for decline.  Years of a dysfunctional economy has not woken Washington up to reality but instead has solidified some of its worst tendencies.  A watered-down economic package is eventually passed, and it helps the economy recover---but never to full health.  As Walter notes, "Most folks would not see again the kind of prosperity they had enjoyed in years gone by."  Some individuals might be richer---spectacularly richer---but America as a whole is a poorer place.

In some respects, the ending of this novel reminded me of the ending of the individual seasons for the HBO series The Wire: each season ends showing the advancement (or decline) of various characters even as the dysfunctional drug culture of Baltimore goes on, unabated.  So it is with Patriots.  There are individual winners and losers in its Washington power games, but it is the culture of Washington that is the ultimate winner and, perhaps, the American public that is the ultimate loser.  Patriots shows a world where an elite has gained power through manipulating and exacerbating tendencies that make government impossible or at least unstable.

Perhaps that pessimism is misplaced; I hope it is.  Perhaps there's something utopian about that despair in the first place.  Washington, or any other nation's capital, has never been a font of total virtue and prudence.  Even the Founders eventually dissolved into petty sniping.  But I hope it is not too utopian to yearn for a politics slightly better than that of Patriots---a politics where careerist blinders do not override personal sympathy, where principle does not degenerate into propaganda, where personal ambition can be tempered at least a little bit by public virtue.

David Frum's Patriots is not a simple indictment of Republicans or the conservative "movement" or the Tea Party or any other faction of the moment; as Frum has said, he could just have easily written a book focusing on left-wing rather than right-wing politics.  It is a sketch of a political dynamic gone terribly, horribly wrong, of the threat posed by an elite unchecked by any sense of humility or public spiritedness, and of the risk that the great experiment of this American republic might trade the pursuit of happiness for the pursuit of political spoils.

I don't want to believe that Patriots's Washington is a perfect mirror image of our own; the lens of fiction has distorted the contours of reality.  I don't want to believe it's a prophecy, either.  But it does seem a warning.  It is perhaps a sign of the extent of our troubles when even seemingly absurd satire could be so easily confused with reality.

(Full disclosure: A contributor to the now-defunct FrumForum, I have worked with Frum before and maintain some level of personal association with him.)

Mourdock's No Christine O'Donnell

A few electoral thoughts on the victory of Richard Mourdock over Dick Lugar in the Indiana US Senate primary tonight.  Some people are comparing Mourdock's victory to those of Sharron Angle and Christine O'Donnell in the 2010 primaries.  This comparison seems to me at least to be a mistake.  Mourdock is a very credible candidate.

Mourdock actually has a track record of winning.  He has now won two statewide elections for state treasurer (in 2006 and 2010), the second by a blowout margin.  The voters are open to Mourdock, and he's shown an ability to win them over.   Angle and O'Donnell had never won a general statewide election before their troubled Senate runs.

Likewise, Mourdock does not start from a huge deficit in polling.  The latest poll (taken in early April) for the Indiana general election finds him tied with Democrat Joe Donnelly at 35% each.  But Donnelly faces other hurdles: a majority of Indiana residents disapprove of Obama's job performance, and 81% disapproved of the job Congress is doing (Donnelly currently serves in the House).

It's true that this race would have been a cakewalk for Republicans with Lugar as the nominee, but, with considerable resources and strong support by Lugar himself in the general, Mourdock has a very good chance in November.

Not Forgetting Manufacturing

On a campaign swing through Ohio, Mitt Romney asserts the importance of manufacturing:

"Manufacturing is big part of Ohio, and of course, its history," Romney said. "I happen to believe that going forward over the coming decade, you're going to see a lot of manufacturing come back to America.
"If we finally crack down on China for cheating, if we also take advantage of the extraordinary energy resources we have here, and therefore low-cost energy, we'll be able to compete with people around the world," Romney said. "I think you're going to find Ohio, and particularly states that are right to work states, bringing a lot of manufacturing jobs back."

These comments seem to indicate Romney's openness to the idea that the current globalist regime might not really be "free trade" after all.  It will be interesting to see how hard he will hit Obama on this issue (especially regarding China policy) in the months ahead.

Social Security and Economic Growth

I have a new piece up at The American Thinker exploring how the right can argue that market-oriented growth would strengthen Social Security.  Here's the intro:

The April release of the 2012 Social Security Trustees Report has occasioned considerable media coverage.  Much of this coverage has emphasized the report's finding that the date for Social Security's bankruptcy has been pushed to around 2033 (the 2011 report suggested that bankruptcy would instead occur in 2036).  Yet the implications of this report are not confined solely to the matter of public finances, and policy reforms for Social Security are not the only thing that could improve the outlook for this program.  Like many federal programs, Social Security is dependent upon the health of the broader U.S. economy; the poor economic performance of the past few years (if not the past decade) has taken a considerable toll on the program.  In thinking about managing Social Security, the right should not miss the influence of economic performance upon the sustainability of this federal program.

Read the whole thing here.

Mickey Kaus games out the cons and pros of a DREAM Act deal.

The latest twist in the Elizabeth Warren origins kerfuffle.

Bloomberg looks at the middle class losing ground under Obama.