Our Real Economic Problem: The Decapitalization of Wealth

 As many economic pundits will tell you today, our current economic crisis was a long time in the making.  Some point to over-consumption, others to the accumulation of debt, and still others point at a broken regulatory system, government spending, and political gridlock.  However, the fundamental issue is none of these things, although each is a symptom of, or a by-product of, the real issue: the decapitalization of wealth.

            The value of capital is the utility that can be realized from it.  Economists generally define utility as the measure of ‘need satisfaction’ realized by a consumer in the consumption of a good or service.  Extending this concept to capital, the utility of capital is the measure of economic goods and services created through its deployment.  Wealth deployed as capital that produces economic goods and services creates healthy economies with low debt, low inflation, and low unemployment.  Unfortunately, much of the wealth created over the last twenty-five years or so has flowed to low capital utility venues.  This process has accelerated over the last decade. 

            So what are these low capital utility venues?  Wealth deployed for war making is a classic example.  Anyone who has taken an introductory course in economics can probably remember the guns vs. butter analysis.  Money invested in death and destruction is obviously not a creator of economic goods, and the US has spent more than $2 trillion in this manner since 2003.[1]  Financial bailouts also have low utility.  As we have seen, we may have stabilized the financial system with the massive bailout of too-big-to-fail banks, but we have not created economic goods in the process, and the bailout funds are now trapped in the balance sheets of banks; idle dollars producing little to no utility.  Our tax system, which is at least partly to blame for the inordinate concentration of wealth in the top 1% of our citizens, is also responsible for decapitalization.  Wealth concentrated among the few means that capital has flowed to idle reserves – in low risk, low velocity trust funds.  Dusty money is not happy money.  Speculation and financial ‘engineering’ is also responsible for decapitalization.  Currency manipulation, which amounts to more than $3 trillion in transactions per day worldwide, does not produce economic goods.  Nor do the billions of dollars invested in credit default swaps that produce no more capital utility than dollars dropped into slot machines on the Vegas Strip.  Another classic example is government spending and investment.  When the Pentagon spends $6,000 on a coffee pot or the White House blows $500 million on Solyndra, it is clear that government bureaucrats make lousy purchase and investment decisions, regardless of party affiliation.  Debt service payments and sovereign debt bailout funds are other examples.  By now you get the idea: most of the places our money ends up today are venues of decapitalization.  That must change.

            In a recent article by the Washington Bureau Chief of The New York Times, David Leonhardt, argued that our current crisis might actually prove to be worse than the Great Depression due to one central difference: during the Depression, invention, production, and investment in public infrastructure continued at high levels.  Leonhardt suggests, “The most worrisome aspect about our current slump is that it combines obvious short-term problems – from the financial crisis – with less obvious long-term problems.  Those long-term problems include a decade-long slowdown in new-business formation, the stagnation of educational gains and rapid growth of industries with mixed blessings, including finance and health care.”[2]  “Mixed blessings” here means finance and health care are relatively low capital utility investments.  When we see job growth in these private, and almost any public sector categories, we must refrain from patting ourselves on the back.  They produce little more than single-round economic effects.

            Correcting this problem is not easy, but it is doable.  As you can see from the above list, one may even argue that decapitalization accelerates in an insidious manner, spawning more and larger venues of low utility.  We need look no further than our own economic history to see that many of these venues, except war making, are relatively new developments in our economic system.  Fiscal policy and, to a lesser extent and effect, monetary policy should both be oriented to direct wealth away from these venues.  Financial system regulations and tax policy can also be changed to affect this.  Education, research and development, small business development, and yes, liberal trade and immigration policies can also help stem the tide of decapitalization. 

            Creating wealth requires a relentless focus on capital utility.  When capital works, it produces economic goods; when idled or addled, it leads to dire economic effects.  Decapitalization is the overarching problem.  Until we recognize this we have little hope of pulling our economy out of the ditch.

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[1] This excludes the $600 to $700 billion the US spends annually as a baseline expenditure for national defense.

[2] David Leonhardt, “The Depression: If Only Things Were That Good,” October 8, 2011,The New York Times, www.nytimes.com.

Re-imagining America

In my last post, “The Best in Us,” I argued that a breach of character – specifically the loss of honesty and humility – was at the center of our political, economic, and social problems in America.  Bringing honesty and humility back to our discourse and decision-making is indeed elemental to the recovery of America.  The lunatic fringe who stand on ideological and religious fantasies, and who spew invective that is void of any credible or durable ideal must be marginalized.  Obama has tried, although addled by his own Socratic disposition and by the virulent and racist attacks against him, whereas a guy like Governor Chris Christie might have a better chance.  Christie doesn’t appear to cotton to stupidity, and he seems to have the honesty thing down. His disposition and, lets face it, his ethnicity, may be more appropriate for the crisis we face.  The last part, as repugnant as it is, is a sorrowful reality.  That said, once we heal our character – in our leaders and ourselves – we must also move forward to re-imagining America.  This requires a holistic makeover of American identity.

            Now, before you go running around with your hair on fire accusing me of being an unpatriotic _________, let me be clear: the basics do not need to change.  Independence, self-reliance, and innovation remain core values in a re-imagined America.  But other myths, dispositions, preferences, and behaviors, which have found their way into our identity since the end of the Cold War twenty years ago, must change.  Unfortunately, the end of the Cold War made us dumb, and 9/11 made us dumber.  It is time to get things back on track.  The “end of history,” which was hubristically claimed by Francis Fukuyama in 1992, was actually the beginning of our self-inflicted decline, which hit warp speed after 9/11.  The post-evil-Soviet-empire era did not result in a prophesized thousand years of peace and prosperity; when coupled with digital technologies it simply created new ways to compete, mostly asymmetrically.  Meanwhile, we Americans gorged ourselves on nothing-down ponzi schemes instead of doubling-down our investment in the things that made us great, most notably all things related to intelligence.  Here are four things we need to re-think.

1. The Power Trap.  The United States won the hard power game based on brawn.  Meanwhile, the rest of the world came up with new pathways to power that are soft, generally based in intelligence.  China has focused on education and economics.  Russia has focused on resource power, principally oil.  Brazil has focused on agriculture, energy, and demographic power.  India is growing a well-educated middle class faster than any state in the world.  Germany kept their debt low and invested in industry and trade.  Ireland welcomed immigrants and entrepreneurs.  But, the United States kept playing the old game: bigger weapons systems and odious domestic security schemes financed with debt and founded in fear.  We are trapped in Cold War power narratives.  Americans need to wake up to the new world and start thinking brains over brawn.
2. The Wealth Myth.  Since the Peace at Westphalia in 1648 that gave rise to the state-centric international system, wealth has been the denominator of power.  The more land, resources, people, and money a state had determined its power in the world.  Wealth is still important, but as argued above, intelligence (which is not always closely correlated with wealth) is now more important.  However, there is another dimension to the wealth myth that needs to be considered anew.  Wealth does not always mean we are better off.  Affluence can actually weaken civil society.  We need look no further than the last twenty years of American history.  Even before the current recession began, depression was up, test scores and graduation rates were down, poverty and homelessness was rising, and the number one threat to our health was not some incurable disease, it had become self-indulgent obesity.  All this occurred as the United States hit the pinnacle of its wealth and power in 2000.  If we are going to succeed in facing the current crisis, we need to shift our focus away from wealth to well-being. We need to practice self-restraint and summon compassion.  We must prefer austerity to audacity.  We need to focus on those things that make us strong and content.  Dignity, respect, resilience, and, moreover our core values of independence, self -reliance, and innovation do not come from wealth, they come from strong bodies, agile minds, and whole hearts.  They come from well-being. 
3. Our Growth Obsession.  The orthodoxy of growth – that more is better – may be fatally flawed.  We are reaching resource limits and facing environmental impacts that suggest we better get on the less-is-more bandwagon.  As Herman Daly, a former member of the World Bank recently argued, “In an empty world, growth is good.  But that is not the world we inhabit.  We live in a world that is full of us and our stuff, a world that is finite in terms of the economic activity it can sustain.”[1]  All of our current financial models call for growth.  It has become the wicked requirement of affluence and the only relatively painless way out of overwhelming financial deficits.  However, what if we rejected that orthodoxy and, with a steady eye on well-being, conceived plans that aimed at contraction?  What if we designed our lives and attendant expectations around less, not more?  I will further suggest contraction, not growth, is the more reasonable way to survive the current crisis and to transcend the many maladies of affluence realized over the last twenty years.  It may seem antithetical, even heretical, when considered through the lens of our current American identity, but it just may be exactly what our future identity requires.
4. The Piety Preference.  May we please retire piety from the political sphere?  Until the 1970s religion was in the private and public sphere – at home and in church.  It crept toward the political sphere during the 1950s as a point of differentiation with “godless communism,” then lurched further forward during the civil rights movement and anti-war demonstrations on the left in the 1960s, only to be met by even more fiery rectitude from the far right after Roe v. Wade in 1973.  Since then, faith-based rectitude has produced more division – and violence – than at any time in US history.  When I hear politicians and despots summon their faith I cannot help but wonder what Jesus, or Moses, or Mohammed, or Buddha, would say to them.  In America, where most politicians claim Christianity, I seldom witness even the slightest correlation between what politicians say and how they behave with the teachings of Jesus Christ.  The fiber of diversity is what made America great, not the twisted interpretation of scripture for the projection of political power.  To those who are elected to lead, please respect our differences by leaving your piety at home.  We are a nation of laws, not prophecy.

It is time to think differently to save our future.  As argued before, we must heal our character, but we must also re-imagine America.  Old orthodoxies that served us well twenty, fifty, or one hundred years ago will not work today.  They may even work against us.  Our core values remain: independence, self-reliance, and innovation.  But, the paradigms we employ – how we think about the world and our role in it– must be reconsidered.  Things will likely get even worse before they get better, but the sooner we start the conversation about re-imagining America, the sooner we will all be better off.

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[1] Interview of Herman Daly by Martin Eirman, September 5, 2011, “We need a Crisis, and a Change of Values,” http://theeuropean-magazine.com/356-daly/357-the-end-of-growth.