In March 2009, I wrote “How Rich Countries Die”, a posting summarizing Mancur Olson’s The Rise and Decline of Nations. It looks as though Olson is being proved right. GM, Chrysler, and their present and retired employees tapped the taxpayers for $100 billion. Teenagers, on the other hand, are unemployed in record numbers (New York Times story today, reporting that 25 percent of teenagers who want a job can’t find one). Classical economics says that unemployment is impossible. If there are a lot of teenagers looking for work, the wage for a teenager will fall to a market-clearing level and every teenager who wants a job at the new (lower) wage will have one. Olson showed how entrenched workers can protect their above-market salaries at the expense of the young.
One disturbing fact from Olson’s book was a chart demonstrating the slow growth rate of U.S. per-capita GDP from 1950 through 1980. We underperformed France and Germany, for example. One wonders if this is because it took us so long to recover from the burden of paying back debt incurred during World War II, as well as the cost of the Vietnam War. Our government is currently borrowing, as a percentage of GDP, a comparable amount to what was borrowed to fight Germany and Japan. We’re spending, on Iraq and Afghanistan, a comparable percentage of GDP to what we spent on the Vietnam debacle. An economist might say that we can handle an extra $9 trillion in debt, but one has to wonder if it won’t come at the cost of economic stagnation from 2020 through 2050.
This book is a great summary of things we can all agree on, I think. Economics is a study of the psychology of money. The reason that economic theory does not work, beyond foundational theory, is that every known system, given time, can be gamed to the players maximum advantage once the player becomes accustomed to the rules. This is particularly true for Monetarism, which relied on relationships (like the Phillips Curve), and the assumptions that the curve would continue as is, with no understanding that the real world would make it’s practical decisions, which would shift the curve, and effectively move the goalposts.
Then we come to the death of empire.
It is a shame that Olson is not around today. He would have seen the rise of China, and been able to comment on it’s adoption of driving elements of capitalism, while remaining a totalitarian state.
America is a nation of True Believers. The most irrational believe the earth is only 6,000 years old, and they will not examine the facts that underpin their beliefs.
The belief in free-enterprise capitalism as a fundamental driving force, where many small businesses compete in a free market has been a fiction forever in industry. The nature of industry is aggregation and increasing control of fewer and larger players.
The huge explosions of wealth in the US have followed huge expenditures by Government on the development of new technology. For example, WW II, and the race to the moon, both caused huge growth in new industries. Yet most Americans denounce big Government spending on basic research to solve practical issues.
At the moment, the US is again losing impetus on new energy technologies to other countries who see this as a growth opportunity, and are prepared to fund research with Government money. The same thing is happening in robotics, and the study of intelligent machines. Say hello to China, and their new research and manufacturing model: build a factory right next to a big college, so that the technology can be seamlessly integrated into a manufacturing environment, and things that you want to be secret remain that way, and you have a really efficient model for clandestine weapons development.
The introduction of new, disruptive technologies has rigor mortis in the US. Coming out of this current depression will not happen, as people game the system for a larger slice of a smaller pie, and the existing large players prevent the adoption of new technologies that would threaten their welfare.
The ability to handle more debt depends on income. National income will fall, making the servicing of the national debt a larger item in an already overburdened budget. With a further $10,000 billion added to the weight over the next ten years, the dollar can be expected to plummet as well. Government spending on new technologies and bold new ventures will continue to shrink as the debt rises, under popular pressure to provide social assistance.
My personal opinion is that things are going to get worse before they get much worse. This is the sunset of the American empire on the world stage, and since the universal natural growth rate and shrinkage rate is exponential, once started, the rate of change will accelerate to it’s conclusion far more rapidly than our straight-line thinking would expect.
Your theory would hold water if the level of UAW members employed has remained steady. It has not, it has greatly declined over the past 20 years. I didn’t read the article but I would bet that somewhere in it, it says that inexperienced teenagers are being beat out of the job market by experienced workers who lost higher paying jobs, competing for those low paying jobs. Something quite different than what you are saying about entrenched workers protecting salaries
Olson’s theory holds true because although the UAW numbers have dwindled, they have captured probably more than their fair share relative to the rest of the population. In addition, they are influencing the health care “reform” process going on: the UAW contracts mandate a much nicer health care package than what my company provides me. Last time I checked, the UAW was voicing it’s concern about including health care benefits as taxable income.