American privilege rots an empire from within

Article by Andy Xie.


BEIJING ( Caixin Online ) — A rising empire rewards people who contribute to its growth and invest in its future. The empire’s decline begins when certain members of society are over-rewarded by means of privileges, and the empire’s money is wasted on outdated endeavors.

Today, America rewards the wrong people and spends disproportionately on projects of the past. Symptoms of the flawed incentive system in the U.S. economy include a massive fiscal budget deficit, high unemployment rate, crumbling infrastructure and a failing basic education system.

International competition isn’t threatening the United States, but internal problems are. And unless the United States tackles its wrong-way incentive system and spending spree soon, its gradual decline will continue until it eventually joins the likes of Latin America.

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A serious effort to correct the U.S. course started in earnest a few months ago during a congressional fight over raising the national debt ceiling. Democrats and Republicans eventually agreed to mandate $1.2 trillion in budget cuts over 10 years through a “super” committee, which was assigned to work out details.

If the super committee failed to reach an agreement, the cuts would be proportionally slapped on future civilian and defense expenditures, with health care and social security programs exempted. Guess what happened? The committee failed to reach a compromise, and thus the consequences will be felt after mandated cuts begin in 2013.

Next year’s election may change the political landscape: One party may again dominate Congress and the White House, leading to a different outcome. Hence, the super committee’s failure isn’t consequential on its own, but it does provide ammunition for election campaigns, and offers another example of America’s dysfunctional political system.

Further, the cuts, even if successful, would not bring the U.S. government budget under control. The total amount on the chopping block is equal to less than one year’s deficit. That’s not very ambitious for a 10-year program.

Against this backdrop, the United States is experiencing a full-blown economic crisis. The nation’s real unemployment rate, which includes idled workers who’ve given up looking for jobs, is 18%. One-tenth of the nation’s properties have been foreclosed since 2007, and another tenth have negative equity. The poverty rate is more than 15%, and another 20% of the population is struggling on incomes near the poverty line. Looming over these grim statistics is the federal government’s budget deficit, which is equal to about 10% of the nation’s GDP.

Obama Calls on Republicans to Extend Tax Cuts

In his weekly address U.S. President Barack Obama is calling on Republicans to quote “stop the games” and extend the payroll tax cut. Video courtesy of Reuters.

The breakdown began with the 2008 global financial crisis, which was like a dam break. Problems had been accumulating for years, and a debt bubble had merely temporarily covered up problems. Now, the U.S. government borrows roughly 40 cents for each dollar spent.

Alan Greenspan, a former U.S. Federal Reserve chairman, was mainly responsible for creating the bubble. The fiscal balance was later wrecked by rising health care costs, social security payments and defense spending along with veteran’s benefits. Spending on these three items alone increased a combined 107% between 2000 and 2010, while nominal GDP rose only 45%, to $2.6 trillion — substantially more than total fiscal revenues. If spending on these three items had grown at the same pace as nominal GDP, the fiscal deficit would be less than half of what it is today.

How bad is it? Excessive health care spending tells part of the story, eclipsing the U.S. trade deficit in seriousness. Some 17% of the nation’s GDP is spent on health care — twice as much as in other developed economies — with about half paid by federal and local governments, and the other half covered by businesses and individuals. Unless these costs are brought under control, America will never resolve its fiscal crunch.

Ironically, excessive health care spending hasn’t produced a healthier population. The United States actually fares worse than other developed countries in areas such as life expectancy, diabetes and cardiovascular disease.

Unlike Europe and Japan, the United States has a growing population. So it could count on growth to solve problems. Its agriculture and mining industries are booming. And it has many competitive companies in industries in areas such as aerospace and pharmaceuticals. But it’s weighed down by excessive overhead costs such as health care, social security and defense.

The Occupy Wall Street movement drew attention to what organizers said was a huge gap between the 99% of the nation’s citizens whose lives are out of synch with the 1% wealthiest Americans.

The top 1% control about one-fifth of the nation’s income and two-fifths of the wealth. The top 10% take in about half of all income and have accumulated 80% of the wealth. Meanwhile, about 80% of Americans merely get by and have very little wealth available as a cushion for when personal finances turn down.

The gap between the rich and the rest, which has roughly doubled over the past two decades in the United States, is an inevitable result of competition. Of course, competition motivates people, and inequality is often a price worth paying if it motivates people to make the pie bigger. All could be better off with a bigger pie, even if inequality worsened. Limiting competition improves equality but decreases incentives for people to work. A society needs to make a trade-off between the two.

Inequality worsens in an environment of limited competition, as inefficiency and social friction rise. Examples of this phenomenon include the Philippines, where few families rule through monopolistic practices. The country has become poorer relative to others over the past two decades, while inefficiencies are supported by Filipinos who work abroad and send money home.

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