The rise of the United States as the major world economic power in the last half of the 20th century coincided with the rise of the American middle class. That rise started with the 1944 GI Bill, which provided returning American veterans with money for college, businesses and home mortgages.
Millions of veterans were able to afford homes of their own for the first time. Moreover, these veterans started families, setting off the post-war Baby Boom. After the homes came the cars, the barbecues, and televisions. This demand created a huge domestic economic boom, creating jobs and prosperity which would last until the end of the 20th century. In turn, a prosperous middle class created a huge tax base which enabled the United States to finance its expansive military commitments around the world.
It is therefore no exaggeration that the American middle class enabled the United States to become the greatest global power since the days of the Roman Empire.
As we head into the second decade of the 21st century, the American middle class is vanishing before our eyes. The major reason for this is due to declining incomes for the average American worker due to off shoring of manufacturing and service jobs to China and India respectively. An analysis of this phenomenon is described in my blog post This is Not A Recession, This is the New Normal.
Concurrent with this phenomenon is that the richest Americans are getting richer. This group of individuals effectively own and control the businesses that are engaging in off shoring, which reduces the cost of doing business and increases profit for the owners. In essence, wealth that was previously shared with American workers through their employment has shifted to the owners of capital by laying off these workers and replacing them with much cheaper overseas labour.
So as fewer and fewer Americans control more and more of America’s wealth, the United States is rapidly becoming a de facto banana republic. That is, America is becoming a country with a lot of poor people and just a few rich people who control the vast majority of its wealth. This phenomenon was explicitly explained in a series of secret memos issued by Citigroup to its investors in 2005 and 2006. The 16 October 2005 memo is called Plutonomy: Buying Luxury, Explaining Global Imbalances. The 5 March 2006 memo is called Revisiting Plutonomy: The Rich Getting Richer.
This does not bode well for America’s status as a global power. Without a large affluent middle class, there is no tax base and consequently no source of tax revenue. With the collapse of its financial system in September 2008 and subsequent bailout of its banks and auto industry, America’s budget deficit has become huge, and the problem will only exacerbate with a shrinking tax base due to the hollowing out of its middle class.
Consequently, the United States may no longer be able to afford to continue financing its military commitments around the world. This does not bode well for geopolitical stability, unless one likes the idea of China, Russia and Iran ruling the world in their respective geographic spheres of influence.
So how can American leadership solve this conundrum? Here are a few suggestions…
Promote Foreign Investment into the United States
Due to the recession, land prices have fallen significantly, as have average wages due to the high unemployment rate (which nationally stands at just under 10 percent). Moreover, the United States Federal Reserve has initiated a second round of quantitative easing which essentially means it will print $600 billion dollars to purchase U.S. Treasury bonds. This will have the effect of decreasing the value of the U.S. dollar.
All of the above have made America a cheaper place to do business. American leaders should therefore actively encourage foreign investment into areas hardest hit by off shoring, such as the rural American south. States and municipalities can offer tax incentives to invest locally conditional upon the creation of local employment.
An excellent example of this can be found in the Fortune magazine article: “American Made, Chinese Owned”, which can be found here.
Overhaul the Immigration System
Under the current American immigration system, there are basically three ways in which someone can immigrate to the United States: (1) immigration through a family member; (2) immigration through employment; and (3) immigration through investment.
The problem with this system is that it doesn’t encourage the best and the brightest to immigrate and stay in America. A ubiquitous example is how the current system treats foreign students from China and India: smart, motivated students come from around the globe to be educated in the world’s best higher-education system. After they’re trained, these graduates often don’t stay because of the difficulty of obtaining a green card. If, for example, an Indian graduate has no family, job or money to invest, he cannot get a green card. He’ll be required to leave the U.S. and take his knowledge back to India, where he will invent, inspire, build and pay taxes. Every year, America sends tens of thousands of the smartest Indians and Chinese back home, which is a great investment — in the future of those countries.
An overhaul of the U.S. immigration system is needed to encourage educated people to immigrate and stay in the United States. An ideal model for this would be to assess immigration eligibility by something similar to the Canadian points system, where eligibility criteria are based on six factors: (1) Education; (2) English language ability; (3) Work Experience; (4) Age; (5) Arranged Employment; and (6) Adaptability.
Under such a system, it would be easier for bright and motivated immigrants to gain permanent residency status and build businesses and consequently create jobs in America. Also, personal ties to countries of origin may prove to be immeasurably beneficial in getting access to foreign markets for U.S. made products and services.
Investing in People: Training & Education
The United States needs better education at every level, especially job retraining. So far, most retraining efforts in the U.S. have not worked very well. But they have worked in countries that have been able to retain a manufacturing base, like Germany and parts of Northern Europe. There, some of the most successful programs are apprenticeships — which cover only 0.3% of the total U.S. workforce.
Good jobs for the future would be to significantly expand apprenticeship programs so industry can find the workers it needs. This would require a major initiative, with cooperation between government, the education system and American industry: the government funds, the education system teaches and industry hires. Such a program would have to be on the scale of the GI Bill.
© Copyright Victor Fong, 2010