Brazil Is the New America: How Brazil Offers Upward Mobility in a Collapsing World (26 page)

How quickly tomorrow has come and gone. It lasted for a generation or so after World War II, and while it did, American workers were far the most highly compensated people on earth.

In 1960, German, Belgian, French, and British workers all earned less than one-third of the typical American income. At that time, the typical income in Japan was just one-tenth that of Americans. Swedes were exceptional in having attained 45 percent of the average U.S. wage.

Then in 1971, Richard Nixon repudiated the gold reserve standard. The countdown to national bankruptcy began in earnest as ticking time bombs destined to explode the American Dream were laid and set. The robust income growth that Americans had previously enjoyed came to a screeching halt, while incomes abroad soared. By 1978, American workers took home 20 percent less than Swedish and Belgian workers. German and Dutch workers also earned a premium over the U.S. income. Japanese income soared from 10 percent of the U.S. level to 68 percent in less than two decades.

Of course, it is important to recognize that much of the downward shift in the relative wealth of Americans came from a sharp decline in the exchange rate of the dollar. As William Easterly observed, the unweighted cross-country world average of gross domestic product (GDP) growth in 131 countries slowed from about 5 percent in the third quarter of the twentieth century to about 3 percent in the 1970s and 1980s. The worldwide average public debt to GDP ratio also rose steeply in the 1970s and 1980s.
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In other words, Nixon's unilateral revision of the world monetary system, scrapping the link to gold, preceded a dramatic drop in world average GDP growth. It also led an even sharper decline in relative U.S. wealth as the exchange value of the dollar plunged.

As I write, 40 years later, the U.S. balance of trade has been in deficit ever since. And the dollar has lost more than 80 percent of its 1971 value. (Seen in terms of gold, the dollar's depreciation is even more dramatic. At the current price of gold as I write, $1,506, the dollar retains just a little over 2 percent of its 1971 value in gold.)

As we discussed in Chapter 6, no one noticed it at the time, but the shift away from gold in the monetary system to pure fiat money led to debt-driven consumption as the main driver of economic growth. Indeed, as I mentioned, when Nixon abolished fixed exchange rates by severing the dollar's link to gold in 1971, the United States was the world's largest creditor. No longer. The move to fiat money resulted in a wholesale substitution of debt for capital in the U.S. economy. This was driven by the decline in per capita global energy output that undermined a key component in the growth recipe of the U.S. economy. It was amplified by the hydraulic force of the largest, cumulative trade deficit the world had ever seen.

From 1971 through 2010, the current account accumulated trade deficits of the United States totaled $7.75 trillion. By accounting identity, when the United States runs a trade deficit, it necessarily borrows an equivalent sum from foreign creditors. Four decades of accelerating trade deficits have hollowed out the capitalist system in the United States, concentrating wealth among the creditworthy and eliminating real income growth among average Americans.

Real average hourly wages in the United States peaked at $20.30 per hour (in today's dollars) in January 1973, on the eve of the first oil shock. Over the next 22 years, the average real hourly wage plummeted to $16.39. The only reason U.S. households have achieved higher real earnings is the influx of women into the workforce, which led to two-earner households. Of course, these data are subject to varying interpretations. Some economists argue that the fall in real income may be exaggerated by deficiencies in the government's calculation of inflation. No doubt there are such deficiencies—but whether they all tend to exaggerate inflation is more problematic.

We could argue the minutia of real income comparisons. Yet a dramatic change in trend in the early 1970s is indisputable. For the tens of millions of middle-class Americans classified as “non-supervisory production workers” in government statistics, the post–January 1973 stagnation in real hourly income represents a dramatic departure from the experience of preceding years.

Look at it this way. From 1947 to January 1973, average hourly pretax earnings, adjusted for inflation using current methods, grew at an average annual “real” rate of about 2.2 percent. If real income had continued to grow at that robust rate, average purchasing power would have doubled to more than $40 an hour by 2006. Instead, it fell to less than $18.00, almost 12 percent lower than at its peak a working lifetime ago.

More often than not the parents of my generation who expected their children to have more prosperous lives than their own were disappointed. I was born into the Golden Age of the Middle Class. Then, in February 1973, it suddenly and permanently ended.

When Nixon acted to sever the dollar's link to gold, domestic oil production had just peaked, and the United States was the world's manufacturing powerhouse. Factory jobs provided high income for relatively unskilled and less educated people. But the transition away from a capitalist to a debtist economy accelerated change in everything. It changed the focus of economic activity in the United States as measured by GDP, from genuine wealth creation to debt-driven consumption.

Unlike a capitalist economy where profits are based upon actually producing goods that consumers wish to buy in an environment of rising incomes, a debtist economy enshrines cost-cutting consumption in the face of stagnant or falling incomes. Americans exploited the dollar's status as the world's reserve currency to bully and borrow trillions through the current account deficit to live beyond our means. As the world's foremost military power, Americans forced oil producers to price crude in dollars. As consumers of last resort, Americans borrowed the money to enjoy a higher standard of living than they could afford, and that destined them to be cost-sensitive. As the process unfolded over 40 years, it was only a matter of time until underemployed Americans lined up to buy Chinese goods at Wal-Mart.

For those Americans who lacked the skills to be appreciably more productive than Chinese peasants on an assembly line, the opening of low-wage economies implied the end of the middle-class lifestyle. Instead of a broad middle class where up to 90 million Americans were subsumed together as “non-supervisory production workers” whose prospects improved year in and year out, the prospects of the former middle-class diverged.

The less educated and less skilled segment who worked in the tradable goods sector sank toward poverty. As Harvard economics professor Edward L. Glaeser has shown, population growth in the least educated three-fifths of U.S. counties was less than 3 percent over the past decade. By contrast, in the one-fifth of U.S. counties where more than 21 percent of adults had college degrees in 2000, growth for the decade was over 13 percent.
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A minority of skilled entrepreneurs, along with the highly educated, a total of about 13.2 million persons, became highly successful—earning more than $100,000 per year.

Another strand of the population continued to enjoy a middle-class lifestyle, but one financed at the general expense. Among those whose skills were not internationally competitive, government employees were exceptional in enjoying growing incomes along with such perks as defined benefit pensions and full-spectrum health care coverage.

Unfortunately, as the Romans discovered in the waning days of their empire, it is impossible for government spending to take up the slack in the shriveling private economy on a long-term basis.

For one thing, the resources to fund intervention at the necessary magnitude are not readily available. The weaker the economy becomes, the more tax receipts fall away. Although it is not widely recognized, by 2011 real per capita tax receipts in the United States had fallen to 1994 levels. In other words, GDP growth over the past 17 years was financed from deficits and debt. In fact, net private GDP has barely budged over the past decade.

While some of the gains in consumption since 1994 were funded on credit cards and through cash-out financing of appreciated real estate equity, the greatest contributor to consumption came from soaring government spending. For the decade since 2001 government spending added a total of $25.94 trillion to GDP.
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Note another ominous aspect of the situation. Notwithstanding the invisibly low interest rates maintained by the Federal Reserve through the first decade of this century, the national debt compounded far faster than the growth of the net private economy upon which the hope of repayment lies.

GDP minus government spending grew from $9.314 9 trillion in 2001 to $9.721 5 trillion in 2010—a gain of just 0.043 percent over a decade.
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At that truly medieval rate of growth, it would take the net private economy 167 years to double.

That kind of growth rate predates the Industrial Revolution.

Prior to the Industrial Revolution, annual growth rates from 0 to 1 percent led to low incomes because they provided too little buffer against the inevitable negative shocks of war, famine, and pestilence. This appears to have been true in medieval England, where real farm wages, measured by half century, showed no improvement in the productivity of the economy from the years 1200 to 1249 to the years 1600 to 1649.
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While growth of the productive economy in the United States over the past decade was negligible, the national debt soared from $5.807 trillion in 2001 to $13.561 trillion in 2010
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—a gain of 133 percent.
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The burden of the national debt compounded more than 3,000 times faster than the productive economy grew.

Those who draw their bearings by looking at the gross GDP numbers to justify a vibrant economy have lost the plot. GDP attributable to government spending, especially deficit spending, is bogus. It is not real prosperity but debt-financed consumption with unpleasant implications for your future.

The U.S. government is doomed to bankruptcy. Indeed, it is already bankrupt. Never in the history of the world has any government owed as much money as the U.S. Treasury owes today.

As mentioned previously, Professor Laurence Kotlikoff of Boston University, an economist expert in government debt, has calculated that the true indebtedness of the U.S. Treasury is greater than the combined GDPs of all countries. Yes, it is true that the debts of the United States are denominated in U.S. dollars—a currency that the government can create at little or no cost. This only means that the dollar is destined to collapse. If your income and wealth are inexorably tied to dollars, you could be wiped out.

Kotlikoff suggests that the IMF has already endorsed a remedy–the doubling of taxes in the United States:

. . .you will find that the IMF has effectively pronounced the U.S. bankrupt. Section 6 of the July 2010 Selected Issues Paper says: “The U.S. fiscal gap associated with today's federal fiscal policy is huge for plausible discount rates.” It adds, “Closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 percent of U.S. GDP.”

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years. . . .

To put 14 percent of gross domestic product in perspective, current federal revenue totals 14.9 percent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act.
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The problem is that any attempt to double taxes would crush the economy. And, of course, it is clear that there is little appetite for spending cuts as drastic as would be required to even balance the budget on an accrual basis that, as Federal Reserve Bank of San Francisco President and CEO John C. Williams has calculated, is trillions of dollars out of whack on an accrual basis.

Forget about achieving an appreciable surplus that would retire some of the national debt. U.S. government debt will never be repaid except for whatever part of it may be extinguished by inflation. That will come directly out of your hide.

Face it: you are an extra caught in the remake of a bad movie.

There is an ominous precedent for the destiny of the United States in the fall of the Roman Empire. We are far poorer than we think. The irresponsible fiscal and monetary policies of the United States government are primed to make Americans poorer still.

Contrary to what many may naively suppose, more energetic efforts to tax the rich are likely to result in an even tighter squeeze on those of lower means.

Consider this from Bruce Bartlett's work titled “How Excessive Government Killed Ancient Rome.” Bartlett is a columnist for the
Economix
blog of the
New York Times
, the
Fiscal Times
, and
Tax Notes
:

As the private wealth of the Empire was gradually confiscated or taxed away, driven away or hidden, economic growth slowed to a virtual standstill. Moreover, once the wealthy were no longer able to pay the state's bills, the burden inexorably fell onto the lower classes, so that average people suffered as well from the deteriorating economic conditions. In Rostovtzeff's words, “The heavier the pressure of the state on the upper classes, the more intolerable became the condition of the lower classes.” (Rostovtzeff 1957: 430). . . .

Although the fall of Rome appears as a cataclysmic event in history, for the bulk of Roman citizens it had little impact on their way of life. As Henri Pirenne (1939: 33-62) has pointed out, once the invaders effectively had displaced the Roman government they settled into governing themselves. At this point, they no longer had any incentive to pillage, but rather sought to provide peace and stability in the areas they controlled. After all, the wealthier their subjects the greater their taxpaying capacity. . . .