Things are Looking Good but Can We Afford to be Complacent?

 

Everybody should read Tyler Cowen’s compelling new book, “The Complacent Class.”  As I have discussed in two recent posts, here and here, Mr. Cowen lays out the thesis that America has lost much of its dynamism in recent years because life has become so comfortable for so many people, especially the professional elites.


But now things are looking even better yet:

  • A global economic upturn is under way, especially in manufacturing.
  • The Federal Reserve is continuing to raise interest rates, confident that fundamental data on employment and inflation (see chart) is looking more and more positive.

  • Progress is being made on fixing the American healthcare system even if it’s not as good as it could be.
  • The Republican Congress and Trump Administration are united in their desire for corporate and business tax reform which will give the American economy a big boost when it gets done.

These trends auger well for the American economy in the immediate future. However there is one very dark cloud on the horizon:

  • Our national debt (the public part on which we pay interest) is now 77% of GDP, the highest since the end of WWII and is predicted by the Congressional Budget Office to keep steadily getting worse without fundamental changes in public policy. In fact, the debt limit, which had been suspended in November 2015, was reinstated by law on March 16. It will have to be raised in the next few months in order to avoid default by the federal government.
  • I fervently hope that the fiscal conservatives in Congress (such as the Republican Study Group and the Freedom Caucus) will insist on real fiscal restraint going forward as their price for voting to raise the debt limit.

Conclusion. We affluent Americans are so wrapped up in enjoying our good fortune that we lose track of a huge problem on the not so distant horizon. Our prosperity is being heavily financed with borrowed money and we will soon have to pay the piper, unless we are willing to bite the bullet.  Do we have the political will to do this?

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The Dangers of Complacency

 

My last post, “What Ails America? I. Complacency,” lays out the thesis of the economist Tyler Cowen that American society has become much too complacent, i.e. self-satisfied, in recent years.  In particular:

  • Fewer Americans are moving.
  • Segregation (by income, education, social class and race) is increasing.
  • Americans have stopped creating. New business creation is down and monopolies are getting stronger.
  • Matching (i.e. assortative mating) is on the upswing.
  • Calm and safety above all is the predominant attitude.

These societal trends are normal and even desirable in many respects. But they can lead to stagnation.  Eventually needed social change will boil over in uncontrollable ways and America will undergo a “Great Reset.”


This will likely involve major events such as:

  • A major fiscal and budgetary crisis. Currently our public debt (on which we pay interest) is 77% of GDP, the highest since just after WWII. It will keep rising steadily without a major change in public policy. When interest rates return to more normal higher levels, interest payments on our debt will be a huge drain, without letup, on our tax revenue.
  • The inability of government to adjust to the next global emergency which comes along. When the financial crisis came along in 2008, debt was at the much smaller level of 38% of GDP. This allowed for temporary fiscal stimulus and larger deficits to ride out the resulting recession. With our currently high debt level, we’ll have far less flexibility when the next recession comes along.
  • A rebellion of many less-skilled men. The median male wage (adjusted for inflation) was higher in 1969 than it is today. In fact, the take-home pay for typical American workers has been falling since the end of the Great Recession in June 2009. To a large extent this explains the rise of Donald Trump.
  • A resurgence of crime. A new crime wave will probably be internet related. There are now tens of millions of identity thefts, phishing attacks and successful but fraudulent pleas for cash every year. Internet crime is calmer than traditional crime and less visible. But the next crime wave could badly damage internet commerce.

 

Conclusion.  Mr. Cowen paints a depressing picture for the future of American society.  Of course, it is possible to turn some or all of these negative developments around.  But will a complacent American populace have the political will to do it?

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What Ails America? I. Complacency

 

The economist, Tyler Cowen, has just published a very interesting new book, “The Complacent Class,” which makes a strong case that American society has lost much of its dynamism in recent years largely because of our increasing fascination with the world of information.

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Here are some of the features of societal complacency:

  • Fewer Americans are moving. There is less rapid job turnover today and a lower rate of entry for new businesses. Large firms are replacing smaller firms and they have less employee turnover. Globalization exports some jobs from the U.S. but leaves the country with a more stable set of jobs overall. The lack of geographic mobility is holding back income mobility.
  • The Reemergence of segregation. In fact there is more segregation by income, by education, by social class and by race. The most heavily segregated cities are the high-tech, knowledge-based metros. This is because the rich and well-educated are keener to live together in tighter bunches and groups. In addition, nationwide the average black student attends a school which is only 8.3% white.
  • Americans have stopped creating. Startups were 13% of the firms in the country in the 1980s but only 7% today. It is harder for new firms to get up and running and successful firms stick around longer. Market concentration is growing in the U.S. There are only two major phone carriers, four major airlines, and major health insurance companies are likely to consolidate from five to three. Nearly 2/3 of publicly traded companies were selling in more concentrated markets in 2013 than in 1996.
  • Matching continues to spread. In the 1930s 1/3 of urban Americans married people who lived within five blocks. For couples who married between 2005 and 2012, 1/3 of them met online. In other words, “assortative mating” has become much more common. Family-connected decisions accounted for 1/3 of the rise in income inequality from 1960 to 2005. Internet matching also helps in job searches. Clearly, matching is disproportionately benefitting better-educated and more productive workers.
  • Calm and safety above all.  Physical disruptions, in the form of riots or protests, are harder to accomplish these days compared to the 1960s and 1970s.  Police departments are more sophisticated and use managerial science, information technology and surveillance to control potential troublemakers.  Antidepressants are now used by tens of millions of Americans.  The heavy use of electronic screens keeps kids calmer and more tranquil.  Our more “feminized” culture is allergic to many forms of conflict.

Conclusion. “Americans are working harder to postpone change or to avoid it altogether. This is true for corporate competition, changing residences or jobs, building things, and social relationships.”  This “complacency” has huge political ramifications.  Stay tuned!

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