The 2015 Economic State of the Union: Get Ready For The Next Debt Crisis

My basement is full of 30-plus-year-old reports with titles like “America at the Crossroads!” “America’s Two Minute Warning!” “America’s Competitive Crisis!” These reports and hundreds more were written at the national, state and city levels by America’s top business, labor and academic leaders in the 1980s. Their dire warnings of exactly the reality America now faces received tremendous attention but, in the end, were ignored.

Post-World War II prosperity and strong growth gave way to U.S. and global economic weakness to the point that Bretton Woods’ core link of the U.S. dollar to a fixed gold price collapsed in 1971 yielding a far weaker dollar. Troubles mounted with soaring OPEC oil prices in 1973 and 1978. How could the U.S. sustain its uniquely high, broad and rising middle-class living standard in a rapidly modernizing world of cheap labor and land with globally and instantly mobile technology and capital? What could prevent global factor price equalization from destroying the American middle class, its economy and security?

A 1985 U.S. Senate report spelled out the clear challenge: “Being competitive for a nation in today’s world means being able to earn – not borrow – a rising standard of living for its citizens. It means maintaining the productive ability to assure sustained economic growth and security in the future.”

It was clear that U.S. companies faced the choice to rapidly “automate, emigrate or evaporate.” But there was a political divide. Many thought that all levels of government (so successful during World War II and in addressing the Soviet “Sputnik” and other challenges) had vital roles to mobilize a new, more productive, competitive policy path. Others, who seemed largely ideological or self-interested, even as they surrounded themselves with American flags, insisted that government was the problem and merely needed to get out of the way with lower taxes and less domestic and trade regulation.

Ironically, it was President Reagan’s high-profile Commission on Industrial Competitiveness that first brought to prominence the threatening “new realities” of global competition and the urgent need for forceful, new government “competitiveness policies” in foreign trade, science, education, venture capital, infrastructure and much more. It was vital to nurture a future of “computer chips, not potato chips.” Democrats were generally enthusiastic but Republican suspicion of government quickly hardened into adamant opposition and even deeper, blind faith in tax cuts, deregulation and “free” markets – “voodoo economics” to Reagan’s vice-president and later President George H.W. Bush.

With tax cuts, deregulation and little more than a few, politically cynical (and temporary) voluntary trade restraints, the new, oil-based trade deficits of the 1970s were quickly joined by a reversal of long-established U.S. manufacturing trade surpluses. Unending, sustained manufacturing trade deficits began in 1983 and first exceeded $100 billion per year in 1986. Sustained deficits in the full U.S. current accounts deficits began in 1982 and first exceeded $100 billion per year in 1985.

There was some hope in 1992 with the election of Bill Clinton as president that the country might get serious about the fierce global competitive challenge. Tragically, the policy dominance of Goldman Sachs’ co-chairman Robert Rubin and his narrowly self-interested Wall Street entourage quickly converted what was a partisan divide into a triangulated and then increasingly bipartisan Wall Street-dependent political money chase.

Virtually every congressional Republican and the Clinton administration assured that giving unprecedented investor guarantees but otherwise deregulating U.S. trade with Mexico would assure the then U.S. trade surplus with Mexico would permanently expand – thereby creating thousands of high-wage U.S. jobs – while also ending illegal immigration, assuring stability in Mexico and helping the U.S. reduce its trade deficits globally.

To those involved, all these assurances seemed absurd even at the time. (I provided Ross Perot with much of his trade analysis and most of his trade charts, a fact that, when learned in 1993, made me a permanent outcast from the previously solicitous Clinton team.) As for trade, the U.S. surplus with Mexico vanished in NAFTA’s first year with ever-greater U.S. trade losses thereafter, and the promised never-ending surpluses now total to $1.1 trillion in accumulated losses to Mexico under NAFTA. The U.S. now imports more vehicles from Mexico than all U.S. vehicle exports to the world.

Chronic trade losses that first appeared and soared at the start of the Reagan administration have now truly exploded, with full current account losses since 1982 totaling $9.9 trillion. Globally, just since 2000, the U.S. auto/vehicle/parts industry’s trade losses alone now total $1.9 trillion including record losses of about $165 billion just in 2014. Since 2002, the U.S. has suffered large annual trade losses even in our most advanced technology products; the annual ATP trade deficit with China in 2014 was over $100 billion for the first time.

With a wide range of very aggressive trade and industrial policies, China’s economy has tripled since 2000 and, measured by purchasing power, overtook the U.S. economy in 2014 to become the largest in the world. Even in its current slowdown, China is growing more than three times the U.S. rate so, if the current pace continues, China will be vastly larger and more powerful than the U.S. economy in each coming year.

In my speech to President Clinton at his pre-inaugural “Little Rock Economic Summit” in December 1992, I pointed out that over the 12 years of the Reagan-Bush presidencies, federal and household debt had soared by half-again as much as the total growth in GDP – “we borrowed it all!” The naively anti-government “free” market Reagan Revolution was an utter failure. Not only did it replace making goods and services with falling wages and a dependence on massive borrowing for imported goods and domestic services, but it sold the pernicious lie that there is no common U.S. public interest, only powerful private interests promising low, low wages and prices to downwardly spiraling suckers.

What I could not even have imagined then is that every four-year period from 1985 until today has seen federal and household debt soar by more than the total nominal growth in GDP. Indeed, since 2000, debt has grown 2.6 times as fast as GDP growth. ($255 of debt for $100 of GDP under Bush and $270/$100 under Obama.)

Combined federal and household debt from the beginning of the republic – including world wars, a civil war, severe depressions… – through 1980 was $2.26 trillion, 79.0 percent of GDP; it is now $31.19 trillion, 177.7 percent of GDP. This debt is now only slightly off its 2013 all-time high of 179.6 percent of GDP but far above its level of 160.8 percent of GDP in September 2008 when Wall Street’s financial system collapsed and was bailed-out. Today’s debt level is far above its peak level of 137.9 percent of GDP at the end of World War II.

After more than 30 years of relentless hollowing-out of the productive U.S. economy, what can be said of the few thousand most extremely rich, their politicians, media celebrities and gravy-train pundits who claim to be mystified about falling living standards and rising insecurity among almost everyone in the U.S. not working directly or indirectly for Wall Street’s crony capitalists? They have now privatized the original definition of the national competitive challenge so that it is merely “how can the globally networked few assure their freedom to pursue their wildest fantasies while keeping a strict lid on the wages and disgust of everyone else?”

With any real discussion of a productive U.S. trade and competitiveness policy off the table, endless posturing over soaring and clearly unsustainable debt seems silly. There is no alternative.

Especially with the rise of the global security state and a Supreme Court that measures democracy by the dollar, the only real questions now seem to be: is it possible to reason with the all-powerful crony capitalists and, if not, how best to prepare for when the unsustainable stops again?

Dr. Charles W. McMillion is the recently retired president and chief economist for MBG Information Services, a past contributing editor of the Harvard Business Review and associate director of the Johns Hopkins University Policy Institute. He was a founder and policy director of the bipartisan Congressional Competitiveness Caucus. This article originally appeared in Manufacturing and Technology News.

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