A Plan to Reestablish the U.S. Economy’s Global Lead

In the United States today, a great debate is raging as to whether the country is becoming "too socialist." The Republican Party, having increased the national debt by 70% ($2.4 trillion) during the eight years of President George W. Bush's Administration, has concluded since losing office that government is getting too big.

The Democrats are finding it difficult to respond, having inherited an economic crisis that only massive government spending can prevent from turning into a new Great Depression. Politically entertaining though this debate may be, it is hindering the nation's ability to formulate a strategy for overcoming the structural crisis that confronts it.

In the year 2010, it's too late now to discuss the kind of economic system the United States will have. The fact is, the United States has had a "managed economy" since 1942. By itself, that is regrettable. What makes it truly tragic is that the United States’ managed economy has been very poorly managed.

To find a policy that works, it is first necessary to make an honest assessment of the economy's failings.

The harsh truth about the U.S. economy is that it is not viable as it is currently structured. It is in crisis because the country consumes much more than it produces. Worse, there are no known tools in the existing policy tool kit that can correct that situation without provoking a depression.

The country has lost much of its manufacturing base — and continues to deindustrialize because its wage rates are up to 40 times higher than those of low-wage countries.

Over several decades, the service sector, underwritten by rapid credit expansion, swelled to become the dominant part of the U.S. economy, only to collapse when the private-sector debt burden became unbearable.

The U.S. government has intervened with a multi-trillion-dollar "rescue package" to prevent the collapse in aggregate demand from the private sector from plunging the economy into a new Great Depression. However, the government's response is not sustainable.

Moreover, it has not targeted the causes of the crisis, much less resolved them. In fact, there is every reason to expect that globalization will continue to deindustrialize the United States of America — making it even less able to produce as much as it consumes in the years ahead.

Policymakers must devise a permanent solution to this predicament before the government's ability to support the economy through deficit spending is depleted. To be effective, the solution must bring the country's trade back into balance, bring the government budget back into balance — and wean the country off its dependence on credit growth as the driver of economic progress.

In other words, the solution must entail restructuring the U.S. economy to make it self-sustaining. This must be accomplished in a manner that does not provoke a global depression.

How can this be done?

Trillion-dollar annual deficits for the next decade may keep the United States from collapsing into a severe depression, just as very large annual budget deficits have kept Japan out of depression.

But they would do nothing to restore the economy's long-term viability. In 2020, the U.S. economy would still be dependent on debt. More trillion-dollar budget deficits would be needed to support it in the years that followed.

Plus, the U.S. trade deficit would still be massive, and the process of deindustrialization would be much closer to completion. The country would continue to consume much more than it produced as long as other countries continued to accept its IOUs.

But with each year that passed, structurally the U.S. economy would be increasingly rotten at its core. Eventually, it would all end very badly in one of any number of "you get what you deserve" scenarios.

There is a much more attractive alternative future, in which the United States remains the world's dominant superpower with a revitalized, self-sustaining economy. That alternative requires a national industrial restructuring program, in which the U.S. government would invest in 21st century technologies with the goal of establishing an unassailable American lead in the industries of the future.

That goal could be achieved at the cost of $3 trillion over ten years. It would leave the United States government $20 trillion in debt in 2019, rather than $17 trillion, as appears likely otherwise.

But it would make the country a technological superpower, with a quarter-century lead over its closest competitor. It would also yield technological marvels that would enrich every person on the planet.

Editor’s Note: This feature is adapted from CORRUPTION OF CAPITALISM by Richard Duncan, published by CLSA Books. Copyright 2010 Richard Duncan. Reprinted with permission of the author.