This is the second in a multi-part series of posts that comprise Future 500 founder Bill Shireman's insightful essay, The Two Deficits, from the book Towards a New Agenda for America: Ideas To Bridge the Left and Right and Move the Nation Forward (Future 500, 2012). Read part one here.
America used to be exceptional, but it is becoming less so. This is both good and bad. It is good, because the principles that made America exceptional — freedom, justice, democracy — are becoming more widely embraced. Nearly a billion people now live in nations that have grown prosperous and powerful in large part by championing principles like these.
But America is also growing lax. We consider freedom and prosperity our birthrights. We have grown more comfortable spending our riches than growing them. For three generations, America has been spending down our wealth and power, transferring our assets to dictators in the Middle East and totalitarians in China, in trade for fossil fuels and cheap labor.
Nations have every right to trade their resources. But let’s face it — the nations of the Middle East are controlled by a handful of super-rich families who maintain their political power by paying off their people and supporting religious extremists, who use their wealth to foment fear and terror. This is not particularly healthy — for them or us. And China’s government remains totalitarian — its people, while they enjoy increasing economic freedom, can’t legally trade their own labor; that right is held by their government. When we grow dependent on these nations for both our labor and our resources, we discover the true cost of debt.
The finance sector now accounts for fully 32 percent of U.S. economic output. We make much of our money by counting and processing the money of the world, taking a small portion along the way. Too much of this wealth ends up in the hands of those lucky or cunning enough to be standing astride the river of money as it flows by. Too few of those individuals add enough value to the flow to earn the wealth they accumulate. Many in the sector are aware that a significant portion of their wealth is unearned and undeserved. Occupy Wall Street was right. But the solution is not to redistribute wealth — it is to create prosperity.
That is one of America’s true gifts. America is exceptional because of the principles that define it: freedom, justice, democracy. The way our predecessors embraced and codified these principles brought us unprecedented prosperity and power in the past. They can do so again.
American Prosperity and the First Productivity Revolution
America’s political paralysis follows closely on one of our greatest historic triumphs: unprecedented material prosperity. Before World War II, in all prior civilizations and social orders, “the vast bulk of humanity had been preoccupied with responding to basic material needs,” Brink Lindsey wrote, in How Prosperity Made Us More Libertarian (Cato Institute, 2007). “Postwar America, however, was different. An extensive and highly complex division of labor unleashed enormous productive powers far beyond anything in prior human experience. As a result, the age-old bonds of scarcity were broken. Concern with physical survival and security was now banished to the periphery of social life.”
America’s triumph was built on the radical increase in labor productivity brought about by industrialization. Between 1890 and 1990, U.S. labor productivity exploded 40-fold — workers generated 40 times more value per hour at the end than the beginning of the 20th century. In the years following World War II, our extensive division of labor unleashed enormous productive powers far beyond anything in prior human experience.
That explosive growth was enabled by three primary drivers. First, it came from the genius of machines — their capacity to take a prototype design and replicate it over and over, enabling a huge middle class to enjoy benefits once available only to the rich. Second, it came from the methods of scientific management, which broke processes down into simple, replicable tasks that could be carried out across assembly lines by almost anyone with basic skills. Third, it came from huge increases in material consumption. We saved human labor, but we substituted fossil fuels and raw materials.
The first factor, machines, is a source of value that can be sustained over the long run. Machines multiply not just muscle, but also mind. They take a powerful prototype, something conceived by human creativity, and replicate it, shaping raw materials into functional designs that deliver real value. The second factor, simplified work tasks, is also sustainable, but at a certain cost. It takes a complex human being, with extraordinary creative capacities, and turns him or her into a machine part, performing rote functions over and over. The benefit is a big paycheck at work and cheap goods at home. The cost is the alienation of the worker from the purpose they are serving. They become a very small part in a very big whole. The third factor, increased physical consumption, is not by itself sustainable. Material resources are intrinsically limited. We cannot increase consumption indefinitely.
Big Government and Big Corporations: The Rise of Dependence
The cost of material prosperity has been two forms of dependence. The first is the reduced power of the American worker: In return for prosperity, workers willingly became small parts in large production processes. They sacrificed sovereignty over their own workdays and their individual creative capacities in order to follow rules established for the good of big institutions: big corporations, labor unions and government. Their reward was big paychecks, generous benefits, and long-term health and financial security.
To insure that the tradeoff was worthwhile, the Democratic Party championed a political and economic New Deal, which sought to guarantee Americans a succession of material rights: high wages, generous benefits, safety protections, retirement security and now universal health care. The problem is, the nation no longer has the power to deliver on these promises in the ways we conceived in the 1940s. Because of globalization, combined with the rising costs of entitlement programs, the money to do so is no longer there. The left’s “solution” is often to deny that fiscal limits really exist, and simply print more money: spend, baby, spend.