Is This The End of the American Century?

This site features updates, analysis, discussion and comments related to the theme of my book published by Rowman & Littlefield in 2008 (hardbound) and 2009 (paperbound).

The Book

The End of the American Century documents the interrelated dimensions of American social, economic, political and international decline, marking the end of a period of economic affluence and world dominance that began with World War II. The war on terror and the Iraq War exacerbated American domestic weakness and malaise, and its image and stature in the world community. Dynamic economic and political powers like China and the European Union are steadily challenging and eroding US global influence. This global shift will require substantial adjustments for U.S. citizens and leaders alike.

Thursday, September 10, 2009

The Bankruptcy of American Economics

It is not just the American economy that is bankrupt, but the profession of economics as well. It is partly the interaction of these two that has led to the collapse of the American economy and the huge economic hole we find ourselves in.

Paul Krugman provides a devastating critique of his own profession in the Sept. 6 New York Times Magazine , in an essay entitled “How Did Economists Get it So Wrong?” Krugman, a Princeton economist, New York Times columnist and Nobel prize winner, believes that

American economics, as a field “got in trouble because economists were seduced by the vision of a perfect, frictionless market system.”
The profession was blind to the possibility of catastrophic failures in a market economy, he asserts.

In a June lecture at the London School of Economics, Krugman argued that most
macroeconomics of the past 30 years was “spectacularly useless at best, and positively harmful at worst.”

Others besides Krugman are dissecting the economics field, and finding serious problems with it. Britain’s influential Economist magazine had a cover story (7/18) on “Modern Economic Theory: Where it Went wrong—and how the crisis is changing it.” They quote the LSE’s Willem Buiter saying that a training in modern macroeconomics was “a severe handicap” at the onset of the financial crisis. The main problem was that in many macroeconomic models, insolvencies simply cannot occur.
So much for those models.

The problem of economics is even worse, I think, because the discipline has been so intolerant of dissenting views. Modern economic theory is as much an ideology as anything else, with a faith in the market that ignores both reality and those who challenge the dominant paradigm. As the New York Times put it in a story last March:

“For years, economists who have challenged free market theory have been the Rodney Dangerfields of the profession. Often ignored or belittled because they questioned the orthodoxy, they say, they have been shut out of many economics departments and the most prestigious economics journals. They got no respect.”
I saw this firsthand at my university a decade ago, when we were attempting to create a department of economics within the college of liberal arts and sciences. I was on the search committee to hire an economics professor to begin building that program. But it soon became clear that there was a basic inconsistency between the goals of the liberal arts curriculum—free inquiry, critical thinking, competing ideas—and that of the economics profession. The candidates we considered most interesting , with provocative ideas and wide-ranging interests, were largely outcasts in their own discipline, which favored narrow specialties, and strict adherence to the free market ideology. “They got no respect” from the economics discipline, so didn’t have the necessary credentials, and couldn’t be hired. Eventually, the university gave up on trying to create an economics department in the liberal arts college.

Not only is the narrow ideology of modern American economics inconsistent with the traditions of critical thinking, it has proved totally incompetent at predicting the crisis, or figuring out how to get out of it. There are a few exceptions, like Paul Krugman, Yale’s Robert Schiller, and Columbia’s Joseph Stiglitz—all Nobel laureates—and some economics writers like the New York Times’ David Leonhardt. But until now, most of them have been voices in the wilderness, trying unsuccessfully to point out the problems of mounting debt, growing inequality, and neglect of economic and social infrastructure.

President Obama , I believe, recognizes the problems and is trying to remedy them, but he is caught in a vise between huge accumulated needs of the U.S.—for example in health care and education—and the unprecedented level of government and consumer debt.

From an outsider’s perspective—that of a non-economist—it seems to me that the problem is pretty obvious and simple, and the solution is equally obvious and simple, but horribly painful. The problem is that for a generation, American government and citizens have both been living well beyond their means, borrowing to pay for the plethora of consumer goods most of us enjoy. But in the meantime, we have neglected the poor, the schools, the health care system, infrastructure, the environment, and most of the rest of the world. We have lots of goodies, but the society is ailing, and we have passed the buck to the next generation.

The painful solution is that Americans will have to spend and consume less, pay more in taxes, and be prepared for a long-term contraction in the economy. There is evidence of this already, with people finally beginning to save, and to practice “consumer thrift.” But more saving and less spending simply contributes to a contraction of the economy. Banks, retailers, the service and entertainment industry have all depended on people borrowing to spend. As this changes, all these industries will decline, and the economy will decline.

Most American economists, including those with the President, are predicting an imminent end to the recession, and a relatively quick economic recovery. So far, virtually all such predictions have proved overly optimistic and wrong. I think those predictions are based on flawed economic models, and do not account for the depths of the hole we have dug ourselves into. We are in for a very long slog.

While I agree with President Obama and Professor Krugman on most things, I disagree with them that the solution is more spending, by government and consumers, to prime the economy. What we need now is belt-tightening, and a return to a more modest standard of living—perhaps comparable to what we had in the 1970s. This will entail a continuing and severe contraction of the U.S. economy, to return to equilibrium. In the long run, though, it will be best for both the U.S. and the rest of the world.

But you won’t hear this from many economists

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Anonymous said...

Hello Prof. Mason,

I am reading your book at the moment. The information that you have provided shock me. I find it so hard to believe that the U.S. is becoming poor even though my mother has told me many times. I still believe that the U.S is a superpower in terms of economic and military strength. However, our high federal debt really gives me a concern. I strongly wish that President Obama will be able to help save the nation out of such an ordeal. I know it is not an easy task, but American must reemerge as a more prosperous nation. We need to regain our confidence.

What I don't understand is why the U.S. doesn't have many exports as compare let's say to China? Why can our businesses find ways to export material things--things that the world want--to other nations? Like you said we consume more than produce; I am quite agree with you!

David S. Mason said...

My friend Charlie Yokomoto sent this response to my posting on "The Bankruptcy of American Economics."

You say that the solution is simple and obvious. I think that people looking in from the outside in a lot of situations, without full knowledge of the details often find a solution "simple and obvious." I have two examples that I would like to share along this line.

One day, at a tennis tournament for 12 year olds, I heard one entrant saying to her friend, "I'm playing the top seeded player. How do I beat her?" Her friend said, "Easy,just hit winners." To her friend, the solution was simple, but it really wasn't.

When I was teaching at another university in your city, one of my colleagues, who was a great advocate of faculty rights, became President of the Faculty. His views on issues that pitted faculty against administration changed from very pro faculty toward a more balanced and sometimes administrative bent. We asked him if he "changed his stripes," and he said, "No, I have much more information now, and the problems are not as simple as I once saw them, and the solutions are not as simple as I once thought." He went on to become a great President of the Faculty.

I understand your point that we have to revert to the economy of a bygone year (1970), but you may have forgotten one thing--the population now is much bigger than it was in 1970, and the problems that society faces are much bigger than they were back then. How do you propose that we divide up the wealth of a 1970 economy with a 2010 population? Divide it proportionally? You say it is simple, but painful, but you haven't addressed the pain. How do we scale things back?

Are you saying that this is the only solution? Or could there be other simple solutions with less pain? And why 1970 and not another decade?


David S. Mason said...

My response to Charlie:

When I suggest that we need to return to the "standard of living" we had in the 1970s, I was referring to GDP per capita, not to the nominal GDP (or raw size of the economy). The GDP per capita in the mid-1970s was about half of what it is now. So a return to that standard of living would be wrenching, but the country was pretty affluent even then, so it would not be a return to the dark ages.