Indianapolis Star Neutral on Presidential Endorsement

The Indianapolis Star decided to withhold endorsing either Obama or McCain for President this year. This was the first time since 1964 (Lyndon Johnson) that the Star had not endorsed the Republican candidate for President. Dennis Ryerson, the editor of the newspaper, wrote that the editorial board was not able to reach consensus, so they simply "decided to agree to disagree" and to withhold an endorsement.

Indiana is one of "swing states" in the electoral campaign, with polls in the state showing the Obama-McCain contest to be a tossup. The latest statewide poll conducted by the Star shows Obama with 45.9% and McCain with 45.3% support among Hoosiers. If Indiana votes for Obama, it will be the first time the state's electoral votes have gone for a Democrat since Lyndon Johnson's landside victory of 1964.

The Unraveling of the U.S. Economy

Since I posted “Bankrupt America” here ten days ago, major pillars of America’s financial edifice have come crashing down. First, the federal government had to take control of Fannie Mae and Freddie Mac, the nation’s two largest mortgage finance companies. Then the prominent securities firm Lehman Brothers declared bankruptcy, and the even more venerable Wall Street firm, Merrill Lynch avoided the same by selling itself to Bank of America. Today the Federal Reserve announced that it was taking over the insurance giant, A.I.G., in a bailout that will cost taxpayers $85 billion.

These are all huge companies—mainstays of the U.S. economy. It is difficult to make much sense of Senator John McCain’s assertion that “the fundamentals of our economy are strong.” These companies were the fundamentals, and they are all bankrupt. Most people, even most financial analysts, I think, do not quite grasp how elemental these developments are. They signal a shift that is as fundamental for the United States as global warming is for the planet.

The collapse of these financial institutions are part of the bigger picture of economic weakness that I describe in The End of the American Century. The United States has been overspending and under saving for a generation or more, and this has led to borrowing, deficit spending, and debt inside and outside the government. As I write near the end of Chapter One of the book, “where the U.S. once drove the world economy through economic growth, invention, and productivity, now it is doing so almost entirely by consumption but at levels it cannot pay for.”

The consumer spending and borrowing binge has been fueled by the growth of the financial services industry, which has increasingly replaced manufacturing as the mainstay of the U.S. economy. The shrinking manufacturing sector now accounts for only about 10 percent of corporate profits in the U.S., compared to 44% of such profits from the financial sector. Banks, mortgage companies, loan agencies and credit card companies make their money by making loans, and they are constantly seeking new customers and encouraging existing ones to borrow more.

It is this symbiotic relationship between binging consumers and profit seeking financial companies that has created the piles of consumer debt—the largest in U.S. history. All of this is starting to unravel now. People borrowed more than they could afford; the mortgage crisis undercut their ability to repay loans and mortgages; the banks and loan agencies faced mounting defaults and declining profits and stock prices. And as goes the financial sector, so goes the rest of the economy.

This is not some episodic financial downturn. The chickens are coming home to roost, and they have nowhere to land. The U.S. government has record budget deficits and is deeply in debt; Social Security is unfunded; households have zero savings (literally); the dollar is at record lows; energy at record highs; and now the stock market is taking a bashing. Former Fed chief Alan Greenspan told ABC that this is a “once-in-a-century type of event.” And former Commerce Secretary Peter Peterson, who I invoke in my “Bankrupt America” post, admitted that “these are the most extraordinary events I’ve ever seen.” (NYT 9/15/08).

In The End of the American Century, first written a year ago, and appearing next month, I wrote this at the conclusion of my Chapter One on “Imperial Overstretch and Economic Decline”:

A serious recession, perhaps even a depression, is the probable outcome. Such a recession will actually be necessary, however, for the long-term viability of the American economy. It will cause unemployment in the short run and declining wages and incomes in the long run, but this is inevitable if balance is to be restored. The U.S. economy will shrink, as will the country’s standard of living. This will simply reflect the actual economic situation in the U.S., which for so many years has been obscured by mortgaging the future with deficits and debt. The U.S. will no longer be the dominant economic power in the world, and with economic decline will come military, diplomatic, and political decline.”

What does all this mean for us? Stay tuned. (And your comments and thoughts are welcomed).

Bankrupt America

On Sunday (9/7/08) the New York Times carried a full two-page advertisement from the Peter G. Peterson Foundation, an appeal “to the presidential candidates at the American people” to take seriously “America’s $53 trillion hole,” which is the sum total of the country’s current liabilities and unfunded entitlement promises. This translates into $455,000 per U.S. household. The bulk of these unfunded liabilities ($41 trillion) are for Social Security and Medicare. But complicating these enormous debts and obligations, the ad points out, are “out of-control health care costs” an unprecedented trade deficit, and a personal savings rate that is near zero for the first time since the Great Depression. This grim fiscal picture threatens "severe economic hardship for our nation and its citizens, especially the young and future generations."

These were not end-of-times prophesies by some crackpot millionaire or eastern mystic, but a sober economic accounting by Peter Peterson--a former (Republican) Secretary of Commerce, a distinguished economist, and the chairman of the Peterson Institute for International Economics, a well-respected and mainstream economic think tank on Massachusetts Avenue in Washington, D.C. The appeal was also signed by three former U.S. Senators, two former U.S. Treasury Secretaries (George Shultz and Paul O’Neill) the former Chairman of the Federal Reserve (Paul Volcker) and the former Director of the Congressional Budget Office (Alice Rivlin).

Peterson himself first called attention to the multiple dimensions of U.S. debt and deficits in his 2004 book Running on Empty, which was central to the casting of my own book on the even broader dimensions of U.S. decline, The End of the American Century (appearing next month). In that book, I see the U.S. fading as an economic and political superpower, as a model for other countries, and as the preeminent factor in global politics. The core of this decline is economic and social: the multiple levels and dimensions of U.S. debt; the declining standard of living for most Americans; and the growing levels of poverty and inequality. The U.S. government and American citizens have been living beyond their means for at least two decades, and depending on borrowed money (much of it from abroad) to sustain this binge. This can not continue forever, of course, and the rubber is finally hitting the road.

The United States has had periods of debt and economic decline in the past, of course, and has always managed to pull back into economic growth and solvency. What is different this time is the convergence of so many dimensions of debt, deficit, and decline, all at the same time. The U.S. federal debt, at some $10 trillion, has grown from about a third of GDP in the 1970s to over two-thirds now. Next year’s budget deficit will add almost $500 billion to that debt. The U.S. trade deficit has reached new records in recent years, even as a percentage of GDP. Government profligacy is matched by consumers: the household savings rate in the U.S. has been declining for two decades, is the lowest among all developed countries, and in 2005 fell below zero for the first time ever. Credit card and mortgage debt are both near record levels, as are bankruptcies and mortgage foreclosures. The whole financial system is under stress, and not only because of Fannie Mae and Freddie Mac. Meanwhile, the value of the dollar is at a record low against the euro, and the price of oil is a record high.

It is difficult to see how the country can reverse all these trends. As Peterson points out in his New York Times appeal, to “grow out” of this crisis “would require real economic growth in double digits for the next several decades.” Even in the best of times, the U.S. economy grows only about 3% a year. Sustained double digit growth is impossible, especially given the new environment of high energy prices, competition from China, India, and others, and the declining willingness of other countries to let the U.S. set global rules. The United States is in for tough times.

Our leaders, and the mass media, need to address and confront these issues. This will be a difficult task for whomever is elected President, because it will require belt-tightening and reduced expectations from all of us. Both Obama and McCain are promising recovery and prosperity. The reality is likely to be quite different. The new president will have to make many tough decisions. It will require wisdom and patience from both leaders and citizens to navigate these difficult shoals.