Umair Haque / Bubblegeneration
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Thursday, November 18, 2010

Macro Perspective: Is This America's Great Decline?


It's the oft-unspoken thought on many lips: America's in decline. The glory days are over, the train's left the station. So: is this a great decline? Unfortunately--probably. And I'd suggest that when you take a hard, serious look into the economy--when you voyage past it's superficial, largely irrelevant position in terms of budgets, "gross product", or "unemployment"--that great decline is deeper and darker than pundits, beancounters, and politicians think, want to admit, or even suspect.

The great crisis is a story of structural decline: a decline that's hardwired into the patterns amongst this great machine's many parts. They've settled, over the last three decades and more, into fundamentally bad, toxic equilibria--where speculation precedes investment, model precedes reality, management and financial jargon is a substitute for real insight, cheap talk substitutes for hard work, and indulgence has replaced inspiration.

Here's its story.

Trade structure. America's trade structure is, of course, bent entirely out of shape. But the deformity is structural: imports outweigh exports not just today, but over decades--because the economy's engine is consumption. That's hardwired, institutionalized, into the fabric of global trade agreements--that make it eminently possible, sometimes even desirable, to make, market, and sell hypercommoditizing junk artificially cheaply (think, for example, "low-cost labor pools" as "comparative advantage". Oh, wait--you mean sweatshops?). And, of course, without concern for the destabilizing imbalances that pile up--and sometimes pop up.

Industry structure. The structure of most American industries is significantly distorted, from welfare's perspective. Largely artificial entry and exit barriers--like patent thickets, copyright litigation, or "off-balance sheet" gimmicks--concentrate market power, and flatten relative competitiveness. It's the resulting competitiveness gaps that are the real root of a global race to the bottom--think about it: instead of amplifying competitiveness, the parlous state of American industry means that no one's racing to the top.

Market structure. The effect of poisonous industry structure is a poisoned market structure. In industries as different as autos, banking, pharma, food, retail, and media, relentless, vicious consolidation has been the name of the game. The result is a heavy dose of heavily concentrated industries--and while that's good for beancounters, it's terrible for innovation, basic quality standards, customer service, and, of course, investors. These are all basic, real-world manifestations of a lack of competitiveness.

Economic structure. In turn, a lack of competitiveness means that tomorrow's industries don't get created yesterday. Consider a jaw-dropping statistic. In 2010, Chinese companies: 391 I.P.O.’s, worth $89.5 billion. American companies: 99 I.P.O.’s worth $15.69 billion. That's not just parlous--it's frankly pathetic (and remember, China's not innovating yet--it's mostly privatizing, selling off relatively small stakes in state-controlled, quasi-governmental entities) Translation: the structure of America's economy is broken. Value added, like profitability, is concentrated heavily in finance--to the exclusion of productive industry. Remember, of course, that finance isn't productive--it's allocative. (Think about it this way: a global economy of N-1 traders and a single producer probably would be radically less productive than vice versa). Hence, manufacturing being offshored--but only low-value services (think lawnmowing) replacing them.

Employment structure. The result of a broken economic structure, where yesterday's doddering industries age on into non-oblivion is an equally broken employment structure. America's creating two kinds of jobs: McJobs and MegaJobs--with nothing in the middle. And, of course, there are deeper problems with both. The MegaJobs are more like lottery tickets, than prizes in a meritocracy (think landing a spot at a top law firm, or investment bank--it's more about who you know and where you studied, than what you can do). And the McJobs, of course, vastly outnumber the MegaJobs--and worse still, they're total dead ends: offering zero prospect for "skills gains", or, perhaps more vitally, to grow any of the many kinds of intelligence.

Demand structure. Result? A eviscerated structure of demand. The middle class has been under the assault of all the above--which smash their welfare--for decades. The outcome is an economy where savings rates are spiking upwards, and their mirror rate, consumption rates, spiking downwards. Of course, that shift is being mirrored by corporations as well--as it must be. The next step, of course, is shifting those idle savings into investments. Not, remember, the mere idle speculations of yesteryear--which led to bubble-driven malinvestments, like McMansions that are being torn down. Real, long-run investments, that yield enduring, meaningful returns.

Incentive structure. To get there, we come to the final piece of the puzzle. America's incentive structure is completely broken. Execs book benefits with having to create anything of demonstrable, long-run benefit to, well, anyone--and when you aggregate all those transactions up, you get a Ponziconomy. One where it's possible to "profit" without having done anything of enduring value. Of course, in such a situation, my "profit" represents no net gain--just a transfer from you. When we're all "profiting" that way, we're just playing musical chairs--moving the same old dwindling pot of wealth around, instead of adding a penny or two back into it. Result: decline.

I could go on, with fix or six additional structures. Or a boatload of numbers. But perhaps I've made my point.

America's great decline is the emergent product of a set of toxic equilibria. The sum is greater than the whole of the parts: this decline is a complex, nonlinear combination of interdependent, linked components settling into an unforeseen level of breakdown. You might say it's the dynamic equilibrium of a complex system, akin to an attractor, where the economy's stuck in a corner of performance space that limits long-run value creation to dwindle ever further.

Hence, I'd suggest a simple, but perhaps radical, conclusion: it's learning to invest in companies, ideas, and insights that break all the bad equilibria above that will separate tomorrow's outperforming [countries, companies, and investors] from those stuck in the gears of a great decline.

If it's opportunities for returns you seek, get structural--and restructural.

NB--There's an open Q&A thread for this post here.

-- umair // 2:42 PM // 10 comments


Comments:

It's a very linear and commonplace thought people casually throw about these days.

Those who appreciate phenomena in a wider space and longer time frame perspective would say : it's time for America to review, reengineer and consolidate itself for the next burst of resourcefulness and creativity !
// Blogger vam // 4:29 PM
 

Apparent typo: "Execs book benefits with having to create anything of demonstrable, long-run benefit"
// Blogger jim // 7:38 PM
 

Got a couple of typos:

Execs book benefits with (without)...

I could go on, with fix (five) or six additional structures. But perhaps I've made my point.

(you can delete this)
// Blogger EcoDevPro // 8:19 PM
 

An Essential Enterprise:

The Commons-dedicated Account*

*A self-supporting , Commons-owned neutral network of accounts for both political and charitable monetary contribution... which for fundamental reasons of scale must allow a viable micro-transaction (think x-box points for action in the Commons).

Has just been GRANTED A PATENT for its mechanism for political/charitable contribution!!!

Why Politics MUST be Localized

Empowering the Commons: The Dedicated Account (Part I)

Credit Creation and the Building of Sustainable Economic Ecologies

Personal Democracy: Disruption as an Enlightenment Essential

LinkedIn http://www.linkedin.com/in/culturalengineer

Demo & FAQ http://www.Chagora.com

The catalyst for this essential network's formation centers around the hypothesis that micro-transaction has unrecognized but considerable utility in networked citizen lobbying... for some number perhaps frequently... and for the rest at least occasionally if made sufficiently convenient.

However this transaction is currently disallowed because of costs associated with it (both direct transaction costs as well as added cost in the case of political contribution of reporting issues).

BUT, by utilizing this simple mechanism (concept at root similar to X-box points facilitating purchase of virtual goods under $1)... this transaction becomes viable.

Moreover, while most people DON'T ever give to a cause or campaign... the DO at least occasionally give to a charity. Herein lies an opportunity.

By combining the capability to use the same account for both purposes... and because of benefits to both sides of the transaction...

It becomes more than likely that given proper implementation such a system could come to hold a dominate place in the charity/campaign services sector, draw more people into the political process...

And especially lead to online localization capabilities (again for both sides of these transactions) which are of great benefit to better governance.

Further, again given good implementation... this results in a highly stable user-base... which should be of some interest to potential investors and existing (but potentially transitory) social networking platforms.

Moreover...

It's a civilization fundamental for scaled speech and association.

Capability ENABLES Responibility
// Blogger CulturalEngineer // 12:49 AM
 

An Essential Enterprise:

The Commons-dedicated Account*

*A self-supporting , Commons-owned neutral network of accounts for both political and charitable monetary contribution... which for fundamental reasons of scale must allow a viable micro-transaction (think x-box points for action in the Commons).

Has just been GRANTED A PATENT for its mechanism for political/charitable contribution!!!

Why Politics MUST be Localized

Empowering the Commons: The Dedicated Account (Part I)

Credit Creation and the Building of Sustainable Economic Ecologies

Personal Democracy: Disruption as an Enlightenment Essential

LinkedIn http://www.linkedin.com/in/culturalengineer

Demo & FAQ http://www.Chagora.com

The catalyst for this essential network's formation centers around the hypothesis that micro-transaction has unrecognized but considerable utility in networked citizen lobbying... for some number perhaps frequently... and for the rest at least occasionally if made sufficiently convenient.

However this transaction is currently disallowed because of costs associated with it (both direct transaction costs as well as added cost in the case of political contribution of reporting issues).

BUT, by utilizing this simple mechanism (concept at root similar to X-box points facilitating purchase of virtual goods under $1)... this transaction becomes viable.

Moreover, while most people DON'T ever give to a cause or campaign... the DO at least occasionally give to a charity. Herein lies an opportunity.

By combining the capability to use the same account for both purposes... and because of benefits to both sides of the transaction...

It becomes more than likely that given proper implementation such a system could come to hold a dominate place in the charity/campaign services sector, draw more people into the political process...

And especially lead to online localization capabilities (again for both sides of these transactions) which are of great benefit to better governance.

Further, again given good implementation... this results in a highly stable user-base... which should be of some interest to potential investors and existing (but potentially transitory) social networking platforms.

Moreover...

It's a civilization fundamental for scaled speech and association.

Capability ENABLES Responibility
// Blogger CulturalEngineer // 12:50 AM
 

This is all topical economics. Example:

*The result is a heavy dose of heavily concentrated industries--and while that's good for beancounters, it's terrible for innovation, basic quality standards, customer service, and, of course, investors.*

Wait. So large companies like Apple, GE, GM, Google, and Boeing aren't developing new and exciting technology? Also, if something is good for "beancounters" (like, say, an increase in the company's book value or cash flow), well, isn't that good for investors too?

More: you read the NY Times, see that Chinese IPOs > US IPOs, and conclude America is broken? China's GDP is growing 3-4 times as fast as ours, so 3-4 times as many IPOs seems about right. You also misunderstand how savings flow through our economy. We don't need to "shift savings into investments." The moment banks receive consumer savings, they're lent out to small businesses so they can purchase equipment. That's investment.

You also trot out the "oh woe is our net trade situation" line without mentioning that any trade rebalancing will decrease China's GDP by billions. So there's that.

Look, you're complicating our economic problems. The bottom line: we were overleveraged as a country for the last 5 years. Now our economy is (drastically) adjusting. We'll be fine.
// Anonymous Anonymous // 2:13 PM
 

dear anonymous,

i don't allow anon comments here, and i allowed yours to stand as a great example of why.

it's riddled with 101 level errors. for example, suggesting savings equals investment (the problem, not the solution), that the macroeconomy seeks static equilibrium, and that trade rebalancing will magically "happen", ignoring the fact that yesteryear's imbalances are already back in action.

it's a woeful comment, and exactly why i stopped allowing anon comments in the first place.
// Blogger umair // 8:46 PM
 

Hi,

Can you fix the typo? You seem like a good writer so having "its" and "it's" mixed up is simply bad form, come on! :-) It's in your first paragraph:

"when you voyage past it's superficial, largely irrelevant position in terms of budgets, "gross product", or "unemployment""
// Blogger Jeffrey // 4:58 PM
 

Question: can you give us examples of companies and/or projects that highlight what we should invest in? I have seen you tweet a few examples, but would like to see more.
// Anonymous Jermaine // 9:43 PM
 

"It's all for the good of the Syndicate, Yossarian..!"
// Blogger TJColatrella // 8:59 PM
 
 

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