Defending the American standard of living

One of America's political failures beginning some time after the end of the second world war has been a relatively stagnant standard of living (2008-2010). There was a time when many families relied on just one worker to support a middle class standard of living. Those days are gone. It usually takes two wage earners to stay in the middle class.

The problem has been particularly apparent over the last few years. The 2007 recession seems to have exacerbated it, although how you measure the data can affect your conclusions. And, not everyone agrees that there is much of a problem, if any at all. However, recent analysis suggests that income growth will be slow at best for years to some. Most Americans can sense a problem. The problem seems to come from several sources.

Some people blame it on high CEO salaries but that can't be the whole story. It probably isn't a big factor. One likely factor is America's balance of trade, which has been negative since the late 1960s every year except 1975. America's trade deficit for 1999-2009 was over $200 billion per year, with deficits of about $700-$750 billion per year for 2005-2008. That amounts to a deficit of  about $2.8 trillion for those four years alone. Despite our $14.1 trillion 2009 GDP and some mainstream economic theory to the contrary, it is hard to imagine from a common sense point of view losing that amount of money to our trade partners while still maintaining our standard of living.

Other factors in the mix probably include (1) America's lack of an intelligent and coordinated national level policy on (i) energy and how to reduce the flow of U.S. wealth into imported oil and gas and (ii) international trade policy that puts American businesses on an equal footing with their foreign competitors, (2) ineffective and corrupt U.S. tax policies and (3) insufficient protection of U.S. intellectual property, particularly patents, which are currently under attack by U.S. federal courts, congress and some sectors of U.S. society (none of whom understand the economic power or the importance of patents, but that's a different topic).

All of these things undermine our capacity to effectively compete. To some extent, we are slitting our own throats because of our inability to clearly understand our problems and how to best use  the problem solving tools we do have. We cannot seem to devise and implement shrewd national level policies. As usual, progress in this area is hindered by the ever-present and always popular three horsemen of failure in American politics, inept political and religious ideology, corruption of politics by special interest money and politicians who put self-service before public service.

Free trade isn't fair trade

One example of an unfair playing field is America's Foreign Corrupt Practices Act (FCPA). When the FCPA became law, it seemed like a good idea. However, given the way the world works maybe it isn't such a good idea. Most developing nation governments are moderately to extremely corrupt. It is often the case that to do a business deal, you need to bribe one or more government officials. If you can't bribe, you can't do a deal because your competitor bribed. Many of our economic competitors have no qualms. They just bribe when needed. To them, it is just the cost of doing business, nothing more.

America has taught the rest of the world how to manufacture even the most sophisticated products. America tends to "play fair" while our trade partners cheat as much as needed, whenever needed. Maybe honest and fair free trade isn't such a great idea. We are probably the only party at the table playing the game by those rules.

A very tough problem and bad statistics

One of America's competitive strengths should lie in its ability to innovate. One would think that clever and sophisticated consumer products invented here would be a source of trade surplus. Well, maybe not so much. A Wall Street Journal (WSJ) article (Thursday, December 16, 2010, pages B1, B2) reported one study that concluded that manufacturing and sales activity in China for the iPhone actually added about $1.9 billion to America's trade deficit with China. That was the case even though Apple is American and owns the intellectual property surrounding the iPhone, including the patents.

How can that be? Bad statistics and analysis, that's how. The WSJ article reported that consideration of how the iPhone is made and assembled suggests that the iPhone does add value to the U.S. economy, but that our current ways of analyzing trade no longer accurately reflect the complexities of trade in the global economy.

Clearly, the U.S. needs to get its act together and start being smart about international trade. That we are in this situation at all is intolerable, but that's what you get from political business as usual. We need to better understand what is going on before we can get smart about international trade policy. We can do things that may be "unfair", like subtly limiting distribution channels for imported goods. The Japanese do that to us, even though they are members of GATT and other free trade treaties. China has all sorts of trade barriers against foreign competitors. Our competitors know how to block foreign competition while pretending to be fair and even handed.

Many countries cheat to defend their industries and their standard of living. America doesn't cheat nearly as much and we are paying the price for that honesty. We are not defending our standard of living. Does honesty make sense when we are essentially alone and facing huge trade deficits for who knows how long?

Why is the American standard of living stagnant or falling? If America's chronic trade imbalance is not a significant factor then what is? In other words, who failed and why? If it is the case that it is unrealistic to expect our standard of living to increase, our elected politicians should clearly and honestly tell us that.

Clueless and bored

Despite its importance, the issue of our standard of living is not a major topic for most politicians or the press. When it does come up, it usually gets little or modest consideration compared to other issues of less importance. Why is that? Probably because politicians, especially ideologues, don't know what to do about it. Ideologues just check their brains at the door and let blind faith in ideology replace creative thinking. The press tends to avoid it, maybe because it is complex and boring to them and most of their audiences.

This issue urgently needs intelligent, shrewd political thinking and leadership. Unfortunately, that is something that neither the Democratic nor Republican parties can deliver. They just don't have it in them any more. They are tied to their ideology and enslaved to special interest money. Those things limit intelligent thinking and hinder implementing creative solutions. Either the ideology blocks a solution, a special interest rears its head and unleashes the lobbyist hoards or both factors conspire to sabotage meaningful action. Or, politician self service before public service tosses sand into the gears.

Addressing this will take creativity outside the small confines of liberal or conservative ideology. It will take a cold, honest assessment of both the problem and competing solutions. Solutions need to be grounded in pragmatism and unspun reality, not political ideology and spin. We have had plenty of political ideology (e.g., deregulation of all sorts of things, lower taxes and all the rest the other government-hater ideology that should have been needed, e.g., deregulation in the 1980s and 1990s, the Bush tax cuts of 2001 and 2003, etc.). It all failed. That is part of why we are in these messes.

Democratic and Republican ideologues and special interests with money had power and multiple chances to succeed. Socialists, Libertarians and other third parties were not in power for even a single day. Unfortunately for us, both the Democratic and Republican parties and the special interests that buy them failed. It is long past time for something different, much smarter and much more competent. If we don't get something different, we will pay the price for our political failures. The price will be our lost standard of living.