A GMization of the America – A Trite but Real Description of America’s Structural Problem and Solution?

By now, it is clear that the problems facing America’s economy and recovery are structural. This week, Tom Friedman of the New York Times came out with an opinion about the structural problems facing America.

Friedman discusses three structural problems in his article. First he points out the enormous debt America has piled on to support American’s society’s love with debt-fueled spending. His second point is his favorite – the technological revolution that is destroying older, less skilled jobs. His 3rd problem is that the European Union America’s largest trade partner is facing a crisis of its own.

Unfortunately, his solutions to these “structural problems” involve exacerbating the above problems in the hope that future growth will cure the added burdens. His solution to the first problem is more investment spending financed by spending cuts and tax increases. His solution to the second problem is to create more innovation that can pays workers $40 an hour with a huge, presumably expensive, initiative to train Americans to win these jobs over global competitors. How does a Government mandate creation of innovation and that too paying $40 a hour (or $84,000 per year)? He does not say. The 3rd problem is really Europe’s to solve. America cannot recover as Germany has done by exporting more to China.

Tom Friedman lands in this trap of circular reasoning because he confuses the symptoms for the disease and consequences for the causes.

One level beneath the problems described by Friedman is America’s income problem. Simply put, American families do not have enough income to survive in a reasonable manner. About 20% of Americans are underemployed and the majority of the employed suffer from wage stagnation. As a result, more and more Americans are depending on the Local, State and Federal Governments for some means of support. Ads on New York City buses point out that 1 in 4 New Yorkers use Food Stamps.

Tom Friedman and many others think the solution is to create jobs that pay more, in excess of $80,000 a year according to Friedman’s NYT article. What you hear from Friedman is a prayer, not a solution.

In our opinion, America’s income problem has been building for the past 40-45 years. It just became visible after the 2008 bust. Wage stagnation began in the late 1960s and has continued unabated since then. But this income problem is also a symptom or a consequence of the America’s real problem.

The GMization of America

We think America’s structural problem is simpler and deeper than the symptoms or consequences discusses above. Simply put, America has now become a high-cost society. At every stage and in every area, Americans are being confronted by a high-cost structure that inhibits growth and renders simple solutions unworkable.

This was not the America that began a century of growth over a 100 years ago. At that time, America was a society that was all about building low-cost useful products and solutions for its emerging mass market. This was a game changer for the world. The combination of scale and low cost enabled America’s economy to prosper. This combination allowed America’s companies to make profitable products that their workers could buy. The resulting revenue allowed companies to hire more workers and the spending by the workers from their pay allowed other businesses to prosper. This was a virtuous circle that made America into the world’s economic giant. Europe with its focus on high end, high cost products could not compete with America.

America was at its zenith after World War II, triumphant as the dominant economy on earth. The next 20 years saw a period sustained growth in America’s prosperity. The American family became the world’s richest family with the most comfortable lifestyle. This period also generated America’s baby boom, a demographic mega trend. But success breeds the seeds of its own decline and America was no different. 

After achieving an unprecedented level of financial success and a unheard of level of physical comfort, America began a slow process of creating higher costs. The lean, mean low cost society was fine when America was growing up but as the unquestioned leader of the world, American society wanted higher, more moral standards.

This is when “this should not be so in America” or “this should not happen in the richest country in the world” psychology began to prevail. America began a slow journey of creating an increasing level of “rights” and mandating an increasing amount of benefits for America’s citizens. America began building a social and governmental infrastructure to deliver and enforce these benefits and rights.

The goals were noble and the motivation was beneficent. But this began the slow process of cementing higher costs into American society. America was so rich that these costs were insignificant at first. The additional spending on these social rights were imposed on the private sector and accounted for as future payments to be paid for by future receipts.

Taking care of workers was codified as the social, patriotic duty of America’s corporations. This process began in the 1960s and it continues to unabated to this day. Just look at the series of benefits and rights that workers have come to expect from America’s companies. Health Care, Insurance, Pensions, 401(k)s, Affirmative Action based on Race, Color, National Origin and Age. The job changed from the old scene in McLintock when John Wayne tells a new ranch lad, “you give me an honest day’s work and I will give an honest day’s pay. No one is doing any favors to any one.”

Not only were rights and benefits increased but an infrastructure was built up within companies and in Government to regulate, monitor and enforce these rights. This additional costs began piling up even in those days of robust growth. American businesses began to divert their employment spending towards benefits rather than towards wages. This is why the process of slow stagnation of wages began in the 1960s, a process that continues to this day.

It became clear in the early 1970s that America’s corporations were beginning to suffer from these increased costs. In addition, the attention of Senior Management had been diverted to meeting the new social goals of the new American corporation. Inevitably, product innovation and production quality suffered while costs built up. The American corporation was no longer the low cost producer of innovative products. It is no coincidence that Japanese exports began making inroads in the American marketplace at this time. Their products were like the American products from the 1900s, low-cost, no-frills and built for the mass American market. 

America’s government began raising taxes to pay for the increased infrastructure of benefits and rights. The higher taxes began eating into the disposable income of Americans as well. This continued until the Reagan revolution in the early 1980s. President Reagan took steps that were necessary and correct. He spurred a growth period in American economy. He did so by increasing America’s fiscal deficits to unheard of levels. He argued that growth would take care of the deficits. He proved to be right.

But that was because President Reagan was lucky. The great American mega trend hit just as the Reagan revolution began. The baby-boomers born in the 1950s joined the wage earners in the early 1980s. The baby boomers would earn their highest earnings during the next 25 years. As more baby boomers born in the 1960s joined the work force, American society began generating higher levels of income.

President Reagan and Chairman Volcker killed inflation in the early 1980s. This launched a secular process of steadily decreasing interest rates that continues to this day. Ten-Year Treasury notes than yielded 14% in 1982 now yield 2.60% and might soon go towards 2%. This drop of interest rates over a 28 year period led to a sustained rise in asset prices and made it easier to finance America’s growth.

This growth in income, drop in credit costs and rising asset prices masked the steady, uninterrupted and pernicious process of making America a society with higher and higher cost structure. The fact that higher education was a key to higher income prompted families to move to expensive neighborhoods with better schools. This meant higher housing costs, higher education costs and higher costs of keeping up with a higher class of Joneses. But the steady drop in interest rates allowed American families to supplant stagnant wages with lower costs loans. So began the process of creating today’s leveraged American family. But until 2008, the assets of the American family kept increasing to at least keep up with the deteriorating levels of disposable incomes. So as rates dipped to very low levels and a credit bubble built up, the family home, the largest and safest asset of the American family, became an ATM, a source of cheap funds. This would prove to be America’s moment of peak convexity.

But while these happy days continued, sections of American society began falling off America’s success ladder. As costs kept rising and spending on worker rights kept going up, America’s corporations began a process of taking their production to  low-cost foreign locations.

GM, the lean mean dominant American company of the pre-war period and the 1950s, was the first target of “this should not be so in America” slogans. GM was the first company and the Auto Sector was the first large sector to build in larger and larger levels of worker rights and benefits. It was also the first company and the first sector to demonstrably lose its competitiveness. This problems gained national attention in the 1980s. The problems were blamed on the Oil crisis. The American Government began aiding this ailing sector, a 25-year process that continues to this day.

The Manufacturing sector soon followed the Auto sector into a period of decline in competitiveness and market share. It did not matter so much because the service sector was growing rapidly. The first blow to the service sector was the 2000-2003 bust of the Technology-Telecom bubble. This bust followed the process of the Manufacturing and Auto bust. In the recovery that followed, technology jobs went overseas to lower cost locales and incomes of American families kept stagnating or decreasing relative to the increased costs of the American families.

In other words, one sector after another followed the path of GM. 

Today’s Quagmire

The bust of the credit bubble in 2008 exposed this 50-year process of degradation of American family finances. The huge drop in home values, the stunning drop in stock prices devastated the balance sheet of the American family. Today, the high debt levels remain while the asset values have dropped. The drop in interest rates has depleted any return on savings. And the prospect of wage growth seems laughable. The average American family is today highly leveraged and dangerously exposed.

The situation might be worse for baby boomers. The median baby boomer, some 55 years old, owes more in mortgage debt than all of his or her assets combined. The baby boomer is now on a decreasing trajectory of income but on an increased trajectory of costs, rising cost of health care, rising cost of education for kids (college education not public school education), and rising need to save for retirement.

Today, the American economy is caught in the pincer of two long-term secular mega problems – the increasing high cost structure of America’s economy and the decreasing income level in America’s economy due to baby boom retirement. This pincer is getting tighter by the month.

The solution is obvious. Tom Friedman told us the solution. Create jobs. The Obama Administration is trying but the first Friday of each month brings the terribly depressing news, the Payroll Employment report. This week, the weekly Jobless claims crossed above 500,000, an awful figure after all the stimulus efforts of the Obama Administration.

It is not that jobs are not available. The New York Times reported that many jobs are going begging because people with relevant skill are not available at the wages the jobs pay. This is the rub. Corporations may be willing to hire at a wage they can reasonably pay. But that pay is simply not enough to meet the high cost structure of the modern American family.

This is the most tangible sign that the high costs built into the American system have become so onerous that they are killing any sustained prospect of American revival. The American economy has been GMized with a GM-like cost structure and the same feeling of being stuck in a quagmire.

The GM Solution

Coincidentally, this week the new GM filed for its “initial” public offering. What is different between the new GM and the old GM? Elimination of debt, lowering of GM’s cost structure and finally prospects of a profitable GM. GM will introduce new cars based on proven success of its overseas models. In other words, a lower cost structure plus necessary imports from overseas will be the key to GM’s revival.

But the sad reality is that GM can see this day because the American Taxpayer bailed out GM. Is there some entity out there who can or will bail out America? We don’t think so.

We do think that the process of engineering the new GM may hold promise for a restructuring of America. The first step is to begin a determined long term process to wring out costs from American Business and American Government. This process must include downsizing or outright elimination of many regulations, mandates and costs dumped on American Business over the past 50-60 years. American Government must cut its own expenditure in a determined steady process and deliver the savings to the American people via tax cuts.

Every University, every school system must begin the process of cutting unnecessary departments, courses, educators and above all unions. A restructuring America simply cannot afford large bureaucracies of any type, especially union bureaucracies. Education is a noble goal but the responsibility of education of children is first and foremost the responsibility of parents. Society can provide schools but cannot take the social or fiscal burden of ensuring students learn.

The goal has to be inexpensive, employable education and the objective has to be delivery of educated, trained students that corporations would want to hire. This has to be at all levels, trade school, entry level employees in service sector and highly trained scientists for hard science jobs.

American Health Care has to be restructured as well. The first step has to be emotional – America cannot afford the slogan of guaranteed high level of care for all Americans. Today’s America may be the least bankrupt country of the industrialized world but it is not a rich country any more. The second step is to downsize the huge regulation apparatus and abolish many of the regulations that choke the delivery of affordable health care. Highly negligent behavior by Health Care delivery systems must be penalized but most other legal processes must be curtailed.

But like in GM’s case, lowering the cost structure is merely the first step. In the case of America, there is need to create additional demand. Given the leveraged state of the American family, relying on them to get into greater debt to stimulate current spending may be both dumb and unsuccessful.

The solution is one that America has used before to spark economic growth. This solution will also solve some of the education and health care problems discussed above.

Every year, American universities educate thousands of Ph.D.s in Mathematics, Physics, Chemistry, Biology, Engineering. But the majority of these Ph.D.s are students from overseas who are forced to return to their countries. What a waste?

We propose implementation of the simple solution proposed by Mort Zuckerman, Tom Friedman and many others. Every Ph.D. in these hard sciences should be given a green card or permanent residency status after a security clearance. These are exactly the people America needs, people who can be hired at high wages and whose jobs can create several other support jobs in America. These Ph.D.s will buy houses, rent apartments, buy cars, buy clothes, spend on restaurants. In other words, these Ph.D.s will create new demand in America, something the American economy sorely needs.

This is a reverse outsourcing process that America used several times in the past. It has worked every time and it will work again.

A variant of this process can also help cut health care costs. Today, small communities across America suffer from a lack of adequate medical care. This problem may get worse as ObamaCare gets implemented. American medical system has developed a comprehensive examination to test the medical education of foreign medical graduates. We propose that this system be expanded and foreign medical doctors from around the world be allowed to get certified via these examinations. The most successful foreign doctors should be invited to come to the United States to work in residency programs in American Hospitals. Upon completion of the residency programs, these foreign doctors must serve in small communities or underserved areas for a minimum of 3-5 years. This program must not be small but meaningfully large.

This is the only way the American Medical System will lower its cost structure. The top Doctors, Specialists and Surgeons in America should be able to charge what their patients are willing to pay. But through these new Doctors, America might be able to deliver adequate care to the average American family in a low cost manner. Companies like Wal Mart, Walgreens can expand their in-store medical centers to provide a greater range of medical services via this additional supply of trained, certified doctors. In addition, each such new Doctor job can create several other support jobs. They will buy houses or rent apartments, buy cars, buy clothes and spend on restaurants. These jobs will create new demand that America sorely needs.

America’s greatest asset is its vastness, its relatively unpopulated condition and its ability to integrate immigration, especially immigration of high end Engineers, Scientists and Doctors. This immigration can address both of America’s structural problems – structural high costs and the retirement of baby boomers.

Without the import of new young and highly educated talent from overseas and a determined program to cut costs at home, the American society will remain stuck in a state of high structural unemployment for many years. It will remain like the old GM and without the promise the new, restructured GM is bringing to its new and hopefully lucky shareholders.


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