US
shifts to Brazilian
standards By Martin Hutchinson
President Barack Obama's victory clarifies
the political and economic landscape. Unfettered
in his second term, he will now be able to pursue
the economic policies he truly favors. To see
their result, we can look at a country with an
overlarge government, low domestic savings,
endless "stimulus" spending financed by its
development bank, relatively high inflation, huge
inequality and accompanying tax evasion, state
meddling in major industries, which trade off
their political connections, a high level of
corruption and an education system that does a
poor job of preparing its citizens for the
high-tech world.
That country is Brazil.
Sadly, Brazilian economic policies will if pursued
for two decades or so produce in the United States a
Brazilian standard of
living.
Obama's opponents during the
election campaign accused him of wanting the
United States to be more like the Western
countries of the European Union. Certainly the
EU's all-powerful bureaucracy and its commitment
to various "elite" projects such as fighting
global warming and universal healthcare appeal to
him. But in reality, the United States is a very
different environment from Western Europe, with a
different demographic profile and many attitudes
that have derived from its New World provenance.
The European approach, of large government
that cements in place an industrial structure
built 50 years ago is not available to a country
with a rapidly growing population and a shrunken
manufacturing base. In any case, Europe has its
own problems; the idyllic picture of happy French
peasants bicycling around with strings of gourmet
onions around their necks is already hopelessly
outdated.
The tendency of US living
standards to converge towards Brazilian ones is a
product of globalization, and a natural result of
economic arbitrage in a world of excessive and
growing population and ever-easier communications.
The world's average gross domestic product (GDP)
per capita, on a purchasing power parity basis,
was $11,640 in 2011, just below Brazil's $11,719,
and somewhat below Bulgaria's $14,603 or
Malaysia's $15,589. If Brazilian labor is
equivalent in quality and other factors of
production to US labor, then US GDP per capita of
$48,442 is bound to converge on it over time.
The reason for the US superiority in
living standards is not the country's abundant
natural resources - otherwise Argentina would be
among the world's richest countries. It's the
quality of its institutions and economic policies,
which have allowed a massive investment in
education and a level of high-quality
entrepreneurship that is the envy of the world.
Britain in the 18th century had the best
institutions and policies in the world; the United
States adopted them, and was then lucky enough,
partly because of the continued existence of the
"frontier" through the 19th century, to avoid the
poisonous socialism that grew up in Europe's big
cities.
This factor may seem modest, but
it is analogous to intellectual property or design
excellence, which enable the stars in the
pharmaceutical, technology and other
innovation-driven sectors to enjoy returns far
above the industrial norm for decades. When Apple
unveils a new iProduct, it is fairly similar to
other products already on the market or shortly to
arrive there, but the company is able to command
higher prices and enormously superior margins
because of the excellence of its design and
product features.
However, Apple's margin
superiority is not necessarily everlasting and is
subject to erosion over time. Its early products
in the 1970s and 1980s, notably the Macintosh,
were equally ahead of their time, but struggled to
make large amounts of money. Then the Newton
series of products, introduced in 1993, were
abject and expensive failures. However, Steve
Jobs' return allowed the company's revenues,
margins and stock price to soar once again into
the stratosphere, eventually producing the iPad, a
far more successful descendent of the Newton.
Eventually, even the most successful
companies lose their margin of superiority.
Microsoft, which had such superiority in the
1990s, has now largely become commoditized.
Polaroid, which enjoyed spectacular success with
its instant photography in the 1950s and 1960s,
not only lost its edge after its founder Edwin
Land retired in 1980, it filed for bankruptcy in
2001.
Similarly, Jobs' death last year is
almost certainly going to lead to a gradual
commoditization of Apple's product range and the
descent of its margins and stock price to more
normal levels. Jobs' successors at Apple, like
Land's at Polaroid, are not stupid people, but in
the long run they cannot preserve the company's
unnatural success.
A similar process
applies to the United States. Its economic and
constitutional set-up was greatly superior to its
competitors, carrying it to an unimaginable
superiority in wealth and living standards by the
1950s, aided by the self-destruction of its
European competitors. This wealth was partly
reinvested in college education via the GI Bill,
allowing US living standards a further leap
forward.
However, the Progressives and the
New Deal had already reduced the US advantage over
Western Europe and the Great Society reduced it
further, so by the 1970s, the United States was
finding it increasingly difficult to preserve its
living standards advantages against the rest of
the world. Good leadership in the 1980s created a
new ability to increase wages, so that by the late
1990s, with the United States having invented the
Internet and much of modern communications, and
the post-Soviet peace dividend reducing its
overheads, its ability to charge a premium for its
capabilities was restored and all seemed well.
Since 2000, weak management has allowed
the US competitive advantage to erode. Fiscal and
monetary laxity has drained the US capital base,
an advantage similar to the cash hordes of
Microsoft, Google and Apple. The country's
integrity has slipped; from 16th place on
Transparency International Corruption Perceptions
Index in 2011, with a score of 7.6, the country
had slipped to 24th place in 2011, with a score of
7.1.
Similarly, heavy immigration created
a society with permanently high unemployment (when
those "not in the workforce" are included) and
inequality at a level the country had only briefly
touched before, in the late 1920s. The result has
been an 8% decline in median real wages, mostly in
the recession since 2007 but continuing in the
most recent years when growth had nominally
resumed.
This is why calls for the
Republicans to abandon their opposition to
immigration controls are especially misguided.
High-skill immigration in moderation is highly
beneficial to the economy. But very heavy
immigration, even of the highly skilled, depresses
job prospects and earnings for those in
professions especially subject to it - which is
why median earnings for college-trained software
engineers are lower than those for college-trained
lawyers, where professional restrictions to
immigration apply.
Mass low-skilled
immigration, legal or illegal, inevitably puts
pressure on living standards at the bottom of the
scale. The barber in Boston is paid more than the
barber in Bangalore because he benefits from
geographical proximity to rich neighbors, but if
large numbers of immigrant barbers move to Boston,
his wages will decline towards the global norm.
In addition, the presence of large numbers
of immigrants puts pressure on the political
system to adapt to the norms they are used to. In
the United States of 1900, this did not happen;
first generation immigrants were forced to
assimilate to US norms and were given little
political power until they had abandoned the
collectivist nostrums of their home countries.
However, today we rightly assimilate less
brutally and encourage immigrants to preserve much
of their home cultures. Hence, since a high
proportion of immigration is Latin American in
origin, there is a danger that political norms
will be forced towards the corruption, hatred of
the rich and caudillo cultures that have
impoverished Latin America for the past two
centuries. In other words, if US living standards
converge towards the global norm, it is to Brazil
and not to Malaysia or Bulgaria that the society
will converge.
Globalization is immensely
beneficial to the welfare of the world economy in
general, but most of its benefits accrue to
residents of poor countries, as it provides them
with opportunities to which they would not
otherwise be exposed. If technological advance is
rapid and rich country governance truly superior
this will not matter much; rich countries' living
standards will continue to advance even as poor
countries' standards advance faster, and the world
gets richer overall at a rapid clip.
However, poor countries are catching up
with US education and governance standards all the
time, just as Apple's competitors are seeking all
the time to erode Apple's competitive advantage.
Hence, if the United States suffers a period of
poor governance, an increase in the costs of
government, a long-term distortion of its markets,
a draining of capital by misguided monetary policy
and a partial convergence on the inferior
governance norms and higher corruption of poorer
countries, its living standards will erode.
Technological advances continue (as I
wrote a few weeks ago, I do not expect their
economic benefits to disappear anytime soon).
However, such advances arrive in bursts, with
periods of unimaginable change interspersed with
periods of relative stasis and adaptation to past
advances. If such a period of technological
quiescence coincides with a period of erosion of
US advantages in governance and capital base, the
descent of US living standards towards Brazilian
levels may be quite swift.
For the rich,
of course, it does not matter; they can enjoy
themselves on Rio's Copacabana Beach just as
easily in the Hamptons, albeit with some personal
security problems. But for the poor, the middle
classes and even aspiring professionals, electing
governments of Dilma Rousseffs (the current
president of Brazil) is likely to produce an
economic decline that is both painful and
unexpected.
Martin Hutchinson is
the author of Great Conservatives
(Academica Press, 2005) - details can be found on
the website www.greatconservatives.com - and
co-author with Professor Kevin Dowd of
Alchemists of Loss (Wiley, 2010). Both are
now available on Amazon.com, Great
Conservatives only in a Kindle edition,
Alchemists of Loss in both Kindle and print
editions.
(Republished with permission
from PrudentBear.com.
Copyright 2005-12 David W Tice &
Associates.)
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