What happened to the American dream?

Thirty years or so ago, in the late 1970s, I had the privilege of working as a correspondent in Washington and often thought of the way of life I saw around me: this just cannot last. It is just too wasteful, writes Piet Coetzer.

One of the experiences that triggered this thought was that of another South African colleague based in New York.  One evening on a street corner near his apartment block he picked up an electric golf -ball typewriter, the top-of-the-range tool of our craft in those days before the personal desktop computer.The typewriter, which  did not look all that old, had been put out by another New Yorker for collection with the garbage the next morning.

He took it home and, sure enough ,as he plugged it in it did not work. When he opened the lid he soon  discovered a loose wire. It was easy to reconnect within minutes and he was the new owner of a perfectly functioning IBM golf-ball typewriter – with correctional (typex) tape and all!

It was a typical example of how the American consumer society functioned: You don’t try to fix, you just replace!

These memories of life in the US of the 1970s were very recently jolted by a report I came across on the Web.

In early November, as the world was waiting to hear what the extent of the American Federal Reserve’s next round of quantitative easing – the process of creating money to try and stimulate economic recovery --  was going to be, the German news-site Spiegelonline published a long in-depth analysis of the state of the American economy. Under the headline Is the American Dream Over? their opening paragraph reads: “America has long been a country of limitless possibility. But the dream has now become a nightmare for many. The US is now realising just how fragile its success has become – and how bitter its reality. Should the superpower not find a way out of crisis, it could spell trouble ahead for the global economy.”

Early seeds

Maybe some of the seeds of the present-day crisis were sown when the US took the dollar off the so-called gold standard. In its wake the dollar became the world’s de facto reserve currency. It created an environment in which domestic budget deficits could be rationalised with arguments of dollars sitting all over the globe which in theory could be brought home.

It however, also created an international financial system which, divorced from a relatively neutral and objective measurement of value (gold), became highly manipulatable. In fact it gave rise to an industry and broader economic system in which so-called financial products became more lucrative to investors than the real economy where the production and manufacturing of goods takes place.

Maybe the tipping point went by mostly unnoticed somewhere in the 1980s when, as the Spiegel- eport points out “the retailer Wal-Mart (which has now also shown ambitions in the South African market) displaced automaker General Motors as the world’s largest company.

“In this new order, the consumer was among the winners. The investment fund was the modern advocacy group. Banks became more important, and the banking industry had managed to double its profits since the 1970s. Shortly before the crisis (in 2008/09), almost 40% of American corporate profits were made in the financial sector.”

It also highlights the fact that consumer spending made up more than 70% of total economic output. “But consumers were also spending more than they made, and the savings rate was shrinking. Americans made up for their stagnating or declining earnings by borrowing money. This created a need for lower interest rates.”

It is also true that American companies are still world-class, but today many are investing in Asia, where labour is cheap and markets are growing, while domestic activity is shrinking.

Edmund Phelps, winner of the 2006 Nobel Prize for economics, believes that the American economy has been losing momentum since the turn of the century. It has been increasingly clear that no new jobs are being created on balance, because the US economy has undergone structural changes.

Companies are dominated by investors only interested in the kinds of quick and large profits that can be achieved by reducing the workforce. Almost six million jobs have been lost since 2000. Today only 9% of Americans work in the manufacturing industry – half as many as in 1985, says Phelps.

But, this trend probably started much earlier. Even in the late 1970s it was commonplace to hear references to America as the service economy of the world. Outsourcing important components of actual production processes to other (cheaper) parts of the world was already then becoming a core element of the business plan of many American corporations.

Fiscally ungovernable

The Spiege report concludes that there is  for America no easy way out of its debts crisis. “Obama could raise taxes and reduce the federal budget, but according to Reagan’s former budget director, David Stockman, the country has become fiscally ungovernable. If Washington can’t help America, who then can help Washington and America?

“One of the last hopes is the US Federal Reserve, (Fed), the same institution that helped manoeuvre the United Sates and the global economy into the crisis in the first place. Despite the Fed already having reduced the prime rate to between 0 and 0.25%, the credit business still hasn’t picked up.

“The Fed then sought to influence the markets in a different way by using US treasury bonds and securitised mortgage loans, injecting $1.75 trillion in freshly printed cash into the market.”

Referring to at that stage still only an anticipated second round of this quantitative easing (QE), the report describes this monetary policy as “a risky solution, both for the United States and the entire world economy. It can trigger processes that could gain momentum and spin out of control. Nobel laureate Joseph Stiglitz warns of the consequences of a flood of liquidity. It’’s doing nothing for the American economy, but is causing chaos over the rest of the world.

“More money means that the value of the dollar falls relative to other currencies. This is an advantage at first, because it makes exports cheaper and imports more expensive, making the US economy competitive. But does US industry even make enough products anymore to allow it to increase sales to the global markets? And what happens if the world loses confidence in its reserve currency and unloads its dollar reserves onto the market? The resulting dollar crash could plunge the global economy into the next abyss.”

And Germany?

While the Spiegel report does not do it, it is nevertheless interesting to look at the contrasting picture to the American   scenario that the German economy offers at present. After excellent German growth figures for the second quarter of this year, that country seems to offer a good role model for developed countries in terms of achieving growth.

While the US suffers from what some commentators call an education deficit, Germany benefits from a large talented and stable workforce, which according to the website economywatch has enabled it “to dominate the vehicle, machinery, chemicals and household equipment vertical across the globe.

“It is this strong and productive work force that enabled Germany to meet recession with a resilient face and the German economy could manage to have a GDP (purchasing power parity) of $2,182 trillion in 2009.”

Germany is also a global hub of scientific and technological developments,

The German economy also attracts millions of immigrants from around the world, very much like the US used to do, and is the third largest country in terms of immigration.