

Copyright © 2015 Uzair Paracha

FAP Publishing

3725 Benham Avenue

Nashville, TN 37215

All rights reserved. This book or any portion thereof may not be reproduced or used in any manner whatsoever without the express written permission of the publisher except for the use of brief quotations in a book review.

ISBN-10: 1535148624

ISBN-13: 978-1535148627

To my family:

So, verily, with every difficulty

there is relief.

Verily, with every difficulty

there is relief.

# Table of Contents

Preface 7

1) Turn of the Wheel 11

2) Spender of Last Resort 31

3) Deficits DO Matter 55

4) The Future Behind the Tree 71

5) From Welfare Society to Welfare State 83

6) Paler Shade of Green 103

7) Mon(k)ey Business 123

8) The Visible Hand 143

9) Unwelcome 167

10) Good Governance 183

11) Plan, Consensus & the Second Stage 203

12) Rude Awakening 219

Notes 235

Bibliography 279

Acknowledgements 303

Preface

In 2004 I met a very intelligent gentleman who could carry a conversation on almost any topic. By his own admission he was not business minded nor did he know much about finance or economics. Yet one day our conversation moved to the American economy. When he said something about a possible economic crisis I found such an idea too ridiculous to take seriously. After all America's economy was the largest in the world – far ahead of any other, it was the free market capital of the world and it was the world leader in almost every important category. But despite his limited knowledge he continued to defend his point of view.

In his view the size of an economy was not a guarantee of its strength. He gave me the recent example of the Soviet Union. Naturally I responded by saying that the U.S.S.R. had a communist system while the U.S. has a vibrant free market capitalist system, it was like comparing apples and oranges. But he pressed on that the Soviet problem was that the productive members of society could not carry the burden of a state structure that wouldn't stop growing. Any economic system could suffer under such circumstances. His argument was simple, yet it made sense. Any country could face an economic crisis if the productive members of society could not support it.

A few years later the housing market started sinking and some of my friends were suddenly interested in the subject of economics. I found myself translating the news, daily events, speeches and articles into plainer English. They would get material on the subject, hand it over to me and ask me what it all meant. At first I was just translating the ideas into simpler terms. But the pundits and economists from the private sector, the Federal Reserve, the Treasury Department and other parts of the government were being proved wrong time and again by events on the ground. I remember one official asking the country for patience as the crisis refused to go away. I don't remember who he was but he reasoned that the crisis did not develop overnight so it will not go away overnight. I forgot everything else he said but his above statement raised questions in my mind. How old was the problem? More importantly, what really was the problem? Was the problem in the housing market or was that simply a symptom of deeper problems?

As I started digging deeper, scattered pieces of information from articles, books, the television and radio started coming together and I was better able to compare different points of view. I was also reminded of the 2004 conversation in which I learnt that any economy could lose its vitality under certain circumstances, and I was finding out the types of circumstances that could cause it. Some of these root causes seemed to exist within the U.S. and were much older than most experts were willing to admit. Overall I started to compare many economic foundations of more recent years to the foundations of America's best years. Could the answers simply lie in the past? Things were run very differently when America had the fastest growing economy in the world and history seemed to provide the most valuable lessons.

My goal here is to explain what has happened to the U.S. economy over the years. I hope that the explanation is its own proof why these changes shouldn't have taken place. I have tried to explain things in a language that is simple, yet accurately reflects the changes in the economy. I have also tried to avoid the type of economic theories that are abundant in the academic world but make little practical sense outside it. Economists are fond of making bold predictions provided that 'other things remain the same,' (an often used term that means that if the surrounding environment does not change, their predictions will come true). Yet other things never remain the same and their predictions almost never come true. At best we can compare the ideas of yesterday to those of today because economic history teaches us that a country's path gives us a general idea of where a nation is headed. The prediction of when such problems actually start affecting the general population is impossible to make, but every new nation that sees itself on such a path tries to prove itself the exception by hoping to thrive as it makes the mistakes of earlier nations, yet it only proves to strengthen the economic rules of history and their importance in the choice between sinking and swimming.

Perhaps my findings would bring you to that conclusion on your own.

one

TURN OF THE WHEEL

That government is best that governs least.

-Thomas Paine

The fault, dear Brutus, is not in our stars, but in ourselves, that we are underlings.

-William Shakespeare; Julius Caesar, Act 1, Scene 2.

Starting in the late 19th century, American production was going through continuous gains in technology and mechanization that gave producers the ability to produce far more than they could have imagined just a few years earlier. This phenomenal increase in goods and services needed a rapidly rising population that would consume them. Yet in a nation of immigrants whose population growth relied heavily on foreign arrivals, the U.S. Congress passed legislation in 1921 setting limits on visas based on the country of origin.

Limits on one would eventually limit the growth of the other as goods would outnumber the people they were meant for; unless the government would relax the immigration policy again or wait until a recession would redirect resources where they were used differently.

Damaged and in debt after World War 1, European economies across the Atlantic were under the burden of war reparations and debt payments which weakened America's export markets as an alternative for domestic surpluses.

In the aftermath of the First World War, the British Empire was heavily in debt while keeping up with the costly maintenance of a global empire was taking its toll on its treasury. As a result, Britain's central bank, the Bank of England, was seeing a massive outflow of its gold reserves which were hurting the economy. To relieve these problems the Federal Reserve, the U.S. central bank, expanded its own money supply by an incredibly high 55 percent between mid-1921, and the end of 1928, while reducing its Federal Funds Rate – the rate that sets the standard for all the other interest rates – by an abnormally low rate of 3.5 percent by 1927.1 These two steps flooded the economy with currency that was both cheap and abundantly available, steps which were meant to raise U.S. prices against British prices so that British products compared to American products became cheaper and more attractive to other countries. To stabilize the dollar again, it was inevitable that this policy was going to end sooner or later. Consequently, the Federal Reserve gradually started raising rates in February of 1928 to 6 percent by October of 1929.

The effect of these events was a 30 percent drop in prices as the economy crashed. The stock market, consumption, industrial production, construction activity, steel and automobile production – all fell off a cliff.

How should the government have reacted?

One of the worst panics before this one was the worst depression of the Nineteenth century, the Panic of 1893. After a stock market crash, a financial panic during the spring-summer of 1893 caused bank failures that were on average comparable to those during the panics of the Great Depression (i.e. the early period mentioned above).2 As the crisis spread to the rest of the economy, the unemployment rate rose from 3 percent in 1892 to 18.4 percent in 1894.3 This made the initial rise in unemployment worse than that in the initial years of the Great Depression. From 1892 to 1894, real income (income adjusted for inflation) fell an estimated 18 percent.4

A procession of the army of the unemployed led by a man named Jacob Coxey marched from the Midwest to Washington, D.C., arriving on 30th April, 1894 demanding unemployment relief. Instead, the government arrested Coxey for trespassing on Capitol grounds the following day and his army was disbanded.

The government's response under the presidency of Grover Cleveland was to cut spending, ensure that money maintained its value and to preserve the sanctity of contracts. Beyond this, the government did nothing to intervene, resulting in an economic recovery within a year of the beginning of this recession. Unemployment dropped by nearly 5 percent the very next year and kept dropping almost every following year until it was below 2 percent by 1906.5

The government's response to the Panic of 1893 was the standard response of the government during recessions. As the people tightened their belts, so did their government, as tax revenues fell the government cut spending to relieve the burden on the economy in the present and the future (because failing to cut spending when taxes fell simply placed the tax burden on tomorrow's economy). The same was done during the recession of 1837 when the government had cut spending by more than a fifth. The same process took place during the recessions of 1865, 1869, 1873, as well as during the depression of 1920 when the government cut its size by about one third.

But after the initial crash at the stock market in 1929, President Herbert Hoover was strongly in favor of intervening in the economy while treasury secretary Andrew Mellon strongly advised against it. Giving the example of the 1870s depression, Mellon argued that despite the initial chaos (which he made no efforts to downplay) the quickest way to a sustainable recovery was if the government did not intervene in the economy.6

Nonetheless, inspired by the success of the closely planned war economy during WW1, Hoover believed he could just as effectively manage the private peacetime economy. Soon after the crash at the stock market, as prices started falling, Hoover got commitments from employers not to cut workers' wages.7 The Federal Reserve which had just raised the rates to six percent began cutting them again. By 1930 rates were at two percent. In June of 1930, Hoover signed into law the Smoot Hawley Tariff Act. Due to this act, thousands of imported goods were slapped with a tax and tariffs on nearly 900 items were increased. Over a five year period this act raised average industrial tariffs by more than a fifth. Many of these were raw materials used to make goods for exports. At an average of forty percent tariff rates were the highest in U.S. history.8

Another major step was a huge increase in spending on public works, sums that were unheard of until then. In 1931 the government created the Reconstruction Finance Corporation (RFC) which would serve as Hoover's main instrument for public works spending. During his presidency, spending by the federal government increased by about forty percent.

The money, of course, had to come from somewhere. By the fiscal year 1932 the government was borrowing sixty percent of every dollar it was spending. Worried about balancing the budget that he had so massively unbalanced, Hoover started increasing taxes. The Revenue Act of 1932 increased taxes on personal and corporate incomes along with manufactured goods and real estate. In 1931, the lowest tax rate for personal incomes was 1.5 percent while the highest rate was twenty five percent for incomes of $100,000 and above. By the following year, the lowest rate was more than doubled to four percent while the highest rate was raised to sixty three percent for incomes of $1,000,000 and above. As such, anyone making $100,000 or more would give up more than half their earnings at the very least.9 On the other hand excise taxes made both luxuries and necessities less affordable. Despite tax hikes the revenues of the federal government fell by sixty nine percent between 1930 and 1933.10

All these steps were hurting the economy. As prices kept falling without customers, employers (who still felt pressured not to cut wages) started laying off workers instead. Unemployment which had averaged 3.3 percent between 1923 and 1929, now averaged 16.1 percent between 1930 and 1932 peaking at 24.9 percent by 1933. A quarter of the workforce was without a job. As a result, not only did the jobless stop buying but also the employed, who faced the uncertainty of their own future employment, were afraid to spend. By 1932, the steel industry was operating at twelve percent of capacity and overall industrial construction had fallen by more than eighty seven percent from 1929. By 1933, the national income had fallen by half as about a thousand homes were being foreclosed each day.11 The same year, industrial production had fallen by half.12 Consumption spending had also dropped 18 percent from its 1929 high, construction by 78 percent and investment by 98 percent.13 Over a third of all bank offices were permanently shut down and the GNP had declined by 46 percent from 1929.14 To make matters worse, the Smoot Hawley Act of 1930 got a strong reaction from countries that were exporting to America since their economies were being hurt by these excessive tariffs. It should not have been a surprise when twenty five countries decided to retaliate. As a consequence, American exports were down by more than half between 1929 and 1932 and world trade fell by one-third between 1928 and 1932.15 The period that came to be known as the Great Depression was well under way.

In this environment, the country was desperate for a fresh face as Franklin D. Roosevelt replaced Hoover in the White House. One of the first steps of the new administration under FDR was to slash the salaries of veterans and federal employees by about half a billion. However, this effort to reduce spending was the only step that was consistent with how the government traditionally reacted to depressions.

The government believed that creating an inflationary environment would get the economy rolling. In order to do that, it took the country domestically off the gold standard that kept the dollar stable. No more could Americans exchange their dollars for gold. With a threat of a fine or imprisonment, the government confiscated gold and gold certificates from the public at the historically fixed rate of $20.67 per ounce of gold and outlawed gold clauses and the following year devalued the dollar to $35 per ounce thus causing the dollar to lose 40% of its value. The government also started adding silver to its reserves by buying silver at above market prices (as much as 1 ½ times the market price).16

After declaring a bank holiday to calm the panic, the federal government provided assistance to the banking sector as banks reopened. This help included buying preferred shares of banks to inject money into the banks. The Congress also passed the Glass–Steagall Act which separated the commercial banking and investment banking activities of financial firms. This law also created the Federal Deposit Insurance Corporation (FDIC) which insured deposits of up to $5,000 for those banks that were members of the Federal Reserve System. The 1935 Banking Act gave the federal government power over the money market such as the credit markets, currency markets and open-market operations (buying and selling of federal government securities by the Federal Reserve in the open market). The president was also granted the authority to choose the seven governors who ran the Federal Reserve.

In order to bring 'fairness' to the economy, the National Industrial Recovery Act brought new requirements such as minimum wages, maximum hours, license requirements for starting businesses, collective bargaining rights and hundreds of codes introduced for all types of professions (including performing arts and personal grooming) and industries. Collective bargaining rights increased the number of unions and new provisions (such as the right to strike) strengthened their position. The unionization of America along with all the other provisions increased the cost of doing business so industries were allowed to restrict the supply of their goods and increase their prices. Some provisions actually forced sellers to sell at set prices (no less), set quantities (no more) and employ workers at set wages (no less). People who gave discounts were fined or even jailed. Small businesses which were usually hiring at lower wages and providing these discounts to their customers were losing the ability to compete with bigger businesses under these labor laws. In several hundred industries businesses themselves drew up the rules of 'fair competition' which at times led to cartels under the protection of the government.

Things which were part of everyday needs of people and businesses were becoming scarcer and more expensive, including oil which now faced restrictions on movement across state lines, and import duties were levied, thus restricting the import of foreign oil.  Restrictions were also placed on the quantity and price of fruits, vegetables, crops and other farm products like dairy and livestock. The Agricultural Adjustment Administration (AAA) gave farmers money to destroy crops, fruits and vegetables, kill livestock and restrict production. Farmers were given above-market prices to produce nothing and were given generous loans, subsidies and insurance protections against damages; different steps that aimed at contradictory goals and objectives.

Through an alphabet soup of agencies like the NRA, CWA, FERA, TVA and WPA (namely the National Recovery Administration, the Civil Works Administration, the Federal Emergency Relief Administration, the Tennessee Valley Authority and the Works Projects Administration) the government, directly and through state and local governments, hired millions of workers to build and improve roads, bridges, dams, canals, airports, schools, hospitals, playgrounds and other public projects. Under normal circumstances such projects are good for a country and many were, but the original priorities of these agencies were not the infrastructure projects that were undertaken but in fact the need to provide the jobless with jobs. So for instance, people were not only hired to increase literacy and educate people but also perform as musicians, theatre actors, writers of books, plays and music, creators of paintings, sculptures and murals under the Federal Art Project of the WPA. The size and speed at which these projects were being pushed created waste, fraud and abuse along with the opportunity for political favors to party loyalists, punishing some while rewarding others with funding. Moreover one must question the process by which the pros and cons were weighed to borrow billions to fund such projects.

Because every dollar that was borrowed had to be repaid sooner or later, as early as 1935 the new administration felt the need to raise taxes to cut the deficit. The top tax rate on personal incomes was again raised to 79 percent for incomes over $5,000,000. These individuals would get to keep about a fifth of their earnings. Through the 1935 Revenue Act, corporate income taxes were also raised along with other forms of income. Then, the 1937 Revenue Act would be another attempt to raise revenue by eliminating loopholes in the tax code.

The only authority that could have stopped these interventions in the economic system was the Supreme Court, and it did – at least in the beginning. In a unanimous decision in 1935, the Supreme Court struck down provisions of the National Recovery Act on constitutional grounds (United States v. Schechter Poultry Corp). This law had been the basis on which there were set limits on wages, prices and quantities along with formulated codes for American industry and businesses. The next year the Court rejected the AAA processing tax and challenged the government's new role in the agricultural sector (United States v. Butler).

As more and more provisions of the New Deal met opposition from the Supreme Court the administration pushed back. The president announced a proposal to seek a judicial overhaul by changing the number of sitting judges from nine to fifteen (in order to pack the court with six of his own appointees to turn court opinions in his favor). The official reason that was given was that the Supreme Court was overburdened. But the justification was hard to believe since adding the number of judges would not quicken the decision process. The public was strongly against packing the court including FDR's own vice president, John Nance Garner who worked hard to weaken these efforts. The resistance from the public and the political establishment was enough that by 1937 the administration abandoned efforts to pack the court. But the ordeal brought a change of heart at the Supreme Court as its decisions started favoring the administration's efforts. In March, 1937, the Supreme Court came out with a verdict that upheld Washington State's minimum wage law that was similar to a New York state law the Court had rejected just a year earlier. Some other decisions that favored the government were National Labor Relations Board v. Jones & Laughlin Steel Corp. that expanded the government's authority over commercial activity, reversing an earlier decision. Another one was in support of social security – both within a year of the court packing issue. The other change that began within the year was the retirement of the judges. In fact within a few years, seven out of the nine judges at the Supreme Court were FDR appointees. There was no need to pack the court anymore.

Nearly ten years had passed since Herbert Hoover had begun his intervention into the economy against the advice of his Treasury Secretary. More than six years had passed since Franklin D. Roosevelt had begun with his efforts to intervene in the economy when treasury secretary Henry Morgenthau Jr. made a statement to the House Ways and Means Committee on May 9, 1939:

"We have tried spending money. We are spending more than we have ever spent before and it does not work...We have never made good on our promises...after eight years of this administration we have as much unemployment as when we started...And an enormous debt to boot."17

Morgenthau was not some disgruntled junior employee. In fact as the U.S. secretary of treasury he was in a unique position to have made such a statement, and Morgenthau also enjoyed a close personal and professional relationship with the president.

Government spending had more than doubled from $4.6 billion in 1932 to $9.1 billion in 1940.18 The national debt grew more than two and a half times faster than the GDP during the 1930s. Every dollar that was borrowed to spend meant that taxes would need to be raised to pay off the lenders before they got nervous about the government's ability to pay back these loans. The longer the government would wait, the more the debts piled up, and the more vulnerable the economy would become, because the government had become such a large participant in the economy by now. In 1930 the revenue collected by the federal government was equal to 4.2 percent of the GDP. By the early 1940s it had more than tripled that share to 13.3 percent of the economy.19

But how could an economy grow when its new architects were focused on 'fairness,' a subjective and broad term whose interpretation during the 1930s actually prevented a recovery? In speech after speech, FDR tried to win the support of the labor majority by aiming at the business community minority – not a good time to vilify those who created jobs. The heated rhetoric and everyday changes in laws and policies increased costs, increased barriers, but above all increased uncertainty about the rules, and amid the uncertainty investors, both large and small, had lost the incentive to invest. Many businesses, both small and large, that had initially survived the Great Depression could not survive the New Deal programs. Unemployment which was an average 3.3 percent during the seven year period between 1923 and 1929 reached an average of 17.2 percent during the Great Depression between 1930 and 1941. During the 1930s unemployment never went below 14.3 percent. Real per capita GNP did not recover its 1929 level until 1940.20 The government refinanced a fifth of all urban homes and farm mortgages and yet house prices fell by 30 percent during the 1930s.21 The Dow (stock market index) which had lost more than a fifth of its value during the 1930s waited 23 years to recover its 1929 highs. Since farmers were being paid to produce less food, shortages were turning the country into a major importer of farming and agricultural products.22 And yet farm incomes did not return to their 1929 level till 1941. After the initial excitement of the New Deal spending programs, many were being scaled down by 1937 and unemployment jumped by 4.7 percent to 19 percent in 1938. By employing millions of workers, the government had made the economy too dependent on the government for the private sector to grow the economy out of its crisis, as the sudden jump in unemployment revealed. The American economy did not recover because of the New Deal but in spite of it. Since its continuous rise beginning in the 1800s, the strong foundations acquired by 1929 provided the resilience to carry it through the 1930s.

So what really brought the economy back to growth?

The popular belief is that World War II brought the economy out of the depression. In narrow statistical terms, it can be said that since people were rehired to provide goods and services focused on the war, the economy was growing in the sense that people now had jobs and production was increasing. But this view ignores the prosperity that must support these numbers, namely that the economy must not just provide jobs but value jobs that provide goods and services that people actually want. Planes, tanks and guns are not the goods and services that businesses and people need for their personal and commercial use, and those activities were put on hold as car factories were retooled to make military vehicles and garment workers were rehired to make uniforms. So the people were working, but for the most part it was not the kind of work that consumers and businesses valued. However, one aspect of the war was growing the U.S. economy. In 1939, Britain and France had declared war on Germany and started buying war supplies from the U.S. with gold payments, and military spending by the French and the British was enriching America, in other words, export jobs.

Then the 1934 Trade Agreements Act had authorized the president to renegotiate tariff rates on a country by country basis. Over the next five years the United States was able to significantly reduce trade barriers and establish trade relations with partners which revived global trade by the late 1930s.23 In 1939 Congress also removed the undistributed profits tax on corporations which could now amass funds for future investments without worrying about taxes. During the 1940s the government also repealed some industrial policies and started dismantling New Deal programs like the Civilian Conservation Corps (CCC), Works Projects Administration (WPA) and the National Youth Administration (NYA). After the Second World War ended the economy grew at an average of 4 percent a year for about two decades.

During the war it wasn't so much that the economy moved forward but that the rest of the industrialized world had been pushed back. The British Empire which was the global superpower had lost about a quarter of its wealth as a result of war costs and the resulting decimation. As many as half of Europe's urban buildings had been razed in some of its main cities. In other cities the situation was not much better. Europe's manufacturing base was in ruins. The second largest economy in the world, the Soviet Republic, was also left with 1,700 destroyed cities and towns with battered roads, bridges, railway tracks, industries and farms throughout the country.24 Japan had lost a quarter of its own wealth to the war along with a large chunk of its infrastructure and manufacturing base. By contrast America had suffered no comparable damage or depletion of resources.

This by default left the U.S. with half of the world's economic production. The nation had also amassed two-thirds of the world's gold reserves, three quarters of the world's invested capital, two-thirds of the world's oil production, half of the world's coal production, over half of the world's steel production, more than 40 percent of global electricity generation and half of the world's industrial output.25 Nine out of every ten dollars spent by the world in research and development (R&D) were by the U.S. along with eight of every ten automobiles produced. Extraordinary numbers for a country that was a mere 7 percent of the world's population.

Soon after the war ended the government also made some wise investments in the country's future. One was the G.I. Bill of 1944 which allowed returning veterans a chance at government funded education. The resulting improvement in skills and productivity helped to expand the middle class that had a positive impact on the economy and the nation. Another was the 1950s Highway Project. Though originally intended for military use, the $32 billion Highway Act of 1956 connected the country in a way that positively affected the lives of all Americans. Another influence was the entry of women and minorities into the workforce that began after the war, and accelerated in the 1960s and 1970s.

The 1930s are the most important decade in the economic history of America because of how they redefined the role of the government in the economy. Until then the federal government was usually around 4 percent of the economy, unless it was a time of war. This small size left ample room for the local governments to play their role and the private economy to flourish. However the change in attitude during Hoover's and later Roosevelt's time broke through that limited role barrier. The federal government was setting wages, prices, quotas, through the Social Security it was withholding wages and funding retirements, it was strengthening certain groups and thus weakening others, buyers and sellers were no longer the only active participants in the market as the government became the architect of the economy. The Employment Act of 1946 was a legislative recognition of that role which committed the federal government to peacetime management of the economy and established the role of Keynesian countercyclical policy which was a complete break from the past philosophy of non-intervention. The government promised to provide full employment and voters would hold them to that promise more than any other. In the 14 months leading up to elections, if unemployment came down (as it did for Eisenhower, Nixon, Reagan, Clinton and Bush Jr.) a president was reelected. When unemployment went up (as it did for Carter and Bush Sr.) he was defeated .26

The evidence was clear, the New Deal failed to bring the economy out of the Great Depression, instead delaying it much longer than any depression in American history, even those that started out just as badly. But the philosophy of non-intervention was cold-hearted in appearance even though it was well-meaning in its intentions and successful in achieving its goal. It demanded self-control from its leaders and patience from its public during times of panic. While the 'do something' philosophy of the 1930s, despite its disregard for the lessons of history, was sympathetic in its appearance and this made it far more popular in history, despite its failure to achieve its objective.

The instinctive reaction of people during a recession is to tighten their belts, so before the 1930s, when a recession hit, the government did what its people did and in doing so it relieved the burden on the people by taking less of their money (less spending – less taxes). Since then it chose to relieve their burden by giving them money (more spending – more borrowing – more taxes). The first was more cautious, the second more politically rewarding.

It was also an era of new expectations from the state and fewer responsibilities upon the individual. Government institutions started replacing the interdependent system of tight-knit communities with comparatively inflexible and impersonal bureaucracies. A person's role in and concern for his society was for the most part being taken over by the public sector while the individual's responsibility entered a narrow, clearly defined context – his tax obligations. The government became the middleman between those in need and those who (as tax payers) would support those in need, and a balance between self-interest and the common interest of shared values started eroding in people's personal lives, eventually spilling into their professional lives.

Yet perhaps the most important change was the ascent of Washington. The confrontation between the Supreme Court and the White House ended up with a judiciary that was now more supportive of the economic policies of the federal government. Nor was the judiciary alone in this. Until the Great Depression the nation was better described as a collection of states that were in healthy competition with each other. One state would experiment with a policy and its success or failure set the example for other states to adapt, avoid or alter. This competition between the states made the nation as a whole more attractive globally, growing the country with the offer of so many choices. But the New Deal provided federal aid to the states. The states started turning to the federal government as a source of funds after laws like the $300 million Emergency Relief and Reconstruction Act. The differences between the states that made them diverse and distinct were replaced with a stronger federal presence. The federal government's tax revenues which were 4.2 percent of the economy in 1930 never returned to that level and stayed at an average of 18 percent after the Second World War. Federal taxes, which were still a sixth of taxes collected at all levels (local, state and federal) in the pre-World War II era made up more than half of all taxes by 1950.27

Earlier in this chapter, I mentioned a discussion that took place between the president and his treasury secretary at the beginning of the Great Depression. Hoover, as president, was arguing for strong government intervention on the belief that times had changed the nature of the economy. Treasury Secretary Andrew Mellon was staunchly against any interference on the belief that human nature had not changed.28 Besides the issue of intervention, Mellon was raising another important point. No matter how much the nature of an economy changes, economics is a social science that is based on the fundamentals of human nature. And since human nature is unchanging, certain fundamentals of economics must also remain the same even if the particular details may vary from time to time.

Because perfectly free markets cannot exist in an imperfect world it makes sense to have laws that take into account moral, legal, social, cultural and national considerations, all countries do. However there must always be a need to keep close watch on the effect of these considerations on the economy so that the incentives are aligned with an economy that grows at its greatest potential.

Keeping such issues in mind, the pages that follow take a look at the changes made to the foundations of the American economy that make its economic philosophy different from an America that was once the fastest growing economy in the world. The single most influential shift came with the New Deal but fundamental changes had been going on throughout the 20th century and accelerated in the later decades. I have chosen these specific themes to help explain what has happened to the economy because they matter regardless of how much the times change. Irrespective of the nature of an economy the role of the state in the economy will always be an important issue (chapters 1 and 5) and how it manages its own affairs will always be meaningful (chapters 2 through 4). Like the governments of today, societies of the past have also dealt with the matter of currency management (chapter 6) and the role of banking (chapter 7) in their own way. Civilizations and empires of earlier periods have redirected the market to reflect their priorities (chapter 8). The size of the market (chapter 9) will never lose its relevance to the field of economics. The basic rules of governance (chapter 10) have shaped the commercial environment in every era. Among other things, every nation defines itself through its dealings with those around it (chapter 11) and how it compares to others (chapter 12).

It is my hope that these pages show that the deeper issues affecting the economy are not so simple that they can be explained away in a tagline nor are they so complicated that they are beyond comprehension.

two

SPENDER OF THE LAST RESORT

I regret to say the word 'billion' does not encompass the nature of the problem.

-Alan Greenspan, chairman of the Federal Reserve

commenting on excess spending in a 2005 appearance

before the House Banking Committee.

During its early years every nation tends to keep taxes low. Its government has limited resources because of which it strictly prioritizes its spending to the most basic requirements of a governing body. This helps to limit its growth compared to the rest of the economy. With time it reaches beyond the vital functions to the ones that are not as necessary. Yet when it faces a shortage of revenues it does one or both of two things. It borrows in order to keep up with the less important functions and/or it cuts those functions that are easiest to cut (i.e. the ones that meet the least resistance). Since the new criteria is not 'necessity' but lack of resistance, the types of cuts made may not be in the nation's best interest.

America's founding fathers were quite aware of the need for a government watchful of its expenses. America's third president Thomas Jefferson stressed on the need for a wise and frugal government, in his inaugural address.

For a business, spending brings with it built-in checks and balances. No matter how convincingly it can justify spending money, if it overspends its profits suffer, it goes through losses or it simply goes bankrupt. These restraints help to keep its expenses within limits – spend well or suffer quick, measurable consequences. For a government, any government, the situation is not so black and white. Its expenses tend to have less direct benefits or costs which make the effects of its spending habits less quick and less easily measurable.

In the pre-depression era federal spending was around 4 percent of the economy. In the post-World War II era it has averaged around 20 percent. Every administration found a reason that justified spending more to try to accomplish more. An example of this are the Great Society programs of the 1960s. The 1965 Great Society programs were a declaration of war on poverty and unemployment. They involved a massive expansion of government programs some of which were aimed at education assistance (Elementary & Secondary Education Act of 1965 and Higher Education Act of 1965) through scholarships and cheap loans. Others were aimed at healthcare (Medicare in 1965 and Medicaid in 1966). But overall the government had overcommitted on welfare programs and underdelivered on its promises. Most programs were widely accepted as failures when they didn't even benefit those they aimed to help. The poor management and bad execution of stated goals further created a new underclass of recipients stuck in a continuous cycle of welfare dependency and poverty. It was not until 1996 that this failure was seriously recognized. In July of 1996 the Clinton administration brought welfare reform which ended some federal cash assistance programs that began during the New Deal six decades earlier and aimed at the Great Society programs by linking them to work requirements and reducing the length of time for which one could stay on welfare. The Aid to Families with Dependent Children (AFDC) which had not produced results was replaced with the Temporary Assistance to Needy Families (TANF). But like the example of the 1960s each government tried to address some problem of society through more spending, and so in dollar terms each government expanded with time.

The only president who has gained a reputation in recent history as being in favor of smaller government (or anti-big government to be more precise) is Ronald Reagan who in a 1980 presidential campaign famously said, "In this present crisis, government is not the solution to our problem; government is the problem."

Yet whatever his intentions and words, his reputation for actually cutting government down to size is baseless. His attempts to eliminate the Department of Energy, Department of Education, Small Business Administration and some financial assistance to farmers would hardly have made a serious difference to the actual size of the federal government and even those attempts failed in the face of political resistance. He did manage to shrink funding for some programs like education, training and some social programs, but overall the welfare state kept growing. At best Reagan managed to slow the growth of the welfare state, not stop or reverse it. The year before he took office the federal government was 21.7 percent of the GDP (1980). During his last year in office (1988) it was 21.1 percent of the GDP and this reduction relative to the rest of the economy had more to do with economic growth than anything else, since 1980 was a historic recession year and 1988 fell within a period of prosperity.

The size of the federal government did not change in terms of programs offered or money spent, but it did change in a more indirect way. During the Reagan administration there was a strong shift towards public-private partnership that contracted work out to private businesses. The government appeared smaller because there were fewer employees directly on its payroll. This celebrated change added complexity to the size of the government without actually reducing its size. The line between the public sector and the private sector was harder to see (how private were the private businesses directly dependent on tax dollars?), the political complications increased with new interest groups, and yet spending rose 22 percent in real dollars (i.e. taking inflation into account) during his eight year term.

But if this happened to the size of the government during the time that it said it wanted to shrink, what happened during the other times? In 1960 the federal government was 18 percent of the GDP, by 1970 it was around 20 percent, by 1980 21.7 percent and after rising to over 25 percent because of the recession in 2008, it was around 21 percent in 2013. But even these numbers do not give us a complete picture because the government is more than the federal government. There are also state and local governments that collect their own taxes, borrow for their own needs and spend their own money. Total spending by the entire government was over 40 percent of the economy during the Great Recession and is starting to come down to the recent average of 35 percent.2

Discussed below are four key areas of government focus, namely social safety nets, security, infrastructure and education:

Social safety nets: It was right in the middle of the Great Depression that the Social Security System was put into place to provide retired workers a minimum income for when they probably wouldn't be able to work. Enacted in 1935 it planned to provide those who were 65 years old and older a steady stipend when the average life expectancy was at 62 years, so it was meant to help the fortunate few in their very last years. Initially the law had limited coverage, for instance farm workers (around 30 percent of the workforce at the time), domestic workers and immigrants were excluded. But starting in the late 1930s the law was amended every few years to include a few more dependents and expand a few more benefits. Changes during the even years (read 'election' years) of the 1950s brought a sevenfold increase in eligible families.

Now workers can retire at 62 years when the average life expectancy is 78 years. When the system was started, only 7.5 million Americans were over 65 years old in a population of 127 million and many of these seniors were outside the system. By 2010, Social Security had 58 million beneficiaries in a population of 310 million. So while the national population has grown by 142 percent, the beneficiary population has expanded by over 673 percent.

In theory a person and his employer contribute a portion of his regular income to his Social Security account until he enters retirement age when he will get a regular payment from that account for the rest of his life. In practice the model depends on today's workers for today's retirees through a PAYGO (Pay As You Go) system. It takes the contributions of those working today and supports today's retirees with those contributions. For the success of such a system the money coming in each year must be equal to or more than the money going out every year so that the government does not have to make up for the shortage from elsewhere (i.e. borrowing or sacrificing other responsibilities). This would constantly require more workers than retirees.

Also, if there is more money coming in, the government should save what is left over in case of a future shortage. For almost the entire life of the system there was more money coming in than going out. Quite recently surpluses were averaging $150 to $175 billion a year and the Social Security Trust Fund should have had around $2.6 trillion saved up by 2011.3 This trust fund would have been quite helpful in the coming years because due to demographic changes (to be covered later) there would permanently be more money going out than coming in. The estimate on the permanent period of shortage has been revised a few times, each time bringing the shortfall years closer. Then recently the federal government temporarily cut the payroll tax (the tax that goes to the Social Security account) by 2 percent because of which there was already a $115 billion shortage in 2011.4 So a current shortage which will soon turn into a permanent shortage will require the use of this trust fund.

Unfortunately this trust fund doesn't practically exist because the government has borrowed all of that money to pay for other things. It was the easiest of three choices: raise taxes to pay for other expenses, cut other expenses or borrow and keep up those expenses.

The Social Security system is only part of the system of government social programs. In fact the original law passed in 1935 would have included a healthcare insurance plan had it not been abandoned to gain needed support for social security itself. It was revisited in 1947 by the Truman administration and others later, but not until 1965 would something happen. In 1965 amendments to the Social Security Act introduced Medicare and Medicaid. These two now take up 3 of every 4 dollars spent on federal medical bills, thus their importance to the healthcare budget. In 2010 Medicare, Medicaid and the Children's Health Insurance Program (CHIP) cost $900 billion with 46 million on Medicare, 69 million on Medicaid, 16 million on TRICARE (meant for veterans, military members and their families) and 9 million on the Federal Employees Health Benefit Program (FEHBP) for civilian federal workers and their families.

If all entitlements are included (like veterans' pensions, child nutrition programs etc. besides those mentioned above) their share has increased from 36 cents of every dollar the federal government spent in 1970 to 59 cents of every dollar it spent in 2010, essentially consuming all the taxes collected by the government.7 For the economy at large social programs were 1.6 percent of the national income in 1930, a few years before Social Security. Still less than 9 percent in 1970 they grew to 18.3 percent of the 2010 national income.8 Both these trends show a shift in the priorities of the government along with a change in the focus of the overall economy. So far entitlements have been taking up a larger share of the budget and national income due to policy changes. But legal changes are not the only ones to influence entitlements. Demographic changes are also important.

That brings us to the most important influence on the future of entitlements: baby boomers. After World War II the nation saw a surge in its population as 79 million babies were born between 1946 and 1964. Because of this surge, baby boomers (or boomers) have affected social trends in the country as they entered different stages of their lives. In 2011 the oldest boomers turned 65, starting a wave in which around 10,000 workers will retire every day for nearly two decades. This will bring the population of seniors (65 and over) from 40 million in 2010 to 72 million by 2030. So Social Security and Medicare – the two main entitlements for seniors – went from 14.8 percent of the 1963 budget (i.e. before Medicare) to 40 percent of the budget in 2009. But this increase was mostly due to new commitments made by the government as seniors have hardly increased from nearly a tenth of the population in 1970 to around 12 percent by 2010. But by 2030 they will be 20 percent of the population, roughly four times the earlier increase in half the time.

This means that if the current system stays in place, by 2030 Medicare, Medicaid, Social Security and pensions (civilian and military) will consume all federal taxes even in a healthy economy.9 There will be no room left for infrastructure, education, security, defense or even to pay interest on past loans without borrowing money or raising taxes. In fact these entitlements are large enough not only to influence the budget but also the entire economy. Medicare, Medicaid and Social Security were about 9 percent of the GDP in 2010 and could reach 17.4 percent of the 2030 economy to maintain these social commitments.10 And no matter how fast the economy grows entitlements will grow faster because payments are going to rise with inflation and medical costs. So no amount of prosperity will reduce the burden of entitlements on the budget or the economy.

Such expenses are mandatory payments that the government has little or no discretion over because of past laws. Such non-discretionary spending also includes pensions, interest payments on debt and other social programs like child nutrition, food stamps and family aid. They are unlike programs which the government does have discretion over, namely defense, infrastructure and education, which are discussed below.

Defense: For the country its greatest military assets have been its natural borders. Vast oceans that separate it from Europe on one side and Asia on the other have served as a greater deterrent than anything made by man could have otherwise accomplished. That is why until the Second World War America's defense commitments were comparable to armies of Latin nations far smaller and poorer than the U.S.. The 19th largest in the world, it was smaller than armies of European nations like Portugal and Bulgaria even in the late 1930s. So underfunded was it that training exercises were often done on horseback with cardboard cutoffs of rifles.11

But the war changed all that. By the late 1940s the defense budget was averaging around $18 billion a year while hardliners were arguing for a $50 billion budget, a sum too large to consider seriously. That all changed when North Korea attacked South Korea in June of 1950, starting the Korean War. Suddenly $50 billion defense budgets were quite acceptable and in every decade from the 1950s the country has been embroiled in a war with the financial drain that all wars bring: the Korean War (1950s), Vietnam War (1960s and 1970s), the height of the Cold War (1980s), the Gulf War (1990s) and the Iraq-Afghan Wars (2000s). In 1960 the federal government was 18 percent of the economy. By 1984 it had grown to 25 percent of the GDP due to the automatic growth in entitlements and growth in defense spending which averaged 5 to 8 percent of the economy during the Cold War era.

It was only after the Cold War that the defense structure saw a drawdown as military forces were shrunk by more than a third and defense spending was brought down to 3-4 percent of the economy. Yet domestic base capacity had been reduced by only a fifth due to political resistance.12 Towns and local economies that were once home to thriving industries, producing goods and services that consumers and businesses valued the world over, had with time become far too reliant on the bases they surrounded and the risk-free economic opportunities they offered. In 2009 military compensation was an average $122,263 for soldiers, sailors and marines, and such type of spending had been driving economic growth.13 Internationally bases had actually increased while Cold War rival Russia reduced its foreign presence from around a dozen naval bases to two in recent years.

One of the results of the public-private interdependence mentioned earlier is the military industrial complex. Take for instance the Pentagon's largest weapons program meant to dominate the future of the American jet fighter force. The engines for the F-35 Joint Strike Fighter are a $100 billion market. A back-up engine for the jets costs the government an extra $465 million a year. Yet the Pentagon, including the then defense secretary, Robert Gates, called it a waste of money and the administrations of Bush and Obama tried to get rid of it since 2006. This would however hurt the profits at General Electric (GE) which was developing the engine with Rolls Royce. From 2008 to 2010 GE and its subsidiaries doubled lobbying from under $20 million to nearly $40 million so Congress kept on funding the program because it 'encouraged competition.'14 It was finally abandoned in 2011 due to budget pressures.

The above is a small example in which defense priorities were being ignored for immediate political and economic gains, wasting resources. But in fiscal year 2010 the U.S. Department of Defense awarded contracts worth over $216 billion to private firms. Over a quarter of this sum went to the top five firms and nearly 60 percent to the top fifty firms.15 Add to this that security budgets by their very nature of secrecy cannot be opened to public scrutiny and criticism and that it is (politically speaking) better to be accused of spending too much money to protect the country than to be accused of not doing enough, and the political complications can be overwhelming.

Presently the defense budget has been on the rise during the 21st century and in fiscal year 2011 it stood at around 5 percent of the GDP.16 Doubled (in dollar terms) over a decade it has grown twice as fast as the economy. How does this compare to the rest of the world? According to the Stockholm International Peace Research Institute, in 2009 global spending on military was $1.59 trillion. The U.S., which is around 4 percent of the world's population and around a fifth of the world's economy, spent 43 percent of that military share. By comparison China, with roughly a fifth of the world's population and around an eighth of the world's GDP, spent an incomparably small 7 percent of that global military share. And China had the second largest budget in the world. In fact if the official defense budget takes into account war funding, defense spending on anti-terrorism efforts by the Department of Homeland Security, the Department of Energy's responsibilities towards nuclear weapons, the budget of the Department of Veterans Affairs, pensions and benefits to military retirees and their dependents, and interest payments on defense expenses of past years the U.S. figure for any given year is higher by about a third.

During the 19th century it was said that the sun never set on the British Empire, a presence that was as expensive as it was far reaching. Now with an estimated 900 military bases in 135 countries and a headcount of half a million it never sets on an American base. And the operational costs of defense per uniformed member of the armed forces have been rising by 2 to 3 percent a year, (even after accounting for inflation) while equipment is aging with time.

Infrastructure: The story of America's infrastructure really began in 1817 with the construction of the Erie Canal. After opening in 1825 the $8 million structure paid for itself within just a few years and encouraged infrastructure projects across the nation.17 Then in 1828 the first American passenger railroad service began and with it the most extensive railroad system in the world was already underway when railways were replacing the horse and carriage as the fastest and most modern method of cross-country transportation. While the country still had that lead in 1956 the government was inspired by the efficient system of military transport on Germany's Autobahn and began the largest construction project in the history of mankind to build the interstate highway system that connected almost every part of the country to every other part with a recent total of 46,876 miles.18 People, goods and services could move to any corner of the nation, and airports and railways only added to that ability. In 1800 travelling coast to coast could take a whole year. By 1930 railways had made that possible in three days. By 1960 air travel made it possible to travel from coast to coast within a day.

Roosevelt had brought electricity to farms across the country and with time waterways, sewage lines, bridges, canals and tunnels improved the life of every American. When Eisenhower left the White House in 1961 the government was spending a fifth of its budget on infrastructure. And even before the interstate project wound down in the 1980s the next new thing was on the horizon: bullet trains that emerged in Japan during the 1970s.

But the infrastructure budget which was 3.6 percent of the economy half a century ago lost out to the increases previously mentioned, and steady declines in funding that started in the 1970s and 80s have put the average spending of the recent past between 2 and 2.5 percent of the economy. This is while Europe has been spending about 5 percent of its GDP on infrastructure, India about 4 percent and China about 12 percent.19 So how has this affected America's historic position as number one? In the 2011-2012 Global Competitiveness Report the World Economic Forum ranked America's infrastructure 24th among the 142 countries it profiled.20

In 1988 a congressionally chartered commission, the National Council on Public Works Improvement released a report card on the U.S. infrastructure titled, "Fragile Foundations: A Report on America's Public Works," in which it gave eight categories of the country's infrastructure a cumulative "C" grade. Already the public was being informed that its national assets were in need of repair. In following years the American Society of Civil Engineers released periodic reports updating the public on the condition of its infrastructure. In the 2009 report card it graded fifteen categories of infrastructure including the water systems, energy, roads, bridges, railways and two categories of waste systems. Because of underfunding and delayed maintenance the highest grade for any category was a "C+" while the cumulative grade for all categories was a "D." More than one of every four bridges was either 'structurally deficient or functionally obsolete.' A third of roads were in poor or mediocre condition while 45 percent of major urban highways were congested. The average age of all federally owned or operated locks (that protect inland waterways) was nearly 60 years, well past the design life of 50 years. The 100,000 miles of levees that protect towns and developments were over 50 years old, increasing the risk to public health and safety from failure. The average age of dams was over 51 years old with a "D" grade.

The report estimated the need for a five year investment of $2.2 trillion to bring the national infrastructure up to good condition while current spending amounted to less than half of that figure. In fact the required amount is a big increase from the $1.3 trillion estimated in the 2001 report card and the $1.6 trillion estimated in 2005.21

But this is not just about numbers. In late August 2005 Hurricane Katrina broke through a network of federal levees that was designed to protect against flooding but was neglected over the years. The resulting flood swept through 80 percent of the city of New Orleans overnight, turning it into a disaster zone without basic necessities like food, water, electricity, medical care, basic communication and transportation. In the end 1,500 lives were lost, 700,000 people were displaced and 300,000 homes were damaged or completely destroyed. Almost two years later a highway bridge over the Mississippi River in the city of Minneapolis collapsed on August 1st during the evening rush hour traffic, killing 13 people and throwing 50 cars into the river.

Underfunding of the infrastructure has not only denied the average citizen the chance to continue to improve his quality of life, as did past generations, it is not even enough to maintain the assets that already exist. Corrosion and erosion due to a lack of maintenance have made the system substandard to the point of being dangerous, as the examples of New Orleans and Minneapolis show. For example after the Clean Water Act of 1972 the federal government was contributing 75 cents of every dollar that municipalities needed to maintain their water and sewage treatment systems. By 2010 this contribution was down to three cents.22 The American Society of Civil Engineers gave both systems a "D-." Hit by pension costs, falling revenues and budgetary pressures of their own, local governments are selling their water and sewer systems to private corporations.23 And this pattern of neglect and privatization is happening with all types of infrastructure, a responsibility that has been one of the basic expectations that taxpayers have of their government.

Education: Massachusetts was the first state that started using its taxes to provide a high school education, available to the public in 1827. Soon thereafter the idea spread to the rest of the country as most states were investing in free public education by the early 19th century. The importance of education did not even weaken during the 19th century's largest conflict, when in the midst of the Civil War Abraham Lincoln signed the Land Grant Colleges Act of 1862. Public land was to be used to establish a university system in each state in order to train students in all types of professional fields including medicine, law, engineering, agriculture and arts.

That sense of priority also shows after World War II when the government saw the need to help veterans readjust to civilian life and passed the 1944 GI Bill to provide them with unprecedented access to education and skills training. Financial aid was given through grants that covered tuition, books and even living costs. The seven year program gave 7.8 million people, nearly half of all veterans, an opportunity to improve their education and skill level, 2.3 million of whom got a college education. They went on to become the foundation of an educated middle class in modern American society. Then followed the Higher Education Act of 1965 and Pell Grants in 1972 that expanded the idea of the GI Bill to the general public by offering grants and loans to all high school graduates. Pell Grants started out with the federal government covering three quarters of college expenses.

The sector of higher education is now around 3 percent of the GDP but it faces structural problems. Over the decades students have been getting less and less help to the point that the federal government now covers about a third of college costs through Pell Grants. Many of America's universities are known the world over, but 80 percent of undergraduates are enrolled in public colleges most of which do not enjoy such recognition.24 And yet college costs for private and public colleges have skyrocketed. Inflated salaries for tenured faculty, lavish accommodations and recreational activities for students (like rock-climbing facilities and cuisine menu meals) along with budget problems (of local and state governments) have raised college education costs much faster than inflation, costs are over two and a half times what they were three decades ago for private colleges and have risen even faster for public colleges.25

Higher costs raise the need to borrow. According to the non-profit research and policy group Project on Student Debt those who earned a bachelor's degree in 2011 graduated with an average of $26,000 in student loan debt. Meanwhile, nearly a third of students do not take any courses that involve more than 40 pages of reading over an entire term. A federal survey found that the literacy of college educated citizens declined from 1992 to 2003. Only 1 in 4 was considered proficient, defined as, "using printed and written information to function in society, to achieve one's goals and to develop one's knowledge and potential."26 According to the College Board the issue of how much debt a student will owe upon completion of studies is the most important factor in enrollment decisions.27 Yet enrollment itself is no indication of a brighter future as graduation rates have been on the decline. As recently as 1995 the country was still tied for first in college graduation rates, but by 2006 it had dropped to fourteenth, an important issue since post-secondary degree holders can earn 30 to 70 percent more than high school graduates.28 Almost uniquely among developed nations American men now aged between 25 and 34 are less likely than their fathers to have a college degree. 29

Among the national investments that complement higher education, one is research and development (R&D) and the lion's share of this spending always came from the federal government which contributed 50 to 70 percent of that share since the end of World War II. But steady declines have reduced federal R&D spending from a high of around 2.25 percent of GDP during the 1960s to 1 percent or less of GDP since the early 1990s.30 According to the National Science Foundation the country spent $398 billion on R&D in 2008. The federal government's share was over a third with another 20 percent from state and local governments. Out of the federal sum, an even smaller share of $30 billion is crucially important for fundamental research that brings the latest innovations in technology, and this crucial sum has fallen over the decade even though it is almost exclusively funded by the federal government and could yield a 28 percent return on federal research investments, based on an often cited estimate from the Congressional Budget Office (CBO). Such reductions explain a 2005 warning by the National Research Council that America's dominance in the field of science was in decline.31 In terms of R&D spending as a percentage of GDP America came in 10th in 2011. 32

And what about the state of school education? During the 1950s and 60s the American school system was the best in the world. In 1959 the country spent about 3.3 percent of its GDP on elementary and secondary school education with over 90 percent of that coming from the government. Most recently in 2008-2009 the country spent over 4.5 percent of its GDP on school education while over 90 percent of that sum (exceeding $600 billion) came from the government. State and local governments have always been the majority contributors with less than one of every ten dollars spent by the federal government.33

While the system does not suffer from a lack of funding it has seen a lack of attention. A shift in priorities has led to neglect and a disconnect between goals and incentives.

In April of 2009 the consulting firm McKinsey & Co. released a study that showed the impact of the decline in education on the American economy. To compare American students to others it used the Program for International Student Assessment (PISA), a respected comparison of 15 year olds by the OECD that measures the 'real world' (applied) learning and problem solving ability of high school students. In 2006 the U.S. ranked far below its European competitors, 25th among 30 nations in mathematics and 24th in science.

Even though government spending at an average of over $10,000 per student per year is among the highest in the world, the report found that the system is inefficient when it is compared to other countries, because of underlying issues such as school-site leadership, teaching practices, systemic investments, system wide strategies and the type of public policies in place. According to one measure the country gets 60 percent less for its education dollars, when measuring the average of score results, than do other wealthy nations, spending vast sums with mediocre results in many districts. The study also noted the relative decline because of local stagnation over the last four decades while students from other countries have been improving consistently. Moreover lagging performance was not only seen in poor kids from poor neighborhoods but amongst most kids from most schools.

About four decades ago America was the leader in high school graduation rates, but according to the U.S. secretary of education 25 percent of high school students today either drop out or fail to graduate on time.34 This placed the country 18th in graduation rates among 24 industrialized nations.

The conclusion of McKinsey's findings was that the continuous gap in the country's education system imposes a permanent national recession on the economy, one that is far worse than the recession of 2008. If between 1983 and 1998 the country had managed to close the gap in educational achievement levels between itself and better performing countries like Finland and South Korea the GDP in 2008 could have been $1.3 to 2.3 trillion or 9 to 16 percent higher. During the same period if the performance of the country's black and Latino students had been raised to those of white students the GDP would have been 2 to 4 percent higher.35

The study reinforces the view that a good education helps to improve the quality of life in a number of ways including economic conditions. When there is a long term improvement or decline in a nation's quality of education, incomes start following in the same direction in about two to three decades.

In the comparison between the past and the present we see a clear shift in government spending. Of every dollar spent in the 2011 federal budget 57 cents went to benefit programs, 24 cents were spent on the defense and homeland security and 6 cents on interest on a debt that deserves its own chapter. That left only 13 percent of the budget over which the government had the discretion to make non-security decisions, according to the White House Office of Management and Budget. Most of what it spends the government is already committed to because of past promises or political reasons.

For every government that comes with fresh ideas there is little room to make changes without drastic legal changes. Decisions have already been made for them. And since that 13 percent includes basic functions like infrastructure, education, R&D etc. that can't just disappear, there is no room for unforeseeable events like natural disasters and recessions. Even in our daily lives we learn the need to prepare for such unexpected events like an illness, a sudden job loss, home or car repairs etc., for a nation such a need is no less important.

A historical comparison also shows that in the past the focus was on the future and in the present the focus is more towards the present. With the shift towards benefits and security the government has moved towards consumption spending and the investments into its future have suffered from lack of funds or lack of attention, and have been in decline. These long term investments provided the essential tools for continued prosperity, but after the shift in focus the future is now arriving.

Another aspect is the size of spending itself. By that I don't mean spending relative to taxes, which simply aims to balance the budget, but spending relative to the economy. Businesses create wealth. A government that does not own businesses does not create wealth, but if it invests wisely it can help develop the tools that provide a wealth creating environment. Although it is the largest participant in the economy the U.S. government, unlike many other governments, does not run its own businesses. Every dollar the government spends is a tax on someone today or, if the money is borrowed, someone tomorrow. So the smaller the government is relative to the rest of the economy, the better able the rest of the economy is to grow by saving and reinvesting. An exception to this would be if the government itself favors investments over consumption, but we saw that it didn't apply here. Every time the size of a government increases it means that the government will require more support from the private sector due to its larger size. But it also means a private sector that is smaller in size which makes it less capable of supporting the government and the economy, so even small changes matter.

During the Great Depression one of FDR's key economic advisors, Adolf Berle Jr., was concerned about the increase in the government's size and wrote to the president that, "Unless the government nationalizes great blocks of industry reliance must be had on at least seven times as much private activity as government activity."36 In other words he argued for a tax reliant government that was 12.5 percent of the economy. The present governments of Singapore and Hong Kong are around 20% of their economies. Even this leaves ample room for the private economy to grow and support the government. When China started with market reforms its central government's spending fell from 31% of the GDP in 1978 to a low of 11% by the mid-1990s. Since then the central government has deliberately strengthened its share and was 22% of the GDP in recent years.37

So compared with some measures of the past and present where is the American government today? The federal government has been just over a fifth of the GDP since the late 1960s and about a quarter of the economy during the Great Recession of 2008. Even this does not measure the state and local governments. The total size of government spending relative to the rest of the economy has historically been about a third of the GDP. During the Great Recession, it was above 40% and is now slowly coming down to its historical average.38 This left less than two-thirds of the GDP for wealth creating private activity in recent decades and less than 60% of the economy during the recession. Such high levels are similar to European countries but European governments (in spite of their welfare states) have been investing heavily in their infrastructure and education. Various European nations like Scandinavian countries rank higher than the U.S. in such categories. And unlike the U.S., most countries actively own commercial businesses like airlines, mining firms, telecommunication firms, etc. including the previously mentioned governments of China, Singapore and many European countries.

This means that the size of the government must be cut drastically to compete with booming Asian competitors or even further to restore the growth that Adolf Berle Jr. had in mind, the type of growth in the 19th and early 20th centuries. At the same time there must also be a shift towards investments rather than consumption. A move to a smaller size will come through a difficult transition but its end purpose would mean that the private sector will be employing more people directly than indirectly (i.e. through the government). After lower spending and lower taxes that money will not just disappear but either be saved or spent. All saved money (whether in a bank or some other investment) and spent money will employ people and resources that went to the government, but this way both will be within the wealth generating part of the economy – the private sector.

three

DEFICITS DO MATTER

The public debt is the greatest danger to be feared by a republican government.

-Thomas Jefferson

No pecuniary consideration is more urgent, than the regular redemption and discharge of the public debt.

-George Washington

You know Paul, Reagan proved that deficits don't matter.

-Vice President Dick Cheney's comment to

then treasury secretary, Paul O'Neill when

he warned about rising deficits in late 2002,

a month before he was fired.

The creation of wealth cannot take place if you spend more than you make. Nor can it take place if you spend as much as you make. A person, business or nation must spend less than they earn to become wealthier and they must be reluctant and careful about why they borrow. When governments borrow lenders know that a government can pay back loans by raising taxes, something individuals and businesses cannot do, so they normally consider governments the safest to lend to. Governments can also add incentives that the private sector may not be able to match, for instance interest income from federal, state and municipal bonds is exempted from certain taxes. Overall governments enjoy a privileged status over other borrowers, but if this status is overused it could affect the entire economy.

Borrowing by a government can impact an economy in different ways. Of all the money that is lent out the more the government borrows, the less there is for everyone else to borrow. Since anything that becomes scarcer becomes more expensive, this means that corporations, small businesses and individuals must pay more to borrow and some may be left unable to borrow entirely. So when the Clinton administration managed to change budget deficits into four years of surpluses (1998 to 2001), long-term interest rates fell and banks looked for profitable alternatives elsewhere in the private sector. In other words when there was more money for everyone else it also became cheaper to borrow it. Every dollar that is borrowed by a government means another dollar in taxes and higher taxes hurt economic growth. The more a government borrows, the more it pays in interest, the less it must set aside for traditional expenses. By 2013 the federal government is projected to pay around half a trillion dollars in interest alone.1 Money that could have gone to roads, schools, research and development – or lower taxes which would mean $500 billion in people's pockets that year and similar savings every year if past governments had settled their debts in the past. Investors, especially foreign investors, closely watch government deficits and debt levels before making investment decisions because they know that they would influence a government's future policies. Higher levels discourage investments.

Because of such factors economies where government deficits and debts are high tend to grow more slowly than similar economies where governments control their borrowing. If the money is owed to lenders outside the country it could also become an issue of sovereignty. No one likes being told what to do and governments are especially protective of their ability to make decisions independently. But when under heavy debt economic and political decisions that governments take for granted as their own to make can face outside pressure and interference because of which a nation may be forced to enact laws and policies that the people and their government may disagree with and strongly resent. Consider some examples past and present:

The devastation of two world wars left the British Empire as the world's largest borrower with almost $15 billion in debt and a war damaged economy. The U.S., on the other hand had emerged as the largest lender in the world along with Britain's main lender. For post-war recovery the British requested another interest free loan of $5 billion from its closest ally but foreign aid had become quite unpopular and the U.S. refused because of public sentiment. The British could not afford a refusal and eventually accepted a 50 year loan of $3.75 billion at 2% interest in July of 1946. They were also forgiven billions in previous loans given under the Lend-lease Agreement (through which the U.S. had given Britain military aid during World War II). But the British had to accept heavy concessions in return. They had to eliminate the empire's trade barriers which supported the economy through its colonies and also accept convertibility of the British currency.2 As a result within 20 months the empire dismantled its interests in parts of the Middle East, the Indian subcontinent and on the Mediterranean Sea.

Ten years later Britain and France entered into an armed conflict with Egyptian forces after a dispute with Egypt over control of the Suez Canal. The Soviet Union planned to help Egypt which would have increased the size of the conflict with America's involvement. The U.S. which still owned a large amount of Britain's foreign debt demanded that the Anglo-French forces withdraw. When they refused the Eisenhower administration threatened to sell off a chunk of British pound holdings, a move that would have made the pound worthless. Britain and France accepted U.S. demands and withdrew within weeks.3

More recently in 2010 lenders had decided that the governments of Ireland and Greece had borrowed too much money and both countries faced a crisis. The Greek government wanted loans from the IMF and the European Union, and in return had to drastically cut deficits from 7.5% of GDP in 2011 to 1% by 2015 by raising income and sales taxes, cutting pensions and salaries of government employees and other government programs, and raising the retirement age.4 Ireland had to accept conditions that were similarly drastic and intrusive.

During the 1990s the Asian Tigers and Russia faced their own crises and had to accept political and economic changes in exchange for loans. Such changes led to mass protests in all these countries and even violence on the streets.

Abraham Lincoln said that, "men readily perceive that they cannot be much oppressed by a debt which they owe themselves."5 In fact the belief that government debt is merely money people owe themselves is still quite common. However this simple view may be inaccurate because a government may borrow and spend that money today to help the present generation but the loans may be paid back by a different government taxing a future generation. The British finished paying their World War II debts in 2007. In 2010 Germany finished paying war reparations and outstanding interest on loans dating back to World War I. The original borrowers were not the ones being taxed for these bills.

One line of reasoning is that if the government uses the borrowed money for something that future generations can also make use of then they should also share in paying for it. An example of this could be a bridge expected to last 50 years. However borrowing does not avoid taxes, it simply delays them, so the responsible thing would be not to transfer one's debt to one's children or grandchildren because it was not their decision to borrow this money, they may not have the ability to pay back such loans and they may not be able to benefit from that money as their parents or grandparents did, for instance if the bridge unexpectedly lasts 30 years but the tax bills on the loans last 50 years.

Some nations borrow money to build critical infrastructure or for a crucial investment of similar importance to get their people out of poverty and then use the created wealth to pay off loans at the earliest. But this does not mean that deficits are a sign of prosperity because prosperity is determined by how wisely a nation invests those loans.

America's founding fathers like Thomas Jefferson, James Madison and George Washington clearly understood the importance of avoiding, controlling and reducing debt. Thomas Jefferson warned that, "Debt and revolution follow each other as cause and effect." Their words made their views clear and their actions spoke even louder. The very first government worked hard to cut down debts taken on by a war fought for its independence and managed to have essentially no debt from the 1830s to the Civil War in the 1860s. In 1835 the government was completely debt free. Then the Civil War brought the debt to roughly a fourth of the economy but the government ran surpluses from 1866 to 1892 and managed to bring its debt to about a tenth of the GDP before the First World War. Again war costs raised borrowing to just over a third of the economy and again the government worked hard to reduce the debt burden until the New Deal took the debt from less than 20% to 54.2% of the GDP by 1939 and the Second World War took it still further to 121.7% of the GDP in 1946.

Until the 1960s the government was spending less than it made 75% of the time and used the savings to reduce its debt. Deficits were an emergency exception that averaged around half of one percent of the economy during this period. After 1960 the government has been spending more than it collected 90% of the time and yearly deficits were averaging around 2.3 percent of the economy until the Great Recession. Deficits were the norm no longer limited to emergencies. During the Great Recession, deficits were averaging around a tenth of the entire economy.

The reason for this is the added responsibility that the government had taken to 'manage' the economy after the Second World War. The policy was that of Keynesianism (based on the theory of English economist John Maynard Keynes) that during an economic recession a government should spend borrowed money to support the economy.  However Keynes also believed that during prosperity a government should save money to reduce the debt by cutting spending and increasing taxes. But the government has been following the first half of the intervention policy without following the second half and ran a deficit for most of the last 50 years during the recessions and the booms.

At first deficits were relatively small so the debt level kept falling as a share of the economy during the 1960s and 70s. By 1981 it had fallen to around a third of the economy. But it has been rising for the last three decades with the exception of four surplus years from 1998 to 2001. More recently because of the Great Recession federal tax revenues dropped to around 15% to 17% of the economy while spending jumped to around 23% to 25% of the GDP. The government was borrowing roughly 25 cents of every dollar it was spending.

In early 2012 the total debt of the federal government was equal to the GDP of the entire country or about seven times the federal government's tax revenues for the year.6 This is certainly not the highest ratio in the developed world but it is one of the highest. Before the global crisis Japan's own debt was nearly double its GDP in 2008, but this falls to a much lower 100% as the net level after considering its massive stock of foreign exchange reserves. By 2010 its debt had climbed to 220% of its GDP, placing an even greater burden on their taxpayer and their economy.8 Italy had a total debt at 119% of its GDP and it is on a short list of industrialized nations whose ability to pay back their debt has come into question (nations like Greece, Portugal and Ireland). In fact America's debt to GDP ratio is greater than that of Germany, France, Britain or Canada. It is much larger than those of the Netherlands, Norway, Spain and Switzerland.9

As I mentioned earlier, the last time debt crossed such a milestone relative to the size of the economy was during World War II when it was 121.7% of the GDP. So how are things compared to back then? After World War II personal debt was 23% of household income i.e. a typical household earned more than four times its entire debt. By 2010 debt was over 122% of household income making personal debt much higher than a typical household's yearly earnings.10 Consumer debt which includes car loans, credit cards etc. has grown exponentially over the last three decades, now amounting to $2.4 trillion while student debt crossed the $1 trillion mark in 2011 for the first time in history.11

Even with respect to foreign trade the country was enjoying surpluses for around 200 years, earning wealth by exporting more than it imported until 1975. But since then the trade balance has been negative throughout and trade deficits have averaged $600 billion a year between 2001 and 2008.12 An important way to measure financial health is the current account balance which is a sum of all the payments coming in and going out of the country from the rest of the world (mostly from trade) and this has been in the negative throughout the 1990s and 2000s. This shows an erosion of wealth over two decades. Other countries are quite careful of their current account balances. Germany, Europe's largest economy, was running huge current account surpluses even in recent years. According to one study when industrialized nations begin running current account deficits between 4% and 5% of their GDP their economic growth tends to slow down.14 Between 2001 and 2008 the current account deficit has averaged 5%, levels not seen since the 1870s.15

All told there is over $15 trillion in federal debt, $13.3 trillion in household debt (which includes consumer and mortgage loans), $7.3 trillion in corporate debt, $3.5 trillion in small business debt, $2.4 trillion in state and local government debt and $200 billion in farm debt.16 This puts the country's total borrowing (excluding the financial industry) at $41 trillion or roughly 273% of the American GDP, one of the highest levels in history. It also makes the country the largest borrower in the world while after World War II it was the largest lender in the world.

Meanwhile the country's personal savings rate, still over 10% of disposable income during the early 1980s, was -4% (negative four percent) by the late 2000s until the Great Recession convinced people to start saving more. This is completely different from the saving habits of other large economies that are growing through savings and investment. The Chinese save over a fourth of their income and India's savings were over a third of their GDP in 2008, expected to rise to 40% by 2015.17 Moreover American savings and borrowings are being used less for economy growing investments and more for consumption. Consumption's share of the GDP has been rising steadily from around 63% in the early 1970s to 72% by the late 2000s while investment's share of the GDP has been falling from over 21% of the GDP in the 1970s to around 18% by the early 2000s.18 Compare this to China which has an investment rate approaching 50% of their GDP in recent years.19

When government debt ratios rose in the past they were due to temporary events. The War of Independence, the Civil War, the First World War, the Great Depression and the Second World War all had a temporary life and a clear end. When they concluded so did spending and then the government worked hard to reduce its debt. In 1945 the debt was 121.7% of the GDP. When the war economy ended and producers and sellers switched back to the private economy prosperity returned with it. The debt was only larger than the GDP for three years during that period and just ten years later, in 1955, the debt was around 69% of the GDP. In fact the ratio went down steadily until 1981 when it bottomed at around a third of the economy. The deficits of today and tomorrow are largely due to entitlement spending that will go on for generations and keep adding up for the foreseeable future. As the retirement of baby boomers continues to add to the debt by 2021 federal debt will be over $26 trillion and keep outgrowing the size of the economy if the current system stays in place.

To address the debt problem one of the recent attempts was through the 18 member bipartisan National Commission on Fiscal Responsibility and Reform that released its findings in late 2010. But it was unable to get the 14 votes needed for immediate congressional action on its plan. The disagreement was in the tough choices which aimed to trim the deficit with a one dollar increase in taxes for every three dollars in spending cuts. As difficult as it was it aimed to gradually get rid of deficits (i.e. stop borrowing) by 2035 by spending no more money than the government had.21 To actually shrink the debt the government must have surpluses by spending less than all the taxes it collects and that possibility isn't even seriously raised anymore.

The commission's disagreement is the microcosm of a deadlock which is decades old. Small government supporters pushed for a limited government role and tried to get it by focusing on low taxes while supporters of an actively involved government focused on more spending to achieve their vision. Both ideas had popular support so none was willing to negotiate and the result of this stalemate was a third type of expectation from the government to keep taxes low and spending high, a situation with permanent deficits that needed lenders to finance them.

So who are these lenders and will they keep lending to America for the coming decades?

In early 2012 the federal government's total debt was over $15 trillion, over $48,000 for every man, woman and child in America. $4.7 trillion of this, nearly a third was borrowed from the Social Security and Medicare Trust Funds and pension funds of federal employees.22 But the retirement wave is already increasing pension, Social Security and Medicare payments while payroll taxes (which go into Social Security) have been cut, so the government's own projections show that Social Security will need half a trillion more dollars than it will collect from 2011 to 2017.23 Without drastic changes this shortage will continue into the long term.

That leaves about two-thirds of the total debt which is in the form of Treasury bills that can be bought and sold by lenders, a portion that is also called the public debt. During the Second World War the debt was owed entirely to Americans. Even until the 1970s less than 5% of the debt was foreign owned. But in 1974 William E. Simon, as treasury secretary for the Ford administration, entered into an agreement with the Arab oil producers who started investing billions in U.S. treasuries. Since then foreign debt has grown faster than debt itself. By 2011 over half of the public debt (or a third of the total debt) was with foreign lenders and that rate is continuing to grow. In 2011 four of the largest foreign lenders were China, Japan (who together hold over a fifth of the public debt), the U.K. and the Middle East oil producing countries.

With the recent growth in U.S. debt the Chinese government has expressed concern a number of times and it has also made practical changes. In 2000 America's share of China's exports was 31%, by 2009 it was 18%.25 Then after the global crisis of 2008 weak export markets in America and Europe have further pushed Asian exporters including China to shrink both the export pie in general (looking for domestic markets) and America's share of it (looking for markets in Africa and other places).26

Up until the Great Recession domestic consumption was about 72% of the American economy, 67% of the Indian economy and less than half of the Chinese economy.27 By these numbers the U.S. economy was too focused on domestic consumption, the Indian economy was relatively more balanced while the Chinese were under-consuming and relying on an export economy. However, after the global recession the Chinese government changed direction to encourage domestic consumption. One step to promote consumption is by increasing the country's purchasing power through a gradual long-term rise in the value of the currency. From mid-2010 to the early part of 2012, the yuan had risen by over 8%.28 Another way is to encourage spending through less saving. Two of the major recipients of Chinese savings are the education system and the healthcare system (i.e. people save for an education or in case of an illness). Most of the education spending in China is not by the government but historically by the private sector and households. This will change with the twelfth 5 year government plan released in March of 2011 that shows a more inclusive focus on public sector education to encourage consumption. Its public healthcare system is also going through a three year overhaul to give people better access to medical care.

Such steps which are gradually decoupling China from the U.S. economy will automatically reduce China's surpluses with the United States.

The United States was not the only country that saw a population boom after World War II. In fact the entire industrialized world had a surge of some type. This brings us to the second largest foreign buyer of American treasuries, Japan. Currently 21.5% of Japan's population is 65 and above and Japan's baby boomers are also set to retire in the coming years which will bring that share to 40% by 2050.29 As these boomers enter retirement they will not only be taking up more of the country's savings through welfare state support but also private savings set aside during their careers, turning savers into spenders.

If the challenge of the industrial nations is a growing population of seniors the challenge for the Arab world is a massive population of the young. Sixty percent of Arabs are 25 years old or younger. This presents Arab governments with the daunting task of providing their youth with education and more importantly jobs. The recent political unrest in the Arab world has pushed the urgent need for domestic economic development to maintain political stability. These state-run economies (for instance 84% of Saudi Arabia's economy is state-run) will be spending more of their savings on internal growth while using more of their own oil production to fulfill the energy needs of their growing populations.30 This will affect both future surpluses and past loans made by their governments.

This is the situation with three of the four largest foreign holders of the U.S. government's public debt. The fourth, Britain, is going through financial problems of its own which also makes its future ability to lend uncertain at best. More importantly it makes the sovereign independence of the U.S. open to outside pressure. Of the remaining one third of America's debt the Federal Reserve and private investors are the main lenders. The Federal Reserve buys treasuries by printing dollars to pay for them. This is damaging because it creates inflation in the economy. Regardless, the Federal Reserve and private institutions will not be able to cover future deficits on their own.

Another problem from this debt piling up is that interest payments are the fastest growing portion of the federal budget. The hundreds of billions that go to yearly interest payments are American tax money taken away from American roads, schools and R&D that finance foreign roads, schools and R&D. A direct transfer of wealth from the U.S. to foreign countries which own this debt. At the rate that deficits are growing the taxpayer will be paying nearly $1 trillion in interest on the debt by 2020 bringing no present or future benefit to the people of the country.31 This is if rates stay at present levels which are historically low. If interest rates went to 2007 levels payments would already be near a trillion dollars. If rates rose to levels seen during the 1970s and 80s payments today would be around $2 trillion dollars. If lenders buy less of America's debt, which the above trends show as more than likely, then interest rates will go up as the demand for Treasury bills goes down. According to the Treasury Department about half the U.S. debt is due in about five years.32 Such bills are normally just resold (i.e. the debt is just 'rolled over') at the new interest rates, so interest payments on future and past debts could rise within a few years.

The debt issued by the government is considered the least risky debt and its rates are always the lowest compared to all other investments. When these rates rise all borrowing becomes more expensive and rates for corporate bonds, mortgage loans, car loans etc. all rise, draining the entire economy of its income and wealth.

This shows the present drain on the American economy and the problems it is expecting in the near future. History is full of examples in which nations borrow too much money. The authors of THIS TIME IS DIFFERENT sum it up well in their New York Times Bestseller study of financial crises: "Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period when bang! – confidence collapses, lenders disappear, and a crisis hits."33 Governments are forced to raise taxes, go back on promises and start printing money to pay their bills. The money printing causes higher inflation and interest rates jump to painful levels as the value of the currency drops internationally. Businesses and banks shut down and the economy falls off a cliff.

The only sure way to avoid such a situation is, quite obviously, to reduce the debt. And while such an unpopular decision may weaken the economy temporarily (during the transition to a less debt fueled economy) it is the only way to long-term economic strength.

four

THE FUTURE BEHIND THE TREE

We have a 1950s level of taxation and a 21stcentury-sized government.

-Robert Bixby, executive director of the deficit reduction group the Concord Coalition.1

Don't tax you, don't tax me, tax that man behind the tree.

-Proverb

So far we have a decent understanding of where the government spends its money and how this spending will rise through social programs and interest payments. The other side of this coin is taxes. If the spending of today is not paid with the taxes of today then it is paid with the taxes of tomorrow. So if low taxes of today are not backed by low spending then the people of a nation will simply be facing higher taxes tomorrow, paying their own bills along with those of their parents and grandparents.

Among the financial issues mentioned so far the one that has the most immediate and direct effect on the economic behavior of the people is taxes. Under normal conditions a young nation has a limited ability to enforce tax policies so tax rates are kept low to encourage people to pay their taxes and this allows the economy to develop. But as the government grows with a prospering economy it becomes better capable of taxing people and it expands its role with its ability to tax. High taxes slow the economy down which also hurt the government's finances and the government must then raise taxes to fill that shortage, so a downward cycle can begin in which higher taxes slow the economy further which in turn require higher taxes to fund the government.

To avoid getting caught in such a cycle a government must pay its bills as soon as it can and for most of its history this government did. When the War of 1812 began tariffs were immediately raised from an average rate of 12.5%. After a number of gradual increases average tariff rates were at 40% by 1820.2 The next big bill came when the famous Civil War broke out in April of 1861, the first year of Abraham Lincoln's presidency. In his second year average tariff rates were above 47% (a significant hike from the late 1850s when average rates were only 15%) and they stayed at that level or higher for most of the next five decades.3 Through a temporary income tax and excise taxes the Lincoln administration raised around 28% of their war costs.4 In 1913 the country introduced a permanent income tax but it only covered about 2% of the population and was set at 1% to 7%. But then in 1917 the country entered World War I which brought the first big bill of the 20th century and by the next year 15% of U.S. families were paying income taxes and the top rate jumped from 7% in the prior five years to 73%.5 In fact a fourth of the bill for World War I was covered through taxes during the war.6 Even during the Second World War the top tax rate reached a high of 94% and a direct and indirect expansion quadrupled the tax base during the 1940s. Incomes of $624 and above also paid a 5% Victory tax to fund the war.

So what we see is a clear pattern of tax hikes that took place as and when the government faced its largest expenses, which were usually reduced as the bills and debt were brought under control. This continued on even after the Second World War when President Truman raised the top rate from 85% to 92% around the time of the Korean War. Later during the 1960s the bills of the Vietnam War and the Great Society programs caused Lyndon Johnson's administration to raise rates also. In fact tax payers had to pay a 10% surtax over and above their original tax bill to fund the Vietnam War, and in the late 1960s the Alternative Minimum Tax (AMT) was introduced for which tax payers also needed to calculate their taxes by a separate method and whichever of the two methods showed a higher tax was the amount they had to pay.

However this philosophy started changing in the 1980s when Cold War spending was still substantial. Instead of increasing taxes President Reagan signed a law in 1981 that actually cut $750 billion in taxes over five years, a break from the past that now made it acceptable to delay paying bills. Even his successor George Bush Sr. campaigned with the famous pledge, "Read my lips: no new taxes!" recognizing this new thinking. But to shrink growing deficits he broke the promise and raised tax rates and paid for his decision when he lost the next election. The Clinton administration also managed to raise taxes but the increase was short lived.

That brings us to the massive bills that began with the 21st century: two costly wars, domestic security spending and a drug benefit program that was the largest expansion of Medicare in decades. And instead of raising taxes the Bush Jr. administration dropped the top tax rate from 39.6% to 35% along with other cuts on dividend earnings, real estate and the gift tax. Six types of tax cuts in the first five years of the presidency. The administration's actions reflected the words of former House Majority Leader Tom Delay (R. TX), "Nothing is more important in the face of war than cutting taxes."7 Whatever his reasons for such a statement history shows that the traditions of the American government in the two centuries before 1980 completely contradicted such words and actions. Federal revenues as a share of the GDP fell from 20.9% in 2000 to 16.3% in 2004 while spending as a percentage of the GDP went up during the same period.8 After the recession of 2008 the ability of people to pay taxes slid below 15% of the economy since 2009, levels not seen since the 1950s. By 2011 federal tax revenues were 14.4% of the GDP while spending which had climbed to around a quarter of the GDP since the recession was above 25% of the economy in 2011.9 For years budget problems had forced states to find creative ways to raise money, for example 43 states along with the District of Columbia, Puerto Rico and the Virgin Islands offer lotteries to raise revenues.10 But state and local tax revenues which mostly come from sales, income and property taxes faced new shortages with a slower economy, higher unemployment, falling property values and record property foreclosures across the country. By March of 2011 nine out of ten states already had or expected to have major budget shortages, and since most states cannot run deficits by law, about 30 states had to raise taxes by early 2011 to fulfill past and present promises.12

None of these expenses (the wars, the security structure, the Medicare program or the 2008 recession) were expected to take place even in 2000 and the budget deficit is starting to come under control. But some major expenses are expected to begin with the boomer retirement wave and resulting expansion in entitlements that will far exceed taxes if they remain at past levels. In other words the government expects to be underfunded in coming years because of projections showing how much future revenues will fall short of future costs. This is not imaginary accounting but real money that will come out of the pockets of real people. The term unfunded liabilities is well known as a legally binding obligation upon private corporations. Company executives prepare in advance for such expenses that they expect to make in the future and are legally liable (under the Sarbanes-Oxley Act) if they hide any of the unfunded liabilities from their accounting books. Even individuals prepare for predictable times when they will need to make large expenses like their own retirement, a child's college education etc.. For a government this long-term fiscal gap would include the unpaid taxes of the past (i.e. debt) and the spending of the future minus future taxes (i.e. expected future deficits). Estimates on the government's fiscal gap vary depending on the methods used by the think tank, foundation or government agency for its calculation. But to give an idea I have provided two main examples below.

One 2002 study was originally authorized by the Treasury Department and was the result of close consultation with the White House Office of Management and Budget, the Social Security Administration and the Centers for Medicare and Medicaid Services. It found a fiscal gap of over $44 trillion in the fiscal year 2002 expected to grow to nearly $54 trillion by the fiscal year 2008 according to the study's calculations.13 The study's authors were among the most qualified people for the job but it only covered Social Security, Medicare and the debt held by the public. And after this study was done generous tax cuts, a vast expansion in Medicare and a historic recession have dramatically changed the federal government's situation.

Then at the state and local levels the government had also made promises to its workers. Public employees including policemen, firefighters, teachers and sanitation workers are promised retirement pensions for which governments are seriously underfunded. In 2010 the Pew Foundation did a study on state and local unfunded liabilities. The Pew Center on the States estimated that states and local governments had promised $3.35 trillion in benefits and pensions which are unfunded by about $1 trillion just over the next decade. Another estimate by Joshua Rauh at Northwestern University places the pension liabilities of the states at $3 trillion, not far from the first estimate.14

A broader study by USA TODAY covered the public debt of the federal government plus the unfunded liabilities of Medicare, Social Security, military retirement and disability benefits, and Federal Employee Retirement Benefits (including pensions). This came to a total of $61.6 trillion or $534,000 for every American household. Add to this, the state and local debts and unfunded benefits and it was another $5.2 trillion or $44,800 per household. All told the nation's unfunded liabilities on January 1, 2011 were $66.8 trillion or $578,800 per household according to this calculation.15

Outdated as it is the first study was originally done for the Treasury Department which makes it valuable even today. And by its methodology today's total obligations far exceed those calculated by USA TODAY. So, far from being tainted by political considerations both studies give a trustworthy estimate of the problem. This means that taxes as a share of the economy will reach levels they have never reached before.

Despite the tax increases in the past the federal government's taxes have always been less than 21% of the American economy, coming close twice, during the Second World War and in 2000. During World War II the private economy had been replaced with a war economy and 2000 was the year of the dotcom crash and recession. Thus the ability of the economy to grow when federal taxes are above 21% of the country's GDP is untested in the history of the American economy. Yet if the current laws stay in place the coming decades could see spending and taxes take at least 6% more of the GDP than they have in the past, making federal taxes alone a quarter of the entire economy.16 At the local and state levels taxes have averaged an additional 10% of the GDP and they will also need to rise if the present system stays in place. Most importantly, behind these GDP numbers will be real people whose lives will be impacted by the added tax burden.

In 1950 the ratio of workers to entitlement beneficiaries was 16 to 1, meaning there were 16 workers supporting every person who got an entitlement benefit through the government. With demographic changes and expansions in the system the number of beneficiaries increased and now there are around 3 workers for every beneficiary. As a result the total employer-employee payroll tax rate on taxable earnings (which funds social security) has risen steadily from 2% when payroll taxes began in 1937 to 15.3% today. This increase was easier for the economy to handle than it would have been otherwise because the labor force was growing much faster than the rest of the population until the 21st century. So the total number of dependents (which would typically include a spouse and kids) per worker actually went down as the entrance of women into the workforce turned dependents into workers (at the same time that baby boomers were moving into the workforce). But after keeping the proportion of workers and non-workers steady since 2000 the wave of retirements will add retirees by roughly 3% each year while workers will rise by less than 1% a year from 2010 to 2030. This will bring retirees from around 12% of the population to 20%. The Fiscal Commission expects that there will be just over two workers per retiree by 2025 (exactly 2.3) down from 3.1 workers per retiree today.17 In fact just as workers grew faster than the rest of the country up until 2000, non-workers will grow faster than the rest of the population until 2050. Moreover, since historically healthcare spending has been rising faster than the economy and Social Security payments are tied to living costs which grow with the economy, no plausible amount of economic growth will be able to make entitlements easy on the economy or the taxpayer. According to the federal Government Accountability Office (GAO) even if the GDP grows in double digits for a decade it will still not grow the government out of the current fiscal problem.18

In early 2004 the 'non-partisan' international agency, the IMF, calculated that closing the long-term gap between taxes and spending would need an immediate and permanent federal income tax hike of 60% or a 50% cut in retirement benefits.19 Using the methodology of the study originally ordered by the Treasury Department, if federal taxes weren't increased by 2010 – which they weren't – they would need to rise by 84% beginning in 2010.20 And every year these tax hikes are delayed it will mean higher taxes for the next year's workers as spending surges within this decade. By 2030 seniors will be one of every four voters so attempts to renegotiate such promises will also become more difficult as the years go by.

Yet as these promises gradually raise taxes by a third, by half or more in coming years they will affect individuals, businesses and the economy. In such circumstances financial resources (wealth, savings and investments) and human resources (the most skilled and the most ambitious) tend to seek greener pastures elsewhere as the cycle of higher taxes and a slower economy begins.

Now when it comes to tax hikes one popular myth is that the middle class majority can avoid any additional taxes if the rich make a larger contribution. This would be possible by raising income taxes on corporations and wealthy individuals. But corporations in America already pay one of the highest rates in the world. At 35% the corporate tax rate is far higher than the OECD average of 25% and if Japan follows through on its plans to lower the corporate tax rate then the U.S. tax rate would be the highest in the industrialized world. There may be an argument to eliminate corporate subsidies and loopholes that allow some corporations to greatly reduce or completely avoid paying federal income taxes and this could raise some revenues, but the fast growing emerging economies may actually force the tax rate down to keep America globally attractive to corporations. As for individuals, the top one percent already paid 38% of all individual income taxes that the federal government collects. The top ten percent pay roughly 70% of the federal government's income taxes on individuals.21 So the rich are already contributing sizably to help run their government. Here also there is justification to do away with legalese that help some of the rich avoid and delay taxes through tax loopholes and such. In fact tax rates on the rich may also be increased, but there are not enough rich people nor are they rich enough to raise the amount of money that will be needed to pay these massive bills. For example if income taxes for the top ten percent of wage earners in 2010 were doubled, it wouldn't even cover half of the federal government's deficit for 2011 while the drastic step of doubling taxes will hurt economic growth and next year's taxes. To balance the budget if a dollar in taxes was raised from the wealthy for every three dollars in spending cuts it would mean raising the top rate from 35% today to over 50%, an increase steep enough to affect the economy.22 On the other hand in 2011 46% of the country's households paid zero federal income taxes.23

The fact that the wealthy are already contributing so much of tax revenues while nearly half of households contribute no income taxes means that meeting future needs while sparing the middle class will be mathematically impossible and taxes will rise on the vast majority of the population in the years to come.

five

FROM WELFARE SOCIETY TO WELFARE STATE

...the friendliness and charity of our countrymen can always be relied upon to relieve their fellow citizens of misfortune.

-President Grover Cleveland 1

There is no trust fund. Just I.O.U.s that I saw firsthand.

\- President George Bush Jr.2

Social safety nets have always existed, even when they didn't exist as formal government institutions.

Historically the most important social safety system has always been the family unit. Support for people in their old age had been the primary responsibility of their children once they entered working age. The gathered savings of the older generation would help the younger generation in various ways like paying for a good education, handing down a family business, saving on living costs by living under one roof, or savings which could somehow support the family income or help the new generation get a head start in life – for instance by starting a small business. Here the traditional contract required that the older generation contribute through their acquired knowledge, experience and financial support and the younger generation provide their labor and entrepreneurial drive. This combination allowed a good standard of living for the whole family, merging the strengths and needs of those who wanted a slower pace in life and those who needed the resources to tap their own potential.

But even if they didn't live or work together members of the family would save and pool their resources together when predictable and unpredictable problems and opportunities came up. If they needed help beyond their resources they would reach out to outer circles of the family unit.

This left some people who could not take care of themselves, nor had a relative on whom they could depend. For them neighborhoods would assist through the efforts and focus of social institutions like neighborhood churches and charities. This system could vary from time to time and person to person. Some had food they wished to share, some had living space, some had time and others money. Some had less today and more tomorrow and gave according to their ability. During particularly hard times (like recessions and natural disasters) charitable giving would actually increase. All this made the system quite flexible.

These social institutions were part of the neighborhood and promoted a sense of community and self-ownership. This system also made a clear distinction between those who were clearly unable to support themselves (the disabled, the infirm, orphaned children etc.) and those who were willing and able to work but unable to find it. The former were obvious candidates for support but for the latter it came in exchange for whatever contributions they could make by cooking, cleaning, repairs or lending their skills in whichever way. This helped to minimize the social stigma associated with getting assistance. Since social institutions were part of the community they could distinguish between the deserving and the non-deserving. Non-government institutions could not force the people to donate (i.e. they could not impose taxes) so they needed to protect their resources and reputations against waste, fraud and abuse and constantly tried to get the most benefit from each dollar.

After the family and community base this left very few who slipped through the cracks and had no support. For them local governments were a resort. They could use financial and non-financial means to help the unfortunate by allowing neighbors to help neighbors which further strengthened the interdependent relationships of society.

The effectiveness of such a system can only be understood if one looks at more traditional cultures such as those of Eastern nations like India. Families tend to live together and collectively pool a share of their incomes for the running of the household. If any member of the family is faced with an unexpected hardship (illness, accident, job loss etc.) they can rely on the whole family for help and support. In fact one reason why birth rates in such places are so high is that parents expect their kids to take care of them when they grow old. The larger the family the better they are able to care for their parents. Taking contributions from some family members according to their ability and giving them to some according to their need. Like all systems it has its flaws but it is a flexible and sustainable system.

When this system was replaced with government institutions having the primary role it crowded out private welfare. In fact charities like the Red Cross were traditionally against the idea of federal aid to the poor because they feared it would dry up donations to private charities.4 As the government took up the responsibility to care for seniors the family unit also began to fall apart. In 1940 when Social Security had just started, the average household size was 3.67 and it was common to live with one's parents. However the next five decades saw continuous declines as more kids moved away from their parents' homes and the average household size in 2009 was 2.63, roughly flat over the last two decades.5

The American Social Security system also needs high birth rates to remain successful. The more workers per retiree, the more contributors per beneficiary. When government safety nets don't exist parents can make that link directly between better support and bigger families and this encourages them to have more children. This is partly why birth rates continue to remain high in developing nations. But in the industrialized world this link does not exist directly for individual families because the government is the source of support. So even though governments need growing birth rates they do not get them because parents do not get the same encouragement that they have in Eastern nations. And birth rates have been in decline in the entire developed world, including the United States, due to a number of reasons.

In some ways the Social Security system is the very model of efficiency. Eighty-five percent of the beneficiaries get payments through a direct deposit into their bank account at a cost of ten cents per deposit. The government has plans to phase out paper checks entirely by March 1, 2013 so electronic payments will essentially cover the whole system.6 But the absence of inefficient wastage does not always mean that society's resources are being used in the best way possible.

The payroll tax increases the cost of hiring workers and any added expense increases the hesitation to employ more people. It also makes workers less competitive with workers in other countries who do not add such costs when they are hired. Nor can a person make decisions about his social security contributions like he can with the rest of his earnings. One person may consider a good retirement plan the purchase and renting out of property and may want to use his payroll contributions to finance such a plan. Unlike social security he can also pass on the property to his heirs after his death. Another person may consider his children his source of support in old age and may want to put money into their college fund instead. Both these options play the same role that entitlements do but they are not consumption spending but long-term investments for the family and the economy. Government funded social security also lowers the need to save, a view supported by the long-term decline in the savings rate. There are also other realities that have changed over the years.

Throughout the 1900s average life expectancy was rising at 1.5 to 2.7 years every decade. In 1900 the average life expectancy was 49 years and 3 months.7 Later when the Social Security system was started average life expectancy was 62 years while payments began at 65 years. The few who outlived the average person by three years would collect any benefits. A further rise in life expectancy would have been completely expected so the retirement age should have climbed with it. But while the average life expectancy has climbed to over 78 years nearly 73 percent of retirees claim Social Security benefits even before they turn 65.8 Under the current system billionaires Warren Buffett, Rupert Murdoch and Carl Icahn (born in 1930, 1931 and 1936 respectively) are eligible to receive regular payments from the Social Security System. These may be a few extreme cases but they represent a real change in the situation of seniors.

For one thing the nature of jobs has changed dramatically with time. According to one study, in the 1960s, 48 percent of private sector jobs required moderately intense physical activity. By 2008 such jobs were down to 20 percent. This was because sedentary service sector jobs rose from 52 percent in the 1960s to 80 percent by 2008.9 This has made work less exerting on all workers and has brought new opportunities for seniors. Among people 65 and above the share of people who work and those who are willing to work has risen from 10.8 percent in 1985 to 17.9 percent in 2011.10 In fact the director of the Center for Retirement Research at Baton Rouge, Alicia Munnell, estimates that 75 percent of the senior population can work past retirement age.11

A few decades ago poverty among seniors was much higher than the national poverty rate. But over the years senior poverty rates have fallen faster than for the rest of the country. A survey by the Pew Research Center found that in the 25 years between 1984 and 2009 people 65 and older saw a typical rise of 42 percent in their net worth while those under 35 saw a median drop of 68 percent in their net worth. A Federal Reserve Survey of Consumer Finances showed that the typical net worth of the 55 to 64 age bracket in 2009 (i.e. those expected to retire over the next decade) was $222,000 while the typical net worth of families in the 35 to 44 age bracket was only $69,000.12 Helped by Social Security seniors were also the only group to prosper during the 2000s with a 7.5 percent rise in household income (after adjusting for inflation) while a typical American family actually got poorer during the same decade.13 Seniors are also out-earning workers 15 to 24 years old for the first time, and the number of people with jobs who are 55 years and older are at record highs while at record lows for those 16 to 24 years old.14 While the average poverty rate for the working age population from 2006 to 2010 was 12.6 percent, it was 9.5 percent for seniors.15 Since Social Security is a PAYGO model which takes the contributions of today's workers to support today's retirees, it is supporting an age group that is better off than the rest of the country in many ways. And it's not just about the working age. The poverty rate for children during 2006-2010 was 19.2 percent, more than double the senior rate. Yet a 2011 study by the Urban Institute found public spending per child (education, health, housing, social services etc.) was $11,300 per year while seniors got $24,800 per person per year (mostly through programs like Social Security and Medicare).16 This shows a focus away from the future even though many seniors can work while children obviously cannot.

But the greatest beneficiary of the system of entitlements has actually been the government itself. The government has defended the sanctity of Social Security on one side while on the other side it has borrowed all of the trillions which the Social Security and Medicare Trust Funds saved for their own future.

Confidence in the future of Social Security is now shaking. A USA TODAY/Gallop poll in mid-2010 found that half of retirees expected an eventual cut in Social Security benefits and six out of ten non-retirees didn't expect Social Security to be able to pay them when they retired.17 This lack of confidence is well founded. The National Research Council and National Academy of Public Administration recently formed a 24 person bipartisan committee of liberals and conservatives, including three former directors of the Congressional Budget Office (CBO). The committee's findings were released in a 338 page report titled "CHOOSING THE NATION'S FISCAL FUTURE," that was released in 2010. The conclusion of their findings was clear. Whatever rate of economic growth can be realistically expected from the American economy it would not stop the debt from rising to levels where tax rates will damage the economy. The usual targets for spending cuts like foreign aid, earmarks or even the ever-popular 'waste, fraud and abuse' were too small a portion of the budget to make any difference. Unless the government makes serious cuts in actual benefits like Social Security, Medicare and Medicaid it would have to raise rates even higher than those in European countries, levels that the larger American public has never come close to experiencing. If benefits are not cut and taxes are not raised either, then defense spending will need to be a small portion of what it is today and the government will need to ration out health care.18

In a July 2010 report the Congressional Budget Office (CBO) warned that if the government waited ten years to address the snowballing debt the U.S. economy could shrink by as much as 2% and the type of tax hikes and spending cuts that are needed to reduce the debt problem today will need to double if left alone for another ten years.19 How will the economy grow under such circumstances? How will it even support the system of entitlements?

Study after study has come to similar conclusions. It will be a choice between much higher taxes, a lot less spending on entitlements or almost nothing on everything else. What can be expected is some combination of all three.

In 2010 nearly 49% of American households received at least one type of federal benefit among the dozens that it gives out, including food stamps and Social Security.20 That half of all households get government assistance during a time when the country is not in a recession should itself be a cause for concern. But as pressure on the government rises it will have to make changes. Already every Social Security beneficiary is supported by three workers. Many of the retired beneficiaries are not just capable of working but also have substantial wealth while the workers supporting the system include many with modest means. However there are also some seniors who will need support so the government will need to come up with non-government solutions out of practical necessity.

Earlier I mentioned how Eastern cultures care for their elderly but even in ancient Athens it was a fundamental obligation as a member of society to care for one's parents, in fact it was one of the requirements of citizenship. Today similar legislation is in place in China making it a legal obligation upon adult children to take care of their parents. In India neglect of parents is punishable with imprisonment, a popular law that is frequently enforced when needed. Even in the developed world Singapore allows parents to sue their adult children also. And in the case of all these countries social pressures and the legal system have strongly supported the parents. There is no doubt that cutting the size of the government to one that allows the economy to flourish and compete will mean a reduction in the size of defense spending. But it is not possible without a reduction in the size of the welfare state either. One solution may lie in the Athenian system, a system that has already been a source of fundamental ideas for American society. With a mix of incentives (like temporary tax incentives) the government must restore the role of families as the primary safety nets for individuals. According to the Giving USA Foundation total charitable giving in America in 2010 was $291 billion.21 This is much smaller than the welfare state but it shows the presence of an infrastructure of neighborhood churches, charities and other non-government institutions that can re-establish their role given the right circumstances. For those who cannot afford to help themselves, don't have family to rely on and even slip through the cracks of social institutions, local governments can be an adequate source of support.

Now the federal government may be able to continue its role as the primary source of welfare support with various changes to the system, like increasing the retirement age. But this will always leave the system open to exploitation for political gains. Thus these various changes may save the system of entitlements for a few years while doing nothing to actually allow the economy to grow unless the government returns to a secondary role, hence the need for structural changes.

The primary role of families and social institutions will also include the medical needs of those in their care but the healthcare industry has some additional issues which complicate the situation.

Half a decade before Medicare and Medicaid existed the healthcare industry was 5.2% of the GDP in 1960. During the 1980s it had grown to 9.1% of the economy and by 2009 it was a $2.5 trillion industry that was 17.4% of America's economy and medical care bills were the leading cause of bankruptcy.22 During this time the average life expectancy has risen from around 70 years in 1960 to around 78 years today. But when compared with other developed countries Americans rank behind in a number of health criteria. For instance the Dutch, French, Germans, Canadians and Japanese on average live longer and do better in a number of health categories listed by the World Health Organization while their healthcare sectors take up a lot less of their resources (Netherlands 12% of their GDP, France 11.8%, Germany 11.6%, Canada 11.4% and Japan 8.5%).23

And Americans may be living longer than they lived before but they are not necessarily healthier. Take for instance the issue of overweight and obesity. Excess body fat has been linked to a number of illnesses like cardiovascular disease, stroke, respiratory dysfunction, certain types of cancers, osteoarthritis, type 2 diabetes, hypertension, dyslipidemia, gall bladder disease and gout. In 1960 less than 45% of Americans were overweight and around 13% of Americans qualified as obese. Today over two-thirds of Americans are overweight while over a third of Americans qualify as obese.24

According to the STOP Obesity Alliance the overall costs of being overweight over a five year period are $24,395 for each obese woman and $13,230 for every obese man. According to an estimate by Sandra Schneider, president of the American College of Emergency Physicians, 20% of all healthcare costs can be linked to obesity related illnesses, and these costs will continue to rise as obesity rates rise to 50% by 2030.25 And these are just the costs of obesity not of overweight in general.

So after comparing with other developed countries (and in some categories even with itself a few decades ago) Americans can be healthier while spending less. Instead the healthcare industry could exceed 30% of the GDP by 2050.26 Such large portions of the economy devoted just to staying healthy are simply not good for overall economic development no matter who pays for them.

But to understand costs it is important to understand who pays for healthcare. When Medicare and Medicaid were signed into law in 1965 it was met with resistance from the medical care establishment. Physicians in Ohio were concerned about Medicare costs and 10,000 of them refused to accept seniors. In different parts of the sector and in other states various forms of resistance were making things difficult for this law. But after a few compromises between the government and the medical care industry most of Medicare was implemented. In 1960 the government was around a quarter of the health care sector, already a major presence. But by 2007 it was covering over 45% of the sector's costs while private insurance plans were paying for another 35% (the tax policy since World War II strongly encourages employer provided healthcare insurance plans). In fact only 12% of the costs were paid by patients out of their own pockets.27 In March of 2010 the government passed a law that requires Americans to purchase health insurance by placing penalties on individuals, households and businesses that do not buy it. The law tries to cut some costs by introducing a state based health insurance exchange system that will allow better comparison shopping and requires drug companies to give discounts on brand name prescription medication. It also raises revenues by charging health insurers and drug makers a fee and taxing some healthcare plans. But already Medicaid had 69 million patients in 2010 and the new law expands that by another 16 million from 2014 to 2019.28 All in all federal subsidies and the expansion in Medicaid could cover another 32 million people. The overall effect of the law will be a further rise in healthcare costs to the country with so many new patients.

Medicare and Medicaid are not as efficient as the Social Security system of payments so looking at waste, fraud and abuse can cut costs. According to the government Medicare overpayments due to human error or criminal intent were $36 billion in 2009.29 But there is a limit to how much of this inefficiency can be cut. In Fiscal Year 2010 fresh efforts by the government to pursue healthcare fraud brought about the largest recovery in the Justice Department's history and yet it was a mere $2.5 billion, small enough to be a rounding error on the government's bill.30

The deeper problem is that so few patients pay out of their own pockets that it leaves most of them unaware of the direct costs of their treatment. One study showed that a typical working couple retiring in 2011 will get roughly three times as many dollars in Medicare services as they paid in Medicare taxes.31 While Medicare is one of the largest and fastest growing sources of revenue for the healthcare industry it sets prices through estimations of how complicated, time consuming and critical the medical care is and then guarantees a profit over this cost estimate.

This cost-plus model provides no incentive for the medical care industry to find long-term cost cuts since profits are already baked-in. The behavior of the buyers of any good or service is that they weigh the costs against the value or benefit they get for spending their money. When customers are more price conscious so are sellers. Cushioning patients from direct costs leaves them overtested, overmedicated and overtreated, wasting resources with little or no benefit, or at times harm to the patient. As a small example take the top reason for antibiotic use on kids' ear infections. According to a study review by the JOURNAL OF THE AMERICAN MEDICAL ASSOCIATION published in November of 2010 four out of five kids with ear infections can get better within 3 days without using medication. And 30% of kids who use antibiotics develop side-affects like a medication related rash or diarrhea. Yet $2.8 billion a year in antibiotics is used on kids most of whom don't need it.32 Savings from this alone could be more than the fraud recovery efforts of the Justice Department mentioned above. Similarly studies show that up to a third of all imaging tests such as x-rays and CAT scans are unnecessary while radiation (which is a common side-effect of such tests) increases the risk of cancer.33

One strong reason why the medical care industry tends to overdo things is because of medical malpractice lawsuits. Nearly all neurosurgeons, obstetricians and orthopedic surgeons, and around 3 out of 4 doctors who practice pediatrics, family medicine or psychiatry get sued during their careers.34 With such high chances medical malpractice starts focusing more on malpractice avoidance than on patient care, a phenomenon known as defensive medicine, which leaves doctors constantly second-guessing their judgment and actions. In a recent survey 9 out of 10 physicians admitted to overtesting and overtreating patients to protect themselves from medical malpractice suits.35 Doctors can follow standard of care guidelines and still worry about being sued. Take the case of emergency rooms which pose the highest risk of errors. It is quite common for emergency room doctors to pay $300,000 to $400,000 a year in insurance premiums to protect themselves from possible lawsuits. These costs get passed on and add to the total cost of treatment. The added risk also discourages doctors from wanting to work in emergency rooms (ERs) and the shortage of doctors raises costs even further. Emergency departments in non-rural America have shrunk by a third from 1990 to 2009 even though ER patient visits went up by 35% during that time.36 It is necessary that patients get adequate compensation and treatment if they are harmed by carelessness or incompetence. But unless there is a cap on the size of lawsuits the legal profession will continue to stretch the definition of what is careless and incompetent, raising healthcare costs for everyone.

Doctors in general are at the center of all medical care and licensing laws at the state level and legislative controls on the number of residencies at the federal level have limited the number of doctors entering the workforce. The Association of American Medical Colleges projects a shortage of as many as 150,000 physicians as demand rises over the next 15 years.38 The government does have the responsibility to make sure that qualified individuals become doctors but it must also make sure that its restrictions do not leave a shortage of doctors and it must find creative solutions (like immigration policies and subsidized education for medical students) to make sure that the supply of doctors (and other healthcare professionals) keeps up with the demand or costs will keep rising.

The mismanagement of pricing for medication is another reason for rising costs of healthcare. Take the problem of premature births in America which costs an average of $51,000 in the first year and a national total of $26 billion each year. One of the treatments for it is a compounding drug called progesterone – developed through federal funding from the government's National Institutes of Health – which costs patients around $10 a week with a twenty week course. But after drug firm KV Pharmaceutical paid $200 million for exclusive rights to sell the drug for seven years the firm announced in March of 2011 that it will sell for $1,500 per dosage under the name Makena. At this price the company could recover its $200 million 'investment' within the first three weeks of sale and enjoy profits on a seven year drug monopoly that was originally funded by the taxpaying public and was in the beginning years much cheaper and more accessible to pregnant mothers.39

The specific problem of Makena is unique but Americans pay some of the highest prices in the world for their medication because the healthcare system is neither a free market system nor a government-run system but has aspects of both. Medicare part D is the epitome of this mix. In 2003 three out of four seniors already had a private or government prescription drug coverage plan.40 But in late 2003 the government passed the largest expansion of Medicare in decades that added a prescription drug benefits program for seniors known as Medicare part D. One of its legal provisions banned the government from negotiating over the price of drugs that it bought from pharmaceutical firms since the size of the government as a buyer gave it an unfair advantage. Instead the government was paying above-market prices. Other governments are also active in providing medicines to their public but they are not shy about negotiating with drug companies. In 2009 Decision Resources reported that among the 170 best-selling medications European prices averaged 40% less than American prices in 2008 while Japanese prices averaged a third less.41 Even the Department of Veterans' Affairs pays 40% less on drugs than other government healthcare programs. In fact even corporations like Wal-Mart use their size to negotiate with sellers over prices. Whatever profits sellers lose per item they more than recover with the large size of the order from the buyer. Moreover, for safety reasons federal law prohibits importing of drugs except by the manufacturer. But 80% of the active ingredients in drugs consumed in the U.S. already come from overseas, so the issue of safety is being addressed in some form.42 And Europe has safely allowed drug imports to push prices down while the federal restrictions over here do not distinguish between countries so even drug imports from Canada next door are prohibited.

Thus many aspects of the healthcare industry are neither based on purely welfare state thinking nor on pure free market thinking. But ideas from both philosophies have been cherry-picked without a larger sense of purpose, resulting in the highest costs in the world with subpar results.

Like all welfare spending healthcare must also be the primary responsibility of families and non-government social institutions. But costs of healthcare are very high. To lower them the government cannot just continue to take over the price burden. This will only transfer costs to others (i.e. to the taxpayers) without reducing them for the country. To lower the price-tag individuals must be more exposed to the out-of-pocket expenses of their medical care and the government must work hard to ensure that as the cost exposure increases it also becomes more affordable by removing certain restrictions and re-evaluating the factors that increase the price, like the ones earlier mentioned. If profit margins go down will all innovation, research and development in healthcare cease to exist? Most research does not come from for-profit corporations, but from government funded institutions, universities and private foundations. And even for-profit firms can drop prices without reducing their profits if they start looking for less costly treatments. Moreover corporate innovation and R&D take place in other industries and sectors of the American economy and in the healthcare sector of other countries even though their profit margins (while still substantial) are not as high.

In the absence of government help, can society rely more on itself? From 2000 to 2010 multigenerational households increased by 21% to 5.1%.43 Although this is a rise from a small percentage of all households it still shows a reversal after decades of decline. The traditional institution of safety nets, the family unit, is gaining popularity out of necessity. Outside the family unit a recent development is a grass-roots 'village' movement, a neighbor oriented volunteer system in many communities that is helping elderly people who live alone, with their day to day needs like house chores and transportation.44 Another is the concept of pay-what-you-can cafés. Recently the Panera Bread Foundation (headed by Ron Shaich, CEO of the Panera Bread Company) decided to experiment with non-profit community cafés that would suggest donations rather than list prices for customers. Anyone could walk into a PaneraCares Café, order a meal from a full menu and pay the suggested amount, more, less or nothing at all. To prevent abuse people are asked to take only one free meal per day. If they come a few times a week (for a free meal) they are encouraged to volunteer so they can feel that they are contributing something in return. Their first such café in Dearborn, Michigan was able to break even with 60% of customers paying the suggested donation, 20% paying more and 20% paying less. This encouraged them to open others in Missouri and Oregon. In fact, around two dozen non-profit community cafés are being run nationwide by various benefactors including churches and community groups and another thirty are in the planning stage as the idea is catching on.45

As for medical care, every aspect of it revolves around doctors, yet when it comes to cost cutting their capability has been ignored. However, in recent years, doctors throughout the country are working around rigid policies to help their patients. A recent national survey by the American Academy of Family Physicians showed that doctors were seeing eight patients per week through discounts or free care. According to the academy's president, Roland Goertz, doctors throughout the nation are lowering their costs. Some are giving advice by phone to help avoid the cost of an office visit. Besides their own services they are also asking drug sales reps for free samples to give to deserving patients.46

Such examples are the types of flexible solutions that can actually reduce the overall burden instead of simply transferring it to the government but they are still in their very early stages. Their success depends on the type of encouragement they get and how smooth the transition to a less involved government will be, because future projections make it inevitable that society will once again be the main welfare support of its people.

six

PALER SHADE OF GREEN

If you ask me if the U.S. dollar is going to hold its purchasing power fully at the level of 2011, five years, ten years or 20 years from now, I would tell you it will not.

-Warren Buffet 1

Economic development and national wealth depend on a number of things such as the size of the market, the ease with which products and services can flow through the economy (the type of legal and physical barriers i.e. regulations, infrastructure, communication and technology level of a nation), the skill and education level of its citizens and the legal infrastructure which provides the proper incentives and means available to them. Such factors determine the quality of goods and services that a nation can produce. When it increases the quantity of what it produces or improves their quality, this improves the economy. On the other hand if a country doubles the quantity of its currency without any change in its goods or services, the economy has not improved at all.

Money itself is not meant to be consumed. Its usefulness lies in its ability to be exchanged for goods and services which can be consumed. If it cannot be used to consume other things its worth as money is lost. Hence its value depends on its ability to be exchanged for products and services, on how best it can be used to measure and compare their value and its ability to be stored so that people can get the same value with the passage of time. To perform its role well money must have certain properties. It must be uniform in quality and easily divisible without losing its value. For instance one $5 bill must be equal in value to all other $5 bills, five times as valuable as all $1 bills and half as valuable as all $10 bills so on and so forth. This makes it easier to know the value of things without creating confusion. Money must also be easy to store and transport. So gold and silver were better currency than fruits, vegetables, grains or spices because the latter would either spoil over time or were difficult and expensive to store, and now vast amounts of wealth can be carried in a purse or wallet that once took cartloads to move around. Lastly, since goods and services are limited in number the supply of money must reflect this scarcity, so its quantity must also be limited.

In a perfect world the amount of money flowing in the economy will always be exactly what is needed so that the prices and wages of products and services remain stable. But in the real world prices can fluctuate and change both in the short-term and the long-term. If prices in general start rising this is called inflation. In the old days when gold and silver coins were still common currency rulers would start out using the right mix of precious metals to reflect the value of their currency, but as time went by they needed new ways to raise money so many of them would start shaving some of the weight off these metallic coins or mix them with cheaper metals (while keeping their appearance and stated value the same) so they could use the 'siphoned' metal to make extra coins. Since this added the amount of money while the amount of goods and services were the same, it created an upset in prices. With more money to buy fewer things prices would start rising. Then rulers further needed to raise money and debased their currency even more and this cycle would continue until coins became virtually worthless. When printed currency notes came into circulation it made this process even easier as governments simply printed more money when the need for money came up. But the affect was the same and the cycle always led to severe economic problems. In Western Society one of the most well-known examples is that of Germany after the First World War. In 1918 an American dollar was worth four German marks. By 1920 currency overprinting by Germany made the dollar worth forty marks and by 1923 it was worth more than four trillion marks. This was an extreme case of inflation gone wild – or hyperflation.

Historically the most frequent cause of inflation is the creation of excess money in the economy. In the early stages people see their profits and incomes rise and feel richer. But when prices (meaning the cost of things) start to rise also, the effect of inflation sets in and incomes are constantly trying to catch up with prices, leaving the people poorer and worse-off. As the new money trickles its way into the economy inflation affects different people at different times, and in different ways. Those who receive the excess money in the beginning of the process can get the most value from this when prices have not yet risen, but as they rise, each dollar becomes worth less as it passes from person to person. Soon its ability to be exchanged for goods and services gets weaker, it gets harder to compare the value of different things and – since the longer people wait to spend their money the less it's worth – they stop storing (i.e. saving) it instead preferring to constantly spend and consume. Agreements made at a set price become costly and difficult to honor as costs start rising, while lenders prefer to lend short-term. This discourages long-term business contracts and investments (like factories and infrastructure) because of an unpredictable environment. People on fixed incomes find it more and more difficult to manage the rising cost of living. Laws like tax policies, fines and penalties start losing their relevance. Unable to compare values accurately businesses set prices incorrectly. A house sold at a small profit may actually turn out to be a loss after taking inflation into account.

When prices in general start falling, i.e. the opposite of inflation, this is called deflation. If the government is introducing money into the economy at a certain rate and then reduces that rate, the amount of money flowing in the economy decreases while the quantity of products and services remains the same. With less money to buy more things prices start falling. Buyers decide to postpone buying, hoping for cheaper prices with every delay. This further removes money from the economy creating a downward cycle in prices. Businesses and people see their profits and incomes fall and feel poorer as the value of whatever they own keeps going down. Money's ability to be exchanged for goods and services becomes too powerful and – since the longer people wait to spend the less things cost – they start hoarding money, bringing the flow of goods and services (and with it the economy) to a halt. Because this decline is uneven, measuring and comparing the value of different things again becomes a problem. Promises made at a certain point in time become more difficult to fulfill as falling sales, prices and profits hurt the ability of sellers to pay back lenders. Every buyer wants to wait for the perfect lowest price which in an uncertain environment no one has any way of knowing. Thus stability in prices is the best thing for the economy both in the short-term and the long run.

From 1834 to 1933 the United States government had fixed the value of the dollar at $20.67 for an ounce of gold. To do this the government kept a sizable amount of gold reserves and anyone could trade dollars for gold with the government at this price. The exceptions to this were periods of war, because of the Civil War gold convertibility was suspended from 1861 to 1878 because of the toll it took on the government treasury.2 But otherwise fixing the currency to gold was part of the international monetary system. The gold standard, as it is called, began in 1821 with many countries gradually adopting it in some form, until it collapsed in 1914 after the beginning of the First World War. The United States was on this standard from 1834 to 1913 (except for the Civil War suspension mentioned above). During these eight decades average prices declined by 0.14% a year, a trend that would be defined as extremely mild deflation which in the real world is the closest that the country has come to keeping long-term prices stable.3 The government was committed to maintaining the value of money which it did quite successfully. After the collapse of the gold standard attempts to revive it resulted in the gold exchange standard in 1925 under which countries could hold gold plus dollars or British pounds.4

But after the First World War gold outflows from an impoverished Central Bank in England and a weakened British economy led to the system's collapse by 1931 also.5 By the 1920s huge expansions in the money supply (that were covered in the first chapter as a major cause of the depression) had also put pressure on the U.S. dollar and in 1934 Roosevelt took the country off the domestic gold standard and reset the value of the dollar at $35 for every ounce of gold. Gold flooded in, increasing the money supply at abnormal annual rates of 14%, 14.8% and 11.4% in 1934, 1935 and 1936 respectively.6 Yet the private economy did not recover till after the Second World War, over a decade after the devaluation. Supporters of a stable currency would argue that devaluing the dollar contributed to a prolonged depression that was partly caused by tampering with the money supply in the first place.

That is why the commitment of earlier governments was to maintain the value of the currency for the sake of long-term stability. But this devaluation changed all that in an attempt to make people feel richer (more willing to spend money) by floating more money into the economy. It clearly did not work but it was the first of many attempts to achieve short-sighted economic stability at the expense of long-term stability. Until then if the economy came to a halt and prices dropped, the government did not intervene. As prices kept falling a good bargain and the natural need to consume would inevitably attract buyers and swing prices back up (we saw this during the Panic of 1893 mentioned in the first chapter). When they returned to stability it kept up the long-term stability of prices. In contrast intervention was aimed to return price levels artificially by increasing the quantity of money. This weakened the long-term value of money.

In 1946 when two-thirds of the world's gold reserves were with America a new modified gold standard known as the Bretton Woods Agreement was set up.7 With this system the U.S. still tied the dollar to gold at $35 an ounce while other nations tied the value of their currency to the dollar. This meant an even greater need for a stable dollar because now it affected the stability of other countries' currencies also.

But by the late 1950s recovering European nations were running surpluses which led to a transfer of gold reserves from the U.S. to these countries. Then came an acceleration in the Vietnam War during the 1960s and an expansion of welfare under the 1965 Great Society programs. These expenses were only partly supported by taxes. To pay for them the government started printing more money. The money supply which grew by 23% during the 1950s was raised to 44% during the 1960s and 78% during the 1970s.8 By the mid-1960s the rate of inflation was running at 5% to 6%, about double the average rate since after the Second World War. As the amount of dollars started exceeding the amount of gold held by the U.S. government other countries grew nervous. If they brought their reserve of dollars to the U.S. to be exchanged for gold there wasn't nearly enough gold to pay everyone. By the summer of 1971 foreign countries had three times in dollars as the American government had in gold reserves.9 Since nations had tied their currencies to the value of the dollar, inflation in America was raising prices in other countries which blamed the U.S. for exporting inflation. The French president Charles de Gaulle was among the most prominent critics of the effects of America's domestic policies on global inflation.

During the 1960s the U.S. government dumped about half a billion ounces of gold hoping that when international markets were flooded with gold supplies its price would fall and inflationary pressure on the dollar would fall with it.10 But the problem was not a shortage of gold but too many dollars, so inflation kept getting worse. By the late 1960s the Bretton Woods System started breaking down. Within the country, economic stagnation had set in with inflation – a situation known as stagflation – with no economic growth and 6% inflation by 1970.

On August 9, 1971, the government of England asked America for gold reserves in exchange for $3 billion dollars it had in its possession (as per its agreement with other countries).11 Declining gold reserves since the end of World War II meant that by now this shipment alone would have drained a third of its entire gold stock, pushing prices even higher. Instead the Nixon administration announced that countries could no longer exchange their dollars for gold. The government also started devaluing the dollar against gold while it imposed controls on prices and wages and raised tariffs on foreign imports. When the effect of a devaluing dollar hit oil the country saw its first major oil price shock in 1973-1974. The stock market lost 15% of its value in 1973 and a quarter of its value in 1974. The Dow Jones Industrial Average which had climbed to 1,000 points in 1966 would not permanently pass that level for another 16 years. Finally by 1975 the link between the dollar and gold was completely severed which made it even more difficult to maintain the long-term stability of the currency as a free-floating currency. The price of gold shot up to $195 an ounce within a year and then fell to nearly half that by the next summer.12 Even though unemployment hit 9% prices kept climbing as the quantity of money produced kept exceeding the production of goods and services.

By 1979-1980 the country had its second major oil price shock. Although the stated explanation was political, oil priced in gold was much more stable throughout the period, so in spite the international rhetoric the underlying problem may have been the devaluing dollar more than anything else. By early 1980 inflation was at 15%, two and a half times its level in 1970 and five times its average from the mid-1940s to the mid-1960s.13 Then the Federal Reserve started raising their interest rates, an indirect way of reducing money in the economy by making it more expensive to borrow it. By December of 1980 banks were lending at 21.5% to their best customers.14 Inflation fell to 3.2% by 1983.

The attempt to reduce inflation was successful but extremely high borrowing rates led to a rise in the value of the dollar, creating a new set of problems. Auto production fell by more than a third between the middle of 1981 and early 1982, steel production by more than half between the summer of 1981 and the end of 1982.15 Neighborhood stores, factories and small businesses closed down and bankruptcy filings hit the highest levels since the Great Depression along with the unemployment rate which went to 10.8% in 1982. Even when these jobs eventually returned with time, workers had to trade down to less pay, fewer hours and lower skill requirements (factory workers were stacking boxes at retail stores, flipping burgers at restaurants). This trend continued over the next few decades as employers saw ways to cut costs by hiring cheap labor in other countries in Latin America and Asia.

Starting in the middle of 1980 the dollar rose by more than a third (against a trade-weighted basket of currencies) in a little over a year and kept climbing.16 By the mid-1980s the dollar was higher by over 50%.17 An expensive dollar made American exports more expensive for foreign customers while foreign imports were cheaper than ever. Foreign industries thrived while domestic production dwindled, for example, the Japanese share of the U.S. auto market grew from 20% to 30% from 1981 to 1991.18 Investment in physical assets like machinery, plant and equipment declined to levels not seen since the end of the Second World War.

For some emerging foreign countries the expensive dollar and high rates had a two-fold affect. Countries in Latin America and Africa which relied heavily on oil, mineral and agricultural exports for their economic prosperity saw a decline in the dollar based price of their commodities. At the same time these countries were heavily in debt when this price deflation came along. In 1983 Latin America's foreign debt alone was equal to half of that year's GDP.19 Since many of these loans were based on floating interest rate agreements the cost of borrowing became too expensive with falling export incomes and rising interest rates. An international debt crisis was right around the corner when these countries got emergency loans. This helped them with their immediate problems but also increased the total debt that they would have to pay back over the long run while the underlying problem of falling incomes and high borrowing costs still remained. Emerging economies were now in decline and wouldn't start recovering until the 1990s.

In this new currency system prices were fluctuating in the short run and the value of the dollar was not stable even in the long term. The 1960s and 1970s saw rising prices while the 1980s saw falling prices, yet each instability was damaging to the economy in its own way. At home entire sectors of the economy have disappeared during a time when the dollar has been unstable. Globally America was the largest consumer, producer, importer and exporter in the world. Oil, in fact most mineral and agricultural commodities were bought and sold with the dollar. Most international transactions were being done with it. Some countries linked the value of their currencies to the dollar and amassed huge dollar reserves to keep their value stable. The 1980s deflation of the dollar in the global economy encouraged the hoarding of dollar reserves by central banks around the world. According to the Federal Reserve 80% of the growth in the usage of the dollar since the 1980s has been outside the U.S..20 The most popular American export has not been a piece of machinery made by a worker in a factory but a piece of paper with no intrinsic value. Global use of the dollar also made it cheaper for Americans to buy most things. Consider the fact that other countries first buy dollars (at a cost) in order to pay for all their imports and foreign purchases while Americans do not. When Americans consider a foreign purchase they may worry about the change in its price but other countries have an additional worry, a change in the price of the dollar valued in their local currency. This added risk, known as currency risk, is an advantage that Americans have over others.

But having a global currency does not come without its own set of problems. Every currency is in essence a liability of its government. Every country holding a foreign currency provided products or services for which it was paid in this currency. When it presents this currency to that country it is owed a product or service in return. For all the dollars held by other countries America also owes them a product or service in return. The other issue is control. Control over its own currency is one of the basic sovereign rights of every nation, but when enough foreign countries start using a nation's currency some of that control is out of its hands, which makes domestic inflation vulnerable to foreign influences. About three of every four $100 bills are used by people outside the United States which means that their confidence in the dollar is extremely important to its value and stability.21 Bye bye confidence, bye bye stable dollar.

Global acceptance of the U.S. dollar had made it a common practice for corporations and governments in emerging economies to borrow in dollar based loans for their domestic purpose. It was also the preferred currency of lenders and investors. This became an important issue during the 1990s when fast growing Asian economies started opening up their capital markets (like stock and bond markets) to foreign investment. Overly optimistic investors rushed in to buy up everything they could, driving prices sky high. Then in 1997 rumors began that Thailand didn't have enough dollars to support its local currency. In a frenzied panic investors sold off their investments with prices crashing down. Soon the panic spread to all sectors of the economy and then from country to country – Malaysia, Indonesia, the Philippines and South Korea. It was the worst economic crisis in the region's modern history. For many borrowers currency risk had put them in a desperate state. Businessmen and governments had borrowed in dollars and then converted their loans into local money to use domestically. But after their currencies lost value against the dollar they suddenly owed much more money overnight. Many were unable to pay their debts, many businesses closed down and others were sold off at dirt cheap prices. Cautioned by the Asian Crisis, businessmen feared taking loans in dollars in the event that currency fluctuations may ruin them again so they started repricing off dollar based loans in favor of their local currencies. More-developed emerging economies that mostly relied on international debt have shifted to around 70% of their debt in the local currency.22 As Latin America gained political and economic stability their governments also reduced the use of the dollar in their domestic economies so that they could better control their monetary policy by encouraging the use of their own currencies.

While this was going on in Asia and Latin America, the United States economy was seeing an inflation created boom. Between 1995 and 1999, the money supply was growing twice as fast as the economy because of which trillions of dollars were driving up prices of young technology firms that had yet to prove their worth. But when the rate of money supply growth was stabilized and borrowing rates were increased, it inevitably created price deflation and triggered the dotcom crash. Many investors within and outside the U.S. who had invested in America lost $6.5 trillion and were looking for ways to reduce their risk through other types of investments.24 Investment opportunities were cropping up all over the world. Whether it was stocks, bonds, a joint venture, putting up a new factory or investing in a foreign company, investors were selling their dollars to buy local currencies with which they made these purchases.

Over in Western Europe, countries were celebrating the circulation of a new global currency, the euro, which began on January 1, 2002. Within the Eurozone, Germany has had the strongest economy, a country that has had Europe's worst case of hyperinflation in the last hundred years (mentioned earlier in the chapter). Shaped by its past, the German central bank, the Bundesbank, is a very conservative institution. Reflecting the conservative views of the Eurozone the main job of the European Central Bank (ECB) is to control inflation to maintain stability of the euro (while the Federal Reserve has a dual mandate, to control inflation and create jobs, and it has preferred the second over the first for most of its existence). Cautious central bankers all over the world now had the euro to help them avoid putting all their eggs in one basket, the dollar. Within a decade of its launch the euro made up 27% of international currency reserves, reducing the dollar's share to 61%.

At the urging of developing economies the World Bank began a new system in late 2007 known as the Global Emerging Markets Local Currency Bond (GEMLOC) Program whose purpose is to raise loans for developing nations that are free of currency risk because domestic and foreign investors lend in the local currencies.25

To make matters worse the Federal Reserve created more money between 2000 and 2007 than it did in the country's entire prior history put together, an exponential growth in the money supply.26 From 2000 to 2008 the U.S. Dollar Index – a trade weighted index showing the dollar's value against a basket of currencies – lost over 15% of its value. The dollar also lost its value against all types of metals, minerals, agricultural commodities and raw materials including gold, silver, oil, wheat, rice, fruits and vegetables. By early 2012 the dollar was at its lowest inflation-adjusted level since the early 1970s (when its value is compared to other major currencies).27 On December 31, 1999 gold was priced at $288 an ounce, but during the 2000s it rose 415% against the dollar. By the end of 2011 it was selling at nearly $1,540 an ounce.28 But again the government had mistaken the abundance of dollars for a shortage of gold and tried to lower its price by selling it off, hoping that cheaper gold would reverse the dollar's decline.29 This time a large portion of the Federal Reserve's dollars went into buying homes and average home prices jumped 50% from 2000 to 2005 while homes in the fastest growing markets roughly doubled in value. Even office prices rose by almost 60% from 2003 to 2008 in the central business districts of 32 markets throughout the country.30

But when the Federal Reserve began cutting the rate of money supply in 2006-2007 house prices started falling, eventually pulling down the stock market and then the entire economy. In other words changes in the quantity of money had again swung prices from high inflation to strong deflation. Again the Federal Reserve intervened to raise prices artificially and more than doubled the adjusted monetary base from $856 billion in April of 2008 to $1.749 trillion in April of 2009 and continued to make money cheap and abundant even after.31

The volatility in the value of the dollar has not gone unnoticed. The chapter began with a quote from billionaire investor Warren Buffett. On the evening of January 16th, 2011, a day before he left for Washington, the Chinese president Hu Jintao commented on the status of the dollar saying that, "The current international currency system is a product of the past." The president then went on to criticize the United States for pumping dollars into the international economy.32

In fact, various Chinese officials have voiced their concern over the value of the dollar because of the estimated $2 trillion in Treasury debt that China holds directly and indirectly. As the value of the dollar falls so does the value of these loans. Moreover the higher the country's debt, the greater the temptation to print more money to pay these loans (rather than raise money through unpopular taxes), the lower the value of the dollar. Research shows that countries with heavy foreign debt typically have inflation rates double those that do not have such debts.33

As a result the Chinese government has been buying mining firms, agricultural companies and other large assets all over the world to lessen the effects of a declining dollar. For example, China has a third of the world's rare earth minerals – minerals that are used in critical components for electronic devices like laptops, flat screen TVs and cell phones. It also has control over 90% of their production. 34

China is also one of the largest traders in the world and it is seeking to reduce its exposure to the dollar here also. On March 2nd, 2011 China's central bank announced that Beijing aimed to allow all exporters and importers to carry cross border business in the Chinese yuan by the end of the year.35 On June 26, 2011 Moscow and Beijing permitted bilateral trade in the ruble and yuan.36 Similar dollar independent trade agreements have been made with others like Brazil, Russia and Indonesia, some of the fastest growing economies. In fact China has signed currency swaps with around 20 countries. In the last quarter of 2012 China settled 14% of its trade, roughly 900 billion yuan ($145 billion), in its own currency, up from almost nothing three years earlier.37 With other partners (like Africa) it used a counter trade system of barter that avoids the use of costly foreign exchange currencies entirely. China sells machinery, merchandise or whatever the African country needs and in return gets paid with whichever mineral or agricultural product the country can provide.38 In 2011 the World Bank was also expected to float bonds whose denomination included the yuan in its basket of currencies. In the same year three Chinese bank branches in the U.S., one in New York and two in Los Angeles started offering bank accounts in the Chinese currency.

All these steps, big and small, signal a change in Chinese policy that make its business less dependent on a currency that it does not itself manage. And as we saw, countries all over the world are trying to increase domestic stability through currency independence in ways they haven't done before (for instance other countries like Japan–India and Russia–Iran have also made bilateral trade agreements to use their own currencies).39 But the short-term and long-term instability of the dollar was a strong reason that made the countries want to avoid its use.

Prices were stable for eight decades when the country stuck to the gold standard even though the economy was booming during that time. But since the system's collapse the dollar's purchasing power – its ability to buy things – has been in steady decline. Since 1975 (when all links to gold ended) it has lost over 80% of its purchasing power and producing currency at will has hurt its ability to function as money is meant to function.

Before the dollar emerged as the global currency the British Empire's Imperial Preference System made the pound sterling the currency used for over half of all international payments, making it the previous currency exchange standard for the world. But too many liabilities hurt the stability of the British pound after World War I. After World War II the British saw a steady drop in the usage of the pound as the global currency, which gained momentum in the 1950s and 60s. Meanwhile the dollar's use was increasing steadily. In fact, it took over two decades of decline in the pound's usage until its role as the reserve currency had effectively ended by November of 1967.40 Thus it was a long and economically difficult process in which the British were frequently seeking financial help, devaluing their currency and making large concessions at the insistence of their lenders. Similarly America's massive debts will continue the decline in the dollar's value as the Federal Reserve keeps printing too much money.

Given that so many dollars are kept outside the U.S. the stability of the dollar is highly dependent on the confidence of foreign users. If a declining dollar leads to a dollar sell-off by foreigners it could trigger high inflation (in extreme cases even hyperinflation) when unemployment is already high. In other words it could create a stagflationary environment, a risk that increases every time the Federal Reserve pumps more money into the economy. One can only guess how such stagflation will affect people's lives. During a guest appearance on CNBC real estate billionaire Sam Zell said that his biggest concern was the end of the dollar as the world's reserve currency. He further predicted a 25% decline in living standards if the dollar loses its status as the reserve currency.41

Though an end to the dollar's global status could affect the U.S. in a number of ways none of these roads lead to a desirable outcome. Some of this decline will be difficult to avoid as other economies develop and assert more currency independence as they get stronger. But if the U.S. stabilizes its currency it would help the economy in its long-term development. In the digital age a gold backed currency similar to the classical gold standard may seem like an outdated concept but it is the best guarantee of a stable currency as history has shown. The fact that its quantity can't be manipulated is a strength not a weakness. It makes a government more self-disciplined and prudent. It encourages long-term planning, contracts and investments, and provides a better economic balance between consumption and savings. Commitments, especially long-term commitments are easier to keep with a stable currency.

But gold is not the only option available. Many people know of John Maynard Keynes' view on gold based currencies through his description of gold as a 'barbarous relic.' But Keynes did propose an alternative system that based an international currency on other commodities like oil or wheat. More recently, one of the original designers of the euro, Bernard Lietaer, proposed a world currency based on a basket of commodities like silver, copper, zinc, oil, rice, cotton, sugar etc..42 Such solutions are critical to address a problem of such serious magnitude.

Moreover, such ideas show that currencies, not just international ones but also national ones, can be based on solid foundations that stabilize their value with the value of whatever commodities countries choose, preventing the global volatility that fiat currency – currency based on no inherent value – has brought within the United States and around the world in the last few decades.

seven

MON(K)EY BUSINESS

The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.

-Lord Acton

During the 17th century people in England had started entrusting their gold to goldsmiths for safekeeping and in return they were given a receipt which they could present to get their gold back. As time went by people started using these receipts as substitutes for the gold, exchanging them for goods and services. As issuers of these receipts the goldsmiths saw ways in which they could benefit from this by lending out receipts for which they charged interest payments. Their common usage had made them an alternative currency which represented gold deposits. People rarely presented too many receipts all at once to get their gold back, so slowly goldsmiths started lending out receipts that far outnumbered the quantity of gold in their possession. Thus was born the modern banking system.

Lenders would charge lower rates of interest because they were lending out and earning interest on loans that were several times the amount of money in their possession. Once in a while if someone came with a receipt asking for gold they used this small amount to pay them. But if enough people came with these receipts there wasn't nearly enough gold with them and it caused a run on the bank – it would collapse.

This system, known as the fractional reserve system, created two problems for the economy. For every dollar that was lent to a bank it would lend out several dollars to the larger public, instantly multiplying the amount of money in the economy. But since more money was chasing the same number of things to buy, the price of everything would start rising. In other words the expansion of money was highly inflationary for everyone. On the other hand every dollar that was withdrawn from a bank would also take several dollars out of the economy. This reduction was highly deflationary. In this way the banking system was creating constant volatility in prices and the economy as a whole. The other problem was that since banks were lending so much more money than they actually had themselves, even a relatively small number of people demanding actual currency could cause a collapse of a bank, even of the entire banking system.

Given these extremely harmful flaws in the banking system it was frequently causing problems not just to the banking system itself but to the entire economy. In fact, many have argued that the banking system as it has existed has done more harm than good and that there is a need for an entirely different system of finance.

Instead the system remained largely intact, bringing down financial systems and economies from time to time. To protect against such collapses countries relied on central banks which provided financial help to banks when they were about to go belly-up. This added to the flaws of the banking system because banks were always tempted to lend more and more money than they had so they could earn more profits through interest. If they lent five dollars for every dollar in their possession, lending ten dollars for every dollar in their possession doubled their earnings. But this also made their situation more fragile. The more they lent out, the fewer people it would take to cause a run on a bank by asking for actual money. After earning outrageous profits, if a bank was in danger of collapse it could simply ask for the central bank's help to survive. Thus the potential for huge profits with limited risks and losses made the business of banking like no other. Moreover if the system was supported by a central bank it gave one institution the ability to manipulate money.

That is why when central banks were founded in America they were strongly opposed. The first Bank of United States founded in 1791 and the Second Bank of United States founded in 1816 were formed to raise cheap loans for war financing for the government. Each of them lasted two decades. Similarly the Bank of North America financed the American Revolution but its federal charter was also abandoned within a few years. The resistance to these central banks was because they concentrated control and power in a central authority. In this environment the U.S. banking system needed other ways to create stability.

At the regional and local level small banks came up with the mutual guarantee system under which member banks guaranteed each other's losses without limit. They also regulated each other through a board of directors with broad powers of authority like the power to close a bank down, regulate the ratio of money loaned out to the money held as deposits, restrict the payment of dividends that are given to owners out of the bank's profits and suspend conversion of deposits to cash – all meant to conserve a bank's finances when needed. The pledge to cover each other's losses was a strong incentive to closely monitor and penalize violators of agreed rules.

Since each bank enjoyed the support of all the members, unlike non-member banks, they did not need to resort to desperate measures to avoid bank failures. During its existence from 1834 to 1865 none of the member banks failed.1 The system gradually came to an end as member banks converted to national bank charters to avoid a ten percent federal tax on state bank notes.2

As for larger banks, they formed Clearing House systems which served as lenders of last resort that provided deposit insurance in case banks were unable to pay depositors. Members pooled their funds together and issued joint liabilities to help troubled members.

Bankers served Clearing Houses in a part-time official capacity, but since the system was self-regulatory it created better collaboration among banks because of a common need for stability. To reduce risky activities members had to accept regular auditing and loan-to-deposit ratio requirements. Violators were penalized or even faced loss of membership, strong incentives to follow regulations. If a bank's financial situation was in doubt Clearing House officials would examine the bank's books and give an impartial account of the bank's solvency. When needed, Clearing Houses also accepted a bank's illiquid (i.e. not so easily convertible to cash) assets as collateral and provided receipts that worked as cash substitutes.3 Started in New York in 1853, the system had spread to virtually every state by the turn of the century.4

The system may not have been perfect but if the membership of each Clearing House was kept limited, it was an effective system to control the risky activities of members. The image of the New York Clearing House, and Clearing Houses in general, was damaged during the Banking Panic of 1907. The panic mostly affected trust companies which were not members of the New York Clearing House. As problems were spreading across the financial system the Clearing House took steps to help out its members but refused to help out non-member institutions. The initial crisis deepened to a full blown banking panic in which the highly reputed banker J.P. Morgan stepped in to restore calm. The Clearing House's decision not to help non-members may have made perfect sense from their point of view but its reputation was permanently damaged.5 The creation of more collective institutions like the Clearing House would have been an effective tool to prevent and handle future crises for all financial firms including non-member banks and trust companies. But after the panic eased off bankers and government officials started pushing the idea of a central bank.

The built-in fragility of the financial system meant that panics would happen quite often. So even in the absence of a central bank the government had been intervening through the Treasury Department to prevent or turn panics around as it did in 1873 (through the New York Sub-treasury), 1890, 1893 and 1907. But the creation of the Federal Reserve in 1913 was a much broader attempt to make the fractional reserve system work.

In the beginning the Federal Reserve's (or Fed's) purpose was to give the country elastic currency, improve supervision of the banking system and help in the buying and selling of commercial paper. After the Second World War its obligations would also include protecting the purchasing power of the dollar, keeping America's transactions in balance with the countries which it had dealings with, providing economic growth and keeping the unemployment rate low.7 With respect to its monetary role the Fed had two main powers, the ability to set interest rates and to determine the money supply – in other words control over the cost and quantity of money. In the previous chapter we focused on the quantity of money or money's supply aspect, equally important is the cost of money aspect, i.e. interest rates. The Federal Reserve has the power to set the Federal Funds Rate, the rate at which banks lend to each other. This rate provides the basis on which all interest rates are set, so it moves borrowing costs for the entire economy.

In the first chapter we saw that the unusually high rate of money supply was one of the reasons that drove prices high during the 1920s. When this was discontinued and brought to stable levels it created panic in the economy. After the crisis the Fed dropped rates from 6% in October of 1929 to 2% by 1930. Only briefly were rates raised to 3.5% but they stayed at 1% or less from 1936 to 1948. Through the Reconstruction Finance Corporation (RFC) the government also invested $1 billion in 6,000 banks while loaning out another $2 billion to those and other banks between 1932 and 1936.8 Yet unemployment, a good way to judge results, remained high throughout and didn't return to pre-depression levels for 13 years.

Then in the last chapter we saw the increase in the money supply from the 1950s to the 1960s to the 1970s which again created high inflation, a problem the Fed solved by slowly increasing its rates from 6% in 1978 to 14% by May of 1981. A severe recession hit which sent unemployment to 10.8% by 1982, along with the other problems mentioned previously. Later between 1995 and 1999 the Fed increased the money supply more than twice as fast as the economy itself was growing. This created inflation in the value of technology companies with the dotcom bubble of the 90s. When this high money supply was reduced $6.5 trillion in wealth was wiped out.9

Then between 2000 and 2007 the increase in the money supply exceeded the supply of the country's entire prior history. On top of this the Fed began lowering rates from 6.5% until January of 2001 to 1% by mid-2003. With inflation such low interest rates meant that borrowing money from the Fed was practically free. The Fed also bought over $150 billion in government securities while it lent $45 billion to banks, flooding the markets with money.10 This time money flooded into real estate which after its own bubble saw a housing crisis beginning in 2006 as rates were slowly raised from 1% until January of 2003 to 6 ¼ - 6 ¾% by June of 2006. The resulting recession dropped the GDP by 3% from October of 2008 to March of 2009, the worst six months in 50 years, while manufacturing fell by a third and unemployment hit 10.2% by October of 2009.11 The Dow Jones Industrial Average lost over half of its value from October of 2007 to March of 2009. Corporate bankruptcies tripled from 20,000 in 2006 to 61,000 in 2009.12 The average price of homes fell by a third by 2011 from their 2006 peak value and was expected to fall further.13 Commercial real estate also lost 45% of its value while a fifth of all office space was empty by the fall of 2010.14 Over two of every three Americans saw a decline in their net-worth during the recession, with a typical drop of 18%.15

The Fed's response was to start cutting its rate from 5 - 5 ½% in November of 2007 (the month after the Dow was at its peak) to ½ - 1% by December of 2008, rates that are again low enough to make money free to borrow from the Fed when accounting for inflation. And according to policymakers rates are likely to stay under 1% until late 2014.16 Before April 2009 the federal government (including the Federal Reserve) had either spent, loaned or guaranteed a total of $12.8 trillion, most of which was off their balance sheet.17 As for the Fed, it had become the largest domestic lender to the U.S. federal government, having purchased $2.3 trillion in Treasury bonds and mortgage related securities from 2008 till the summer of 2011, paid for with money created out of thin air.18

Yet unemployment which went from below 5% in 2007 to 10.2% in October of 2009 still shows no signs of returning to the pre-crisis levels any time soon. The Fed itself expects unemployment to be between 6.7% and 7.6% at the end of 2014.19 The non-partisan Congressional Budget Office (CBO) does not expect unemployment to return to normal rates of 5% until 2019 which would be a return to pre-crisis levels after well over a decade.20 Nationwide home prices are not expected to return to their peak 2006 value until 2021 according to Celia Chen, an economist for Moody's Analytics. The price of homes has become important not just for the housing market and the industries that directly depend on it like furniture, appliances, construction etc. in fact, according to a 2009 Gallup Survey of small business owners almost a quarter of them borrow against their homes or use them as collateral to fuel their small business.21 Given the massive efforts of the government and the Federal Reserve mentioned above the recovery of the private sector has been quite a disappointment to say the least.

Since the creation of the Federal Reserve around a century ago, the country has had three lost decades – the 1930s, the 1970s and the 2000s – with respect to the economy. In all three cases there was the initial introduction of excess money supply. As inflation was climbing there was a constant choice between introducing more and more money (driving prices ever-higher as the value of the currency kept falling) or returning the quantity of money growth to a level that reflected the value of goods and services being produced. When the money supply growth rate was returned to stable levels the economy would go through painful recessions quite like the painful detoxification of a recovering addict. The Fed's policies thus (fully or partly) caused these three lost decades and the government was unable to bring the economy back in the two most severe situations, the 1930s and the 2000s, despite massive efforts to do so. The recovery from the lost 1970s came at heavy costs mentioned in the previous chapter.

Then there was its purpose to improve the supervision of banking. As I mentioned earlier, the fractional reserve system has structural weaknesses that can keep causing bank runs and banking panics. To reduce this risk the systems of mutual guarantee and clearing houses had self-regulatory controls that were quite successful, not because self-regulation is good per se, but because the financial laws were quite conservative and the losses were their own to bear if they failed to regulate effectively, so members diligently monitored each other. In the event of a bank run they also had a process by which depositors could withdraw their savings in an orderly fashion.

But the federal government had been pushing for another way to protect depositors. From 1886 to 1933 one hundred and fifty legislative bills were introduced to the House or Senate to create some form of deposit insurance.22 Since 1908 eight states had actually tried deposit insurance systems but they all collapsed in the 1920s because their protection led to too much risk taking and fraudulent activities.23 But it was only the desperate willingness during the Great Depression which allowed the passing of the Glass-Steagall Act which created the Federal Deposit Insurance Corporation (FDIC). The FDIC's purpose was to identify, observe and take necessary steps to ensure the safety of deposits. It also provided deposit insurance to banks and savings institutions i.e. if there was a bankruptcy depositors could get their money back (since October of 2008 each deposit worth up to $250,000 was fully insured).

The money comes from a pool of funds created with premiums from member banks. If these funds run out then the FDIC can borrow from the U.S. Treasury. A problem with the system of Clearing Houses was that as their membership got larger it became more difficult to keep an eye on the activities of each member while the possible losses of each bank could be shared with an ever-larger group. In this way the chances of riskier activities increased, a problem that could be controlled by limiting the size of each Clearing House. But by replacing them with central institutions like the FDIC and the Federal Reserve this problem was only magnified. Centralized regulatory institutions were overseeing the entire nation's banking system. Each member could contribute less while enjoying access to a much larger pool of funds, thereby encouraging individual risk-taking.

However other portions of Glass-Steagall restricted the scale of banks by stopping insurance, banking and securities firms from expanding into each other's activities by separating commercial banking activities from investment banking activities and prohibiting commercial banks from entering non-financial businesses. Such limitations greatly reduced the risky activities of banks and were a source of stability to the economy. Until the 1970s the financial system was quite controlled but starting in the 1970s it went through deregulation and liberalization that changed the entire industry. All over the country banks were merging and acquiring each other and creating national institutions. Meanwhile lower capital reserve requirements were making them more vulnerable. New technologies allowed firms to make massive transactions and cash injections in mere moments and consolidated individual financial markets into a single globally connected market. During the 1980s and 90s limitations were further reduced by the Federal Reserve and the Comptroller of the Currency by permitting banks to enter new activities and new regions with laws like the 1994 Federal interstate branching law which the Fed had strongly pushed. This allowed bank holding companies to buy banks in every state and removed most restrictions on opening branches in multiple states. Between 1990 and 2005 there were 74 mega mergers involving banks with assets of over $10 billion each.24 Then came the 1999 Banking Act (the Gram-Leach-Bliley Act) which repealed what little was left of Glass-Steagall and now commercial and investment activities could mix without any restriction after 66 years of separation.

One of the most harmful by-products of this deregulation wave was the growth of derivatives, paper assets whose value was derived from changes in the value of markets or financial products. The creation and accumulation of wealth was drifting further and further away from the real world of products and services.

In 1996 the Commodities and Futures Trading Commission (CFTC) took notice of the $13 trillion market of over-the-counter derivatives. Already it was large enough to collapse the global economy and it was operating outside any regulatory supervision. Headed by Brooksley E. Born the CFTC wanted to regulate the OTC derivative market as supervisor of agricultural commodities and the derivatives market. But she met strong resistance from Alan Greenspan (chairman of the Federal Reserve), Robert Rubin (secretary of the U.S. Treasury), Arthur Levitt (head of the Securities and Exchange Commission) and the influential Harvard economist Lawrence Summers who was Robert Rubin's top deputy at the Treasury Department. The CFTC's authority was curbed with a regulatory freeze. After an intense smear campaign Born was forced to resign and in 2000 the government actually banned the regulation of derivatives (including Credit Default Swaps, one of the most damaging instruments of the 2007 financial crisis) by passing the Commodities Futures Modernization Act. Born had warned lawmakers in 1998 of the unknown risks to the stability of the U.S. and world economy because there was no transparency in these markets and they were encouraging the type of limitless borrowing that created the Great Depression, but such warnings were completely ignored. When the law was passed OTC derivatives had a notional value of $95.2 trillion with an underlying market value of $3.2 trillion. By June of 2008 when the market was at its peak OTC derivatives had a notional value of $672.6 trillion – more than ten times the size of the global economy – with an underlying market value of $20.3 trillion.25

In 2011 the government's inquiry commission released its final report on the causes of the 2008 financial crisis. It concluded that the crisis was avoidable, warning signs were ignored and regulators didn't do their jobs. The blame fell on politicians, bankers and regulators whose collective efforts, "...had stripped away key safeguards, which could have helped avoid catastrophe."

"In case after case, regulators continued to rate the institutions they oversaw as safe and sound even in the face of mounting troubles, often downgrading them just before their collapse. And where regulators lacked authority, they could have sought it. Too often, they lacked the political will – in a political and ideological environment that constrained it – as well as the fortitude to critically challenge the institutions and the entire system they were entrusted to oversee." The Office of the Comptroller of the Currency (OCC) which oversaw nationally chartered banks was described as "...particularly zealous in its efforts to thwart state authority over national lenders, and lax in its efforts to protect consumers..." The OCC's 2010 LARGE BANK SUPERVISION HANDBOOK released after the crisis still instructed examiners not to "...attempt to restrict risk-taking but rather determine whether banks" themselves can "identify, understand, and control the risks they assume."26 The commission was particularly critical of the Fed which supported and encouraged deregulation, ideas "championed" by former Fed chairman Alan Greenspan.27 The Fed General Counsel, Scott Alvarez, put it succinctly: "The mindset was that there should be no regulation."28 The earlier described decision to ignore Brooksley Born's warnings and ban regulation of the OTC derivatives market was seen as "...a key turning point in the march towards the financial crisis." 29

Since the 1970s, the Federal Reserve's purpose of improving the supervision of banking and the financial sector has changed dramatically. The Fed along with other supervisors had instead become the industry's chief spokesmen, arguing for less regulation and lobbying on their behalf.

To understand the kind of problems this brought, consider the following example: Suppose firm A made a financial investment of $100,000 in firm B by putting up $10,000 of its own money and borrowing another $90,000. By the end of the year if that investment doubles in value, firm A can sell its investment for $200,000. The investment itself has doubled but firm A saw its $10,000 bring it $105,500 ($200,000 minus the $90,000 loan and 5% interest owed on the borrowed $90,000 i.e. $4,500), a 955% profit! On the other hand since firm A only invested $10,000 of its own, even the smallest loss can bankrupt it. This is an example of leverage that can be highly profitable if prices and profits are rising but even more damaging if prices drop.

Similarly during July - September of 2007, just before the crisis hit, brokers and hedge funds were using a dollar of their own money with over $30 borrowed from others to bet on risky ventures while government sponsored entities had borrowed nearly $25 for every dollar of their own. Institutions leveraged against deposits were also in a fragile state, with commercial banks at nearly 10 to 1 and savings banks and credit unions at around 8 to 1.30 Requiring firms to put up more of their own money would mean that they would be able to take personal responsibility for their own actions. Their losses would be their own to bear, instead of requiring bailouts from outside.

If defined narrowly such costly bailouts may be seen as a success if they restore calm during a frenzied panic, if borrowers can keep on borrowing and the financial sector is stabilized. Even better if the government can recoup its bailout money along with a small profit. But the long-term costs to the economy are of a different nature. It becomes far safer and more profitable for investors and lenders to put their money into the financial sector than a manufacturing firm or any other venture (for instance lenders to AIG and Bear Stearns did not lose a single dollar on their investments due to government bailouts). This continues to give the financial sector an advantage over all other sectors of the economy, attracting the human and financial resources, expanding one sector at the expense of others. High profits lead to high salaries, attracting the best and brightest minds who would have otherwise become doctors, scientists or engineers. While only 16% of American students graduate with a degree in science or engineering, 26% of Japanese, 27% of British, 28% of French, 33% of German and 38% of Korean graduates earn such degrees.32 In 1980 the financial services sector was 15% of the economy while its profits were 15% of all corporate profits. By the mid-2000s the sector had grown to 20.4% of the economy with a third of all corporate profits in 2003 (this fell to 27% by 2006, just before the crisis).33

Former White House strategist, Kevin Phillips commented on the disproportionately large financial sector of the U.S. economy, seeing it as a warning that America is following a trend set by earlier civilizations like the Spaniards and the Dutch before they went into decline. He points to a common theme of "...finance as a late-stage economic and societal tendency to luxuriate..." arguing that even the present emerging economies (like the fast emerging BRIC nations – Brazil, Russia, India and China) and the industrial economies (like Japan, Germany and Switzerland) are far less dependent on financial services and more on manufacturing for their growth. He mentions a 1904 statement by the British colonial secretary, Joseph Chamberlain, to bankers, "Banking is not the creator of our prosperity, but is the creation of it. It is not the cause of our wealth, but it is the consequence of our wealth." 34

In the business world financial resources are also referred to as liquidity because of their ability to easily flow in and out of each place. But the actual liquid resources of the world (like water) are managed quite carefully because of their ability to flow so easily. Dams, barricades, levies and their like are erected for a more even distribution to make sure that some places are not left barren while others become flooded. Similarly money can flood in with the mass hysteria of frenzied greed driving up prices overnight, and then rush out with the same haste of irrational fear, dropping prices just as fast while leaving a trail of financial ruin behind it. It can happen based on rumors true, false or exaggerated. In spite of the Federal Reserve's push for deregulation historical evidence overwhelmingly shows that liberalization creates greater capital mobility and financial creativity which can trigger a banking crisis within a few years, irrespective of whether a country is developing or developed.35

Aware of this reality, economies like China, Indonesia, Malaysia, Taiwan and Thailand have road blocks on foreign capital flows. Brazil charges high taxes on many foreign fixed income investments. In Columbia foreign investment can be made directly in domestic firms but foreign ownership of debt or corporate shares is restricted to prevent panic sales. In Chile, foreign investment must be for a minimum one year period to discourage speculative activities. China has been curbing real estate speculation (especially after the American real estate bubble) by requiring a 20% down payment on primary residence, a 50% down payment on a second home and a full payment on a third home. The financial panic of 2007-'08 has even further encouraged countries in Asia and Latin American to experiment with strong capital controls and a conservative shift regarding the flow of finances. Even within America, state and local governments were the decision makers as to which activities and regions required a bank and they would tax, closely supervise and even own significant shares in these banks during the 19th century.36 Yet this period was the fastest growing in the country's history in spite of such hurdles, or maybe because of them. By ensuring that the consequences of banks' actions were borne more by the banks and less by society as a whole mutual guarantee and clearing houses provided better safeguards for the participants and the rest of society than the Fed, the FDIC and the Comptroller of the Currency (OCC) which replaced them.

By keeping rates low and providing cheap money a debt based economy has replaced a savings based culture (as we saw in the chapter on debt). It has also discouraged investment and encouraged consumption, two issues closely related to saving and spending. From the 1970s consumption has risen steadily from below 63% to 72% of the GDP by the mid-2000s while investment fell from over 21% to around 18% by the early 2000s.37

Revisiting the stated purpose of the Federal Reserve, its currency elasticity (i.e. instability) has harmed rather than helped the economy, its supervision of banking has been replaced with a zealous push for free reign during good times and a strong push for government bailouts to save the economy from Armageddon during bad times. For political gain the Fed has been used as an alternative way to raise money – by creating it – rather than through taxes. It has also been used to create more money in the near term, creating a fake sense of prosperity with high employment and grateful voters in the short term. But this has hurt its role as protector of the currency's purchasing power, and eventually its currency mismanagement has led to the three worst periods for unemployment in the last century – the 1930s, the 1980s and the 2000s. It is high time that the Fed's reasons to exist and the general shift towards a liberal financial system are seriously questioned.

During the 1980s the financial sector faced some of its worst times due to loan losses when interest rates were at their highs. Some of the largest banks would not have survived had they not diversified into venture capitalism. For many banks profits on equity investments were over a fifth of their total earnings during the decade, while their return on equity was an impressive 21% during the 1980s and 90s for those investments.38 Conventional banking is either based on a system of very high interest rates which ruin the borrower or low interest rates on the multiple use of the same money at the same time, spreading costs (with inflation and panics) throughout society. But completely outside this system, equity investments that actually own portions of real firms can be a mutually beneficial option that benefits both finance seekers and providers, and need not harm the larger economy nor require government assistance to survive during bad times. Its profits can be very high even if it would not enjoy a privileged status as an industry, diverting resources from other sectors. In other words better alternatives are available.

But regardless of the specifics, a conservative financial sector with controls will be critical for the stability of the economy and without them financial panics will continue to bring unsteady volatile growth.

eight

THE VISIBLE HAND

We must now supply a real and visible guiding hand to do the task which that mythical, non-existent, invisible agency was supposed to perform, but never did.

-Rexford Guy Tugwell, advisor to FDR on the New Deal.1

Driving with the brakes on: Over the years parents of infants had been buying a new item called a crib bumper. These bumpers were used to dress-up the inside of cribs and provide a safety barrier to prevent infants from getting their arms or legs trapped between crib slats. But their usage showed that they create suffocation risk for infants, which is why Canadian health officials warn parents against using them. Even in the U.S. the American Academy of Pediatrics and other child safety organizations have similar warnings while the government's Consumer Product Safety Commission (CPSC) has been less than decisive on the issue.2

But while the government has hesitated to give clarity the private sector has taken strong steps of its own. Many stores demanded stricter quality standards that provide better safety. Babies R Us, the retail chain owned by the toy giant Toys R Us issued new manufacturing requirements to producers along with warning labels and better usage instructions to increase safer usage. Retail giant Target made product safety information more accessible to the public through its website. In its efforts to maintain public confidence Wal-Mart reassured the public that its safety standards were consistent with international standards of quality.3

The above is an example in which big corporations took steps to benefit their consumers without being forced by the government to do so. But before the existence of formal regulatory procedures society already had a more informal process by which commerce was regulated. Small businesses like neighborhood butchers, bakers, deli owners, community farmers, mom and pop stores and such relied on their interpersonal relationships with the community in which they lived. Buyer-seller relationships were built on a reputation and referrals through word of mouth. Despite the absence of a legal infrastructure enforced by a regulatory workforce the value of such relationships cannot be underestimated because businessmen were very conscious of their role in society and took their business personally. Customers' families went to the same churches and schools and their lives were well integrated with each other as friends, relatives, neighbors and community members.

If problems like contamination arose they were not widespread because the production, processing and transportation of goods by small businesses were not as centralized as their larger competitors. If businesses did take advantage of customers, the courts were an option to right a wrong.

This is not to say that regulations were completely absent in the 19th and early 20th centuries, there was regulation, but nothing like the changes that came with the New Deal. Businesses, both big and small, had to accept new codes of conduct that dictated every procedure. But for neighborhood businesses with diverse and individually unique products (which did not come from a large assembly line) quality consciousness came from personal judgments, skills and pride in their work. In this environment formalized guarantees of quality added little benefit but saddled heavy costs. As a result small businesses all across the country were at a greater disadvantage than bigger businesses.

The New Deal was the revolutionary foundation of a regulatory infrastructure upon which all succeeding governments built. In fact there were two major periods when regulations were drastically increased, the 1930s and the 1970s, but regulations have been gradually added throughout the years. On the surface this may make perfect sense with changes in technology, education, the culture and the environment, but that would mean that outdated and redundant laws should be replaced with new, relevant ones. Yet while many old regulations were discarded (when the Carter and Reagan administrations cut the size of the Federal Register by about half during the 1980s), the vast majority of regulations are just new ones piled-up upon old ones. This has created a cacophony of rules that many times contradict each other, no more simple or easy to follow or evident in the benefit they bring.

More focus is placed on the stated purpose and immediate benefits, less on the overall consequences to society, or if the success is worth the cost or even whether the intended level of success is actually being achieved. On the whole laws are passed for a static environment and there is little room for feedback and reevaluation once a law is passed.

Take the example of anti-trust laws originally designed to encourage competition among businesses. If a large corporation is forced to break-up in the name of competition this could prevent the heavy long-term investments that only the very largest and most dominant companies can afford to make, either alone or by closely cooperating with a handful of other players. This is especially true in the hi-tech industries where many products cannot be produced without multibillion dollar investments. In his 1982 work, ANTI-TRUST AND MONOPOLY: ANATOMY OF A POLICY FAILURE author Dominick Armentano examined fifty-five famous anti-trust cases throughout American history and found that in many situations the defendants were being targeted because they "...had lowered their prices, expanded their output, engaged in rapid technological change and generally behaved in ways consistent with an efficient and rivalrous market process." He concluded that the anti-trust laws that were in place had been hurting competitive behavior and protecting the status quo at the expense of the consumer.4 Despite this mismatch between intents and results, the laws continue to remain without any meaningful changes.

One problem is that if the regulatory body appears to be neglectful of its role and the government overcommits and underdelivers on its promises then it hurts the image of the regulator and reflects badly on the government. The 2008 financial crisis tarnished the reputation of regulators not just in the United States but also in other countries. As a more specific example take the zealous prosecution and conviction of Martha Stewart for obstructing an investigation into the sale of her personal stock holdings. While attention was focused on this $40,000 issue the investment banker Bernie Madoff was running a Ponzi scheme worth tens of billions of dollars. Various tips had been submitted to the SEC supported with enough facts to warrant an in depth investigation but when skeptics approached Madoff asking about his suspiciously consistent profits he would show them that the SEC had cleared him of any wrongdoing a number of times. Thus until authorities became aware of the crime after Madoff's voluntary admission to his sons the SEC's clearance was providing a false sense of legitimacy to the scheme.

Or consider the 2008 scandal regarding the Interior Department's regulatory division, the Mineral Management Service, in which their office workers in Denver were found accepting favors from energy companies, like football tickets, golf games and ski outings. They would socialize with company executives, accept drinks and illegal drugs from them and had sexual relationships with them.5

Another issue is that when regulatory barriers are added the costs of doing business rise with them, hurting smaller businesses more than larger ones. When the government has decided to regulate some activity, instead of opposing regulations it is better for established corporations to lobby the government in order to shape the policies in a manner that would benefit or do the least harm to them. Small businesses or new entrants who could be harmed by such regulations are left unrepresented.

In 2007 the usage of toxic chemicals in toys created a scandal for national toy corporation Mattel. Nationwide, toys were being recalled because the overuse of chemicals made them unsafe for kids.

The government responded by passing the Consumer Product Safety Improvement Act (CPSIA) in 2008 which raised the costs for all toy makers. For Mattel whose reputation was badly damaged by the scandal, spending more money for better testing was essential to repair its image and Mattel made no efforts to oppose regulation. But it succeeded in getting permission to test its products on its own, more specifically by its subcontractors.6 However, the law did threaten the livelihoods of mom and pop stores and neighborhood toy makers and sellers who fought this cost prohibitive regulation through the Alliance for Children's Product Safety, a coalition of small businesses and manufacturers. For such small businesses the added cost of testing brought little value since they were already making quality conscious products at their own discretion but now they had to prove this through outside testing.7

Yet another solution came from customers themselves as cautious mothers started blogging to share information on products. One blogger, Jennifer Taggart, of thesmartmama.com would charge clients $5 to share information on products which she tested with an XRF gun. She was not alone; other blogs like thesoftlanding.com, safe baby.com and 2recommends.com were similar sources of product information. Also, advocacy groups like the Michigan based Ecology Center were releasing product reports on sites like healthystuff.org.8 Far more effective than the law families were taking the initiative and providing more peace of mind than the government or businesses could. And it was without adding costs to businesses.

More regulation means more approvals, licenses and other requirements that slow down the speed of doing business while adding costs. American firms pay an average of $161,000 while manufacturing firms pay an average of $688,944 per year due to regulations.9 Businesses also get distracted as their focus on the needs of the customer is replaced with the requirements of the regulator. Ideally regulators are there to protect the interests of the public, including the customer, but individual levels of competence, personal motivations and relevance of the regulation to each unique situation complicate things. Even the most common professions like florists, manicurists and barbers require state licenses before starting seemingly harm-free and limited skill-level jobs, creating problems for employers and employees. The U.S. Small Business Administration estimates that small businesses pay $10,585 in regulatory costs for every employee they hire.10

But regulations even affect the largest corporations, the kind that have the resources and ability to compare the ease of doing business with other countries. In fact, unlike the average business, large corporations can more easily move their operations elsewhere.

Estimates on the cost of complying with federal regulations alone are between $1.13 trillion (a 2005 estimate) and $1.75 trillion (a 2008 estimate).11 It is quite possible that many of these regulations protect the interests of society but many have simply been costly while not as beneficial as originally intended and need to be reformed. Some policies have become problematic in a more globally connected economy where American workers compete with a global workforce and American firms compete with firms all over the world for customers. In such an environment policymakers must be extremely aware of the policies of the rest of the world as a reality they simply cannot ignore, because it is their competition and potentially also their greatest source of new ideas.

In the 2011-2012 executive survey by the World Economic Forum which looked at the global competitiveness of government regulations (among other issues), the U.S. ranked 58th with fast growing economies like Malaysia, Saudi Arabia, Nigeria, China, Chile and Indonesia far above. Even industrialized economies like Finland, Iceland, Switzerland, Denmark, Sweden, the Netherlands and Canada next door ranked higher with less cumbersome regulations, shedding doubt on any notion that such burdens are the inevitable price of doing business in a developed economy.12 When a country's regulations are globally competitive low taxes encourage domestic growth instead of pushing investors to send their money overseas. By easing the burden on doing business domestically they encourage a country to enter free-trade agreements rather than shy away from them because it cannot compete.

Keeping such issues in mind the entire infrastructure of regulations must undergo reforms which weigh benefits against costs and consequences. Many rules will cost less time and money to follow if they are simpler, clearer, more specific and more consistent when businesses deal with different regulatory agencies and with different states and localities. In an ever-changing world unique situations will keep arising to create the temptation for more laws and greater supervision of the behavior of individuals. But liability laws have always been a viable option. This is not to say that regulations have no role to play, they did before the New Deal and they still do today. Many wrongs cannot be made right even through the courts (loss of life and permanent loss to health being two examples). But when you are 58th in the world a more balanced approach with some of the motivations and guidelines mentioned above can greatly reduce restrictions on entrepreneurship and the economy.

Given below are some other ways in which the government has intervened in the economy:

Handouts by the visible hand: Subsidies are normally thought of as monetary assistance in the form of grants or exemptions from the government. To understand the effect that subsidies can have, suppose that the government pledges to cut $50 billion in Medicare drug entitlement spending but at the same time gives a $50 billion tax exemption to pharmaceutical firms for offering seniors discounted drugs. This does not relieve the burden on the taxpayer in the present or the future but the government has technically reduced spending by finding an indirect way to spend the same amount of money on the same people for the same purpose. In this sense subsidies are basically spending by another name.

Some temporary subsidies are meant to help out an infant industry in the medium term until it is strong enough to compete. For instance subsidies to technology firms helped Silicon Valley become what it is today. However during the 2008 recession temporary subsidies were being offered to stimulate sales to boost the economy in the short-term. Such temporary subsidies simply snatch sales away from non-subsidy periods. One such subsidy was the home-buyer tax credit of $8,000 for a first-time home purchase and up to $6,500 for move-up buyers of homes. After the program expired in April of 2010 sales of new homes fell 32.7% from April to May 2010 to the lowest level since 1963 when the compiling of data had started.13 Any surge in sales during a subsidy period will be because those planning to buy before the period will delay their purchase and those who planned to buy some time in the future will buy sooner to avail the subsidy. In other words, there is no proof that enough people who weren't buying were convinced to buy, so temporary subsidies to revive the economy accomplish nothing and are a complete waste of money.

One of the most permanent subsidies has been the government's assistance to homeowners. Before the Second World War, homeownership rates were around 40% in an era when the economy was much more cash-based. Even mortgage terms were quite strict and a 50% down payment requirement on a home was quite common. But as the government got more involved in the economy it took great interest in helping people own their own home. Tax incentives encouraged families to get mortgages and homeownership rates rose from 43.6% in 1940 to 55% by 1950. By the 1980s and 90s rates were averaging around 64%. Throughout this time the government was continuously pushing greater ownership. Whether it was the creation of the Housing and Urban Development agency (HUD) in 1965, the Congress created privately-owned-but-government-supported mortgage corporations Fannie Mae (1938) and Freddie Mac (1970), the 1977 Community Reinvestment Act (CRA), the 1990 Cranston-Gonzalez National Affordable Housing Act or the 1990s and 2000s push to use the CRA to give loans to people with poor credit and higher risks of default – the government was constantly involved. By the early 2000s people without any job, income or assets were able to get a home, a complete contrast from earlier periods when banks thoroughly verified an applicant's employment status, stated income and claimed assets. By the spring of 2004 homeownership was at 69.2% until the market started tumbling.

According to the Congressional Budget Office (CBO), federal support for homeowners totaled $230 billion in 2009 with $127 billion in tax breaks and $103 billion spent on homeowners. This was besides the $60 billion which went to support tenants.14 The mortgage interest deduction is one of the largest subsidies offered by the federal government and allows tax breaks on mortgages worth up to a million dollars on primary and secondary residences. Its cost to the government is around $92 billion.15 Countries like Australia and Canada do not offer a tax deduction on mortgage interest yet they enjoy high homeownership rates. Canada has a homeownership rate of 68% (higher than the current U.S. rate) yet their housing and mortgage markets are much healthier than America's.16

In fact, what have these overall government efforts done to help people afford a place to live? In 1930 a typical mortgage was worth around twice the typical annual salary and mortgage payments took about 8% of one's annual income. By 2000 a typical mortgage was worth around four times the typical annual salary while mortgage payments were taking around 20% of one's yearly income.17 Back then a typical mortgage lasted 15 years after which the resident owned his home free and clear but now 30 year mortgages are the most common ones. Thus the burden on mortgage payers is larger and lasts longer than it used to. Subsidies are aimed to reduce costs (after tax breaks and such), but lower costs increase demand and eventually drive prices higher. After decades of homeowner subsidies the cost of shelter has actually gone up. This inhibits the basic right to shelter which is far more important than the right to homeownership.

A constant argument made in favor of homeownership is that is prevents urban decay and encourages families to be more involved and active in their communities. But in countries like Germany and Switzerland where homeownership rates are much lower, there is no evidence of urban decay or less involvement in the community.

The strongest opposition to eliminating these tax breaks has been from the real estate lobby. The National Association of REALTORS claims that losing tax breaks would cut demand for homeownership and reduce home values by 15%.19 Assuming that such claims are accurate, isn't making homes cheaper and more affordable for families the very purpose of tax breaks? If such breaks are raising home prices then aren't they making it harder and more expensive for people to afford a home? If more people can afford cheaper homes wouldn't it encourage them to buy a home?

Over the years mortgage subsidies have also allowed people to use their homes as ATM machines by borrowing against their home whenever they needed. In a 2004 Survey of Consumer Finances the Federal Reserve found that 45% of homeowners who withdrew money against their home equity used that money for medical bills, taxes, electronics, vacations and other such expenses – or to consolidate their debts (since mortgage loans are cheaper than most other loans). Another 31% used it for home improvements. The rest bought more real estate, cars, investments, clothing or jewelry.20 In this way mortgage subsidies are subsidizing a lot more than just homes at the taxpayer's expense.

There are various arguments against these tax breaks including the fact that there is a difference between actually owning a home free and clear, and a mortgage where the home actually belongs to the bank. With average equity in American homes at 38% 'homeowners' own significantly less than half of their home on average.21 While there are incentives to encourage a mortgage over renting a home there are no incentives that encourage full ownership over a mortgage. In this way these breaks have raised prices, encouraged consumption and more debt, and are a waste of money.

Another example is corporate subsidies. In 1960 corporate income taxes brought in 23.2% of the federal government's revenues. By 2010 they made up only 7.2% of all federal revenues.22 At the federal level over 30 tax credits and 75 tax expenditures for businesses allow some corporations to gain advantage over others.23 While these subsidies are denying the government much needed revenues during record high deficits the general corporate tax rate is one of the world's highest, putting current and potential corporations at a disadvantage compared to foreign firms. In other words, cutting the corporate tax rate while removing subsidies would benefit government revenues and make businesses more competitive.

Corporate subsidies are not just limited to the federal government. The efforts of states, cities and localities to attract corporations for jobs are pitting one region against another by creating an upward bidding process for handouts and a downward bidding process for taxes for certain politically savvy businesses which gain unfair advantages over their competitors. Such possibilities distract businesses away from the focus on the consumer to other ways to raise revenues and cut costs through tax breaks, land grants, energy subsidies and infrastructure meant for exclusive use – among other incentives.

To encourage the use of clean energy technology the Department of Energy offers a loan guarantee program. The first, known as Section 1703 supports innovative clean energy technologies that commercial banks find too new and risky to invest in. The second, Section 1705, provided more loan opportunities to renewable energy firms after the 2008 recession. Since their creation (in 2005 and 2009 respectively) these two programs provided nearly $35 billion in loan guarantees for renewable energy projects by mid-2011. As a result the clean energy industry is able to grow and innovate while driving down costs every year. For instance, according to the Solar Energy Industries Association the average price of an installed solar energy system fell by more than a fifth from the beginning to the end of 2010.24 At least this type of support has a long-term goal with a defined end to support an infant industry until it can compete with traditional energy production. But the majority of subsidies have no long-term vision.

All in all, subsidy earmarks are estimated to be worth $1.1 trillion a year due to cracks in the tax code.25 Not only do they cost an indebted government precious revenue, but they also necessitate higher tax rates for the remaining taxpayers who are left to fill the gaps. Some breaks are politically motivated while others are based on misguided goals. The money is still being spent on the economy but it diverts resources from more productive ventures and changes the direction of the economy by pulling resources from more deserving sectors, after all it is the more profitable businesses that can pay the taxes that support these subsidies. By eliminating them it would encourage the right jobs, the right skills and the right investments.

The Department of moral hazard: Large corporations have a tendency to become highly layered and bureaucratic, raising the chances of waste, fraud, corruption and power plays. If a government gets involved in running businesses such problems are further magnified since corporations sink or swim with their profitability but government-run businesses can tolerate losses year after year by covering them through taxes.

Then there are also government sponsored businesses which are privately owned and privately run with profits going to their private owners but they enjoy the backing of the government. The common element shared by all government sponsored entities or GSEs is the 'GS' part. Government sponsorship means that the trial and error process essential to economic progress is distorted by removing the risks inherent in the error part of the process. Failure does not pose the same problem for them that it does for other businesses because there is always an implied promise of government help when it is needed. Because the losses are covered by the taxpaying public, having such a safety net pulls resources from other parts of the economy. Financial and human resources seek such less risky areas instead of moving to more productive ones.

Two of America's GSEs have been the Federal National Mortgage Association or Fannie Mae created by Congress in 1938, and the Federal Home Loan Mortgage Corporation or Freddie Mac chartered by Congress in 1970 – both of which enjoyed the government's implicit backing. Both were started to encourage homeownership by buying mortgage loans from the banks that actually provided these loans to families. When they sold off these loans to Fannie and Freddie the banks had more cash to give more loans to more families, and so the cycle went.

However, since the nation's two largest mortgage finance companies enjoyed government backing, there was a lot of pressure from the government to lend to more and more people, even those who couldn't afford to pay a mortgage. During the 1990s and 2000s Fannie and Freddie dramatically expanded their lending when the government's Housing and Urban Development agency (HUD) authorized them to leverage themselves many times their capital base, to buy more mortgages. By the late 2000s the GSEs owned or guaranteed $5.3 trillion of the mortgage market with capital of less than 2% and their fragility made them a disaster waiting to happen.26 As the financial crisis of 2008 came along, the government's implicit backing became explicit as it took control over Fannie and Freddie which were losing an average of $17 billion a month. According to an estimate by the Congressional Budget Office (CBO) Fannie and Freddie will cost taxpayers $389 billion between 2009 and 2019.27 This was only part of a larger effort to underwrite large portions of the economy as agencies and GSEs owed around $7.4 trillion by mid-2010, showing the size of responsibilities the government had taken upon itself.28

Through a $700 billion bailout the government also bought parts of or lent to auto manufacturers and suppliers plus 650 banks, insurance companies, financial service firms, investment funds and mortgage services. A CBO estimate places the bailout loss to taxpayers at $99 billion.29 Protection to financial conglomerate Citigroup alone was worth $301 billion (partly from the bailout funds).30 The government bought out insurance giant AIG's counterparties by paying them 100 cents on every dollar while the CBO estimated that the government would lose $36 billion on this $182 billion bailout.31 A report by the president's National Economic Council titled THE RESURGENCE OF THE AMERICAN AUTOMOBILE INDUSTRY said taxpayers were likely to lose about $14 billion of the $80 billion they used to help the auto industry.32

But losses or profitability on the money invested only look at the effect on the government, not on the greater economy. The free market mechanism brings prosperity, innovation and improvement in the quality of life through a constant process of trial, error and discovery. Eliminating the consequences of error affects the entire development process because error helps to redirect misplaced resources to better use. Without the consequences of error, resources get misplaced even further.

This is not the first time the government helped out automakers, in 1979 it guaranteed $1.5 billion in loans to Chrysler. Nor is it the first time it gave assistance to the financial sector. In 1970 the commercial paper market was in crisis when the Penn Central Transportation Company went bankrupt with $200 million in commercial paper debt. The Fed responded with $600 million in loans to commercial banks.33 In 1984 the government nationalized the eighth largest bank as the FDIC took 80% ownership of Continental Illinois which ended up costing $1.6 billion.34 During the 1980s a crisis in the savings and loan industry led to the creation of the Resolution Trust Company by Congress which dealt with $400 billion in loans and other assets for 747 firms. Valued in 2008 dollars the cost to taxpayers was $200 billion.35 In fact, in 1970 the Nixon administration arranged for a $250 million loan to defense contractor Lockheed on national security grounds.36

The expanding role taken on by the government in all these situations is that of an implied guarantee to more and more parts of the economy with insurance against failure. The possible losses on the recent guarantees – everything from flood insurance to the bailouts – are estimated between $170 and $986 billion.37

If the costs of the failure of a few will be shared by many (in this case the taxpaying public) then it will only encourage recklessness and discourage self-reliance. Every move to shelter (sections of) the economy from failure limits the entire economy's potential for success. Resources are diverted from successful businesses (since they are the ones that can pay taxes) to losing ventures, and until this diversion is stopped it will limit the development of the country.

Barriers: In the last eight decades there have been two main eras when the government resorted to protectionist barriers on foreign imports in order to shelter domestic producers. The first was with the Smoot-Hawley tariffs that contributed to the Great Depression. The second was a ten percent tariff on imports in 1971 that violated trade agreements and contributed to the slow growth during the 1970s.

Protective barriers increase prices and lower the standard of living as they take more money out of people's pockets or force them to buy inferior quality substitutes. Factories must also pay high prices or settle for inferior quality substitutes for their raw materials. It should be no surprise that tariffs lead to retaliatory steps by other countries and cause domestic businesses and exporters to suffer as a consequence. In both eras, the 1930s and the 1970s, other governments reacted strongly against U.S. tariffs slowing down global trade and hurting American exports, not to mention commerce in general.

In recent years the country has also placed some protections against two of its most important trade partners.

Under the 1994 North American Free Trade Agreement (NAFTA) Canada, U.S. and Mexico were required to lower trade restrictions between the member countries. Part of the agreement gave Canadian, Mexican and U.S. trucks unrestricted access throughout the three countries. U.S. and Mexico should have had access to each other's highways by 2000, but under pressure from interest groups – like the Teamsters, the country's largest transportation union, along with a national association of independent truckers – Mexican truckers were largely restricted to a 25 mile buffer zone beyond which they couldn't enter the U.S.. If Mexican freight had to go beyond this area it was transferred to a U.S. trucker. Canadian truckers faced no such restrictions in the U.S..

A 2001 arbitration panel ruled the restrictions in violation of the NAFTA and both countries agreed to allow up to a hundred trucking companies to move international cargo beyond the limited zone on either side of the border through a 2007 pilot program. When the U.S. government cut this program in 2009, Mexico imposed tariffs on nearly a hundred U.S. imports including fruits, nuts, ketchup, pet food and frozen french fries. The tariffs were estimated to have cost U.S. firms $2 billion and the U.S. Chamber of Commerce found that not complying with the agreement had cost the United States 25,600 jobs. Then in March of 2011 both governments agreed to give each other's trucks access to its highways.38 The results of this agreement are yet to be determined.

Since the early 2000s the trade gap with China had been widening steadily and by 2010 America was importing four times as much as it was exporting to China. Although the U.S. had been running trade deficits with a number of its trade partners – both developed and developing economies – China became the focus of the blame for its trade deficits. The accusation was that China's peg to the value of the dollar undervalued the yuan which gave China's factories an unfair advantage over American firms because of cheap labor. An undervalued yuan was also seen as a lowering of the Chinese consumer's purchasing power, denying American firms an export market.

In 2003 the U.S. government placed tariffs on bras that were made in China. The Chinese responded by cancelling a plan to buy three million tons of American wheat. More recently, in September of 2009 the United Steelworkers, a union that also represented American tire workers, gained a victory when the government announced a 35% tariff on auto and light-truck tires imported from China. Within the same month China placed tariffs on U.S. autos along with anti-dumping duties of up to 105.4% (for a five year period beginning in September of 2010) on American chicken on the grounds that it was being sold at below fair value. Since then the dispute remains unsettled as tariff impositions emerge from time to time.

The issue of China's currency is not as simple as portrayed. First of all the yuan has been appreciating over the years. On May 27th, 2013 the yuan closed trading 35% stronger than its June 2003 rate against the dollar, due to gradual increases.39 This appreciation was halted during the financial crisis to bring some stability to the currency markets, but it was resumed as the global economy stabilized. China sees a need to keep its currency stable in order to bring domestic manufacturers certainty about the value of their imports and exports (a currency risk issue we covered earlier) so it has allowed a gradual rise of the yuan. As the country's economy is shifting from export based growth to more domestic consumption, this appreciation will continue. Because of the yuan's appreciation the Chinese government has taken serious losses on its U.S. Treasury debt yet it continues to revalue its currency. But will a more expensive yuan change America's debt balance problem? In January of 1985 an American dollar could buy 254 Japanese yen and mounting deficits with Japan were blamed on an undervalued yen. By 1995 a dollar was worth 80 yen yet deficits with Japan keep adding up even till today. In fact, America's largest trade deficits are with China, Japan, Canada and Mexico and the Canadian dollar and Mexican peso are fully free floating currencies. Of every dollar that Americans spend on clothes and shoes, 75 cents go to clothes and shoes made outside the United States and over half of that foreign share goes to countries besides China.40 Even if a revaluation raises the cost of making things in China, many countries like India, Bangladesh, Vietnam and others in Africa and Latin America have plenty of cheap labor to offer. Moreover, of every dollar spent on Chinese made goods 55 cents go to American firms for sales, marketing etc. and up to 60% of China's exports are actually by foreign firms in China, so any trade restrictions directly hurt American businesses.41 Clearly the U.S. economy has much to lose from this dispute with little to nothing to gain from it.

After the 1930s tariffs had climbed steadily and despite reductions they still averaged around 50% before the Second World War. But since then they fell steadily and are around 5%, allowing the free flow of goods and services. But a weakened economy has led to pressure for new protections of which the above two were examples. Mexico and China hold great importance to the United States. Mexico is the U.S.'s second largest export market after Canada. Twenty-two states have Mexico as their largest or second largest export market. The three largest exporting states Texas, California and Michigan send more than $100 billion in exports to Mexico.42 China is not only the world's fastest growing economy but also America's third largest and fastest growing export market. From 2000 through 2011 U.S. exports to China rose 468% while increasing 55% to the rest of the world.43 China is also America's largest foreign lender.

Given such facts, the potential consequences of barriers against these two countries can severely damage the U.S. economy and even impact the global economy. More broadly, within two years of the 2008 crisis the United States placed 400 protectionist measures affecting over 300 types of products, and unless this growing trend is changed the gains in global trade since World War II are in danger of being lost with serious economic costs.44

nine

UNWELCOME

"...Keep ancient lands, your storied pomp!" cries she

With silent lips. "Give me your tired, your poor,

Your huddled masses yearning to breathe free,

The wretched refuse of your teeming shore.

Send these, the homeless, tempest-tost to me,

I lift my lamp beside the golden door!"

-Lines from THE NEW COLOSSUS, the sonnet by Emma Lazarus

engraved on the pedestal below the Statue of Liberty on Ellis Island.

America is experiencing the first brain drain in its history and doesn't know it.

-Vivek Wadhwa 1

For those who came to the Ellis Island immigration station (and could read English) it is hard to imagine a more poignant welcome than the engraved sonnet by Emma Lazarus. There was a time when the American government was pushing to populate more and more of the Western frontier to expand its territory so the immigration policy of the nation until the 1920s was pretty much that anyone could enter as long as they were healthy and had no criminal record. There was a strong demand for labor in a booming economy and the population was doubling and tripling periodically. The wave of European immigrants reached its height in the 1900-1914 period before the First World War. By 1920 over 13% of the population was foreign born when 20 million people had arrived in the last four decades.2 Ellis Island itself welcomed over 12 million immigrants in the 32 years from 1892 to 1924.

When a region's economy starts growing it attracts people who are aspiring for better quality of life. This creates an upward cycle in which an expanding population creates more consumers which encourages businesses to hire more people who can produce more goods and services. The newly employed have money to spend and they themselves become consumers, and so the cycle goes. Similarly the flow of people from other parts of the world to American ports created an upward cycle of prosperity.

However in 1921 Congress passed the Emergency Quota Act and started placing country by country limits on the number of arrivals to the country which were made permanent in 1924. In a country that was so heavily depending on immigrants to grow its population, it was inevitable that the economy would be affected within a few years. As the 1929 economic crash turned into the Great Depression by the early 1930s immigration fell another 90% from 236,000 in 1929 to 23,000 in 1933 – a mere fraction of its high of 1.2 million arrivals in 1907.3 After the end of the Second World War the post-war baby boom contributed a lot to the economy. With the memories of war still fresh the immigration policy was still restrictive but an internal population surge of 79 million births between 1946 and 1964 kept the population growing.

Beginning in the 1960s the country again started opening up to foreigners (although the 1965 Hart Celler Act was more focused on family reunification than anything else). Meanwhile the government became less selective about the type of country that people were coming from – a change from the 1920s laws. During the 1980s there was a boom in people seeking asylum and the 1986 Immigration Reform and Control Act allowed illegal immigrants to gain legal status. In his 1986 State of the Union address Ronald Reagan pointed out that, "You can move to Paris and live there all your life and never be accepted as French. You can move to London and live there all your life and never be accepted as British. You can move to Berlin and live [there] all your life and never be accepted as German. But you can move to America and be accepted as an American from the first day." Efforts of the Reagan administration helped around 3 million undocumented workers gain legal status. Legal immigration hit an all-time high of 1.8 million arrivals in 1991 with a mix of incentives and encouragement.

Most immigrants arrive at a time in their lives when they have a lot to offer. Among immigrating adults 24.6% are aged 25 to 34 years while another 28.3 percent are 35 to 44 years old, showing that over half of them come during their most productive years.4 A substantial portion of those who arrived came under student visas. They had already earned a high-school education (or more) at the expense of their country of origin and came from a good educational background. While American born workers have an average education of 13.7 years, a Chinese immigrant has an average education of 14.6 years and Indian immigrants of 16.1 years.5 After further studies in the U.S. many stayed on for better job prospects and quickly became part of American society. Foreign countries would bemoan this loss of talent. Conferences, seminars, media discussions and intellectual conversations in developing economies constantly focused on the brain drain problem where the country's best and brightest acquired a good education and then moved to the West, usually America, for a better future. If they came to study, their tuition fees brought wealth in from other countries which then profited the American economy if the student stayed on to work here. According to the Commerce Department 690,923 foreign students were enrolled in American institutions in 2009, bringing around $20 billion into the U.S. economy.6 A good portion of this talent pool comes from Asia whose natives are roughly 5% of the U.S. population but over a fourth of the engineering graduates from the country's top universities.7

Between 1996 and 2008 immigrants were found to be twice as likely as native borns to start a new business, showing a greater entrepreneurial spirit among them.8 Over half of Silicon Valley start-ups during the dotcom boom era were launched by immigrants, according to Vivek Wadhwa, visiting scholar at University of California - Berkeley.9 Some of the country's most accomplished people have been immigrants like Albert Einstein, billionaire investor and philanthropist George Soros, billionaire media mogul Rupert Murdoch, billionaire Google co-founder Sergey Brin, former actor and California governor Arnold Schwarzenegger, America's first billionaire Andrew Carnegie, founder of soap-making empire William Colgate (as in the toothpaste), the co-founders of e-bay, Yahoo! and Intel, and the founder of Boeing. Had Henry Ford's parents not left Ireland for the United States the famous car company Ford Motors may never have existed. Had Abdul Fattah 'John' Jandali stayed in Syria his estranged son Steve Jobs may never have had the chance to make Apple one of the world's most valued companies. Many of Silicon Valley's brilliant software engineers were originally trained in the former Soviet Union. According to Vivek Wadhwa foreigners make up 24% of science and engineering workers with bachelor's degrees and 47% of those with a Ph.D..10 Today overall 13% of the population is foreign born with another 11% with at least one immigrant parent and immigration contributes to about a third of the growth in population.11

A large portion of the foreign born have also come illegally. In 2007 there were an estimated 11.8 million illegal immigrants in the United States.12 Over 70% of them had jobs making them 5.4% of the American workforce.13 Many take up jobs avoided by most Americans because they are menial or low paying like housekeeping, janitorial services, dishwashing, gardening, meat and poultry processing plant work, farm work, maid service etc.. The Pew Hispanic Center found that 25% of farm workers, 19% of building and grounds keepers, 17% of construction workers, 12% of food preparers and servers and 10% of industrial production workers are undocumented.14 Many of these undocumented workers find jobs with the help of fake ids and contribute to the Social Security Trust Fund without expecting any benefits. If they own property they pay property taxes also. The National Research Council found that they pay an average $1,800 more in taxes (Social Security, Medicare, income taxes, sales taxes when they make a purchase, property taxes as homeowners etc.) than the benefits they receive from the government. Moreover government estimates show that 50 to 75 percent of undocumented workers pay state and federal income taxes.15 So regardless of their legal status, while immigrants have benefitted from coming to America, they have also benefitted America and the American economy.

In recent decades the technological and communications world was going through innovative changes by which a supply chain could span different continents. Businesses could cut costs by delegating all kinds of jobs to cheap labor in developing countries. Raw materials from one country could be turned into components in another country, assembled in a different country, packaged somewhere else to be sold in an entirely different region.

Global trade is an age-old phenomenon but this aspect of it was new and it was changing global commerce as it evolved. Lawyers, doctors and accountants were leaving assignments at the end of their workday for assistants sitting in an office across the globe in a different time zone to have them completed before they came back to work the next morning. It started with savvy firms that were willing to trust foreign workers so they could reduce their own costs. But as time went by, the practice became more widespread while breakthroughs in technology allowed firms to supervise the work even more closely, opening up newer possibilities. What began as a competitive advantage for some became a necessity as firms struggled to cut costs to stay as profitable as their competitors. Entire sectors of the economy were moving out of the country.

From 1964 to 2000 the American manufacturing workforce stayed between 17.5 million and 19 million despite the growth in the population and labor force during this period.16 But after the turn of the century this number started dropping fast. From 2001 to 2010 around 42,000 factories were shut down eliminating around a third of all manufacturing jobs.17 Even after a post-recession recovery there were 11.9 million workers in manufacturing in early 2012, levels low enough to date back to the 1940s.18 And it hasn't just been manufacturing. Call-centers in the Philippines employ around 350,000 workers with 330,000 in India as a close second.19 In fact, call-centers have been opening up in Vietnam, China, Egypt, Morocco, Kenya, South Africa and parts of Eastern Europe and Latin America. Governments in the developing world are aggressively pursuing ways to attract American jobs and are getting better at it every day. Engineering, architecture, accounting, computer animation, customer support, banking; back-office assistance to architects, accountants, lawyers, doctors; blue collar work in furniture, tobacco, textile and pharmaceutical factories – are just some of the jobs moving to other countries. Since local, state and federal governments here regularly give out contracts to private firms, even government work is being done by foreign workers hired indirectly.

This migration of American jobs will not only continue but grow as long as other countries can offer qualified labor that is much cheaper to hire. The developing countries are learning and gaining experience with better technology, better work ethic, better training and education, and modern infrastructure. All such strides are narrowing the efficiency gap between the typical worker in a developed and developing country. Most of the difference in the productivity of workers in developed and developing economies is due to the technology they use (less so because of differences in training and skills) and technology is transferable overnight (i.e. machinery and equipment). Moreover, if four foreign workers are as productive as one American worker while they each earn only a tenth of his salary they are still cheaper to hire. A 2004 survey by the U.S. Manufacturing Performance Institute found Chinese factories with a 99% on-time delivery rate and 98% of manufacturers met specifications on the first attempt. Both rates were higher than the United States.20 It isn't just cheap labor that is attracting American firms – modern infrastructure, fewer regulations, less union confrontations and lower costs of employment (i.e. pensions, healthcare, social security etc.) are also factors. Technology improvements are also making it cheaper and easier to hire workers with face-to-face type interactions experienced through videoconferencing, telepresence and similar innovations.

The U.S. Department of Labor tracks 750 occupations and around a fourth of these are vulnerable to job losses due to automation or Business Process Outsourcing i.e. hiring an outside firm to provide a good or service that could have been produced internally. Before the financial crisis former vice chairman of the Federal Reserve Board, Alan Blinder predicted a loss of as many as 40 million jobs, more than one in four, vulnerable to outsourcing alone over the next decade or two.21 When jobs are in danger of moving overseas, students tend to avoid getting educated in those fields. As knowledge starts migrating it transfers the expertise in modern industrial and business practices, the ideas and capability to produce and innovate. When a job migrates it also takes with it supporting functions like the demand for energy, real estate, construction, raw materials, logistics and support services (like tech-support), taking all the relevant jobs with it. More importantly, as these jobs start migrating it is inevitable that they would influence migration patterns.

After the dotcom crash Asians started eyeing their countries of origin for a fresh start. Asian economies were booming while the recession had slowed things down in the United States. But besides the possibilities of success in fast growing economies there was also the attraction of reconnecting with family and friends, an issue that became more important after September 11, 2001. Security concerns were also discouraging towards those who wished to move to America as the national cap on work visas for highly skilled workers fell from around 195,000 a year between 1999 and 2004 to 65,000 a year by 2009.22 In 2003 alone the number of foreigners with exceptional and advanced degrees who were allowed into the country fell 65%.23 Student visas also plunged and didn't return to their 2001 levels till 2007. Cost, distance and fear of visa denials were discouraging students from considering American universities while other countries stepped in to offer new options. According to the Organization for Economic Cooperation and Development (OECD) the total number of students enrolled in a college outside their home country rose 85% from 2000 to 2008 with 3.3 million students in 2008. During this time America's share of these foreign students fell from 24% to 19%.24 In 2000 the United States attracted 475,000 foreign students. In 2009 this number rose to 690,923 but this growth was mostly driven by Chinese students who climbed 29.9% from just the previous year while over half of the countries that have been sending students to America showed decreases from the year before.25

Any region that sees large numbers of people moving in is bound to have some type of negative reaction from those who are already living there and the United States was no exception. As far back as the 1750s when German immigrants were not assimilating into a United States that was still an English colony Benjamin Franklin (the American founding father pictured on the $100 currency note) warned against the Germanizing of Pennsylvania. Such views remained in the 19th and 20th centuries. But in recent years the focus on the costs of immigration has completely overshadowed the benefits because of which the environment for immigrants is getting increasingly unfriendly. In 2008 the federal government set aside $700 billion to bail out troubled financial institutions through the Troubled Asset Relief Program (TARP) discussed in the previous chapter. One of the conditions of the TARP was that banks are not allowed to hire foreign white-collar workers who they normally hired through H-1B work visas. The concern was that local graduates would be at a disadvantage during a time of high unemployment. As a result foreign firms had access to a global pool of graduates with diverse ideas while many domestic firms did not. Under the 14th Amendment to the constitution, anyone born in the U.S. is granted automatic citizenship, but a proposal by Steve King, the Republican Representative from Iowa, intended to change the law to prevent the children of illegal immigrants from getting citizenship – one of around a dozen proposals to discourage legal and illegal immigration submitted by members of both parties. In 2000 there were less than 9,000 Customs and Border Patrol agents and officers along the border. By 2010 that number was close to 23,000.26 In April 2010 Arizona passed a law that required law enforcement officials to determine the immigration status of a person during any legitimate contact made by an official or agency of the state if they suspect that the person is an illegal alien. More recently Alabama passed a law that invalidates any contracts made with illegal immigrants. Strictly read, this would even invalidate apartment leases and basic work agreements.27 Because of such factors on top of an ailing economy the flow of illegal crossings measured by Border Patrol arrests have fallen nearly 80% from 1.6 million in 2000 to 327,577 in the fiscal year 2011, with a 25% drop just over the last year.28 Meanwhile Homeland Security estimates that the total population of illegal immigrants has dropped from 11.8 million in 2007 to 10.8 million by 2010.29 As for work visas, between 2007 and 2011 visa denials jumped from 7% to 27% for highly skilled applicants with 'special knowledge' of products, services or markets. In fact, 90% of such visas were either delayed or denied in the fiscal year 2011.30 And because of the change in focus in 1965, among the total visas that are issued a majority of two out of every three are to reunify families (which now includes uncles, aunts, cousins etc.). Such a policy crowds out other priorities as a mere 15% of visas are for employment. Meanwhile, Canada which invites a lot fewer immigrants gives over half of its visas for employment reasons.31

On the other side of the equation the number of people leaving the country has been rising steadily. According to the Chinese Ministry of Education, 134,800 Chinese returned to the country in 2010, a jump of nearly 25% from the year before.32 Many of them were from the U.S.. Every year about half a million Vietnamese expats (known as 'Viet Kieu') are also returning to their country of origin.33 Roughly 60% of those returning are estimated to be from America.34 Similarly people are leaving the industrialized world for India, Brazil, the Middle East, Africa and Eastern Europe, taking with them their accumulated wealth, experience and skills. Take the case of Portugal which was facing 14% unemployment and a 3% shrinkage in its 2012 GDP. Unable to provide jobs, the government encouraged its citizens to emigrate. The prime minister advised unemployed teachers to, "Look to the Portuguese-speaking market as a whole and maybe find alternative (opportunities) there," pointing to former colonies like Brazil, Macau and Angola. As a result teachers, recent graduates and others without jobs are moving out in droves. Recent numbers show 330,000 Portuguese citizens living in Brazil with another 200,000 in Mozambique and Angola, strong numbers considering that Portugal has a total population of less than 11 million people.35

When they migrate, their families move with them, taking along the future generation of lawyers, doctors, engineers, teachers and entrepreneurs. Some who leave, later return to recruit others. After graduation Indian born Kunal Bahl was unable to get a work visa to stay in the United States so he went back to Delhi and created an online coupon company Snapdeal in 2010. As one of the fastest growing tech firms in India it helped to create 850 jobs by 2011. The same year Bahl visited Stanford, Columbia, Northwestern and the University of Pennsylvania, four of America's top universities, to recruit 20 to 30 engineers, product managers and marketing executives.36

Instead of dropping the unemployment rate such trends have left a shortage of skills throughout the workforce. Take for example the high value STEM jobs (Science, Technology, Education and Mathematics) which earn an average wage premium of 26% over other jobs.37 According to Arne Duncan, the U.S. secretary of education, there were 3 million unfilled jobs in America in the STEM fields while unemployment was around 9%.38 Meanwhile in 2011 the Georgia Agriculture Department estimated a shortage of 11,080 farm workers for the spring harvest.39 In fact, the Bureau of Labor Statistics expects the U.S. economy to produce 20.5 million new jobs between 2010 and 2020 with only 10.5 million people joining the workforce during that time.40 In other words the economy faces a long term shortage of skills in the future.

What all this shows is the start of a reverse cycle in which jobs and people are leaving the country, creating an outflow of producers and consumers in a downward cycle that is in its beginning stages. And it comes at a time when the country can least afford it. After the Second World War the developed economies accounted for nearly a third of the world's population but now they have just over a sixth of the world's people. The developing world's population is growing at a much faster rate than the developed nations in an economic era of mass production and consumption where population numbers can drive economies.41 More specifically in the U.S. the 2010 census showed that the population grew 9.7% over the last decade, the slowest growth since the 1930s.42 In fact, the fertility rate has been in decline since the post-war baby boom ended. According to 2009 estimates by the National Center for Health Statistics the fertility rate has been above the replacement level – the exact level at which a generation can replace itself – in only 2 years (2006 and 2007) out of the last 39. Overall, America was 7% of the world's population after the Second World War while it has 4.3% of that share now. In relative terms America's population has fallen drastically. If the nation had just kept its share of the world's population from the mid-1940s there would be nearly half a billion people in the country today. Seems far reaching but keep in mind that for four decades between the mid-1920s and the mid-1960s there was a lot of resistance to foreign arrivals and the growth during half that period (1946-1964) was only internal. After re-opening its doors arrivals returned to new highs but in percentage terms the numbers don't compare. During the earlier peaks in the early 1900s yearly arrivals were well above 1% of the country's population while in recent periods they peaked at around 0.7%. Those immigrants would also have contributed to higher fertility rates because even economists recognize that without immigration and high birth rates among recent immigrants the country's demographic problems would resemble the more serious problems faced by Japan and Europe.43

Then there is the issue of illegal immigration. During World War II a good part of the farm labor had been diverted to provide soldiers. To supplement this labor shortage the FDR administration arranged for Mexican guest workers to work on farms in California, Texas and other states through the Braceros Program named after the braceros i.e. strong arms that had been brought over. After the war ended there was a surge in illegal immigration from Mexico during the 1950s. To curb the flow there was a crackdown on undocumented workers while at the same time the Immigration and Naturalization Service allowed Mexican migrant workers to enter legally through an expansion of the Braceros Program. With the choice of legal options, illegal immigration (measured by number of apprehensions of illegal aliens) went down by around 95% between 1953 and 1959. But due to its success unions and other interest groups pressured the government to scale the program down and it was ended in 1964. Over the following decade illegal immigration rose tenfold as legal choices ran out.

The popularity of the program is evident as it led to the hiring of 5 million workers until 1964 and it shows that people will use a practical legal alternative if it is given to them. Today applicants can easily wait a decade or more to be accepted for a visa. This slow process is itself a discouragement to laborers who wish to come to the country.

Over the last few decades entire sectors of the economy have left the country, so many that if the country suddenly decided to stop outsourcing its manufacturing and services to other countries it does not have the industrial base, the knowledge and skill level to fully support such a decision because of shortages and inadequacies. That is why immigration is less a choice between allowing a person into the country or not and more a choice between importing producers, consumers and taxpayers from other countries or exporting jobs to them. In a global economy the global workforce is now competing with American workers for jobs but if they compete as immigrants instead of foreign workers it is a lot better for the economy. Despite the advancements in technology, businesses prefer to be physically close to those who provide them with products and services because it reduces their inventory costs, they can protect their intellectual property rights more easily, they can have better quality controls, reduce lead time (i.e. the time between order and delivery) and react faster to the changing demands of the local market.

That is why to stimulate economic prosperity it is essential to remove hurdles for people who wish to come to the country. Not only must the bureaucracy be cut but the general policy towards immigrants must change so that they are encouraged to apply and move here. Family reunification is fine as long as this social objective does not crowd out the economic objective of inviting the skilled and the ambitious. Other governments are already pursuing such policies by pinpointing entrepreneurs and people with exceptional skills who they aggressively seek by offering perks and incentives if they bring their skills to their country. They are invited to work, do research and teach in these countries and they are offered generous terms in return. For instance under one program called Qianren Jihua, China aims to attract up to 2,000 top-level scientists, entrepreneurs and financial experts from outside in 5 to 10 years.44 Indian CEOs are seeking top developers in Silicon Valley to fill their own demand for skilled people.45 Such countries have plenty of cheap labor so they do not need it but in a country with labor shortages all across the economy it is essential to not just allow but invite people belonging to all parts of the economy to create economic growth or suffer a continuous out-migration of jobs, skills and people.

ten

GOOD GOVERNANCE

If fifty million people say a foolish thing it is still a foolish thing.

-Bertrand Russell

The American Republic will endure until the politicians realize they can bribe the people with their own money.

-Alexis de Tocqueville

In the middle of the 20th century, Seymour Martin Lipset's POLITICAL MAN argued that democracy is necessary for economic development. Without seriously challenging the idea, Western thought gradually accepted it as fact and kept building upon the idea over the years. Yet America's founding fathers envisioned a republic and not a pure democracy. The Athenian model based on the popular vote was seen as short-sighted, volatile and destabilizing. The cradle of democracy squandered its public resources on lavish structures, an expensive navy, naval expeditions and generous payments to jurors.1

If a government is too focused on the day to day changes in popular opinion it could lose focus on the long-term development of a nation. Current generations get favored over future ones because this is where the votes are, and priorities that require a sacrifice today to reap the rewards tomorrow (like education, long-term infrastructure projects, fiscal prudence etc.) can get neglected. The constant need to seek consensus can also leave room for inconsistent policies, indecisiveness and unclear lines of authority and responsibility. Consider the following lines from the respected publication BARRON'S during the Great Depression:

"Of course we all realize that dictatorships and even semi-dictatorships in peacetime are contrary to the spirit of American institutions...And yet well, a genial and lighthearted dictator might be a relief from the pompous futility of such a Congress as we have recently had...So we return repeatedly to the thought that a mild species of dictatorship will help us over the roughest spots of the road ahead."

BARRON'S XIII, February 13, 1933, 12.

The influence of the popular vote on political stability can be decisive, as the following excerpt states:

"A democracy cannot exist as a permanent form of government. It can only exist until the voters discover they can vote themselves largesse out of the public treasury. From that moment on, the majority...always vote[s] for the candidate promising the most benefits from the treasury with the result that democracy always collapses over a loose fiscal policy, always to be followed by a dictatorship.2

These words are actually from a 1965 tape recorded speech by Ronald Reagan, one of the most popular democratically elected officials in American history. Reagan's words and those of nineteenth century political scientist Alexis de Tocqueville at the beginning of the chapter both raise the same issue – the popular vote can potentially lead to misuse of the public treasury that can hurt the stability and prosperity of a country. Historically the most common form of government during Western Europe's industrial rise was either a monarchy, an absolutist or a constitutional system.3 Even America's industrial revolution during the nineteenth century took place before women (in the 1920s) or African-Americans (in 1965) could vote. Only a small minority of adult males were allowed to take part in the electoral process during its economic rise.

A democracy creates a governing system through a formal electoral process where all the adult members of society have a say in choosing their government in a fair and transparent manner, and whose rulers are not under the authority or influence of any military force or ideological group that would compromise their responsibility to the people. By this description most of the developed world including the United States, Western Europe and Japan were industrialized well before they became democracies. Even in the developing world countries in Asia have had booming economies without democratic systems, like Malaysia under one party rule during the 1980s and 90s with 8% average growth per year or Indonesia under General Suharto during the 1980s and 90s with an average yearly growth of 7%. Even today in countries like Vietnam, China and Singapore economic development is taking place without democracy. Similarly in Latin America, countries like Brazil and Chile have had economic growth both before and after democratic reforms. Today there are both democracies and other systems that are growing at an incredible rate. So contrary to popular opinion, democracy is irrelevant to economic development, under some circumstance it could even hurt economic growth.

Democracy is a means to an end, not an end in itself. Among other things that end would include improving the people's quality of life. To do so any government must listen and be aware of the needs and circumstances of the people while having a clear vision of the future and how it intends to achieve it. To do this there must be a healthy balance of power among the various parts of the government, including power sharing between the national and regional governments. In the case of small countries like Singapore, centralized decisions have worked, but Singapore is a city-state of around 5 million people. For larger nations one-size-fits-all policies on diverse societies with diverse needs simply don't work. Centralization increases bureaucracy as regional decisions gravitate to a central body that is less aware of the people's specific problems. On the other hand, regional governments are a counterweight to the power of the central government and can advocate on behalf of their own people since they are more in touch with their circumstances and needs.

In 2012, less than 2 percent of all proposed laws were actually passed by Congress making it the least productive two year gathering on Capitol Hill since the end of World War II.4 In recent years, American politics is being seen as increasingly confrontational between opposing viewpoints. But confrontation in American politics is nothing new, even the founders engaged in bitter conflicts. The administration of the second president, John Adams, was marked by bitter opposition from his fellow Federalists, most prominently former treasury secretary, Alexander Hamilton who supported an anti-French foreign policy. After passing the 1798 Alien and Sedition Acts, Adams' presidency under the Federalist party was able to prosecute Republican party members because the law had made it criminal 'to oppose any measure or measures of the government of the United States.'5 During the 1800 presidential campaign Thomas Jefferson called his rival John Adams a "blind, bald, crippled, toothless man" who "is a hideous, hermaphroditical character with neither the force and firmness of a man, nor the gentleness and sensibility of a woman," to which Adams replied calling Jefferson a "mean-spirited, low-lived fellow, the son of a half-breed Indian squaw, sired by a Virginia mulatto father."6 Four years later, Vice President Aaron Burr settled a dispute with the former treasury secretary, Alexander Hamilton by entering into a duel on July 11th. The vice president won and former treasury secretary died of his gunshot wounds the next day. Bitter disputes were there during the early years, during Abraham Lincoln's presidency, Franklin D. Roosevelt's presidency and are still a part of American politics today. But what is different is that the federal government is about a fourth of the country's economy and its laws have far more influence on the day to day lives of ordinary people than they ever did. Even in the 1950s 1 in 20 members of the workforce needed government permission to do his job compared to 1 of every 3 today.7

The American government was by design resistant to change but it had a very limited role in the daily lives of ordinary people. So the constant quibbling normally didn't affect the economy or the general public as much. As the government has increased its presence in the overall economy its own situation has become more and more important to economic growth and an economy must be nimble and quick to change so that it can grow in a dynamic environment. That is why other governments like China, India, Vietnam and their neighbors reduced their role by cutting their presence in some areas and delegating authority to regional governments in other areas. In Africa, nations experimented with centrally controlled governing bodies and faced political and economic failures. But recently there has been a shift to more tribal and regional control where locals are adding or cutting regulations to the central government's regulations and trade policies. Even in the U.S. the Reagan administration called for New Federalism in 1982, wanting to transfer powers to local and state control, but their efforts didn't get far due to lack of support. To restore dynamism to the American economy most of the decisions and funds must be decentralized and handed over to the state and local governments which are more familiar with the requirements of their people and able to make more timely and accurate decisions in a fast paced economy. Replacing centralized decisions with regionalized ones will also allow people to measure success and failure of various policies by comparing those of one region with another.

A fundamental challenge that all governments, democratic or not, constantly face is the need to limit the influence of vested interests. The First Amendment right "...to petition the Government for a redress of grievances," was intended to allow ordinary people to be heard by their government. In practice it allowed a legal route by which they could make financial contributions to candidates' political campaigns and seek favors in return. In 1878, for instance, the Republican committee's funds got three quarters of their contributions from federal employees. The purpose was to seek a steady salary through government positions that were hard to get fired from. It should come as no surprise that most of these hirees were not qualified for those jobs.8 Eventually such blatantly corrupt practices were banned but candidates still needed campaign contributions to win and certain politically savvy groups still wanted favors from the government. As more taxes and decisions gravitated to the federal government more people became interested in how those taxes were spent and in whose favor those decisions were made. Well connected individuals and firms known as lobbyists were being hired to represent the political and financial interests of their clients. According to a congressional investigation there were around 400 lobbying firms in the late 1920s.9 By 2011 there were 12,633 registered lobbyists in Washington.10 In 2010, various political issues were awaiting a decision, including a universal healthcare law, environmental issues and regulation of the financial sector. To seek more favorable outcomes the healthcare industry, the energy and natural resources sector, and the finance and insurance services sector each increased their lobbying bills. In 2009 the Association of Private Sector Colleges and Universities (APSCU) spent $200,000. As colleges saw the chance of new restrictions on federal aid the APSCU raised lobbying to $790,000 in just the second half of 2010. When the Environmental Protection Agency (EPA) planned to regulate power plant emissions, electric utilities raised lobbying by nearly 50% from 2009 to around $135 million in 2010.11

Until recently unions, corporations and other groups would use lobbyists to fund extended trips for lawmakers. Then in 2007 ethics rules banned lawmakers from taking such trips if they were any longer than two nights. However, the law placed few limits on trips sponsored by non-profit groups and this allowed non-profits representing different interests to continue the practice. After a decline in 2008 privately funded travel by Congress members during the first nine months of 2009 exceeded their value during the same period in 2007 and again rose further during that period in 2011.12

Some of the most influential lobbyists are former members of Congress, former administration members, former staff members or personal acquaintances of government officials still in office, which gives them better access to key decision makers. For government officials, helping out a lobbyist's client also opens up employment opportunities for themselves in the better paying private sector. For example while Michael Chertoff was still serving as secretary of Homeland Security under the Bush administration he was a strong supporter of body scanning machines at airports. Shortly after leaving his job at the Department of Homeland Security he was hired by scanner manufacturing firm Rapiscan Systems in 2009. By November of 2010 the government had spent $41.2 million with Rapiscan.13 Soon after serving as treasury secretary, Robert Rubin (who had strongly pushed for financial deregulation during his time in office) went on to work for Citigroup which earned him $115 million from 2000 to 2009.14 More recently in early 2011 the commissioner of the Federal Communications Commission (FCC), Meredith Baker voted in favor of a contested sale of NBC-Universal to America's largest cable provider, Comcast. Less than four months later she announced that she was leaving the FCC to work as senior vice president of government affairs at NBC-Universal, essentially lobbying for a firm that she just recently voted in favor of.15 While there is no proof of anything illegal in any of these cases they are part of a pattern in which government officials get hired by firms they have been dealing (favorably) with, showing a clear conflict of interest.

Another influence on the decision making process comes from earmarks, listed awards that are discretely attached to spending bills by lawmakers in return for supporting other issues of the government. Earmarks are usually awarded to specific firms without requiring proof of competitive prices or quality standards. A famous example of an earmark is the 'Bridge to Nowhere,' a multimillion dollar project to access Ketchikan's airport on Gravina Island, Alaska which had only 50 residents in the 2000 census. In 2010 there were 9,000 earmarks worth $16 billion. This amount is a mere fraction of the federal budget but these earmarks are used to get the support of individual lawmakers on much more costly bills which they are opposed to.

The result of such efforts creates a distortion in the market by replacing the primary focus of businesses on the customer with a focus on profits through political means and connections. In January 2010, the Supreme Court gave a ruling on the Citizens United vs. Federal Election Commission (FEC) case, in which corporate money had a greater ability to influence a candidate's next election. For example, corporations could now support or denounce candidates like individuals had been doing. Based on such developments the Berlin based NGO Transparency International (which ranks corruption worldwide) demoted the United States from 19th to 22nd on its 2010 Corruption Perceptions Index (one being the most transparent, least corrupt) citing the growing influence of businesses on politics. Transparency's assessment should serve as a reminder that the economy needs to be depoliticized so that both politics and business can flourish separately.

While the above-stated pressures have increased the influence of business on politics in some areas unions have been influential on politics and the economy in other ways. The strongest boost to the power of unions came through the New Deal through laws such as the 1935 National Labor Relations Act. By 1955 a third of non-farm workers were part of a union.16 As the economic boom after the Second World War got stronger and businesses were showing healthy profits over the next two decades it became increasingly difficult for management to deny union demands while public opinion was on their side. A number of nationally prominent strikes – like the 1946 steel strike by 750,000 workers which lasted nearly a month and the 1946 strike by 400,000 mine workers which lasted nearly two months – made businesses keen on avoiding such costly incidents. Starting in the late 1940s unions in key manufacturing industries like auto, aluminum, steel, glass, tires etc. began committing to more and more concessions. Two to three percent wage improvements every year over automatic increases tied to inflation, paid vacations, paid sick leave, generous pensions and health insurance coverage for retired workers – among other promises so that unions would agree not to strike between negotiations. Even during the Korean War, steel workers went on strike in 1951. The Truman administration saw the union strike as hurtful to the war efforts and ordered the Commerce Department to suspend labor laws and seize all steel plants. But the Supreme Court ruled that the White House had exceeded its authority by violating the 1947 Taft-Hartley Act. In the public sector, Wisconsin became the first state to recognize collective bargaining rights of its workers and then in 1962 the Carter administration allowed federal employees to bargain collectively also. Soon unions at the federal, state and local levels started forming all across the country. It was thus a combination of public opinion, favorable laws, growing numbers and a good economy that kept strengthening the hand of unions in both the public and private sector.

But supporting members of the working class is not the same as supporting unions. Unions can become restrictive on the labor market by preventing certain groups from benefitting in order to protect the immediate interests of their members. At least until the Great Depression the American Federation of Labor was against letting African-Americans enter better paying skilled trades.17 In more recent years they have been a strong voice against immigration programs for workers. Similarly unions including the AFL-CIO tend to support protectionist tariffs and oppose free-trade deals.18 In 2011 Congress passed three long awaited free-trade agreements with South Korea, Panama and Columbia. Businesses and the White House supported the deals arguing that they would create 70,000 jobs while unions opposed them fearing they would cost 214,000 jobs.19 The effect these agreements will have on jobs remains to be seen but generally speaking, free-trade deals are good for a country. If a country is losing jobs due to free-trade agreements it needs to ask why it is unable to compete (issues covered throughout this book are an attempt to answer that question), but resisting free-trade deals themselves are no solution. While many union demands are not good for national prosperity in the long run their financial and popular support make them a power bloc whose endorsement candidates actively seek to win elections. In 2010 three of the top ten campaign spenders were unions.

Unions today are also quite different from the underdogs they once were, as can be seen in the story of Boeing. Since the late 1970s union workers who build Boeing's planes in Washington State have been on strike five times, most recently around the time of the Great Recession which cost the company $2 billion. Worried about losing customers Boeing asked the machinists union in Puget Sound for a ten year no-strike contract but the union refused. Then later the company built an additional $1 billion production center for its Dreamliner which would employ 1,000 workers in South Carolina, a right to work state (meaning where workers are not legally required to be part of a union). Labor laws prohibit a company from shutting a unionized plant to reopen a non-unionized plant elsewhere to punish or avoid unions – what are called runaway shops – but Boeing had not shut its production in Washington State. Most of it was kept to build seven planes a month while the South Carolina workers were to build three planes a month starting in August 2011. But the union complained to the National Labor Relations Board (NLRB) which charged Boeing in April of 2011 with retaliating against the union for exercising its right to strike and demanded that management move production back to Washington State.21 After strong pressure during a period of historically high unemployment the Board was forced to drop its case. The relationship between management and unions varies from company to company but as the Boeing example shows, confrontation and uncertainty can be very costly in a time when unions are much more powerful.

Consider their effect on the auto industry. In 1955 GM became the first company in history to earn over a billion dollars in a single year. Competitors Ford and Chrysler were also enjoying their best years. In this environment it was hard to deny union demands. By the 1970s the United Autoworker's Union (UAW) which represented workers for all three companies had gained the upper hand with generous wage increases, full healthcare coverage regardless of cost, workers collecting pensions and benefits for more years in retirement than years on the job, a jobs bank program whereby workers idled for any reason could collect 95% of their regular pay without working, and distinct job classifications which stopped one type of worker from doing work reserved for members of another classification.22

By 2007 GM had 74,000 hourly workers while it was supporting 340,000 UAW retirees and their spouses, roughly five for every active worker. Chrysler and Ford were not doing much better. Retiree healthcare alone was costing GM $1,600 per vehicle while at Toyota (which didn't have a union) it was only $200 per vehicle.23 During the period 1992 to 2006 GM paid more than four dollars just to the pension program of its workers, for every dollar it paid to its owners as dividend on its shares.24

Corporate hubris and such legacy costs were already causing losses during the boom years but then came the 2008 recession and by 2009 GM and Chrysler had to file for bankruptcy. By law when a business goes bankrupt its senior lenders (banks and bondholders) get paid first, then the junior bondholders, and the shareholders get what is left in the end. But in the Chrysler bankruptcy when the bondholders refused to settle out of court the government restructured the company so that it got 8% ownership of Chrysler, Canada's government got 2%, Fiat got 20%-35% (depending on their performance as the new management) and the largest share went to the union's retirement healthcare fund – 55% of the company. Senior lenders who should have been first in line were offered $2 billion in cash for their $6.9 billion debt.25 GM's senior lenders did get paid in full but its junior lenders who were next in line got only 12.5 cents on the dollar. The government got 60% ownership of GM, Canada's government 12.5%, the union 17.5% and junior lenders got 10%.26 The respect for contracts and bankruptcy law had been ignored and unions were able to save healthcare claims that would not have otherwise survived a bankruptcy. Observers have blamed the automakers' troubles on inferior quality cars. To some extent there is truth to this as corporate hubris led them to underestimate the Japanese and Korean competition. But better cars are created by reinvesting money in them, and every dollar that went to ridiculously high employment costs (added up over the decades) was a dollar that could have been reinvested in research and development, employing other people in other areas.

Examples such as that of the big three have cautioned employers about long-term legacy costs. In 1980, 84% of employees in firms with over a hundred workers had pensions. In recent years, that had fallen to about a third of such firms, substituted with 401(k) retirement plans that didn't hold the same guarantee.27 In fact, employers have become increasingly resistant to unions themselves. Compared to a third of the workforce in 1955, today union membership is only 12.3% of the total workforce and a mere 6.9% of the private sector workforce.28

But in the public sector which does not have the same boss-worker relationship, union membership has stayed at around 36% since 1980.29 Workers in effect elect their bosses who then make direct decisions about public sector jobs and compensation which makes it a highly politicized relationship. Even when the adult unemployment rate in the private sector climbed from 2007 to 2009, more than doubling from 4.2% to 9.4%, it went from only 2% to 2.9% in the federal employment sector because after a one year probation period it is nearly impossible to fire federal employees for bad performance.30 In the budget year 2010 the federal government fired about 0.55% of its workers for all reasons including poor job performance, sexual harassment and stealing. On the other hand, research shows that the private sector fires around 3% of its workers per year for poor performance.31 As for compensation, in 2008 federal employees earned an average of $67,691 for jobs that existed in both the public and private sector, while the average for private jobs was $60,046. The gap for benefits (like pensions etc.) was even wider with an average of $40,785 for federal workers and $9,882 for private sector workers.32 Federal workers are also starting at much higher pay than they used to because hirees from secretaries to mail clerks are being classified as taking more demanding versions of their jobs to qualify them for more pay.33 After comparing with the private sector the payment system for all federal jobs causes Congress to overspend roughly $47 billion a year.34

At the state level only twelve states do not recognize collective bargaining power in the public sector leaving the majority of states influenced by unions. During periods of economic growth politicians have granted unions higher wages while during economic hardship they have agreed to longer termed commitments like pensions and other benefits whose bills may emerge 15 or 20 years later. In 2000 the national average compensation (including pay and benefits) for state and local government employees was below the average compensation for private sector workers. By 2010 salaries for state and local government employees were slightly higher while benefits were much more generous, bringing the average compensation of local and state workers higher in 41 states.

While pensions are disappearing from the private sector, covering around 18% of all private sector workers, they are still predominant in the public sector.36 Many state and local governments have pension plans at 2.5% to 3% of an employee's final year salary times the number of years worked. So for instance a worker who started in his early 20s can retire in his 50s after working for 33 years, at 3% he would get a pension equal to his final year's salary for the rest of his life. With retirement at such early ages states are supporting them for more years as retirees than years as workers. This increases the burden on the working population who as taxpayers must fund the retirement of those who are still quite capable of working. It also cuts into the states' other obligations like infrastructure, law enforcement and public colleges. In fiscal year 2010 the U.S. government at all levels spent a total of $756 billion on pensions.37 The federal government alone spent $275 billion in civilian and military retirement costs.38

Historically government jobs offered greater job security because they couldn't match the private sector's salary levels, but now they make up a separate class of workers who enjoy much better compensation, longer retirements and more job security. Public unions are not the only influence but they have been the strongest influence that slowly brought about such changes over the decades. In fact, both private and public unions have overplayed their hand. Private unions have made American labor unable to compete in the global economy while public unions have made government workers (who are around 17% of the entire workforce) a privileged class who do better than the private sector in almost every way.

Lastly but most fundamentally, good governance depends on maintaining the rule of law. When a government creates a sense of fairness among the public, it gives the people the incentive to strive for their own economic betterment and progress through social cooperation and self-improvement. Such an atmosphere is created when corruption is reduced and the rule of law is established by providing people with a sense of personal safety and protection of property. Cicero's De Officiis (which is one of Western literature's most respected works on morality) stresses that respect for private property is essential to the carriage of justice. The Fifth Amendment in the U.S. Bill of Rights contained protections for not just life and liberty but also property. Seizure of private property for public use was prohibited without 'just compensation.' Such seizures were done for critical infrastructure that was of public use, like roads, canals, railway tracks etc.. When such eminent domain seizures were made, the owners were appropriately compensated for their property. But in 1945 the District of Columbia Redevelopment Act opened the door for local governments to seize private properties if they were in dilapidated condition. Over the years loose interpretations of the term 'blight' allowed an increase in property takeovers not just for public use but also for the much broader purpose of public benefit. Properties considered a blight on the surrounding landscape could be condemned to stimulate commercial activity.39 Eyesores were being taken over and resold to other businesses. More recently a 2005 U.S. Supreme Court ruling in Kelo vs. New London, Connecticut expanded the city government's powers of eminent domain to support economic development which allowed them to seize waterfront properties and hand them over to businesses to build a luxury hotel and high-end condos.40 The traditional definition of a blighted property was a threat to public welfare, safety or well-being. But now any property that showed the potential for financial opportunities for the public (through new jobs and taxes) could be seized regardless of the condition it was in.

The result of every such case has a ripple effect on the community and the wider public whose confidence, sense of self ownership and willingness to strive for financial betterment is weakened. After the 2005 ruling 5,700 properties had been threatened or seized for private development based on eminent domain grounds in one year compared to 10,000 such cases in the five years before the ruling.41 Any jobs created, taxes collected or revenues generated through such means are far less important than the need to prevent society's confidence from eroding by ensuring a sense of justice. The evolved usage of eminent domain laws are a long way away from their original purpose and they must return to those limitations before this confidence is lost.

eleven

PLAN, CONSENSUS & THE SECOND STAGE

This is not a rescue plan. It is the longest ransom note in history: Do what we tell you and you may, in time, get your country back.

-Fintan O'Toole, commentator and author who led a labor union protest against the imminent Irish bailout.1

Iranian President Mahmoud Ahmadinejad: "They're threatening tougher sanctions."

Iranian spiritual leader Ayatollah Khamenei (shown reading about the Eurozone austerity terms for Greece): "At least we're not getting a Greek bailout!"

-Recent political cartoon.2

In the aftermath of the Second World War the western countries were concerned about the expansion of communism and saw it as a serious threat that the United States and Europe must confront. Weakened by the war Western Europe was in no position to protect itself on its own. Aware of the European situation and the dangers they faced, the then U.S. secretary of state, George C. Marshall boldly proposed that Europe come up with a plan whereby the U.S. could help them in their post-war recovery. The offer of assistance came from the U.S. government but they made it clear that it was up to the Europeans to propose the particular type of assistance they required. It was essential that Europe feel fully involved in the planning process and come up with a proposal based on their own understanding of their needs.

After ten months of negotiations within the U.S. government and between the U.S. government and the European governments the U.S. began assistance to sixteen European countries under a four and a half year program that came to be known as the Marshall Plan, after the man who had initially proposed it. The Marshall Plan was solely focused on assistance for economic development, particularly to develop the infrastructure, food and energy resources of the European nations, so military aid was excluded from the $13 billion package.3 American assistance came in the form of counterpart funds whereby a European worker would use the local currency of his country to buy and pay for machinery and equipment sent for free by the U.S. government. That cash was then deposited to the treasury of that worker's government who with the officials on the recovery team would use the funds to invest in national development through infrastructure projects like roads, railways, dams, bridges, canals, power plants etc.. This not only reduced the chances of fraud and corruption but it also gave support to the American claim that this assistance was not charity, an issue the Americans were keen to emphasize. And the assistance came not just financially but also through technical means (like training) and administrative support.

Technical assistance was far less expensive yet quite critical to the recovery process. Nearly 400 technical experts went from the U.S. to Europe to advise and give classes on the latest in American industrial and management practices. During the spring of 1951 nearly 150 productivity teams visited the United States to observe such techniques first-hand, while the U.S. sent 2,500 officials and employees under a technical assistance program to provide expertise to European officials, managers and workers.4 By 1952 around 2,600 French workers and managers, and around as many Italians visited the U.S. to see American business practices first-hand.5 Such cooperation was part of an overall focus on helping Europe become self-sufficient through better production capability. Upgrades in machinery and equipment along with skill development for the European workers improved their capability to produce and earn high incomes, nurturing their domestic economies through modernization.

Whatever its flaws the Marshall Plan was clearly a success for a number of reasons. Firstly, the highest levels of the American government including the president's office felt that their country had a personal stake in the program's success because they needed to limit the expansion of communism. Some members of Congress considered the size of the program too large to afford and wanted to cut it down drastically but the State Department held firm that inadequate funding would only be a waste of money and sufficient finances were needed to achieve success.6 The idea of foreign aid got a lot of national attention and was still a new and widely unpopular idea. However, such scrutiny and skepticism only added pressure on the officials in charge to achieve results. To gain support the government also made efforts to get the public involved. When Europe faced a food shortage due to bad weather, a nationwide effort was made to collect food supplies through the Freedom Train that traveled the country for donations.7 The officials involved in the program were some of the most capable business, academic and management leaders that America had to offer.8 The clearly defined goal of a five year plan gave a deadline against which everyone had to work and the counterpart fund system created transparency, confidence and trust in the program. American officials were also careful that European officials remain in charge of the program so they could develop self-sufficient economies through self-help and have ownership of the plan. The approach of the American officials towards their European counterparts was based on mutual respect and consideration, and they were careful to help the Europeans maintain their self-confidence and dignity.9

The success that resulted from such factors created markets and opportunities for U.S. corporations throughout the European region and made it America's largest trade partner during the post-war era. American exports had a large and vibrant market available to them, creating millions of productive jobs in the country. Even today a fifth of all American exports go to Europe.10

As the Marshall Plan was coming to a close the more capable experts were returning to civilian life in the United States to be replaced with less capable officials whose abrasive ways were beginning to stir resentment in European circles.11 At the same time new opportunities were opening up for the U.S. to expand the idea and establish such relationships with other parts of the world like Africa and Latin America. But the Korean War brought a change in American priorities from helping nations achieve sustainable economic development to a focus on military aid and short-term relief. As colonialism was coming to an end new nations were ideal candidates for development plans of their own. During the early 1960s alone twenty-two African nations gained independence.

But in 1973 Congress passed the 'New Directions' law, shifting from growth to poverty and basic needs.12 The focus on infrastructure projects, sewage systems, energy power plants, roads, bridges, railways and communication systems was mostly replaced with emergency poverty aid like food, healthcare etc. and from investment to consumption. Such expenses were harder to keep track of and little oversight opened the door for corruption and stealing of aid funds, failing to help the average citizens of recipient countries. With time the American government was less eager to keep their public informed and involved in their foreign assistance programs and making such policies was delegated to agencies like the IMF and World Bank.

In the early 1980s the appreciation of the dollar (mentioned in the 6th chapter) spread an economic crisis in Latin America and Africa that placed heavily indebted governments in a state of desperation. Negotiating from a position of strength the international agencies pushed economic and political conditions that were both harsh and intrusive. Policymakers demanded immediate commitments to fiscal austerity which left even the poorest and most vulnerable members of society in a desperate situation without the government's support for basic necessities. Governments were even unable to invest in education and infrastructure because of budget constraints and agreed conditions. A race to privatize state owned businesses and strategic assets left little room for transparency and prudence, creating a corrupt fire sale of government assets at bargain prices through nepotism and bribery. Liberalization of currency and capital markets left domestic economies exposed to the volatility of financial flows which left behind currency crashes and damaged economies in stagnation. In one study done for the National Bureau of Economic Research economic historians found that when global finance was restricted from 1945 to 1971, emerging economies had no banking crises, 16 currency crises and one twin crisis (i.e. a simultaneous currency and banking crisis). But when financial markets were liberalized 17 banking crises, 57 currency crises and 21 twin crises occurred in the developing world from 1973 to 1997.13 By the 21st century the IMF itself admitted that 'premature opening of the capital account...' a philosophy that it pushed during the 1970s, 80s and 90s '...can hurt a country by making the country vulnerable to sudden stops or reversals of flows.'14

This foreign economic policy which by the 1980s came to be known as the Washington Consensus was nothing like the Marshall Plan. It was also completely different from some well-respected economic theories. Take for instance the concept of infant industries, a term coined by the first U.S. secretary of the treasury, Alexander Hamilton. The gist of the theory was that a developing country should protect industries while they are in their infancy, so that they can be nurtured until they are strong enough to compete with foreigners.15 The United States, most of Western Europe and Japan all developed their economies by protecting industries in their infancy. Even the 1947 international trade agreement, the General Agreement on Tariffs and Trade (GATT) which was spearheaded by the U.S., allowed developing nations to use protections and subsidies more frequently than developed economies.16 Article XII of the GATT allowed a country to protect its external financial position, like its balance of payments, by restricting the quantity or value of items it permits to be imported. Yet here governments were being told to remove much needed protection when they were unable to say no.

The most significant aspect of the Washington Consensus was that it did not allow incremental changes that could gradually be evaluated on their success or failure. Instead policy changes came through instant transformation of economic systems by removing barriers, regulations, government programs and services, cutting taxes, privatizing wide-ranging government functions – virtually overnight. This economic shock treatment made the transition to free markets a very painful and damaging process for the people of these countries. So while over $2 trillion in foreign aid has gone from developed countries to poor nations over the last five decades there is little to show for it in terms of development, prosperity or improvement in the quality of life.17

Take the particular case of Africa which was discouraged from growing its export sector with heavy import tariffs in the West on African manufactured goods. At the same time African farmers were being hurt because American and European farm subsidies were lowering the global price of their farm products. For example U.S. cotton subsidies in 2002 were $4 billion while total European subsidies to its farmers were 91 billion euros. As a result world cotton prices were 14% lower, hurting a million cotton growers in Africa.18 In 1965 the average income in Africa was double that of Asia.19 Yet sub-Saharan Africa's per capita income which was growing at 1% to 1.5% per year during the 1960s and 70s actually started shrinking by 0.7% a year during the 1980s and 90s while it was the largest recipient of this $2 trillion in foreign aid assistance.20 During the short life of the Marshall Plan, assistance never amounted to more than 3% of the GDP of any recipient nation. On the other hand, development assistance to Africa has been roughly equal to 15% of its GDP for much, much longer.21 By the 1990s the West had given up on the African continent and the end of the Cold War diverted their efforts to the newly liberated states of Eastern Europe. Though aid was still flowing to Africa it was getting less attention from the international aid agencies.

Meanwhile during a tour of the African continent in 1996 the Chinese President Jiang Zemin announced the 'second stage' of his country's engagement with Africa which would be 'totally different from before.'22 As the Western world looked elsewhere China began seeing Africa as a valuable trade partner which could supply the Chinese people with the precious natural resources – oil, minerals, agricultural commodities etc. – that China needed to fuel its growth. In return, the Chinese government offered financial resources and technical expertise that Africa lacked. Western aid usually came with demands for political and economic changes, changes that had little or nothing to do with the borrowing nation's ability to pay back the loan, but Chinese aid came with no such conditions.

Within China the government had rejected the development model of economic shock treatment and instead chose to experiment with economic zones in which they had introduced market reforms. Based on their successes and failures they made gradual changes which made their transition to free markets a much smoother process than it was for those countries which tried rapid transformations. As a result of their own success, in 2006 the Chinese Ministry of Commerce announced that overseas economic zones would become a key platform in their 'going global' strategy. China planned to support its companies to establish fifty overseas economic zones in countries around the world.23

China has a three pronged approach to developing a relationship with other emerging countries by providing aid, developing trade and making investments. It has been building infrastructure projects like roads, railways, ports, bridges, power generation plants, water supply, telecommunication networks, oil and gas pipelines, hospitals and schools. The Chinese government offered an estimated 2,000 to 4,000 scholarships per year to students while aiming to train around 15,000 African professionals over a three year period.24 In 2007 China Eximbank's total financial commitments (including loans, credits and guarantees) to the rest of the world exceeded those of the World Bank while its Africa commitments were nearly those of the World Bank.25 Like the international agencies, China also offers interest-free loans and has periodically cancelled loans owed to it by African countries – for example, at the 2003 China-Africa Summit China wrote-off loans worth $1.27 billion owed by 31 African countries and another $1.3 billion was estimated to be written off between 2006 and 2009.26 But unlike the IMF and World Bank, China's government does not place conditions on debt reduction, conditions like where the savings from debt relief must be spent.27 Western corporations were closing down operations in Africa as the 20th century saw shrinking markets, political and economic turmoil feed on each other. But China saw a valuable partner with which it would develop various trade agreements including those for minerals and agricultural products. The Chinese government also allowed tariff-free entry to around 440 African commodities in 2007. The United States has also offered duty free entry to most commodities out of Africa through the Africa Growth and Opportunity Act (AGOA) but the AGOA program's rules have been criticized as difficult to follow because Congress keeps changing the law.28 One notable factor in Africa's trade with China is the payment system of compensatory trade where China may provide goods or services to African firms which they pay for with commodities that they produce (minerals or other natural resources). This form of barter helps the African firm avoid the usage of foreign currency which is expensive and difficult to buy.29 China not only relies on Africa for raw materials, natural resources and other commodities, it is also a vibrant export market for Chinese products. African shops may be seen selling Chinese TVs, radios, computers, cell phones and other electronic appliances while carrying virtually no Western goods because they are simply too expensive for most customers.

China's efforts have helped Africa's per capita income rise again since the 2000s while making it Africa's largest trade partner. Over the past decade African trade with China has risen from $11 billion to $166 billion. After shrinking for 20 years real income per person rose 30% over the last decade. Africa is the world's fastest growing continent, at present, expected to grow at an average of 6% a year over the next decade.30 And unlike previous periods, this time growth is not just through commodities but also the service sector, including finance and telecommunication.

Africa's now booming economy has a population of over a billion people, Latin America with over half a billion people is expected to grow its economy by a third between 2010 and 2015.31 At the same time some of Latin America's most important economies like Brazil and Chile have China as their largest trading partner. India with around 1.2 billion people also has China as its largest trading partner with bilateral trade nearly $70 billion, aimed to reach $100 billion by 2015.32 Within the East Asian region, the East Asian Free Trade Agreement is similar to the NAFTA in its efforts to remove trade barriers. For one thing many of these trade relationships are being developed on a non-dollar basis, instead using their domestic currencies or barter. But more importantly China and Africa's relationship is part of an evolving south-south policy trend in which developing regions are expanding trade with each other – Africa-India, Africa-Malaysia, Africa-Indonesia, India-China, Africa-Middle East, Latin America-Africa etc.. At the same time no corporation with global ambitions can ignore the developing world which is growing much faster than the industrialized world. In developing Asia alone which has nearly half the world's population, the IMF predicted the 2012 GDP to grow at a robust 8.5% compared to 2.6% for advanced economies.33

Up until the 1980s countries like China and India had very closed economies and wanted very little to do with the outside world. At the same time their restrictive policies also limited the growth of these countries while the Western World dominated the global economy. Yet these still emerging economies are already developing better trade relationships with other countries than the West. As I mentioned earlier, the developed world has spent over $2 trillion in foreign aid on the developing world over the last fifty years.34 By comparison China has spent $30 billion in aid for developing countries from 1950.35 Yet China has a stronger trade relationship with many of these developing countries.

China's success in Africa can be attributed to many factors common with the Marshall Plan. In both cases the assisting nations saw that the development of the assisted regions was critically important to their own interests i.e. Europe's development was important to America to control the expansion of communism and Africa is valuable as a crucial trade partner to China. The Marshall Plan and the Beijing Consensus (as the China strategy is sometimes described) were not military aid nor charity programs but assistance focused on long-term economic development. In both cases there was strong involvement at the highest levels of the assisting governments. From 1995 to 2009 there were eight Chinese presidential visits and five visits by Chinese premiers to multiple countries in Africa.36 Compared to the Washington Consensus, the Marshall Plan and the Beijing Consensus were more respectful of the sovereignty of the assisted nations and a lot less politically and economically intrusive, working with existing institutions rather than trying to bring about fundamental changes in them. There was also a large scale effort to not just introduce modern technology but also improve the skill level and expertise of the assisted nations to help them become more productive and self-reliant. Around the time of the Marshall Plan Western Europe was flooded with American tourists and American products which helped familiarize Europe with the culture and people of the U.S..37 Similarly while an American or European is hard to find on African streets today, China's trade relations have not just flooded Africa with made in China products but also an estimated half million Chinese people living in Africa presently.38 There are also 320 Chinese cultural centers called Confucius Institutes around the world, including in Africa, which are helping them strengthen ties with other countries. By contrast the United States which even in the 1970s had 300 government run centers and libraries around the world now has only 39.39 And just as the Marshall Plan made the U.S. Europe's strongest trade partner during the post-World War II era the second stage has made China Africa's largest trade partner in this century. But as I mentioned earlier, China's strong trade ties are not just limited to Africa – in fact 124 countries count China as their leading partner – nor is a strong trade development strategy exclusive to China.40 The south-south policy is building ties throughout Latin America, Asia, Africa and Eastern Europe.

What does this mean for the U.S. economy? There are around 115 international trade agreements globally, a number that is growing rapidly. The United States participates in only 17 of them. Of the 30 million companies in America a mere one percent of them export goods to other countries and only 30% of those one percent export to more than one country. According to a White House estimate, every billion in American exports supports over 5,000 jobs inside the U.S..41 By this calculation if American exports were the same proportion of the U.S. economy as Swiss exports are of the Swiss economy, it would create over 23 million jobs, compared to Germany it would create over 19 million jobs, compared to countries like Russia, China or Finland it would create 12 million jobs or if the American export sector was as developed as that of its neighbors Canada or Mexico, it would mean 11 million new jobs.

An overemphasis on a consumption economy, the absence of a global economic strategy and the lack of an export strategy have left the U.S. economy at a serious disadvantage compared to others who have such comprehensive strategies. These occupations are some of the most valuable jobs an economy can have. Exports not only support the skill level of the workforce, they also make a nation globally competitive when it develops its economy and creates wealth by making things other nations value.

EXPORTS AS A PERCENTAGE OF GDP FOR VARIOUS COUNTRIES 42

BRAZIL 10.6%

CANADA 22.3%

CHINA 24.8%

FINLAND 24.3%

GERMANY 34.3%

INDIA 15.1%

JAPAN 10.1%

MEXICO 22.6%

RUSSIA 24.0%

SWITZERLAND 38.8%

UNITED STATES 6.9%

twelve

RUDE AWAKENING

People are frightened by these events. Our economy I think, still, the fundamentals of our economy are strong. But these are very, very difficult times.

-Republican presidential nominee Senator John McCain, September 15, 2008, on the 2008 financial crisis.1

I speak in dispraise of dusty learning and in disparagement of the historical technique...Are our plans wrong? Who knows? Can we tell from reading history? Hardly.

-Rexford Tugwell, economic advisor to FDR, THE BATTLE FOR DEMOCRACY, pgs. 70-71.

After a meteoric rise, Japan, a country the size of California, became the world's second largest economy in 1968. It was the first Asian nation to develop into an industrialized economy and the eastern hemisphere now had a development model on which they could base their own growth.

During Japan's rise, China's living standards were among the poorest in the world but in 1978, a full decade after Japan became number two, China announced its own set of market reforms. The most important reforms were based on successful experiments which took place outside mainland China, done by its much smaller neighbors. In the 1960s the Taiwanese government opened the first Export Processing Zone (EPZ). It was an experiment in free markets in which the government designated a specific region that had its own regulatory policies and administrators, meant to attract and encourage exporters. Firms got incentives like easier, simpler and better organized procedures for investing, and removal of tariffs if they exported everything they made. It was an instant success as local and international firms came in large numbers to participate. Seeing its success the Taiwanese government expanded on the idea by introducing more such zones. As Taiwan's neighbors took notice, the concept was emulated by other countries that came to be known as the Asian Tigers – the development model, the Asian model. The specific privileges and incentives changed from country to country to reflect the long-term economic goals of each government.

Based on this, China introduced Special Economic Zones (SEZs) in its coastal regions in the late 1970s and early 1980s, specific areas that would attract investors and encourage trade through tax breaks, fewer regulations, less bureaucracy etc.. China adopted the Taiwanese model piecemeal. Taking into account their local conditions the Chinese model was a modification of the Singaporean model which itself was a modified version of the Taiwanese model. As the SEZs gained success in China these policies were expanded to the rest of the country, cutting bureaucracy, strengthening property rights and reducing the gap between performance and incentives.

The government gradually reduced their participation in the economy by allowing occupations to be chosen by individuals rather than assigned by the state. Meanwhile, state-run enterprises were either closed down, sold off or given greater autonomy to manage themselves. By the early 2000s nearly 40,000 state-owned industries had been shut down.2 For two decades the government managed to retrain and redirect around 1% of its rural workforce into the manufacturing sector every year.3 The government also took steps to strengthen property rights, in 2003 it announced plans to amend the constitution to guarantee property rights.4 It entered into free-trade agreements with many of its neighbors and cut average import tariff rates (expected to fall from 23.7% in 2001 to 5.7% by 2011).5 The country also built the world's most advanced telecommunications network and its metropolitan areas have the world's most advanced rapid transportation system of high speed railway trains that can travel at a top speed of 416 kilometers (260 miles) an hour. In 2011 its high speed railway track led the world at 5,193 miles, expected to reach 9,942 miles by 2015.6 By comparison the United States has no such trains running presently or planned for the future. Because China's highways were built for commercial activity (unlike American highways which were originally meant for military transport) each lane is about a foot wider than an American highway lane and the Chinese highway system already has a total length of 45,554 miles compared to the USA's 46,876 miles.7 Of the world's 20 largest ports, 15 are in Asia, 9 in China alone. In the five year period between 2006 and 2010 the country announced the opening of seven major research universities and an acceleration in research funding.8 Its total spending on research and development (R&D) was targeted to hit 2% of the GDP by 2010 (comparable to developed economies) expected to reach 2.5% of the economy by 2020.9 A recent symbol of their intellectual capability was seen at a conference on October 28, 2010 when they unveiled the fastest super computer in the world. The Tianhe-1A built by China's University of Defense Technology is 40% faster than its American predecessor, the Jaguar System built at the Oak Ridge National Laboratory in Tennessee.10 While the 2009 Program for International Student Assessment (PISA) ranked American high school students 31st in math, 17th in reading and 23rd in science, it ranked Shanghai high school students first in all three categories.11 Its policy on public debt (i.e. its relative size to the economy) is similar to the prudent policies of the United States before the Great Depression and far below Western levels today, with combined debts of China's central and local governments at about 50% of their GDP, according to credit rating agency Fitch.12 On the other hand, trade surpluses and a very high national savings rate have allowed the country to amass roughly $3 trillion in foreign currency reserves.13

By focusing on farsighted investments and fiscal prudence it has been able to grow its economy at an average of 8% to 10% a year for over three decades and such growth rates have affected the lives of ordinary Chinese in very positive ways. During the early 1980s over half of all Chinese people were living below the poverty line. Since the late 1990s that number has been less than one in ten.14 In China's more developed eastern cities the average life expectancy is in the 80s, comparable to the highest ranking regions Japan and Southern Europe.15 For the less developed regions it has the largest insurance program in the world which covers 94% of Chinese farmers. This public healthcare system is based on farmers who receive basic medical training to practice in the countryside – China's 'barefoot doctors.' Basic health insurance plans cost $3.20 per year while people can get reimbursed for up to 40% of outpatient costs and 30% to 60% of inpatient costs – a mix of basic medical care with some exposure to direct healthcare costs.16 It's manufacturing sector has grown at around 14% year over year for roughly three decades. By 2010 it became the world's largest manufacturer, a position the United States held for over a century. The Pearl River Delta has become the factory of the world by satisfying the world's need for toys, footwear, clothing, appliances and other electronic items. In 2007 it became the second largest exporter in the world behind the European Union with the capability to produce and export not just simple products, but also sophisticated technology including power generation and heavy electrical equipment. The cheaper total cost of doing business along with the advantages that the country offers have made it the world's largest recipient of foreign direct investment since it replaced the United States in 2003.17 In 2010 IPOs raised an estimated $300 billion globally of which two-thirds were raised by Asian firms and a fifth were from China alone.18

By 2010 China became the world's second largest economy measured by GDP on a purchasing power parity basis, replacing a rank Japan had held for over four decades. It is now the largest or one of the largest markets for most industries, for example, it is the world's largest consumer of energy, the world's largest auto market, the world's largest producer and private consumer of gold and has the world's largest online population by a measurable distance. Besides its largest cities – Beijing, Shanghai, Guangzhou and Shenzhen – China has 150 other cities with populations of at least one million residents each, compared to 13 in the U.S..19

In a Gallop Poll released in February 2011, 52% of Americans answered that China was the world's leading economic power while 32% viewed the United States as the leading economic power.20 Considering that America is still by far the world's largest economy one could simply dismiss such findings as the misperceptions of the masses but there are some facts that should be kept in mind. For one thing some of China's regions tend to hide their economic growth in order to attract more of the central government's resources and development funds. Statistical disparities between the central government's GDP figures and those from the regional and local governments could mean that the Chinese economy is around 15% larger than official numbers indicate.21 Moreover, experts have been revising growth projections for China every few years. In 2003 Goldman Sachs predicted that the Chinese economy would overtake the American economy in 2041.22 Then in 2007 Goldman revised its projections, predicting that China will become the largest economy by 2027.23 Even this projection was made before the 2008 recession. The International Comparison Program (ICP) looks at the cost of comparable goods and services in different countries and adjusts output figures to recognize the lower cost of those items in poorer countries, what is known as the purchasing power parity (PPP) method. Because a similar haircut in the rich world would cost far more than it would in the poor world, the PPP exchange rate helps to get a more accurate picture of a country's living standards and productive capacity. On the basis of the ICP's data, China's economy would overtake America's by the end of 2014. Already in 2010 the combined wealth of China's households (all their assets, minus their liabilities) came to $69.1 trillion. That is around 20 percent more than the total wealth of American households.24

Across China's south-western border the government of India became the main participant in the economy through public-sector owned corporations, immediately after their independence in 1947. The government nationalized important sectors of the economy including the insurance industry, most of the banking system, the railway system and the airline industry. Domestic and international firms were being hurt by the multiple layers of bureaucracy and international firms were being encouraged to reduce their share of ownership or leave altogether. This reluctance to allow free markets to function limited the potential of the country and GDP growth rarely exceeded 4% during the first four decades. But in the 1990s they faced economic problems (including a foreign currency shortage in 1991 that threatened the entire economy) after which there was a policy shift from a socialist model towards a free market economy. Industries were slowly opened to domestic and international competition where protected monopolies and government corporations once existed. The top rate on import tariffs was cut from 355% in 1985 to 12.5% by 2005-06.25 Inspired by the success of China's Strategic Economic Zones (SEZs) the country began similar projects of its own across the nation. The shift has resulted in a yearly average GDP growth of 7% since 1997 while it is expected to grow at a rate of at least 5% until 2050, expanding its middle class from 300 million to 580 million over the next two decades.26 During the early 2000s India had 35 cities with a population of at least a million residents and this is expected to rise to 74 cities by 2026.27 Unlike China's rise, India's economy is not as dependent on exports which makes it less sensitive to foreign economic problems. The Indian consumer market is expected to be the world's fifth largest within a decade and a half.28 According to Goldman Sachs' projections (made before the 2008 recession) the Indian economy could be equal to the American economy by the middle of the 21st century.29

In Latin America Brazil has emerged as a regional power with a population of around 200 million people and per capita income growing at nearly 7% per year.30 The 1970s oil price shock pushed the government to make their country self-sufficient in their energy and food requirements. Ethanol usage made it a model for energy independence and it is now not only a net exporter of energy, but also the fourth largest agricultural exporter with a rich supply of mineral resources. A foreign debt crisis during the 1980s brought a shift towards a conservative fiscal policy by building foreign reserves and shifting its foreign debt to debt based on its domestic currency. By 2008 Brazil was externally a net lender to the rest of the world, proof of a strong change from its earlier financial conditions.31

China, India and Brazil are among the most prominent examples of countries that are removing trade barriers and lowering tariffs; investing in infrastructure, communication and education; reducing regulatory hurdles; selling off publicly owned businesses, closing them down or forcing them to compete with private businesses without government help – and updating commercial and property laws to global standards. While the central banks of rich nations are busy printing money, the central banks of developing nations are buying up gold to protect themselves.32 Keeping a prudent fiscal policy with either small deficits or surpluses has left the emerging nations' governments with much better balance sheets than those of governments in the developed world with government debt averaging around a third of the GDPs of emerging economies.33 For many, development has taken place under a disciplined financial market that has created stability. Infant industries have received the support and accommodation of their government if they can prove that they are constantly improving their ability to compete globally. Their economic growth has attracted the attention of expatriates who gained valuable knowledge, experience and wealth during their careers abroad. Many have returned to start a business, join a research facility or institute of learning, or to advise their government on policy issues. The large populations in these countries create mass consumer markets while the migration of people to the cities continuously provides them with affordable labor. While 17% of the developed world is below 15 years, 29% of those in the Less Developed Regions and 40% of those in the Least Developed countries are under 15. At the same time while 22% of the developed world's population is 60 years old or older, only 9% of those in the Less Developed Regions and 5% of those in the Least Developed countries are 60 years or above.34 The effect of such demographics and good planning is that the emerging world offers a lower cost of doing business along with resources that are starting to compete with the industrialized world.

The emergence of these countries will have a much greater impact on the world's economy than that of Japan during the 20th century. After all, Japan has a population less than half of the USA's, living in an area the size of California. In contrast the emerging economies include countries with areas comparable to the United States (Brazil, China and Russia) and many have large populations (China: 1.3 billion, India: 1.2 billion, Indonesia: 242 million, Brazil: 200 million, Russia: 139 million etc.). Around a billion people belonging to the developed world are now competing with around six billion new capitalists. As a small example, take the fact that for the first time in the history of the world, cell phone lines are allowing people to go from having no phone at all to being able to communicate with almost anyone else in the world, any time they want to. In 2011 there were an estimated 6 billion cell phone lines around the world, far above the 1.2 billion land lines worldwide.35

The relevance of the rise of these nations to America's own economy is that their demand for the world's financial, natural and human resources will affect prices and incomes within the United States. Manufacturing was over 29% of the economy in 1950, but by the mid-2000s it was only 12% of the GDP.36 The largest economies in the world including China, Japan, Germany and India are all much more dependent on manufacturing for their growth. Such jobs create the SUVs, flat screen TVs, smart phones, solar panels and wind turbines that all modern nations require, they are not jobs of the past. Moreover, as I showed in the chapter on immigration, manufacturing and service jobs are facing international competition. In a recent visit the Chinese Minister of Commerce told a Chicago audience that China would expect that its firms not bear the "inefficiencies" of the U.S. workforce – a reference to the employment costs and policies that make American firms less competitive than foreign firms.38 Such comments do not get a lot of serious attention here but they show that other countries are aware of the disadvantages that American businesses face and such disadvantages influence important decisions. From 2006 to mid-2010 investors poured $44.5 billion into Asian stock markets (excluding Japan) while withdrawing $210.4 billion from American stock funds.39 A more sobering indicator was a Commerce Department report from April 2011 that showed that since 2000 U.S. multinationals had cut 2.9 million workers in America while hiring 2.4 million workers overseas. This did not even include foreign firms that make and export products and components to the United States so that they can be sold by American companies.40 Since the 1970s the U.S. economy has been growing by an average of around 3% a year but the Social Security Administration expects the boomer retirement to permanently slow this down to 2% per year by the mid-2020s.41 However, a weak recovery after a historical recession has already slowed down the growth to such levels. In fact, if the economy is not measured in dollars but in key foreign currencies or against the value of commodities like gold (to which the dollar once linked its value), silver, copper, oil, cotton, wheat, corn etc. the U.S. economy has been in recession since the turn of the century. On average, past recoveries regained lost jobs in 13 months but compared to the dozen recessions since the 1930s, the 2008 recession was followed by the worst recovery on record – in terms of job creation – despite the trillions spent by the government.42 And while the middle class in the developing world is expanding (it tripled to 1.89 billion from 1990 to 2008, and that is just in Asia) in the United States the Pew Hispanic Center found a decline in the share of the population defined as the middle class down from 61 percent in the early 1970s to 51 percent in 2011.43 Unable to provide growth under such created conditions, the government chose to redefine how it measures success. Take for instance the three most important pieces of economic data, the unemployment rate, the Consumer Price Index (CPI inflation figure) and the GDP.

The unemployment rate used by the Bureau of Labor Statistics is the u-3, one of the six rates it releases. The broadest u-6 unemployment rate includes the discouraged and marginally attached worker. During the recession of 2008-2009 the official unemployment figure (u-3) peaked at 10.2% in October of 2009. If the more accurate u-6 figure is used, unemployment was 17.5% during that month – what is technically called the real unemployment rate. However, even the u-6 does not include more-than-a-year discouraged workers (workers who gave up on a job after searching for more than a year), due to changes made during the Clinton administration. On his Shadow Government Statistics website, former journalist Walter J. "John" Williams shows that during that same October 2009 peak, unemployment was actually above 22%, more than double the officially quoted rate and just 3% shy of the Great Depression's worst period.44 It is important to note that his calculations are not based on any new method but on methods officially used by the government just a few decades ago. Similarly throughout the economic bubble of the 2000s as prices were skyrocketing, the official CPI figure was comfortably low between 2% and 4%. Using the same methodology the government used in 1980, Williams shows that today's official CPI numbers understate inflation by roughly 7%.45 A revision of inflation rates automatically brings into question the official GDP figures, specifically the real GDP which would be growing at around 1% or less as it shows economic growth in inflation adjusted dollars. Another issue is the economy's reliance on imported goods. Arguing from a trade statistics point of view, Susan Houseman – the senior economist at the W.E. UpJohn Institute for Employment Research at Kalamazoo – sees recent gains in worker productivity as inaccurate because so much of what American factories produce today are finished goods made from manufactured parts imported from other countries. According to Houseman, if manufacturing data corrected these mistakes in output numbers it would lower the tally of the GDP by as much as 8 to 10% per year.47 Most recently, in 2013 the Bureau of Economic Analysis made more changes to what it includes in the economy. For instance, under the new method, R&D spending will be counted as investments, copyrights on arts and entertainment will be counted at their capital, present value and pension plan accounting will ignore the deficits being run by pensions and include pensions promised to workers, instead of the actual present value of these pensions. These types of statistical changes have not been made anywhere else in the world, and will add 3 percent to the GDP without any change in the country's actual output. 48

Research such as that of John Williams and Susan Houseman may be controversial to economists but it helps explain to main street America why the numbers have been showing that things have been good when all around them people have been without jobs, prices have been rising and the economy doesn't seem to be growing the way it used to. Simply put, the numbers have been wrong. They are just not as accurate as they used to be.

This is not to say that other countries are not facing problems of their own, they are. For example in 1979, China enacted a one child policy which limited the number of births to one or two per family. As a result, China's population will begin to decline in 2035. Today, for every five Chinese workers there is one elderly dependent, but by 2050 for every worker there will be six elderly dependants.50 In anticipation of such expected problems the Chinese government is planning to loosen the limit on kids.51 Its success is yet to be determined. Next door, India is rife with ethnic conflicts and a tumultuous political structure and the country's population is still in the process of finding a shared sense of identity. Up north, Russia's economy is far too dependent on commodities and the effects of its shrinking population on the country are hard to predict. In Latin America the 2011-2012 Global Competitiveness Report found Brazil's government regulations the most burdensome against 141 other nations, ranking it dead last.52 But to believe that the developing economies do not pose a challenge to America's economy (and those of the developed world) is to ignore the reality that they have been growing at miraculous rates for decades. These nations have been following the tried and true principles noted throughout these pages and have prospered as a result, just as America and other nations benefitted before them. These principles are not based on hidden economic mysteries but they have been ignored because of political expediency.

No less astute a figure than Henry Kissinger, President Nixon's national security chief and secretary of state, told a colleague in the 1970s that the United States had "passed its historic high point, like so many earlier civilizations." 53 One day historians may prove how right he was, unless the nation starts learning from its past and stops running from it, trying to defy such principles. And the sooner the return the smoother will be the transition, the longer the delay, the harder the necessary changes to get back on track. China and India are examples of countries which chose to change sooner – i.e. they made the transition on their own terms before the changes were forced upon them by circumstances or outside forces. On the other hand, the Soviet Union and to a lesser degree Ireland, Portugal and Greece are examples among many countries that waited far too long to make difficult decisions because of which the tough decisions were forced upon their people by circumstances and outside forces, and this made the transition a very painful process for the average Russian, Irish, Portuguese and Greek. Luxembourg's Prime Minister, Jean-Claude Juncker, famously summed up the cursed situation of the policy maker when he said, "We all know what to do, we just don't know how to get re-elected after we have done it." 54

In 1939 when the Great Depression was still hurting the country, one of the nation's most influential journalists, Walter Lippman, wrote an essay titled, THE AMERICAN DESTINY, in the June 5th issue of Life Magazine. In it he wrote that, "In the long run it cannot be true that a nation grows rich by not producing, by not working, by not saving, by not investing, by not being enterprising, by seeking only security and protection from risks..." Lippman was right but his era was just a turn of the wheel, a mere change in direction in the greater scheme of things. Despite the detours the nation has continued on that path to test whether it could still grow by producing even less, working less, saving less, investing less, by being less enterprising, by being less frugal, less prudent about the future, less economically just, less inviting, by being less prudent about its relationship with other nations, by seeking more security and protection from risks, by hoping to prosper while it pushes on this path – only to find on a road much travelled, that no, it could not.

Notes

1

  1. Money supply figure: "MONEY AND GOLD IN THE 1920s AND 1930s: AN AUSTRIAN VIEW," by Joseph T. Salerno, IDEAS ON LIBERTY, October 1999, Volume 49, Issue 10. www.fee.org/publications/the-freeman/article.asp?aid=4942.

  2. Elmus Wicker, BANKING PANICS OF THE GILDED AGE, (NY, Cambridge University Press, 2000), 143.

  3. Ibid, 110.

  4. Real income figures: Robert S. McElvaine, THE GREAT DEPRESSION: AMERICA, 1929-1941, (NY, Three Rivers Press, 2009), 7.

  5. Elmus Wicker, BANKING PANICS OF THE GILDED AGE, (NY, Cambridge University Press, 2000), 110.

  6. Robert P. Murphy, Ph.D., THE POLITICALLY INCORRECT GUIDE TO THE GREAT DEPRESSION AND THE NEW DEAL, (Washington, D.C., Regnery Publishing, 2009), 30.

  7. Robert S. McElvaine, THE GREAT DEPRESSION: AMERICA, 1929-1941, (NY, Three Rivers Press, 2009), 73-75.

  8. Average tariff rates: George C. Herring, FROM COLONY TO SUPERPOWER: U.S. FOREIGN RELATIONS SINCE 1776, (NY, Oxford University Press, 2008), 480.

  9. Tax schedule: Robert P. Murphy, Ph.D., THE POLITICALLY INCORRECT GUIDE TO THE GREAT DEPRESSION AND THE NEW DEAL, (Washington, D.C., Regnery Publishing, 2009), 53.

  10. Harry S. Dent Jr., THE GREAT DEPRESSION AHEAD: HOW TO PROSPER IN THE CRASH FOLLOWING THE GREATEST BOOM IN HISTORY, (NY, Free Press, 2008), 326.

  11. William E. Leuchtenburg, FRANKLIN D. ROOSEVELT AND THE NEW DEAL 1932-1940, (NY, Harper & Row Publishers, 1963), 1, 18-19, 53.

  12. Jeff Madrick, AGE OF GREED: THE TRIUMPH OF FINANCE AND THE DECLINE OF AMERICA, 1970 TO THE PRESENT, (NY, Alfred A. Knopf, 2011), 37.

  13. Robert S. McElvaine, THE GREAT DEPRESSION: AMERICA, 1929-1941, (NY, Three Rivers Press, 2009), 75.

  14. Charles W. Calomiris, U.S. BANK DEREGULATION IN HISTORICAL PERSPECTIVE, (NY, Cambridge University Press, 2000), 19, 24.

  15. U.S. export figures: Thomas J. DiLorenzo, HOW CAPITALISM SAVED AMERICA: THE UNTOLD STORY OF OUR COUNTRY, FROM THE PILGRIMS TO THE PRESENT, (NY, Crown Publishing, 2004), 172. World trade figures: George C. Herring, FROM COLONY TO SUPERPOWER: U.S. FOREIGN RELATIONS SINCE 1776, (NY, Oxford University Press, 2008), 485.

  16. On premium prices for silver: William E. Leuchtenburg, FRANKLIN D. ROOSEVELT AND THE NEW DEAL 1932-1940, (NY, Harper & Row Publishers, 1963), 82.

  17. Burton Folsom Jr., NEW DEAL OR RAW DEAL? HOW FDR'S ECONOMIC LEGACY HAS DAMAGED AMERICA, (NY, Threshold Editions, 2008), 2.

  18. Thomas J. DiLorenzo, HOW CAPITALISM SAVED AMERICA: THE UNTOLD STORY OF OUR COUNTRY, FROM THE PILGRIMS TO THE PRESENT, (NY, Crown Publishing, 2004), 198.

  19. Laurence J. Kotlikoff and Scott Burns, THE COMING GENERATIONAL STORM: WHAT YOU NEED TO KNOW ABOUT AMERICA'S ECONOMIC FUTURE, (MA, MIT Press, 2004), 178.

  20. Thomas J. DiLorenzo, HOW CAPITALISM SAVED AMERICA: THE UNTOLD STORY OF OUR COUNTRY, FROM THE PILGRIMS TO THE PRESENT, (NY, Crown Publishing, 2004), 181.

  21. Refinancing data: William E. Leuchtenburg, FRANKLIN D. ROOSEVELT AND THE NEW DEAL 1932-1940, (NY, Harper & Row Publishers, 1963), 52-53. House price decline: Harry S. Dent Jr., THE GREAT DEPRESSION AHEAD: HOW TO PROSPER IN THE CRASH FOLLOWING THE GREATEST BOOM IN HISTORY, (NY, Free Press, 2008), 108.

  22. Burton Folsom Jr., NEW DEAL OR RAW DEAL? HOW FDR'S LEGACY HAS DAMAGED AMERICA, (NY, Threshold Editions, 2008), 67.

  23. Ibid, 108-109. William E. Leuchtenburg, FRANKLIN D. ROOSEVELT AND THE NEW DEAL 1932-1940, (NY, Harper & Row Publishers, 1963), 203.

  24. Greg Behrman, THE MOST NOBLE ADVENTURE: THE MARSHALL PLAN AND THE RECONSTRUCTION OF POST-WAR EUROPE, (London, Aurum Press, 2007), 15-16, 18.

  25. Ibid, 15. Craig Karmin, BIOGRAPHY OF THE DOLLAR: HOW THE MIGHTY BUCK CONQUERED THE WORLD AND WHY IT'S UNDER SIEGE, (NY, Crown Business, 2008), 118. William Voegeli, NEVER ENOUGH: AMERICA'S LIMITLESS WELFARE STATE, (NY, Encounter Books, 2010), 170.

  26. "IT REALLY IS THE ECONOMY, STUPID: JOBS, STOCKS CAN SWAY ELECTIONS," by Adam Shell, USA TODAY, January 30, 2012.

  27. Harry S. Dent Jr., THE GREAT DEPRESSION AHEAD: HOW TO PROSPER IN THE CRASH FOLLOWING THE GREATEST BOOM IN HISTORY, (NY, Free Press, 2008), 325.

  28. Robert P. Murphy, Ph.D., THE POLITICALLY INCORRECT GUIDE TO THE GREAT DEPRESSION AND THE NEW DEAL, (Washington, D.C., Regnery Publishing, 2009), 30.

2

  1. "WHO'S MAKING $180,000+? DOCTORS, LAWYERS AND DENTISTS TOP IN FEDERAL JOBS PAY RATE, DATA SHOW," by Kevin McCoy, USA TODAY, May 31, 2011.

  2. www.usgovernmentspending.com.

  3. "GOVERNMENT'S MOUNTAIN OF DEBT," by Dennis Cauchon, USA TODAY, June 7, 2011.

  4. "RESTORE THE PAYROLL TAX: BUILD THE KEYSTONE PIPELINE," editorial, USA TODAY, December 21, 2011.

  5. "MEDICAID BILLS SETTLED IN A HURRY BEFORE AID ENDS," by Dennis Cauchon, USA TODAY, March 21, 2011.

  6. National Association of State Budget Officers.

  7. Based on figures by the White House Office of Management and Budget (OMB).

  8. "RELIANCE ON UNCLE SAM HITS A RECORD: 2010 INCOME WAS 18.3% ENTITLEMENTS," by Dennis Cauchon, USA TODAY, April 26, 2011.

  9. Peter G. Peterson, RUNNING ON EMPTY: HOW THE DEMOCRATIC AND REPUBLICAN PARTIES ARE BANKRUPTING OUR FUTURE AND WHAT AMERICANS CAN DO ABOUT IT, (NY, Picador, 2004), 123.

  10. Eds. Alice M. Rivlin and Isabel Sawhill, RESTORING FISCAL SANITY 2005: MEETING THE LONG-RUN CHALLENGE, (Washington, D.C., Brookings Institution Press, 2005), 41.

  11. Greg Behrman, THE MOST NOBLE ADVENTURE: THE MARSHALL PLAN AND THE RECONSTRUCTION OF POST-WAR EUROPE, (London, Aurum Press, 2007), 11.

  12. Eds. Alice M. Rivlin and Isabel Sawhill, RESTORING FISCAL SANITY 2004: HOW TO BALANCE THE BUDGET, (Washington, D.C., Brookings Institution Press, 2004), 65.

  13. "MILITARY TOWNS ENJOY BIG BOOMS: PAY AND BENEFITS DRIVE CITIES' GROWTH," by Dennis Cauchon, USA TODAY, August 17, 2010.

  14. "THE CHALLENGE OF BELT TIGHTENING: PENTAGON HAS TRIED FOR YEARS TO DROP ALTERNATE ENGINE FOR F-35, YET LAWMAKERS REFUSE TO CANCEL PROGRAM," by Fredreka Schouten, USA TODAY, February 14, 2011.

  15. Eds. Jeremy Eagle et al, THE WORLD ALMANAC AND BOOK OF FACTS 2011, (NY, World Almanac, 2011), 142.

  16. "PENTAGON: A LEAN MILITARY STILL MIGHTY: CRITICS SAY CUTS UNFIT FOR SUPERPOWER," by Tom Vanden Brook, Jim Michaels and Aamer Madhani, USA TODAY, January 6, 2012.

  17. Menzie D. Chinn and Jeffry A. Frieden, LOST DECADES: THE MAKING OF AMERICA'S DEBT CRISIS AND THE LONG RECOVERY, (NY, W.W. Norton & Company, 2011), 19.

  18. Highway total: "WILL CHINA BOUNCE BACK AS A GROWTH MARKET? FUNDS HAVE TANKED AS NATION TAPS THE BRAKES TO TAME SOARING PRICES," by John Waggoner, USA TODAY, November 14, 2011.

  19. U.S. and European figures: Harry S. Dent Jr., THE GREAT DEPRESSION AHEAD: HOW TO PROSPER IN THE CRASH FOLLOWING THE GREATEST BOOM IN HISTORY, (NY, Free Press, 2008), 328. China and India figures: Nandan Nilekani, IMAGINING INDIA: THE IDEA OF A RENEWED NATION, (NY, Penguin Press, 2009), 234.

  20. 2011 World Economic Forum, THE GLOBAL COMPETITIVENESS REPORT 2011-2012, pg. 363. www.weforum.org/documents/GCR11/index.html.

  21. American Society of Civil Engineers, 2009 REPORT CARD FOR AMERICA'S INFRASTRUCTURE, 1-9, 141. www.asce.org/reportcard.

  22. "PIPES PUMPS TROUBLE BIG EASY: WATER, SEWAGE INFRASTRUCTURE SLOW RECOVERY," by Rick Jervis, USA TODAY, December 17, 2010.

  23. "CITIES WRING CASH OUT OF UTILITIES: DEALS OVER WATER, SEWAGE SYSTEMS PLUG BUDGET GAPS," by Judy Keen, USA TODAY, April 21, 2010.

  24. '80% of undergraduates...' "TUITION RISES 8% AT PUBLIC COLLEGES: INCREASE IS TWICE THE INFLATION RATE," by Mary Beth Marklein, USA TODAY, October 26, 2011.

  25. Andrew Hacker and Claudia Dreifus, HIGHER EDUCATION? HOW COLLEGES ARE WASTING OUR MONEY AND FAILING OUR KIDS – AND WHAT WE CAN DO ABOUT IT, (NY, Times Books, 2010), 115.

  26. "NOT WHAT IT USED TO BE: AMERICAN UNIVERSITIES REPRESENT DECLINING VALUE FOR MONEY TO THEIR STUDENTS," THE ECONOMIST, December 1, 2012.

  27. The National Commission on Fiscal Responsibility and Reform, THE MOMENT OF TRUTH: THE FINAL REPORT OF THE NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND REFORM, (Lexington, KY, 2011), 40. www.fiscalcommission.gov.

  28. Graduation ranking: McKinsey & Company, THE ECONOMIC IMPACT OF THE ACHIEVEMENT GAP IN AMERICA'S SCHOOLS, (McKinsey & Company, 2009), 8.  www.mckinsey.com/app_media/images/page_images/offices/socialsector/pdf/achievement_gap_report.pdf.

Earnings premium: "WHY DREAM ACT IS RIGHT FOR U.S., YOUNG PEOPLE," by Education Secretary Arne Duncan, USA TODAY, June 28, 2011.

  29. "THE RICH AND THE REST: AMERICAN INEQUALITY IS A TALE OF TWO COUNTRIES," THE ECONOMIST, October 12, 2012.

  30. Thomas L. Friedman and Michael Mandelbaum, THAT USED TO BE US: HOW AMERICA FELL BEHIND IN THE WORLD IT INVENTED AND HOW WE CAN COME BACK, (NY; Farrar, Straus & Giroux; 2011), 230.

  31. "PROPOSED BUDGET CUTS TARGET SCIENCE: COULD LESS RESEARCH ENDANGER THE USA'S FUTURE?" by Dan Vergano, USA TODAY, March 2, 2011.

  32. "BAD MEDICINE: CUTTING AMERICAN HEALTH RESEARCH WILL HARM THE WORLD," THE ECONOMIST, March 2, 2013.

  33. Eds. John W. Wright et al, THE NEW YORK TIMES 2011 ALMANAC, (NY, Penguin Books, 2010), 368.

  34. Thomas L. Friedman and Michael Mandelbaum, THAT USED TO BE US: HOW AMERICA FELL BEHIND IN THE WORLD IT INVENTED AND HOW WE CAN COME BACK, (NY; Farrar, Straus & Giroux; 2011), 221.

  35. McKinsey & Company, THE ECONOMIC IMPACT OF THE ACHIEVEMENT GAP IN AMERICA'S SCHOOLS, (McKinsey & Company, 2009), 5-6,  www.mckinsey.com/app_media/images/page_images/offices/socialsector/pdf/achievement_gap_report.pdf.

  36. Berle Memorandum to the President, April 18, 1938, Franklin D. Roosevelt Library PPF 1306.

  37. Martin Jacques, WHEN CHINA RULES THE WORLD: THE END OF THE WESTERN WORLD AND THE BIRTH OF A NEW GLOBAL ORDER, (NY, Penguin Press, 2009), 167.

  38. www.usgovernmentspending.com.

3

  1. Menzie D. Chinn and Jeffry A. Frieden, LOST DECADES: THE MAKING OF AMERICA'S DEBT CRISIS AND THE LONG RECOVERY, (NY, W.W. Norton & Company, 2011), 173.

  2. Zachary Karabell, SUPERFUSION: HOW CHINA AND AMERICA BECAME ONE ECONOMY AND WHY THE WORLD'S PROSPERITY DEPENDS ON IT, (NY, Simon & Schuster, 2009), 301-302. Greg Behrman, THE MOST NOBLE ADVENTURE: THE MARSHALL PLAN AND THE RECONSTRUCTION OF POST-WAR EUROPE, (London, Aurum Press, 2007), 52.

  3. David M. Walker, COMEBACK AMERICA: TURNING THE COUNTRY AROUND AND RESTORING FISCAL RESPONSIBILITY, (NY, Random House, 2010), 37-38.

  4. "GREEK MINISTERS APPROVE NEW AUSTERITY MEASURES," Nicholas Paphitis, USA TODAY, June 10, 2011.

  5. Andrew L. Yarrow, FORGIVE US OUR DEBTS: THE INTERGENERATIONAL DANGERS OF FISCAL IRRESPONSIBILITY, (New Haven, Yale University Press, 2008), 32.

  6. "US DEBT IS NOW EQUAL TO ECONOMY: $15 TRILLON RED INK PROJECTED TO SURGE," by Richard Wolf, USA TODAY, January 9, 2012.

  7. State figures: "FEDERAL SHARE OF DEBT RISING: OFFSETS CONSUMER EFFORTS TO REDUCE BORROWING," by Dennis Cauchon, USA TODAY, November 7, 2011.

  8. 2008 levels: Menzie D. Chinn and Jeffry A. Frieden, LOST DECADES: THE MAKING OF AMERICA'S DEBT CRISIS AND THE LONG RECOVERY, (NY, W.W. Norton & Company, 2011), 160, 251n31. 2010 figures: "IN THE DEBT-CEILING DEBATE, IS FAILURE NOW AN OPTION?" by John Waggoner, USA TODAY, July 1, 2011.

  9. Debt to GDP ratios: "IN THE DEBT-CEILING DEBATE, IS FAILURE NOW AN OPTION?" by John Waggoner, USA TODAY, July 1, 2011.

  10. Flow of Funds Guide to the Federal Reserve, table "B.100 Balance Sheet of Households and Nonprofit Organizations,"  www.federalreserve.gov/apps/fof/DisplayTable.aspx?t=b.100.

  11. "AS ECONOMY SEEKS BALANCE, BUSINESSES HOLD KEY: CONSUMER'S DEBT WOES WEIGH DOWN RECOVERY," by John Waggoner, USA TODAY, August 31, 2010. "STUDENT LOAN DEBT SURPASSES $1 TRILLION: BURDEN COULD DRAG ECONOMY IN FUTURE," by Dennis Cauchon, USA TODAY, October 19, 2011.

  12. Menzie D. Chinn and Jeffry A. Frieden, LOST DECADES: THE MAKING OF AMERICA'S DEBT CRISIS AND THE LONG RECOVERY, (NY, W.W. Norton & Company, 2011), 14.

  13. David Cay Johnston, FREE LUNCH: HOW THE WEALTHIEST AMERICANS ENRICH THEMSELVES AT GOVERNMENT EXPENSE, (AND STICK YOU WITH THE BILL), (NY, Portfolio, 2007), 51.

  14. William R. Cline, THE UNITED STATES AS A DEBTOR NATION, (Washington, D.C.; Institute for International Economics, Center for Global Development; 2005), 155.

  15. Menzie D. Chinn and Jeffry A. Frieden, LOST DECADES: THE MAKING OF AMERICA'S DEBT CRISIS AND THE LONG RECOVERY, (NY, W.W. Norton & Company, 2011), 15. William R. Cline, THE UNITED STATES AS A DEBTOR NATION, (Washington, D.C.; Institute for International Economics, Center for Global Development; 2005), 2.

  16. Federal debt figures: "U.S. DEBT IS NOW EQUAL TO ECONOMY: $15 TRILLION RED INK PROJECTED TO SURGE," by Richard Wolf, USA TODAY, January 9, 2012. Others: "FEDERAL SHARE OF DEBT RISING: OFFSETS CONSUMER EFFORTS TO REDUCE BORROWING," by Dennis Cauchon, USA TODAY, November 7, 2011.

  17. Chinese savings: Zachary Karabell, SUPERFUSION: HOW CHINA AND AMERICA BECAME ONE ECONOMY AND WHY THE WORLD'S PROSPERITY DEPENDS ON IT, (NY, Simon & Schuster, 2009), 185. Indian savings: Nandan Nilekani, IMAGINING INDIA: THE IDEA OF A RENEWED NATION, (NY, Penguin Press, 2009), 44.

  18. William R. Cline, THE UNITED STATES AS A DEBTOR NATION, (Washington, D.C.; Institute for International Economics, Center for Global Development; 2005), 60.

  19. Martin Jacques, WHEN CHINA RULES THE WORLD: THE END OF THE WESTERN WORLD AND THE BIRTH OF A NEW GLOBAL ORDER, (NY, Penguin Press, 2009), 160.

  20. "IN JUST SEVEN WEEKS AMERICA COULD RUN OUT OF BORROWED MONEY...OR WOULD IT?" by Richard Wolf, USA TODAY, June 16, 2011.

  21. The National Commission on Fiscal Responsibility and Reform, THE MOMENT OF TRUTH: THE FINAL REPORT OF THE NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND REFORM, (Lexington, KY, 2011), 12. www.fiscalcommission.gov.

  22. "U.S. DEBT IS NOW EQUAL TO ECONOMY: $15 TRILLION RED INK PROJECTED TO SURGE," by Richard Wolf, January 9, 2012.

  23. "OBAMA'S SPENDING PLAN LEAVES THE DEBT BOMB TICKING," editorial, USA TODAY, February 14, 2012.

  24. "CHINA HAS A LOT TO LOSE IN DEBT DEBATE: BUT IT PROBABLY WILL NOT STOP BUYING U.S. DEBT," by Kathy Chu, USA TODAY, July 20, 2011.

  25. Martin Jacques, WHEN CHINA RULES THE WORLD: THE END OF THE WESTERN WORLD AND THE BIRTH OF A NEW GLOBAL ORDER, (NY, Penguin Press, 2009), 181.

  26. "EUROPEAN CRISIS FORCES ASIAN EXPORTERS TO SHIFT BUSINESS FOCUS," by Kathy Chu, USA TODAY, December 13, 2011.

  27. Nandan Nilekani, IMAGINING INDIA: THE IDEA OF A RENEWED NATION, (NY, Penguin Press, 2009), 72.

  28. "HIGH-END U.S. HOMES LURE CHINESE BUYERS: THEY'RE NOW THE SECOND LARGEST FOREIGN BUYERS OF HOMES HERE," by Kathy Chu and Julie Schmidt, USA TODAY, April 4, 2012.

  29. Ted C. Fishman, SHOCK OF GRAY: THE AGING OF THE WORLD'S POPULATION AND HOW IT PITS YOUNG AGAINST OLD, CHILD AGAINST PARENT, WORKER AGAINST BOSS, COMPANY AGAINST RIVAL, AND NATION AGAINST NATION, (NY, Scribner, 2010), 144.

  30. Saudi example: Naomi Klein, THE SHOCK DOCTRINE: THE RISE OF DISASTER CAPITALISM, (NY, Picador, 2007), 414-415.

  31. The National Commission on Fiscal Responsibility and Reform, THE MOMENT OF TRUTH: THE FINAL REPORT OF THE NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND REFORM, (Lexington, KY, 2011), 9. www.fiscalcommission.gov.

  32. "IN THE DEBT CEILING DEBATE, IS FAILURE NOW AN OPTION?" by John Waggoner, USA TODAY, July 1, 2011.

  33. Carmen M. Reinhart and Kenneth S. Rogoff, THIS TIME IS DIFFERENT: EIGHT CENTURIES OF FINANCIAL FOLLY, (NJ, Princeton University Press, 2009), xil.

4

  1. "AMERICANS PAY LESS IN TAXES: ANALYSIS FINDS THE BURDEN AT ITS LOWEST LEVEL SINCE 1958," by Dennis Cauchon, USA TODAY, May 6, 2011.

  2. Ha Joon Chang, BAD SAMARITANS: THE MYTH OF FREE TRADE AND THE SECRET HISTORY OF CAPITALISM, (NY, Bloomsbury Press, 2008), 51.

  3. Thomas J. DiLorenzo, HOW CAPITALISM SAVED AMERICA: THE UNTOLD STORY OF OUR COUNTRY, FROM THE PILGRIMS TO THE PRESENT, (NY, Three Rivers Press, 2004), 78.

  4. Andrew L. Yarrow, FORGIVE US OUR DEBTS: THE INTERGENERATIONAL DANGERS OF FISCAL IRRESPONSIBILITY, (New Haven, Yale University Press, 2008), 32.

  5. Harry S. Dent Jr., THE GREAT DEPRESSION AHEAD: HOW TO PROSPER IN THE CRASH FOLLOWING THE GREATEST BOOM IN HISTORY, (NY, Free Press, 2008), 324.

  6. Michael D. Bordo, THE GOLD STANDARD AND RELATED REGIMES: COLLECTED ESSAYS, (NY, Cambridge University Press, 1999), 218.

  7. Peter G. Peterson, RUNNING ON EMPTY: HOW THE DEMOCRATIC AND REPUBLICAN PARTIES ARE BANKRUPTING OUR FUTURE AND WHAT AMERICANS CAN DO ABOUT IT, (NY, Picador, 2004), 15.

  8. Eds. Alice M. Rivlin and Isabel Sawhill, RESTORING FISCAL SANITY 2005: MEETING THE LONG RUN CHALLENGE, (Washington, D.C., Brookings Institution Press, 2005), 3.

  9. Based on White House Office of Management and Budget (OMB) figures: editorial, USA TODAY, January 24, 2012.

  10. "STATES GAMBLE ON WEB LOTTERY SALES," by Rob Jennings, USA TODAY, June 10, 2011.

  11. "SHORT RUN TAX HIKES BEING USED TO FILL GAPS," by Dennis Cauchon, USA TODAY, May 18, 2010.

  12. "...nine out of ten states...." "THE BRINK OF BANKRUPTCY: UNFUNDED LIABILITIES THREATEN THE U.S. ECONOMY," by Mike Kelley, THE GOOD NEWS, May-June 2011.

  13. Jagadeesh Gokhale and Kent Smetters, FISCAL AND GENERATIONAL IMBALANCES: NEW BUDGET MEASURES FOR NEW BUDGET PRIORITIES, (Washington, D.C., AEI Press, 2003), 26-27. www.aei.org/docLib/20030723_SmettersFinalCC.pdf.

  14. Daniel DiSalvo, GOVERNMENT UNIONS AND THE BANKRUPTING OF AMERICA, (NY, Encounter Books, 2011), 32.

  15. "U.S. OWES $62 TRILLION: UNFUNDED OBLIGATIONS AMOUNT TO $534,000 PER HOUSEHOLD," by Dennis Cauchon, USA TODAY, June 7, 2011. "GOVERNMENT'S MOUNTAIN OF DEBT," by Dennis Cauchon, USA TODAY, June 7, 2011.

  16. Eds. Alice M. Rivlin and Isabel Sawhill, RESTORING FISCAL SANITY 2005: MEETING THE LONG RUN CHALLENGE, (Washington, D.C., Brookings Institution Press, 2005), 40.

  17. The National Commission on Fiscal Responsibility and Reform, THE MOMENT OF TRUTH: THE FINAL REPORT OF THE NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND REFORM, (Lexington, KY, 2011), 43. www.fiscalcommission.gov.

  18. Ibid, 38.

  19. Peter G. Peterson, RUNNING ON EMPTY: HOW THE DEMOCRATIC AND REPUBLICAN PARTIES ARE BANKRUPTING OUR FUTURE AND WHAT AMERICANS CAN DO ABOUT IT, (NY, Picador, 2004), xxix.

  20. Laurence J. Kotlikoff and Scott Burns, THE COMING GENERATIONAL STORM: WHAT YOU NEED TO KNOW ABOUT AMERICA'S ECONOMIC FUTURE, (MA, MIT Press, 2005), 69.

  21. "CBO: THE WEALTHY PAY 70 PERCENT OF TAXES," by Stephen Dinan, THE WASHINGTON TIMES, July 10, 2012.

  22. "MYTHS AND MISINFORMATION MAR DEBT-CEILING DEBATE," editorial, USA TODAY, July 29, 2011.

  23. "MAKERS AND TAKERS: AMERICA'S GOVERNMENT REDISTRIBUTES, BUT NOT WELL," THE ECONOMIST, October 13, 2012.

5

  1. Burton Folsom Jr., NEW DEAL OR RAW DEAL? HOW FDR'S ECONOMIC LEGACY HAS DAMAGED AMERICA, (NY, Threshold Editions, 2008), 77.

  2. Daniel N. Shaviro, TAXES, SPENDING AND THE U.S. GOVERNMENT'S MARCH TOWARD BANKRUPTCY, (NY, Cambridge University Press, 2007), 162.

  3. Robert P. Murphy, Ph.D., THE POLITICALLY INCORRECT GUIDE TO THE GREAT DEPRESSION AND THE NEW DEAL, (Washington, D.C., Regnery Publishing, 2009), 14.

  4. Burton Folsom Jr., NEW DEAL OR RAW DEAL? HOW FDR'S ECONOMIC LEGACY HAS DAMAGED AMERICA, (NY, Threshold Editions, 2008), 78.

  5. "CENSUS: ECONOMY PUT MORE PEOPLE UNDER ONE ROOF," by Haya El Nasser and Paul Overberg, USA TODAY, May 5, 2011.

  6. "SOCIAL SECURITY SAYS NO TO PAPER: FUNDS TO GO TO DIRECT DEPOSIT OR DEBIT CARD," by Sandra Block, USA TODAY, April 29, 2011.

  7. Ted C. Fishman, SHOCK OF GRAY: THE AGING OF THE WORLD'S POPULATION AND HOW IT PITS YOUNG AGAINST OLD, CHILD AGAINST PARENT, WORKER AGAINST BOSS, COMPANY AGAINST RIVAL, AND NATION AGAINST NATION, (NY, Scribner, 2010), 14.

  8. "OLDER BOOMERS WHO WORK LONGER CAN GET MORE IN SOCIAL SECURITY BENEFITS: FILING FOR THEM AT 62 COULD CUT THE PAYOUT BY AS MUCH AS 8% A YEAR," by Sandra Block, USA TODAY, July 12, 2011.

  9. "OFFICE WORK DOESN'T SIT WELL WHEN IT COMES TO CALORIES," by Nanci Hellmich, USA TODAY, May 26, 2011.

  10. "THEY WON'T QUIT: SENIORS DECIDE QUIET RETIREMENT DOESN'T SUIT THEM, PREFERRING TO STAY ACTIVE IN THE WORKFORCE," by Janice Lloyd, USA TODAY, January 24, 2012.

  11. "MANY WILL NEED TO WORK PAST 65 – IF THEY CAN: MAKING ENDS MEET WILL BE A CHALLENGE," by John Waggoner, USA TODAY, December 7, 2010.

  12. Surveys by Pew Research Center and Federal Reserve: "END THE SENIOR DISCOUNTS," by Don Campbell, editorial, USA TODAY, January 18, 2012.

  13. "POVERTY AT 15.1% HIGHEST SINCE '93: 10-YEAR INCOME DROP USA'S 1ST IN 5 DECADES," by Dennis Cauchon and Barbara Hanson, USA TODAY, September 14, 2011.

  14. "SENIORS' INCOME UP VS. OTHER AGE GROUPS: OLDER SECTOR OUTEARNS THOSE 15-24 FOR 1st TIME," by Dennis Cauchon and Richard Wolf, USA TODAY, September 17, 2010. "AMERICAN WORKFORCE GOING GRAYER: PEOPLE 55 AND OLDER KEEP JOBS WHILE YOUNG KEPT OUT," by Dennis Cauchon, USA TODAY, December 15, 2010.

  15. AS SENIORS CLIMB FROM POVERTY, YOUNG FALL IN: SOCIAL PROGRAMS AID ELDERLY; CHILDREN SUFFER IN RECESSION," by Marisol Bello, USA TODAY, February 16, 2012.

  16. Ibid.

  17. "FAITH IN SOCIAL SECURITY TANKING: MOST EXPECT CUTS OR LOSE HOPE FOR FUNDS," by Susan Page, USA TODAY, July 20, 2010.

  18. "YOU CAN'T BALANCE THE BUDGET UNLESS BOTH SIDES GIVE GROUND," by Chris Chocola, USA TODAY, March 17, 2010.

  19. Congressional Budget Office (CBO), FEDERAL DEBT AND THE RISK OF A FISCAL CRISIS, (Washington, D.C., Congressional Budget Office, 2010).

  20. "JUSTICE DEPT. PROSECUTING FEWER CASES OF BENEFITS FRAUD: INDICATES A SHIFT IN FOCUS TO FINANCIAL, MORTGAGE SCHEMES," by Brad Heath, USA TODAY, June 28, 2011.

  21. "CHARITABLE GIVING ON THE REBOUND: $291B DONATED IN 2010 AFTER 2 YEARS OF DECLINE," by Haya El Nasser, USA TODAY, June 20, 2011.

  22. 1960 and 1980 figures: eds. John W. Wright et al, THE NEW YORK TIMES 2011 ALMANAC, (NY, Penguin Books, 2010), 381. 2009 figure: "DUTCH TREAT – A MEDICAL SYSTEM WITH FULL COVERAGE, LOWER COSTS," editorial, USA TODAY, October 18, 2011.

  23. "DUTCH TREAT – A MEDICAL SYSTEM WITH FULL COVERAGE, LOWER COSTS," editorial, USA TODAY, October 18, 2011.

  24. Eds. Jeremy Eagle et al, THE WORLD ALMANAC AND BOOK OF FACTS 2011, (NY, World Almanac, 2011), 170.

  25. STOP Obesity Alliance figure and 2030 projection: "MEDICARE TO PAY FOR OBESITY PREVENTION: WEIGHT LINKED TO CHRONIC ILLNESSES," by Kelly Kennedy and Nanci Hellmich, USA TODAY, November 30, 2011. 20% figure: "STUDY: ERs SHRINK AS DEMAND RISES: 1 IN 3 HAVE CLOSED OVER TWO DECADES," by Mary Brophy Marcus, USA TODAY, May 18, 2011.

  26. Robert J. Samuelson, THE GREAT INFLATION AND ITS AFTERMATH: THE PAST AND FUTURE OF AMERICAN AFFLUENCE, (NY, Random House, 2008), 217.

  27. Eds. John W. Wright et al, THE NEW YORK TIMES 2011 ALMANAC, (NY, Penguin Books, 2010), 383.

  28. 2010 figure: "STATES TO LIMIT HOSPITAL STAYS: SOME TO CUT MEDICAID COVERAGE TO 10 DAYS," by Phil Galewitz, USA TODAY, October 24, 2011.

  29. "MEDICARE SLEUTHS LET FRAUD CASES GET COLD: OVERPAYMENTS, WASTE TAKING LONG TO BE REPORTED," by the Associated Press, USA TODAY, August 9, 2010.

  30. "2.5B RECOVERED IN HEALTHCARE FRAUD," by Kelly Kennedy, USA TODAY, January 24, 2011.

  31. "RATION CARE WITH MEDICARE CREDITS: LIKE THE FEDERAL DEBT, THE ENTITLEMENT SPENDING IS NOT REMOTELY SUSTAINABLE AT THE CURRENT RATE. SO LET'S INTRODUCE CHOICE AND THE MARKET," by Don Campbell, editorial, USA TODAY, August 10, 2011.

  32. "ANTIBIOTICS OFTEN UNNECESSARY FOR KIDS' EAR INFECTIONS," by Liz Szabo, USA TODAY, November 17, 2010.

  33. "CANCER DOCTOR 'BREAKS RANKS' WITH THE SYSTEM: OTIS BRAWLEY MAKES HIS CASE FOR THE OVERTREATED AND THE UNDERSERVED," by Liz Szabo, USA TODAY, January 31, 2012.

  34. "HOW DOCTORS CAN REDUCE MEDICAL ERRORS, LAWSUITS," by Kevin Pho, editorial, USA TODAY, January 18, 2012.

  35. "DOCTORS SAY OVERTESTING IS COMMON," by Michelle Healy, USA TODAY, June 29, 2010.

  36. "STUDY: ERs SHRINK AS DEMAND RISES: 1 IN 3 HAVE CLOSED OVER 2 DECADES," by Mary Brophy Marcus, USA TODAY, May 18, 2011.

  37. "HOW DOCTORS CAN REDUCE MEDICAL ERRORS, LAWSUITS," by Kevin Pho, editorial, USA TODAY, January 18, 2012.

  38. "'WATSON' COULD TRANSFORM MEDICINE: THE SUPERCOMPUTER THAT WILL APPEAR ON JEOPARDY COULD PROVIDE A ROADMAP FOR MORE EFFICIENT, AND BETTER, HEALTHCARE IN THE USA," by Yong Suh, editorial, USA TODAY, February 9, 2011.

  39. "HOW ONE DRUG COMPANY IS FLEECING PREGNANT WOMEN," by Senator Sherrod Brown (D), editorial, USA TODAY, March 21, 2011.

  40. Peter G. Peterson, RUNNING ON EMPTY: HOW THE DEMOCRATIC AND REPUBLICAN PARTIES ARE BANKRUPTING OUR FUTURE AND WHAT AMERICANS CAN DO ABOUT IT, (NY, Picador, 2004), 126.

  41. Eds. John W. Wright et al, THE NEW YORK TIMES 2011 ALMANAC, (NY, Penguin Books, 2010), 382.

  42. "FDA AIMS TO BOOST IMPORT SAFETY: PROPOSES GLOBAL COALITIONS TO POLICE FLOOD OF GOODS," by Elizabeth Weise, USA TODAY, June 21, 2011.

  43. "ALL TOGETHER NOW: EXTENDED FAMILIES: ECONOMY, IMMIGRATION ALTER LIVING ARRANGEMENTS," by Sharon Jayson, USA TODAY, November 23, 2011.

  44. "90-PLUS POPULATION TRIPLES IN 3 DECADES: CENSUS: NUMBER IS LIKELY TO QUADRUPLE BY 2050," by Haya El Nasser, USA TODAY, November 18, 2011.

  45. "PANERA'S PAY-WHAT-YOU-CAN CAFES INSPIRE OTHERS: THEY'VE PROVED THAT THEY WORK, AND THE MODEL IS SPREADING," by Sylvia Rector, USA TODAY, February 27, 2012.

  46. "DOCTORS GO TO BAT FOR UNINSURED: FOR PATIENTS FACING HARD TIMES, PHYSICIANS FIND WAYS TO CONTINUE CARE," by Richard Kipling, USA TODAY, September 13, 2011.

6

  1. "BUFFETT DISLIKES THIS [SIC] DOLLAR INVESTMENT," USA TODAY, March 28, 2011.

  2. Michael D. Bordo, THE GOLD STANDARD AND RELATED REGIMES: COLLECTED ESSAYS, (NY, Cambridge University Press, 1999), 150.

  3. Ibid, 163.

  4. Ibid, 159.

  5. Ibid.

  6. "MONEY AND GOLD IN THE 1920s AND THE 1930s: AN AUSTRIAN VIEW," by Joseph T. Salerno, IDEAS ON LIBERTY, October 1999, Volume 49, Issue 10. www.fee.org/publications/the-freeman/article.asp?aid=4942.

  7. Michael D. Bordo, THE GOLD STANDARD AND RELATED REGIMES: COLLECTED ESSAYS, (NY, Cambridge University Press, 1999), 434.

  8. Robert J. Samuelson, THE GREAT INFLATION AND ITS AFTERMATH: THE PAST AND FUTURE OF AMERICAN AFFLUENCE, (NY, Random House, 2008), 77.

  9. Craig Karmin, BIOGRAPHY OF THE DOLLAR: HOW THE MIGHTY BUCK CONQUERED THE WORLD AND WHY IT'S UNDER SIEGE, (NY, Crown Business, 2008), 99.

  10. Ron Paul, END THE FED, (NY, Grand Central Publishing, 2009), 54.

  11. Jeff Madrick, AGE OF GREED: THE TRIUMPH OF FINANCE AND THE DECLINE OF AMERICA, 1970 TO THE PRESENT, (NY, Alfred, A. Knopf, 2011), 63.

  12. Ron Paul, END THE FED, (NY, Grand Central Publishing, 2009), 54.

  13. Early 1980 rate of inflation: Jeff Madrick, AGE OF GREED: THE TRIUMPH OF FINANCE AND THE DECLINE OF AMERICA, 1970 TO THE PRESENT, (NY, Alfred A. Knopf, 2011), 152.

  14. Robert J. Samuelson, THE GREAT INFLATION AND ITS AFTERMATH: THE PAST AND FUTURE OF AMERICAN AFFLUENCE, (NY, Random House, 2008), 107.

  15. Ibid, 107-108.

  16. Craig Karmin, BIOGRAPHY OF THE DOLLAR: HOW THE MIGHTY BUCK CONQUERED THE WORLD AND WHY IT'S UNDER SIEGE, (NY, Crown Business, 2008), 139.

  17. Menzie D. Chinn and Jeffry A. Frieden, LOST DECADES: THE MAKING OF AMERICA'S DEBT CRISIS AND THE LONG RECOVERY, (NY, W.W. Norton & Company, 2011), 40.

  18. Steven Greenhouse, THE BIG SQUEEZE: TOUGH TIMES FOR THE AMERICAN WORKER, (NY, Alfred A. Knopf, 2008), 80.

  19. Dambisa Moyo, DEAD AID: WHY AID IS NOT WORKING AND HOW THERE IS A BETTER WAY FOR AFRICA, (Vancouver, Canada; Douglas & McIntyre; 2009), 18.

  20. Craig Karmin, BIOGRAPHY OF THE DOLLAR: HOW THE MIGHTY BUCK CONQUERED THE WORLD AND WHY IT'S UNDER SIEGE, (NY, Crown Business, 2008), 58.

  21. Ibid, 85.

  22. Dambisa Moyo, DEAD AID: WHY AID IS NOT WORKING AND HOW THERE IS A BETTER WAY FOR AFRICA, (Vancouver, Canada; Douglas & McIntyre; 2009), 88-89.

  23. Ron Paul, END THE FED, (NY, Grand Central Publishing, 2009), 82.

  24. Financial Crisis Inquiry Commission, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, (NY, Public Affairs, 2011), 391.

  25. Dambisa Moyo, DEAD AID: WHY AID IS NOT WORKING AND HOW THERE IS A BETTER WAY FOR AFRICA, (Vancouver, Canada; Douglas & McIntyre; 2009), 90-92.

  26. Thomas E. Woods Jr., MELTDOWN: A FREE-MARKET LOOK AT WHY THE STOCK MARKET COLLAPSED, THE ECONOMY TANKED, AND THE GOVERNMENT BAILOUTS WILL MAKE THINGS WORSE, (Washington, D.C., Regnery Publishing, 2009), 26.

  27. "THE NEXT FRONTIER: AS GROWTH SLOWS IN CHINA AND INDIA, A FRESH GROUP OF MARKETS BREAKS OUT," by Ruchir Sharma, TIME, May 14, 2012.

  28. Gold closing price on December 29, 2011 was $1,539.90: USA TODAY, December 30, 2011.

  29. "AS FEAR FLOURISHES, GOLD IS KING. FOR NOW," by John Waggoner, USA TODAY, June 21, 2010.

  30. Financial Crisis Inquiry Commission, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, (NY, Public Affairs, 2011), 159, 175.

  31. Ron Paul, END THE FED, (NY, Grand Central Publishing, 2009), 8.

  32. "DOLLAR 'A PRODUCT OF THE PAST,'" THE PHILADELPHIA TRUMPET, April, 2011.

  33. Menzie D. Chinn and Jeffry A. Frieden, LOST DECADES: THE MAKING OF AMERICA'S DEBT CRISIS AND THE LONG RECOVERY, (NY, W.W. Norton & Company, 2011), 188.

  34. U.S. – China Economic and Security Review Commission, HEARING ON CHINA'S GLOBAL QUEST FOR RESOURCES AND IMPLICATIONS FOR THE UNITED STATES, written testimony of W. David Menzie, January 26, 2012.

  35. "YUAN TO GET RID OF YOUR DOLLARS?" THE PHILADELPHIA TRUMPET, May-June, 2011.

  36. "DUMPING U.S. A DOLLAR AT A TIME," THE PHILADELPHIA TRUMPET, August, 2011.

  37. "YUAN FOR THE MONEY: THE RISE OF CHINA'S CURRENCY WILL CHANGE THE WAY THE WORLD DOES BUSINESS," THE ECONOMIST, February 9, 2013.

  38. Deborah Brautigam, THE DRAGON'S GIFT: THE REAL STORY OF CHINA IN AFRICA, (NY, Oxford University Press, 2009), 55-56.

  39. "DITCHING THE DOLLAR," THE PHILADELPHIA TRUMPET, March, 2012.

  40. Michael D. Bordo, THE GOLD STANDARD AND RELATED REGIMES: COLLECTED ESSAYS, (NY, Cambridge University Press, 1999), 449-451.

  41. SQUAWK BOX, CNBC, March 3rd, 2011.

  42. David Boyle, THE LITTLE MONEY BOOK, (NY, Disinformation, 2003), 105.

7

  1. Charles W. Calomiris, U.S. BANK DEREGULATION IN HISTORICAL PERSPECTIVE, (NY, Cambridge University Press, 2000), 8.

  2. Ibid, 9.

  3. Ibid, 105.

  4. Ibid, 10.

  5. Elmus Wicker, BANKING PANICS OF THE GILDED AGE, (NY, Cambridge University Press, 2000), 83-84.

  6. Ibid, 132-133.

  7. Its post-World War II responsibilities came with the 1946 Humphrey Hawkins Act. The Fed's goals and purposes are stated on its website: www.federalreserve.gov.

  8. Roger Lowenstein, THE END OF WALL STREET, (NY, Penguin Press, 2011), 271.

  9. Financial Crisis Inquiry Commission, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, (NY, Public Affairs, 2011), 391.

  10. Ibid, 60.

  11. Roger Lowenstein, THE END OF WALL STREET, (NY, Penguin Press, 2011), 280.

  12. Financial Crisis Inquiry Commission, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, (NY, Public Affairs, 2011), 394.

  13. "HOME PRICES HIT 2002 LEVELS: FORECLOSURES MEAN FURTHER FALL," by Julie Schmidt, USA TODAY, June 1, 2011.

  14. Financial Crisis Inquiry Commission, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, (NY, Public Affairs, 2011), 176, 397.

  15. "MANY SAW NET WORTH FALL DURING RECESSION: MORE THAN TWO-THIRDS FELT SUCH LOSS, FED REPORTS," by Sandra Block, USA TODAY, March 25, 2011. From the 2nd quarter of 2007 to the 3rd quarter of 2010 $11.1 trillion in net household wealth had been lost: Financial Crisis Inquiry Commission, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, (NY, Public Affairs, 2011), 391.

  16. "INTEREST RATES WILL STAY LOW, LOW, LOW: FED PLAN ACKNOWLEDGES RECOVERY REMAINS SLOW," by Tim Mullaney, USA TODAY, January 26, 2012.

  17. Arthur C. Brooks, THE BATTLE: HOW THE FIGHT BETWEEN FREE ENTERPRISE AND BIG GOVERNMENT WILL SHAPE AMERICA'S FUTURE, (NY, Basic Books, 2010), 32.

  18. "EXPERTS SEE FEDS TAKING AGGRESSIVE STEPS: POLICYMAKERS HAVE HINTED AT MORE BOND PURCHASES," by Paul Davidson, USA TODAY, August 11, 2011.

  19. "INTEREST RATES WILL STAY LOW, LOW, LOW: FED PLAN ACKNOWLEDGES RECOVERY REMAINS SLOW," by Tim Mullaney, USA TODAY, January 26, 2012.

  20. "CAN GOP WIN IF ECONOMY RISES? FORGET ABOUT POSSIBLE RECOVERY, AND FOCUS INSTEAD ON OBAMA'S BLOATED GOVERNMENT," by Michael Medved, editorial, USA TODAY, March 14, 2012.

  21. "IN HOUSING BUST, A 'NEW NORMAL': AS EQUITY PLUMMETS, A CALIFORNIA COUNTY ADJUSTS TO LOWER EXPECTATIONS," by Julie Schmidt, USA TODAY, February 8, 2011.

  22. Charles W. Calomiris, U.S. BANK DEREGULATION IN HISTORICAL PERSPECTIVE, (NY, Cambridge University Press, 2000), 203-208.

  23. Ibid, 165.

  24. Financial Crisis Inquiry Commission, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, (NY, Public Affairs, 2011), 52.

  25. Nicole Gelinas, AFTER THE FALL: SAVING CAPITALISM FROM WALL STREET – AND WASHINGTON, (NY, Encounter Books, 2011), 92. Roger Lowenstein, THE END OF WALL STREET, (NY, Penguin Press, 2011), 58-61. Financial Crisis Inquiry Commission, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, (NY, Public Affairs, 2011), 47-48.

  26. Financial Crisis Inquiry Commission, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, (NY, Public Affairs, 2011), xviii, 13, 307.

  27. Ibid, xviii.

  28. Ibid, 96.

  29. Ibid, xxiv.

  30. Menzie D. Chinn and Jeffry A. Frieden, LOST DECADES: THE MAKING OF AMERICA'S DEBT CRISIS AND THE LONG RECOVERY, (NY, W.W. Norton & Company, 2011), 79.

  31. Financial Crisis Inquiry Commission, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, (NY, Public Affairs, 2011), xix, xx, 65.

  32. Darrell M. West, BRAIN GAIN: RETHINKING U.S. IMMIGRATION POLICY, (Washington, D.C., Brookings Institution Press, 2010), 130.

  33. For GDP share figures I have preferred the Commerce Department's data because the Financial Crisis Inquiry Commission's figure excludes mortgage lending and real estate operations which, after the repeal of Glass-Steagall in 1999, are inseparable from other financial services: Kevin Phillips, BAD MONEY: RECKLESS FINANCE, FAILED POLITICS, AND THE GLOBAL CRISIS OF AMERICAN CAPITALISM, (NY, Viking, 2008), 31-32. For corporate profit figures: Financial Crisis Inquiry Commission, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, (NY, Public Affairs, 2011), 64.

  34. Kevin Phillips, BAD MONEY: RECKLESS FINANCE, FAILED POLITICS, AND THE GLOBAL CRISIS OF AMERICAN CAPITALISM, (NY, Viking, 2008), 183-184.

  35. Carmen M. Reinhart and Kenneth S. Rogoff, THIS TIME IS DIFFERENT: EIGHT CENTURIES OF FINANCIAL FOLLY, (NJ, Princeton University Press, 2009), 155-156.

  36. Charles W. Calomiris, BANK DEREGULATION IN HISTORICAL PERSPECTIVE, (NY, Cambridge University Press, 2000), 44.

  37. William R. Cline, THE UNITED STATES AS A DEBTOR NATION, (Washington, D.C.; The Institute for International Economics, Center for Global Development, 2005), 60.

  38. Charles W. Calomiris, BANK DEREGULATION IN HISTORICAL PERSPECTIVE, (NY, Cambridge University Press, 2000), 340.

8

  1. Rexford Guy Tugwell, THE BATTLE FOR DEMOCRACY, (NY, 1935), 213.

  2. "DEADLY DEBATE OVER CRIB BUMPERS: INDUSTRY REPORT BACKS THEM, BUT ADVOCATES INSIST THEY'RE SAFE," by Jayne O'Donnell, USA TODAY, April 25, 2011.

  3. "STORES TRY TO ENSURE SAFE CRIB BUMPERS," by Jayne O'Donnell, USA TODAY, April 25, 2011.

  4. Dominick T. Armentano, ANTI-TRUST AND MONOPOLY: ANATOMY OF A POLICY FAILURE, (CA, The Independent Institute, 1990), 2.

  5. "SEX, DRUG USE AND GRAFT CITED IN INTERIOR DEPARTMENT," by Charlie Savage, posted September 11, 2008. www.nytimes.com.

  6. Timothy P. Carney, OBAMANOMICS: HOW BARACK OBAMA IS BANKRUPTING YOU AND ENRICHING HIS WALL STREET FRIENDS, CORPORATE LOBBYISTS, AND UNION BOSSES, (Washington, D.C., Regnery Publishing, 2009), 183-184.

  7. "TOY STORES STRUGGLE WITH THE COST OF SAFETY: EXPENSIVE LEAD TESTING CAN BE A BURDEN FOR MOM AND POPS," by Jayne O'Donnell, USA TODAY, June 17, 2011.

  8. "THIS SMART MAMA DIDN'T COME TO PLAY: JENNIFER TAGGART LEADS THE WAY IN GETTING THE LEAD OUT," by Liz Szabo, USA TODAY, December 6, 2010. "BLOGGING FOR THE GOOD OF KIDKIND," by Liz Szabo, USA TODAY, December 6, 2010.

  9. "TRIUMPH OF THE SMALL-MINDED BUREAUCRATS: AMERICA IS REGULATING ITSELF TO DEATH," by Joel Hilliker, THE PHILADELPHIA TRUMPET, November-December 2011.

  10. Ibid.

  11. 2005 figure: Ibid. 2008 figure: "GOVERNMENT NEEDS TO GET OUT OF THE WAY OF PEOPLE," by Diane M. Hendricks, editorial, USA TODAY, November 3, 2010.

  12. 2011 World Economic Forum, THE GLOBAL COMPETITIVENESS REPORT 2011-2012, pg. 398. www.weforum.org/documents/GCR11/index.html.

  13. "SALES OF NEW HOMES FELL 33% IN MAY: END OF TAX CREDIT PUTS MARKET INTO A RECORD TAILSPIN," by Stephanie Amour, USA TODAY, June 24, 2010.

  14. Congressional Budget Office (CBO), Economic and Budget Issue Brief, AN OVERVIEW OF FEDERAL SUPPORT FOR HOUSING, www.cbo.gov, November 3, 2009.

  15. "10 TERRIBLE TAX BREAKS: THE INTERNAL REVENUE CODE IS A DISASTER. HERE ARE SOME PLACES TO START THE CLEAN UP," editorial, USA TODAY, May 31, 2011.

  16. Canadian homeownership rate: "IDEAS FROM AFAR: LESSONS FOR AMERICA," "HOUSING FINANCE: CANADA," editorial, USA TODAY, July 1, 2011.

  17. David Boyle, THE LITTLE MONEY BOOK, (NY, Disinformation, 2003), 88.

  18. 2006 and 2010 figures by National Association of REALTORS: eds. Jeremy Eagle et al, THE WORLD ALMANAC AND BOOK OF FACTS 2011, (NY, World Almanac, 2011), 83.

  19. "ARE WE READY TO CUT THE U.S. DEFICIT? RISING ALARM OVER THE GOVERNMENT'S DEBT HAS CREATED A 'WINDOW' FOR MAKING SOME TOUGH CHOICES," by Richard Wolf, USA TODAY, November 29, 2010.

  20. Financial Crisis Inquiry Commission, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, (NY, Public Affairs, 2011), 87.

  21. Average home equity as of early 2011: "AMERICA'S EQUITY IN HOMES NEAR RECORD LOW," from wire reports, USA TODAY, June 10, 2011.

  22. Figures by White House Office of Management and Budget: Eds. John W. Wright et al, THE NEW YORK TIMES 2011 ALMANAC, (NY, Penguin Books, 2010), 162.

  23. The National Commission on Fiscal Responsibility and Reform, THE MOMENT OF TRUTH: FINAL REPORT OF THE NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND REFORM, (Lexington, KY, 2011), 29. www.fiscalcommission.gov.

  24. "FUTURE OF FEDERAL SOLAR PROGRAMS IN DOUBT: INDUSTRY DEALS WITH FEWER SUPPORTERS IN GOP – MAJORITY HOUSE," by Erin Kelly, USA TODAY, June 29, 2011.

  25. The National Commission on Fiscal Responsibility and Reform, THE MOMENT OF TRUTH: FINAL REPORT OF THE NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND REFORM, (Lexington, KY, 2011), 24. www.fiscalcommission.gov.

  26. Financial Crisis Inquiry Commission, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, (NY, Public Affairs, 2011), 309.

  27. "FEDS RETHINK SUBSIDIES FOR HOMEOWNERSHIP: WITH FANNIE, FREDDIE SHAKY, A RESTRUCTURING IS IN THE WORKS," by Paul Wiseman, USA TODAY, August 11, 2010.

  28. "AS ECONOMY SEEKS BALANCE, BUSINESSES HOLD KEY: CONSUMER'S DEBT WOES WEIGH DOWN RECOVERY," by John Waggoner, USA TODAY, August 31, 2010.

  29. Menzie D. Chinn and Jeffry A. Frieden, LOST DECADES: THE MAKING OF AMERICA'S DEBT CRISIS AND THE LONG RECOVERY, (NY, W.W. Norton & Company, 2011), 209.

  30. Financial Crisis Inquiry Commission, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, (NY, Public Affairs, 2011), 381.

  31. "WATCHDOG CRITICIZES AIG RESCUE: SAYS FEDS SHOULD HAVE SOUGHT OTHER OPTIONS FIRST," by Paul Wiseman, USA TODAY, June 10, 2010.

  32. "OBAMA'S ECONOMIC PANEL APPLAUDS GM, CHRYSLER RESURGENCE," by Todd Spangler and Aaron Kessler, USA TODAY, June 2, 2011.

  33. Financial Crisis Inquiry Commission, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, (NY, Public Affairs, 2011), 30.

  34. Nicole Gelinas, AFTER THE FALL: SAVING CAPITALISM FROM WALL STREET – AND WASHINGTON, (NY, Encounter Books, 2011), 44.

  35. Andrew Sorkin, TOO BIG TO FAIL: THE INSIDE STORY OF HOW WALL STREET AND WASHINGTON FOUGHT TO SAVE THE FINANCIAL SYSTEM – AND THEMSELVES, (NY, Penguin Books, 2010), 432.

  36. Jeff Madrick, AGE OF GREED: THE TRIUMPH OF FINANCE AND DECLINE OF AMERICA, 1970 TO THE PRESENT, (NY, Alfred A. Knopf, 2011), 60.

  37. Menzie D. Chinn and Jeffry A. Frieden, LOST DECADES: THE MAKING OF AMERICA'S DEBT CRISIS AND THE LONG RECOVERY, (NY, W.W. Norton & Company, 2011), 209.

  38. "U.S. MEXICO SIGN TRUCKING AGREEMENT," USA TODAY, July 7, 2011. "MEXICAN TRUCKS TO HAUL FREIGHT ON U.S. ROADS: CROSS-BORDER AGREEMENT RAISES FEARS OF SAFETY, JOB LOSSES, DRUG TRAFFICKING," by Larry Copeland, USA TODAY, August 3, 2011.

  39. "THE CHEAPEST THING GOING IS GONE: AFTER ENDURING A DECADE OF CRITICISM FOR ITS WEAKNESS, CHINA'S CURRENCY NOW LOOKS UNCOMFORTABLY STRONG," THE ECONOMIST, June 15, 2013.

  40. "'MADE IN CHINA' BENEFITS U.S.: DOMESTIC FIRMS GET 55 CENTS OF A DOLLAR SPENT ON CHINA-MADE ITEMS," by Kathy Chu, USA TODAY, August 25, 2011.

  41. Ibid. Martin Jacques, WHEN CHINA RULES THE WORLD: THE END OF THE WESTERN WORLD AND THE BIRTH OF A NEW GLOBAL ORDER, (NY, Penguin Press, 2009), 159.

  42. Mexico's importance to the U.S.: "MEXICAN TRUCKS TO HAUL FREIGHT ON U.S. ROADS: CROSS-BORDER AGREEMENT RAISES FEARS OF SAFETY, JOB LOSSES, DRUG TRAFFICKING," by Larry Copeland, USA TODAY, August 3, 2011.

  43. "'MADE IN CHINA' BENEFITS U.S.: DOMESTIC FIRMS GET 55 CENTS OF A DOLLAR SPENT ON CHINA-MADE ITEMS," by Kathy Chu, USA TODAY, August 25, 2011.

  44. Menzie D. Chinn and Jeffry A. Frieden, LOST DECADES: THE MAKING OF AMERICA'S DEBT CRISIS AND THE LONG RECOVERY, (NY, W.W. Norton & Company, 2011), 194.

9

  1. Thomas L. Friedman and Michael Mandelbaum, THAT USED TO BE US: HOW AMERICA FELL BEHIND IN THE WORLD THAT IT INVENTED AND HOW WE CAN COME BACK, (NY; Farrar, Straus & Giroux; 2011), 226.

  2. Percentage of foreign born in 1920: eds. Jeremy Eagle et al, THE WORLD ALMANAC AND BOOK OF FACTS 2011, (NY, World Almanac, 2011), 614.

  3. Darrell M. West, BRAIN GAIN: RETHINKING U.S. IMMIGRATION POLICY, (Washington, D.C., Brookings Institution Press, 2010), 3, 28.

  4. Ibid, 10.

  5. Steven Greenhouse, THE BIG SQUEEZE: TOUGH TIMES FOR THE AMERICAN WORKER, (NY, Alfred A. Knopf, 2008), 226.

  6. "COLLEGE STUDY ABROAD SUFFERS A DIP: STUDY: GLOBAL ECONOMIC DECLINE AND H1N1 WERE AMONG FACTORS," by Mary Beth Marklein, USA TODAY, November 15, 2010.

  7. "CNN PRESENTS: DON'T FAIL ME: EDUCATION IN AMERICA," A SOLEDAD O'BRIEN REPORT, CNN, May 15, 2011.

  8. Darrell M. West, BRAIN GAIN: RETHINKING U.S. IMMIGRATION POLICY, (Washington, D.C., Brookings Institution Press, 2010), 15.

  9. "FOREIGNERS ARE TAKING THEIR TECH TALENTS BACK HOME: SILICON VALLEY'S LOSS IS BRAIN GAIN FOR INDIA, CHINA," by Jon Swartz, USA TODAY, May 11, 2011.

  10. Thomas L. Friedman and Michael Mandelbaum, THAT USED TO BE US: HOW AMERICA FELL BEHIND IN THE WORLD THAT IT INVENTED AND HOW WE CAN COME BACK, (NY; Farrar, Straus & Giroux; 2011), 227.

  11. Darrell M. West, BRAIN GAIN: RETHINKING U.S. IMMIGRATION POLICY, (Washington, D.C., Brookings Institution Press, 2010), 3, 12.

  12. "FEWER ILLEGAL IMMIGRANTS ENTERING USA," by Haya El Nasser, USA TODAY, September 2, 2010.

  13. Darrell M. West, BRAIN GAIN: RETHINKING U.S. IMMIGRATION POLICY, (Washington, D.C., Brookings Institution Press, 2010), 138.

  14. Ibid, 120.

  15. Ibid, 11-12.

  16. Ted C. Fishman, SHOCK OF GRAY: THE AGING OF THE WORLD'S POPULATION AND HOW IT PITS YOUNG AGAINST OLD, CHILD AGAINST PARENT, WORKER AGAINST BOSS, COMPANY AGAINST RIVAL, AND NATION AGAINST NATION, (NY, Scribner, 2010), 216.

  17. Andrew N. Liveris, MAKE IT IN AMERICA: THE CASE FOR RE-INVENTING THE ECONOMY, (NJ, John Wiley & Sons, 2011), 13.

  18. "MANUFACTURING A STAR OF AN UPBEAT JOBS REPORT: U.S. SAW ALL EMPLOYERS ADD 243,000 JOBS IN JANUARY, REPORT SAYS," by Paul Davidson and Tim Mullaney, USA TODAY, February 6, 2012.

  19. "PHILLIPINES MAY ANSWER CALL: NATION PASSES INDIA IN CALL-CENTER JOBS," by Kathy Chu, USA TODAY, January 10, 2011.

  20. James McGregor, ONE BILLION CUSTOMERS: LESSONS FROM THE FRONT LINES OF DOING BUSINESS IN CHINA, (NY, Wall Street Journal Books, 2005), 261.

  21. "PAIN FROM FREE TRADE SPURS SECOND THOUGHTS," by David Wessel and Bob Davis, THE WALL STREET JOURNAL, March 28, 2007.

  22. "7 MYTHS THAT HAVE CLOUDED THE IMMIGRATION DEBATE," by Darrel M. West, editorial, USA TODAY, September 1, 2010.

  23. David Heenan, FLIGHT CAPITAL: THE ALARMING EXODUS OF AMERICA'S BEST AND BRIGHTEST, (CA, Davies Black Publishing, 2005), 3.

  24. "U.S. COLLEGES PUSH EFFORTS TO DRAW FOREIGN STUDENTS: IN JAKARTA, SCHOOLS VIE FOR A PLACE IN A LUCRATIVE MARKET," by Mary Beth Marklein, USA TODAY, June 23, 2011.

  25. "COLLEGE STUDY ABROAD SUFFERS A DIP: STUDY: GLOBAL ECONOMIC DECLINE AND H1N1 WERE AMONG FACTORS," by Mary Beth Marklein, USA TODAY, November 15, 2010.

  26. Growth in border agents and officers: "ON U.S. SIDE CITIES ARE HAVENS FROM DRUG WARS: ANALYSIS: 'SPILLOVER VIOLENCE' IS EXAGGERATED," by Alan Gomez, Jack Gillum and Kevin Johnson, USA TODAY, July 15, 2011.

  27. "NEW LAWS LOOK TO MAKE LIFE HARDER: STATES LESSEN APPEAL TO ILLEGAL IMMIGRANTS," by Alan Gomez, USA TODAY, December 21, 2011.

  28. "ALABAMA'S CRACKDOWN NETS MORE THAN ILLEGAL IMMIGRANTS," editorial, USA TODAY, December 5, 2011.

  29. "FEWER ILLEGAL IMMIGRANTS ENTERING USA," by Haya El Nasser, USA TODAY, September 2, 2010.

  30. "ANALYSIS: DENIALS OF WORK VISAS TO U.S. RISE: BUSINESS LEADERS SAY IT HURTS COMPANIES," by Kevin Johnson, USA TODAY, February 10, 2012.

  31. "7 MYTHS THAT HAVE CLOUDED THE IMMIGRATION DEBATE," by Darrell M. West, editorial, USA TODAY, September 1, 2010.

  32. "FOREIGNERS ARE TAKING THEIR TECH TALENTS BACK HOME: SILICON VALLEY'S LOSS IS BRAIN GAIN FOR CHINA, INDIA," by Jon Swartz, USA TODAY, May 11, 2011.

  33. "VIETNAM: A NEW LAND OF OPPORTUNITY: ECONOMIC BOOM LURES SOME WHO LEFT IN THE 1970s," by Kathy Chu, USA TODAY, August 18, 2010.

  34. David Heenan, FLIGHT CAPITAL: THE ALARMING EXODUS OF AMERICA'S BEST AND BRIGHTEST, (CA, Davies Black Publishing, 2005), 8.

  35. "PORTUGAL URGING CITIZENS TO LEAVE TO FIND WORK: FORMER COLONIES SUCH AS BRAZIL, ANGOLA OFFER BETTER OPPORTUNITIES," by Mariana Barbosa, Catarina Sousa and Naomi Westland, USA TODAY, February 22, 2012.

  36. "FOREIGN FIRMS TROLL FOR TECH GRADS: U.S. SUFFERS BRAIN DRAIN AS TALENT GOES OVERSEAS," by Jon Swartz, USA TODAY, November 17, 2011.

  37. "SCIENCE TECH JOBS PAY MORE, LEAD IN GROWTH," by Paul Davidson, USA TODAY, July 14, 2011.

  38. "DREAM ACT PITCHED AS NEEDED ECONOMIC PATCH: CHILDREN OF ILLEGALS CAN CONTRIBUTE, DEMS SAY," by Alan Gomez, USA TODAY, June 28, 2011.

  39. "DON'T LOOK NOW BUT MEXICAN MIGRATION IS SLOWING DRAMATICALLY," editorial, USA TODAY, July 15, 2011.

  40. "WHAT WILL IT TAKE TO BRING THE JOBLESS RATE UNDER 8%?" by Tim Mullaney, USA TODAY, March 7, 2012.

  41. Eds. John W. Wright et al, THE NEW YORK TIMES 2011 ALMANAC, (NY, Penguin Books, 2010), 484, 487.

  42. "CENSUS DATA OPEN VIEW ON 1940: GOVERNMENT ALLOWS PUBLIC ACCESS TO RECORDS FROM TIME TO TIME THAT HAS PARALLELS TO TODAY," by Haya El Nasser, USA TODAY, March 30, 2012.

  43. Eds. Alice M. Rivlin and Isabel Sawhill, RESTORING FISCAL SANITY 2005: MEETING THE LONG-RUN CHALLENGE, (Washington, D.C., Brookings Institution Press, 2005), 31.

  44. Andrew N. Liveris, MAKE IT IN AMERICA: THE CASE FOR REINVENTING THE ECONOMY, (NJ, John Wiley & Sons Inc., 2011), 49.

  45. "FOREIGN FIRMS TROLL FOR TECH GRADS: U.S. SUFFERS BRAIN DRAIN AS TALENT GOES OVERSEAS," by Jon Swartz, USA TODAY, November 17, 2011.

10

  1. Loren J. Samons II, WHAT'S WRONG WITH DEMOCRACY? FROM ATHENIAN PRACTICE TO AMERICAN WORSHIP, (CA, University of California Press, 2004), 6.

  2. David Cay Johnston, FREE LUNCH: HOW THE WEALTHIEST AMERICANS ENRICH THEMSELVES AT GOVERNMENT EXPENSE (AND STICK YOU WITH THE BILL), (NY, Portfolio, 2007), 25.

  3. Martin Jacques, WHEN CHINA RULES THE WORLD: THE END OF THE WESTERN WORLD AND THE BIRTH OF A NEW GLOBAL ORDER, (NY, Penguin Press, 2009), 212.

  4. "61 BILLS: CONGRESS IS ON PACE TO MAKE HISTORY WITH THE LEAST PRODUCTIVE LEGISLATIVE YEAR IN THE POST-WORLD WAR II ERA," by Susan Davis, USA TODAY, August 15, 2012.

  5. Thomas J. DiLorenzo, HOW CAPITALISM SAVED AMERICA: THE UNTOLD HISTORY OF OUR COUNTRY, FROM THE PILGRIMS TO THE PRESENT, (NY, Three Rivers Press, 2004), 73.

  6. "MUST WE ALWAYS HAVE PARTISAN PRESIDENTS? BUSH AND OBAMA BOTH TRIED, OR SAID THEY TRIED, TO CHANGE WASHINGTON AND BOTH FAILED MISERABLY. BUT WHY?" by Cal Thomas and Bob Beckel, editorial, USA TODAY, February 9, 2012.

  7. "TRIUMPH OF THE SMALL-MINDED BUREAUCRATS: AMERICA IS REGULATING ITSELF TO DEATH," by Joel Hilliker, THE PHILADEPHIA TRUMPET, November-December 2011.

  8. Philip K. Howard, THE COLLAPSE OF THE COMMON GOOD: HOW AMERICA'S LAWSUIT CULTURE UNDERMINES OUR FREEDOM, (NY, Ballantine Publishing, 2001), 104.

  9. Joel Miller, SIZE MATTERS: HOW BIG GOVERNMENT PUTS THE SQUEEZE ON AMERICA'S FAMILIES, FINANCES AND FREEDOM, (AND LIMITS THE PURSUIT OF HAPPINESS), (TN, Nelson Current, 2006), 36.

  10. "LOBBYISTS WHO AREN'T LOBBYISTS," editorial, USA TODAY, March 9, 2012.

  11. CQ Moneyline.

  12. "CONGRESS TRAVEL JUNKETS CREEP UP: NON-PROFITS GET AROUND ETHICS RULES," by Fredreka Schouten, USA TODAY, November 2, 2011.

  13. "SCANNER MAKERS BOOSTED LOBBYING: CASH AIMED AT INFLUENCE ON CAPITAL HILL DOUBLED," by Fredreka Schouten, USA TODAY, November 23, 2010.

  14. Financial Crisis Inquiry Commission, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, (NY, Public Affairs, 2011), 265.

  15. "FCC COMMISSIONER MEREDITH BAKER LEAVING FCC FOR NBC-UNIVERSAL," by Paul A. Cicelski, posted May 12, 2011, www.commlawcenter.com.

  16. Daniel DiSalvo, GOVERNMENT UNIONS AND THE BANKRUPTING OF AMERICA, (NY, Encounter Books, 2011), 8.

  17. Burton Folsom Jr., NEW DEAL OR RAW DEAL? HOW FDR'S ECONOMIC LEGACY HAS DAMAGED AMERICA, (NY, Threshold Editions, 2008), 209.

  18. Steven Greenhouse, THE BIG SQUEEZE: TOUGH TIMES FOR THE AMERICAN WORKER, (NY, Alfred A. Knopf, 2008), 211.

  19. "TRIO OF TRADE DEALS PASSED," by Tim Mullaney, USA TODAY, October 13, 2011.

  20. Daniel DiSalvo, GOVERNMENT UNIONS AND THE BANKRUPTING OF AMERICA, (NY, Encounter Books, 2011), 18.

  21. "BOEING'S LABOR PAINS THREATEN $1 BILLION DREAMLINER INVESTMENT," editorial, USA TODAY, June 24, 2011.

  22. Paul Ingrassia, CRASH COURSE: THE AMERICAN AUTOMOBILE INDUSTRY'S ROAD TO BANKRUPTCY AND BAILOUT – AND BEYOND, (NY, Random House, 2010), 8, 96.

  23. Ibid, 200.

  24. Roger Lowenstein, WHILE AMERICA AGED: HOW PENSION DEBTS RUINED GENERAL MOTORS, STOPPED THE NYC SUBWAYS, BANKRUPTED SAN DIEGO, AND LOOM AS THE NEXT FINANCIAL CRISIS, (NY, Penguin Press, 2008), 10.

  25. Paul Ingrassia, CRASH COURSE: THE AMERICAN AUTOMOBILE INDUSTRY'S ROAD TO BANKRUPTCY AND BAILOUT – AND BEYOND, (NY, Random House, 2010), 250, 254-255.

  26. Ibid, 268.

  27. Steven Greenhouse, THE BIG SQUEEZE: TOUGH TIMES FOR THE AMERICAN WORKER, (NY, Alfred A. Knopf, 2008), 43.

  28. Daniel DiSalvo, GOVERNMENT UNIONS AND THE BANKRUPTING OF AMERICA, (NY, Encounter Books, 2011), 8.

  29. Ibid, 10.

  30. "GOVERNMENT JOBS: NICE IF YOU CAN GET'EM," by James Sherk, USA TODAY, July 7, 2010.

  31. "DEATH MORE LIKELY THAN LOSING FEDERAL JOB: GOVERNMENT AGENCIES RARELY FIRE OR LAY OFF EMPLOYEES," by Dennis Cauchon, USA TODAY, July 20, 2011.

  32. "IT PAYS TO WORK FOR UNCLE SAM, DATA SHOW," by Dennis Cauchon, USA TODAY, March 5, 2010.

  33. "FEDERAL WORKERS STARTING AT MUCH HIGHER PAY THAN IN PAST," by Dennis Cauchon, USA TODAY, December 27, 2011.

  34. "GOVERNMENT JOBS: NICE IF YOU CAN GET'EM," by James Sherk, USA TODAY, July 7, 2010.

  35. "IN WIS., PRIVATE SECTOR PAYS LESS: PUBLIC WORKERS EARN MORE IN 41 STATES," by Dennis Cauchon, USA TODAY, March 1, 2011. Average annual compensation: "BENEFITS ARE HARD-EARNED, SAY MILITARY RETIREES: THEY CITE YEARS OF SACRIFICE, UPROOTED FAMILIES," by Dennis Cauchon, USA TODAY, September 29, 2011.

  36. Roger Lowenstein, WHILE AMERICA AGED: HOW PENSION DEBTS RUINED GENERAL MOTORS, STOPPED THE NYC SUBWAYS, BANKRUPTED SAN DIEGO, AND LOOM AS THE NEXT FINANCIAL CRISIS, (NY, Penguin Press, 2008), 226.

  37. www.usgovernmentspending.com.

  38. "FEDERAL BENEFITS, PENSIONS EXPLODE: RETIREMENT PLANS ALMOST AS COSTLY AS SOCIAL SECURITY," by Dennis Cauchon, USA TODAY, September 29, 2011.

  39. Don Corace, GOVERNMENT PIRATES: THE ASSAULT ON PRIVATE PROPERTY RIGHTS – AND HOW WE CAN FIGHT IT, (NY, HarperCollins, 2008), 15-17.

  40. Ibid, 1.

  41. Ibid, 19.

11

  1. "IRISH BAILOUTS LEAVE MANY TAXPAYERS SHOCKED: PLAN DERIDED AS 'RANSOM NOTE,'" by the Associated Press, USA TODAY, November 30, 2010.

  2. Editorial page, USA TODAY, February 22, 2012.

  3. Greg Behrman, THE MOST NOBLE ADVENTURE: THE MARSHALL PLAN AND THE RECONSTRUCTION OF POST-WAR EUROPE, (London, Aurum Press, 2007), 327.

  4. Ibid, 312, 314.

  5. Ibid, 313.

  6. Ibid, 144.

  7. Ibid, 124-125.

  8. Ibid, 315.

  9. Ibid.

  10. European share of American exports: "FOR U.S., EUROPE DEBT STILL A THREAT: BANKING TO POLITICS, A LOOK AT 5 SOFT SPOTS," by Richard Wolf, USA TODAY, October 28, 2011.

  11. Greg Behrman, THE MOST NOBLE ADVENTURE: THE MARSHALL PLAN AND THE RECONSTRUCTION OF POST-WAR EUROPE, (London, Aurum Press, 2007), 315-316.

  12. Deborah Brautigam, THE DRAGON'S GIFT: THE REAL STORY OF CHINA IN AFRICA, (NY, Oxford University Press, 2009), 28.

  13. Ha-Joon Chang, BAD SAMARITANS: THE MYTH OF FREE TRADE AND THE SECRET HISTORY OF CAPITALISM, (NY, Bloomsbury Press, 2008), 87.

  14. Ibid, 87-88.

  15. Ibid, 49.

  16. Ibid, 63.

  17. Dambisa Moyo, DEAD AID: WHY AID IS NOT WORKING AND WHY THERE IS A BETTER WAY FOR AFRICA, (Vancouver, Canada; Douglas & McIntyre; 2009), 28.

  18. Richard Dowden, AFRICA: ALTERED STATES, ORDINARY MIRACLES, (NY, Public Affairs, 2009), 268.

  19. Ibid, 264-265.

  20. Ha-Joon Chang, 23 THINGS THEY DON'T TELL YOU ABOUT CAPITALISM, (NY, Bloomsbury Press, 2010), 117-118.

  21. Dambisa Moyo, DEAD AID: WHY AID IS NOT WORKING AND WHY THERE IS A BETTER WAY FOR AFRICA, (Vancouver, Canada; Douglas & McIntyre; 2009), 36.

  22. Richard Dowden, AFRICA: ALTERED STATES, ORDINARY MIRACLES, (NY, Public Affairs, 2009), 486.

  23. Deborah Brautigam, THE DRAGON'S GIFT: THE REAL STORY OF CHINA IN AFRICA, (NY, Oxford University Press, 2009), 97.

  24. Martin Jacques, WHEN CHINA RULES THE WORLD: THE END OF THE WESTERN WORLD AND THE BIRTH OF A NEW GLOBAL ORDER, (NY, Penguin Press, 2009), 321.

  25. Deborah Brautigam, THE DRAGON'S GIFT: THE REAL STORY OF CHINA IN AFRICA, (NY, Oxford University Press, 2009), 180-181.

  26. Richard Dowden, AFRICA: ALTERED STATES, ORDINARY MIRACLES, (NY, Public Affairs, 2009), 492.

  27. Deborah Brautigam, THE DRAGON'S GIFT: THE REAL STORY OF CHINA IN AFRICA, (NY, Oxford University Press, 2009), 127-130.

  28. Ibid, 95-96.

  29. Ibid, 49.

  30. "A HOPEFUL CONTINENT: AFRICAN LIVES HAVE ALREADY GREATLY IMPROVED OVER THE PAST DECADE, SAYS OLIVER AUGUST. THE NEXT TEN YEARS WILL BE EVEN BETTER," THE ECONOMIST, March 2, 2013.

  31. "JOBS AT TOP OF LATIN AMERICA AGENDA," by President Barack Obama, editorial, USA TODAY, March 18, 2011.

  32. PARSNIPS UNBUTTERED: FLOWERY RHETORIC FAILS TO HIDE DIFFICULTIES IN THE BILATERAL RELATIONSHIP," THE ECONOMIST, May 25, 2013.

  33. "DISCOUNT AIRLINES CHANGE ASIA TRAVEL: DEMAND TAKES OFF AS MIDDLE CLASS GROWS," by Kathy Chu, USA TODAY, November 28, 2011.

  34. Dambisa Moyo, DEAD AID: WHY AID IS NOT WORKING AND WHY THERE IS A BETTER WAY FOR AFRICA, (Vancouver, Canada; Douglas & McIntyre; 2009), 28.

  35. Deborah Brautigam, THE DRAGON'S GIFT: THE REAL STORY OF CHINA IN AFRICA, (NY, Oxford University Press, 2009), 165.

  36. Ibid, 84.

  37. Greg Behrman, THE MOST NOBLE ADVENTURE: THE MARSHALL PLAN AND THE RECONSTRUCTION OF POST-WAR EUROPE, (London, Aurum Press, 2007), 314-315.

  38. Martin Jacques, WHEN CHINA RULES THE WORLD: THE END OF THE WESTERN WORLD AND THE BIRTH OF A NEW GLOBAL ORDER, (NY, Penguin Press, 2009), 383.

  39. "BACK IN THE 'SMART POWER' GAME," by Lewis M. Simons, editorial, USA TODAY, April 6, 2011

  40. "TRADE WITH THE WORLD," THE ECONOMIST, February 16, 2013.

  41. "JOBS AT TOP OF LATIN AMERICA AGENDA," by President Barack Obama, editorial, USA TODAY, March 18, 2011.

  42. Based on GDP and export figures from: Central Intelligence Agency, THE CIA WORLD FACTBOOK 2011, (NY, Skyhorse Publishing, 2010).

12

  1. Eds. C. Alan Joyce et al, THE WORLD ALMANAC AND BOOK OF FACTS 2009, (NY, World Almanac, 2009), 80.

  2. Ted C. Fishman, CHINA INC.: HOW THE RISE OF THE NEXT SUPERPOWER CHALLENGES AMERICA AND THE WORLD, (NY, Scribner, 2005), 74.

  3. Nandan Nilekani, IMAGINING INDIA: THE IDEA OF A RENEWED NATION, (NY, Penguin Press, 2009), 309.

  4. Zachary Karabell, SUPERFUSION: HOW CHINA AND AMERICA BECAME ONE ECONOMY AND WHY THE WORLD'S PROSPERITY DEPENDS ON IT, (NY, Simon & Schuster, 2009), 205.

  5. Martin Jacques, WHEN CHINA RULES THE WORLD: THE END OF THE WESTERN WORLD AND THE BIRTH OF A NEW GLOBAL ORDER, (NY, Penguin Press, 2009), 187.

  6. "CHINA SLOWS HIGH-SPEED RAIL BOOM: EXPANSION CUT BACK AMID CONCERNS OVER VALUE, SAFETY," by Calum MacLeod, USA TODAY, June 1, 2011.

  7. "WILL CHINA BOUNCE BACK AS A GROWTH MARKET? FUNDS HAVE TANKED AS NATION TAPS THE BRAKES TO TAME SOARING PRICES," by John Waggoner, USA TODAY, November 14, 2011.

  8. "PROPOSED BUDGET CUTS TARGET SCIENCE: COULD LESS RESEARCH ENDANGER THE USA'S FUTURE?" by Dan Vergano, USA TODAY, March 2, 2011.

  9. Martin Jacques, WHEN CHINA RULES THE WORLD: THE END OF THE WESTERN WORLD AND THE BIRTH OF A NEW GLOBAL ORDER, (NY, Penguin Press, 2009), 175.

  10. Eds. Jeremy Eagle et al, THE WORLD ALMANAC BOOK OF FACTS 2011, (NY, World Almanac, 2011), 42.

  11. Thomas L. Friedman and Michael Mandelbaum, THAT USED TO BE US: HOW AMERICA FELL BEHIND IN THE WORLD IT INVENTED AND HOW WE CAN COME BACK, (NY; Farrar, Straus & Giroux; 2011), 106.

  12. "SHADOWS LENGTHEN: CHINESE CREDIT RISES, CHINA'S CREDIT RATING FALLS," THE ECONOMIST, April 13, 2013.

  13. "WEN SAYS CHINA HAS CONFIDENCE IN EUROPE," USA TODAY, June 27, 2011.

  14. Martin Jacques, WHEN CHINA RULES THE WORLD: THE END OF THE WESTERN WORLD AND THE BIRTH OF A NEW GLOBAL ORDER, (NY, Penguin Press, 2009), 162.

  15. Ted C. Fishman, SHOCK OF GRAY: THE AGING OF THE WORLD'S POPULATION AND HOW IT PITS YOUNG AGAINST OLD, CHILD AGAINST PARENT, WORKER AGAINST BOSS, COMPANY AGAINST RIVAL, AND NATION AGAINST NATION, (NY, Scribner, 2010), 297.

  16. "CHINA TOO CONNECTED TO IV MEDS: THE COUNTRY'S THREE YEAR OVERHAUL OF ITS HEALTH SYSTEM TRIES TO TACKLE OVERUSE OF INTRAVENOUS DRUGS, BRIBES TO DOCTORS AND ACCESS TO CARE FOR THOSE IN REMOTE AREAS," by Calum MacLeod, USA TODAY, February 18, 2011.

  17. Martin Jacques, WHEN CHINA RULES THE WORLD: THE END OF THE WESTERN WORLD AND THE BIRTH OF A NEW GLOBAL ORDER, (NY, Penguin Press, 2009), 159.

  18. "CHINESE INTERNET IPOs TAKE WING: INVESTORS CAN SEE GROWTH POTENTIAL IN THAT MARKET," by Matt Krantz, USA TODAY, December 9, 2010.

  19. "MORE U.S. COMPANIES EXPAND IN CHINA," by Kathy Chu, USA TODAY, September 12, 2011.

  20. "MOST AMERICANS RATE CHINA'S ECONOMY FIRST: ACTUALLY THE USA IS, BY FAR, IN NO. 1 SPOT," by Kathy Chu, USA TODAY, February 14, 2011.

  21. Ted C. Fishman, CHINA INC.: HOW THE RISE OF THE NEXT SUPERPOWER CHALLENGES AMERICA AND THE WORLD, (NY, Scribner, 2005), 9-10.

  22. Dominic Wilson and Roopa Purushothaman, DREAMING WITH THE BRICs: THE PATH TO 2050," Global Economics Paper No. 99, GOLDMAN SACHS, October 2003.

  23. Dominic Wilson and Anna Stupnytska, THE N-11: MORE THAN AN ACRONYM, Global Economics Paper No. 153, GOLDMAN SACHS, March 2007.

  24. GDP figures: "THE DRAGON TAKES WING: NEW DATA SUGGEST THAT THE CHINESE ECONOMY IS BIGGER THAN PREVIOUSLY THOUGHT," THE ECONOMIST, May 3, 2014. Wealth figures are based on a recent survey by Gan Li of Texas A&M University along with Southwestern University in Chengdu, the capital of China's Sichuan province. The survey, known as the China Household Finance Survey (CHFS), was modelled on the Federal Reserve's Survey of Consumer Finances, "TO EACH NOT ACCORDING TO HIS NEEDS: A NEW SURVEY ILLUMINATES THE EXTENT OF CHINESE INCOME INEQUALITY," THE ECONOMIST, December 15, 2012.

  25. Nandan Nilekani, IMAGINING INDIA: THE IDEA OF A RENEWED NATION, (NY, Penguin Press, 2009), 71.

  26. Past growth figures: Central Intelligence Agency, THE CIA WORLD FACTBOOK 2011, (NY, Skyhorse Publishing, 2010), 303. Future projections: Nandan Nilekani, IMAGINING INDIA: THE IDEA OF A RENEWED NATION, (NY, Penguin Press, 2009), 49.

  27. Dietmar Rothermund, INDIA: RISE OF AN ASIAN GIANT, (New Haven, Yale University Press, 2008), 177.

  28. Nandan Nilekani, IMAGINING INDIA: THE IDEA OF A RENEWED NATION, (NY, Penguin Press, 2009), 72.

  29. Dominic Wilson and Anna Stupnytska, THE N-11: MORE THAN AN ACRONYM, Global Economics Paper No. 153, GOLDMAN SACHS, March 2007.

  30. "JOBS AT TOP OF LATIN AMERICA AGENDA," by President Barack Obama, editorial, USA TODAY, March 18, 2011.

  31. Central Intelligence Agency, THE CIA WORLD FACTBOOK 2011, (NY, Skyhorse Publishing, 2010), 91.

  32. "PRECIOUS RELIC: GOLD REMAINS POPULAR, DESPITE DOUBTS OF ECONOMISTS," Buttonwood, THE ECONOMIST, October 13, 2012.

  33. "OUT OF FAVOR: THE SELL-OFF IN EMERGING MARKETS SHOULD NOT OBSCURE THEIR ATTRACTIONS," Buttonwood, THE ECONOMIST, June 8, 2013.

  34. Eds. John W. Wright et al, THE NEW YORK TIMES 2011 ALMANAC, (NY, Penguin Books, 2010), 487.

  35. International Telecommunications Union numbers for cell phone and land lines: USA TODAY SNAPSHOTS by Rachel Huggins and Paul Trap, USA TODAY, November 29, 2011.

  36. Kevin Phillips, BAD MONEY: RECKLESS FINANCE, FAILED POLITICS, AND THE GLOBAL CRISIS OF AMERICAN CAPITALISM, (NY, Viking, 2008), 31.

  37. "MANUFACTURING GAINS SLOW: HIGHER GAS PRICES MAY HAVE CHOKED CONSUMER SPENDING," from Bloomberg News, USA TODAY, March 2, 2012.

  38. "GIVING CHINA THE BUSINESS: WASHINGTON TALKS TOUGH, BUT STATES AND CITIES SEE A FRIEND," by Ted C. Fishman, editorial, USA TODAY, January 26, 2011.

  39. "EMERGING MARKETS LURE INVESTORS DESPITE VOLATILITY: SOME ANTICIPATE HIGHER PROSPECTS FOR GROWTH," by Kathy Chu, USA TODAY, August 16, 2010.

  40. "WHY THE JOBS ARE GOING OVER THERE: MULTINATIONAL COMPANIES ARE ESCHEWING THE OLDER, MORE COSTLY U.S. WORKFORCE. WHAT TO DO?" by Ted C. Fishman, editorial, USA TODAY, May 18, 2011.

  41. Robert J. Samuelson, "THE GREAT INFLATION AND ITS AFTERMATH: THE PAST AND FUTURE OF AMERICAN AFFLUENCE," (NY, Random House, 2008), 209.

  42. "U.S. LIMPS IN JOB CREATION: POST RECESSION RATE IS THE LOWEST SINCE THE 1930s," by Dennis Cauchon, USA TODAY, May 20, 2011.

  43. "DISCOUNT AIRLINES CHANGE ASIA TRAVEL: DEMAND TAKES OFF AS MIDDLE CLASS GROWS," by Kathy Chu, USA TODAY, November 28, 2011. "2000s HARDEST ON MIDDLE CLASS: 'LOST DECADE' WORST SINCE WORLD WAR II," by Tim Mullaney, USA TODAY, August 23, 2012.

  44. www.shadowstats.com.

  45. Ibid.

  46. "INFLATION? NOT WITH A 9% JOBLESS RATE: DESPITE RISING FUEL AND FOOD COSTS, THE ECONOMY IS STILL TOO SLUGGISH," by John Waggoner, USA TODAY, June 9, 2011.

  47. Ted C. Fishman, SHOCK OF GRAY: THE AGING OF THE WORLD'S POPULATION AND HOW IT PITS YOUNG AGAINST OLD, CHILD AGAINST PARENT, WORKER AGAINST BOSS, COMPANY AGAINST RIVAL, AND NATION AGAINST NATION, (NY, Scribner, 2010), 229.

  48. "CHANGES IN GDP MEASUREMENT CREATE GROWTH OUT OF THIN AIR," by Betsi Fores, www.dailycaller.com, posted April 30, 2013. "U.S. ECONOMY TAKES OLYMPIC LEAP TO ADD 3% TO GDP," by Robert Harding, THE FINANCIAL TIMES, July 28, 2013.

  49. "DEFINING THE STATE: THE ROLE OF GOVERNMENT INTERVENTION IN THE ECONOMY IS PERHAPS THE STARKEST DIFFERENCE BETWEEN THE CANDIDATES," THE ECONOMIST, October 6, 2012.

  50. Ted C. Fishman, SHOCK OF GRAY: THE AGING OF THE WORLD'S POPULATION AND HOW IT PITS YOUNG AGAINST OLD, CHILD AGAINST PARENT, WORKER AGAINST BOSS, COMPANY AGAINST RIVAL, AND NATION AGAINST NATION, (NY, Scribner, 2010) 297.

  51. "CHINA MAY RELAX ONE-CHILD RULE: MORE KIDS NEEDED TO WORK, CARE FOR AGING POPULATION," by Calum MacLeod, USA TODAY, September 9, 2010.

  52. 2011 World Economic Forum, THE GLOBAL COMPETITIVENESS REPORT 2011-2012, pg. 398, www.weforum.org/documents/GCR11/index.html.

  53. "IF I RULED THE WORLD: BEING IN CHARGE IS HARD WORK, BUT IT HAS ITS PERKS," THE ECONOMIST, November 23, 2013.

  54. "ROME'S BAD SPELL: ITALY'S ELECTION MAY BE A DEFEAT FOR AUSTERITY FOR REFORM, BUT ITS PROBLEMS WILL NOT GO AWAY," Charlemagne, THE ECONOMIST, March 2, 2013.

Bibliography

  * 2011 World Economic Forum, THE GLOBAL COMPETITIVENESS REPORT 2011-2012. www.weforum.org/documents/GCR11/index.html.

  * "A HOPEFUL CONTINENT: AFRICAN LIVES HAVE ALREADY GREATLY IMPROVED OVER THE PAST DECADE, SAYS OLIVER AUGUST. THE NEXT TEN YEARS WILL BE EVEN BETTER," THE ECONOMIST, March 2, 2013.

  * "A NEW ATLANTIC ALLIANCE: BRAZILIAN COMPANIES ARE HEADING FOR AFRICA, LADEN WITH CAPITAL AND EXPERTISE," THE ECONOMIST, November 10, 2012.

  * "BAD MEDICINE: CUTTING AMERICAN HEALTH RESEARCH WILL HARM THE WORLD," THE ECONOMIST, March 2, 2013.

  * "BUFFET DISLIKES THIS [SIC] DOLLAR INVESTMENT," USA TODAY, March 28, 2011.

  * "CNN PRESENTS: DON'T FAIL ME: EDUCATION IN AMERICA," A SOLEDAD O'BRIEN REPORT, CNN, May 15, 2011.

  * "DEFINING THE STATE: THE ROLE OF GOVERNMENT INTERVENTION IN THE ECONOMY IS PERHAPS THE STARKEST DIFFERENCE BETWEEN THE CANDIDATES," THE ECONOMIST, October 6, 2012.

  * "DITCHING THE DOLLAR," THE PHILADELPHIA TRUMPET, March 2012.

  * "DOLLAR 'A PRODUCT OF THE PAST,'" THE PHILADELPHIA TRUMPET, April 2011.

  * "DUMPING U.S. A DOLLAR AT A TIME," THE PHILADELPHIA TRUMPET, August 2011.

  * "IF I RULED THE WORLD: BEING IN CHARGE IS HARD WORK, BUT IT HAS ITS PERKS," THE ECONOMIST, November 23, 2013.

  * "MAKERS AND TAKERS: AMERICA'S GOVERNMENT REDISTRIBUTES, BUT NOT WELL," THE ECONOMIST, October 13, 2012.

  * "NO LONGER THE PLACE TO BE: DATA FROM THE ECONOMIST'S LATEST RANKING OF MBA PROGRAMMES SHOW EUROPE'S CHARMS WANING. A POOR ECONOMY AND BRITAIN'S ILL-ADVISED VISA POLICY ARE TO BLAME," THE ECONOMIST, October 6, 2012.

  * "NOT WHAT IT USED TO BE: AMERICAN UNIVERSITIES REPRESENT DECLINING VALUE FOR MONEY TO THEIR STUDENTS," THE ECONOMIST, December 1, 2012.

  * "PARSNIPS UNBUTTERED: FLOWERY RHETORIC FAILS TO HIDE DIFFICULTIES IN THE BILATERAL RELATIONSHIP," THE ECONOMIST, May 25, 2013.

  * "SHADOWS LENGTHEN: CHINESE CREDIT RISES. CHINA'S CREDIT RATING FALLS," THE ECONOMIST, April 13, 2013.

  * "SWEET LAND OF SUBSIDY: THE DOWNTURN HAS FORCED STATES TO BE SAVVIER AND MORE CAREFUL ABOUT PROVIDING TAX INCENTIVES TO BUSINESS," THE ECONOMIST, April 27, 2013.

  * "THE CHEAPEST THING GOING IS GONE: AFTER ENDURING A DECADE OF CRITICISM FOR ITS WEAKNESS, CHINA'S CURRENCY NOW LOOKS UNCOMFORTABLY STRONG," THE ECONOMIST, June 15, 2013.

  * "THE DRAGON TAKES WING: NEW DATA SUGGEST THAT THE CHINESE ECONOMY IS BIGGER THAN PREVIOUSLY THOUGHT," THE ECONOMIST, May 3, 2014.

  * "THE RICH AND THE REST: AMERICAN INEQUALITY IS A TALE OF TWO COUNTRIES," THE ECONOMIST, October 13, 2012.

  * "TIDE BARRIERS: CAPITAL CONTROLS WOULD WORK BETTER IF THERE WERE SOME INTERNATIONAL NORMS," THE ECONOMIST, October 6, 2012.

  * "TRADE WITH THE WORLD," THE ECONOMIST, February 16, 2013.

  * "U.S. MEXICO SIGN TRUCKING AGREEMENT," USA TODAY, July 7, 2011.

  * "WEN SAYS CHINA HAS CONFIDENCE IN EUROPE," USA TODAY, June 27, 2011.

  * "WORLD'S HUGEST TRADE CLUB," THE PHILADELPHIA TRUMPET, July-August 2011.

  * "YUAN FOR THE MONEY: THE RISE OF CHINA'S CURRENCY WILL CHANGE THE WAY THE WORLD DOES BUSINESS," THE ECONOMIST, February 9, 2013.

  * "YUAN TO GET RID OF YOUR DOLLARS?" THE PHILADEPHIA TRUMPET, May-June 2011.

  * American Society of Civil Engineers, 2009 REPORT CARD FOR AMERICA'S INFRASTRUCTURE, www.asce.org/reportcard.

  * Amour, Stephanie, "SALES OF NEW HOMES FELL 33% IN MAY: END OF TAX CREDIT PUTS MARKET INTO A RECORD TALESPIN," USA TODAY, June 24, 2010.

  * Armentano, Dominick T., ANTITRUST AND MONOPOLY: ANATOMY OF A POLICY FAILURE, (Oakland, CA, Independent Institute, 1990).

  * Associated Press, "IRISH BAILOUTS LEAVE MANY TAXPAYERS SHOCKED: PLAN DERIDED AS 'RANSOM NOTE,'" USA TODAY, November 30, 2010.

  * Associated Press, "MEDICARE SLEUTHS LET FRAUD CASES GET COLD: OVERPAYMENTS, WASTE TAKING LONG TO BE REPORTED," USA TODAY, August 9, 2010.

  * Barbosa, Mariana, Catarina Sousa and Naomi Westland, "PORTUGAL URGING CITIZENS TO LEAVE TO FIND WORK: FORMER COLONIES SUCH AS BRAZIL, ANGOLA OFFER BETTER OPPORTUNITIES," USA TODAY, February 22, 2012.

  * Behrman, Greg, THE MOST NOBLE ADVENTURE: THE MARSHALL PLAN AND THE RECONSTRUCTION OF POST-WAR EUROPE, (London, Aurum Press, 2007).

  * Bello, Marisol, "AS SENIORS CLIMB FROM POVERTY, YOUNG FALL IN: SOCIAL PROGRAMS AID ELDERLY; CHILDREN SUFFER IN RECESSION," USA TODAY, February 16, 2012.

  * Berle Jr., Adolf, Berle Memorandum to the President, April 18, 1938, Franklin D. Roosevelt Library, PPF 1306.

  * Bittle, Scott, and Jean Johnson, WHERE DOES THE MONEY GO? YOUR GUIDED TOUR TO THE FEDERAL BUDGET CRISIS, (NY, HarperCollins, 2008).

  * Block, Sandra, "MANY SAW NET WORTH FALL DURING RECESSION: MORE THAN TWO-THIRDS FELT SUCH LOSS, FED REPORTS," USA TODAY, March 25, 2011.

  * Block, Sandra, "OLDER BOOMERS WHO WORK LONGER CAN GET MORE IN SOCIAL SECURITY BENEFITS: FILING FOR THEM AT 62 COULD CUT THE PAYOUT BY AS MUCH AS 8% A YEAR," USA TODAY, July 12, 2011.

  * Block, Sandra, "SOCIAL SECURITY SAYS NO TO PAPER: FUNDS TO GO TO DIRECT DEPOSIT OR DEBIT CARD," USA TODAY, April 29, 2011.

  * Bloomberg News, "MANUFACTURING GAINS SLOW: HIGHER GAS PRICES MAY HAVE CHOKED CONSUMER SPENDING," USA TODAY, March 2, 2012.

  * Bordo, Michael D., THE GOLD STANDARD AND RELATED REGIMES: COLLECTED ESSAYS, (NY, Cambridge University, 1999).

  * Boyle, David, THE LITTLE MONEY BOOK, (NY, Disinformation Company, 2003).

  * Brainard, Lael, and Leonard Martinez-Diaz, eds., BRAZIL AS AN ECONOMIC SUPERPOWER? UNDERSTANDING BRAZIL'S CHANGING ROLE IN THE GLOBAL ECONOMY, (Washington, D.C.; Brookings Institution Press, 2009).

  * Brautigam, Deborah, THE DRAGON'S GIFT: THE REAL STORY OF CHINA IN AFRICA, (NY, Oxford University Press, 2009).

  * Brook, Tom Vanden, Jim Michaels and Aamer Madhani, "PENTAGON: A LEAN MILITARY STILL MIGHTY: CRITICS SAY CUTS UNFIT FOR SUPERPOWER," USA TODAY, January 6, 2012.

  * Brooks, Arthur C., THE BATTLE: HOW THE FIGHT BETWEEN FREE ENTERPRISE AND BIG GOVERNMENT WILL SHAPE AMERICA'S FUTURE, (NY, Basic Books, 2010).

  * Brown (D), Senator Sherrod, editorial, "HOW ONE DRUG COMPANY IS FLEECING PREGNANT WOMEN," USA TODAY, March 21, 2011.

  * Buttonwood, "DEMOCRACIES AND DEBT," THE ECONOMIST, September 1, 2012.

  * Buttonwood, "OUT OF FAVOR: THE SELL-OFF IN EMERGING MARKETS SHOULD NOT OBSCURE THEIR ATTRACTIONS," THE ECONOMIST, June 8, 2013.

  * Buttonwood, "PRECIOUS RELIC: GOLD REMAINS POPULAR DESPITE THE DOUBTS OF ECONOMISTS," THE ECONOMIST, October 13, 2012.

  * Calomiris, Charles W., U.S. BANK DEREGULATION IN HISTORICAL PERSPECTIVE, (NY, Cambridge University Press, 2000).

  * Campbell, Don, editorial, "END THE SENIOR DISCOUNTS," USA TODAY, January 18, 2012.

  * Campbell, Don, editorial, "RATION CARE WITH MEDICARE CREDITS: LIKE THE FEDERAL DEBT, THE ENTITLEMENT SPENDING IS NOT REMOTELY SUSTAINABLE AT THE CURRENT RATE. SO LET'S INTRODUCE CHOICE AND THE MARKET," USA TODAY, August 10, 2011.

  * Carney, Timothy P., OBAMANOMICS: HOW BARACK OBAMA IS BANKRUPTING YOU AND ENRICHING HIS WALL STREET FRIENDS, CORPORATE LOBBYISTS, AND UNION BOSSES, (Washington, D.C., Regnery Publishing, 2009).

  * Carney, Timothy P., THE BIG RIPOFF: HOW BIG BUSINESS AND BIG GOVERNMENT STEAL YOUR MONEY, (NJ, John Wiley & Sons, 2006).

  * Cauchon, Dennis, "AMERICAN WORKFORCE GOING GRAYER: PEOPLE 55 AND OLDER KEEP JOBS WHILE YOUNG LEFT OUT," USA TODAY, December 15, 2010.

  * Cauchon, Dennis, "AMERICANS PAY LESS IN TAXES: ANALYSIS FINDS THE BURDEN AT ITS LOWEST LEVEL SINCE 1958," USA TODAY, May 6, 2011.

  * Cauchon, Dennis, "BENEFITS ARE HARD-EARNED SAY MILITARY RETIREES: THEY CITE YEARS OF SACRIFICE, UPROOTED FAMILIES," USA TODAY, September 29, 2011.

  * Cauchon, Dennis, "DEATH MORE LIKELY THAN LOSING FEDERAL JOB: GOVERNMENT AGENCIES RARELY FIRE OR LAY OFF EMPLOYEES," USA TODAY, July 20, 2011.

  * Cauchon, Dennis, "FEDERAL BENEFITS, PENSIONS EXPLODE: RETIREMENT PLANS ALMOST AS COSTLY AS SOCIAL SECURITY," USA TODAY, September 29, 2011.

  * Cauchon, Dennis, "FEDERAL SHARE OF DEBT RISING: OFFSETS CONSUMER EFFORTS TO REDUCE BORROWING," USA TODAY, November 7, 2011.

  * Cauchon, Dennis, "FEDERAL WORKERS STARTING AT MUCH HIGHER PAY THAN IN PAST," USA TODAY, December 27, 2011.

  * Cauchon, Dennis, "GOVERNMENT'S MOUNTAIN OF DEBT," USA TODAY, June 7, 2011.

  * Cauchon, Dennis, "IN WIS., PRIVATE SECTOR PAYS LESS: PUBLIC WORKERS EARN MORE IN 41 STATES," USA TODAY, March 1, 2011.

  * Cauchon, Dennis, "IT PAYS TO WORK FOR UNCLE SAM, DATA SHOW," USA TODAY, March 5, 2010.

  * Cauchon, Dennis, "MEDICAID BILLS SETTLED IN A HURRY BEFORE AID ENDS," USA TODAY, March 21, 2011.

  * Cauchon, Dennis, "MILITARY TOWNS ENJOY BIG BOOMS: PAY AND BENEFITS DRIVE CITIES' GROWTH," USA TODAY, August 17, 2010.

  * Cauchon, Dennis, "RELIANCE ON UNCLE SAM HITS A RECORD: 2010 INCOME WAS 18.3% ENTITLEMENTS," USA TODAY, April 26, 2011.

  * Cauchon, Dennis, "SHORT RUN TAX HIKES BEING USED TO FILL GAPS," USA TODAY, May 18, 2010.

  * Cauchon, Dennis, "STUDENT LOAN DEBT SURPASSES $1 TRILLION: BURDEN COULD DRAG ECONOMY IN FUTURE," USA TODAY, October 19, 2011.

  * Cauchon, Dennis, "U.S. LIMPS IN JOB CREATION: POST RECESSION RATE IS THE LOWEST SINCE THE 1930s," USA TODAY, May 20, 2011.

  * Cauchon, Dennis, "U.S. OWES $62 TRILLION: UNFUNDED OBLIGATIONS AMOUNT TO $534,000 PER HOUSEHOLD," USA TODAY, June 7, 2011.

  * Cauchon, Dennis, and Barbara Hanson, "POVERTY AT 15.1% HIGHEST SINCE '93: 10-YEAR INCOME DROP USA's 1st IN 5 DECADES," USA TODAY, September 14, 2011.

  * Cauchon, Dennis, and Richard Wolf, "SENIORS' INCOME UP VS. OTHER AGE GROUPS: OLDER SECTOR OUTEARNS THOSE 15-24 FOR 1st TIME," USA TODAY, September 17, 2010.

  * Central Intelligence Agency, THE CIA WORLD FACTBOOK 2011, (NY, Skyhorse Publishing, 2010).

  * Chang, Ha-Joon, 23 THINGS THEY DON'T TELL YOU ABOUT CAPITALISM, (NY, Bloomsbury Press, 2010).

  * Chang, Ha-Joon, BAD SAMARITANS: THE MYTH OF FREE TRADE AND THE SECRET HISTORY OF CAPITALISM, (NY, Bloomsbury Press, 2008).

  * Charlemagne, "ROME'S BAD SPELL: ITALY'S ELECTION MAY BE A DEFEAT FOR AUSTERITY FOR REFORM, BUT ITS PROBLEMS WILL NOT GO AWAY," THE ECONOMIST, March 2, 2013.

  * Chinn, Menzie D., and Jeffry A. Frieden, LOST DECADES: THE MAKING OF AMERICA'S DEBT CRISIS AND THE LONG RECOVERY, (NY, W.W. Norton & Company, 2011).

  * Chocola, Chris, "YOU CAN'T BALANCE THE BUDGET UNLESS BOTH SIDES GIVE GROUND," USA TODAY, March 17, 2010.

  * Chu, Kathy, "'MADE IN CHINA' BENEFITS U.S.: DOMESTIC FIRMS GET 55 CENTS OF A DOLLAR SPENT ON CHINA-MADE ITEMS," USA TODAY, August 25, 2011.

  * Chu, Kathy, "CHINA HAS A LOT TO LOSE IN DEBT DEBATE: BUT IT PROBABLY WILL NOT STOP BUYING U.S. DEBT," USA TODAY, July 20, 2011.

  * Chu, Kathy, "DISCOUNT AIRLINES CHANGE ASIA TRAVEL: DEMAND TAKES OFF AS MIDDLE CLASS GROWS," USA TODAY, November 28, 2011.

  * Chu, Kathy, "EMERGING MARKETS LURE INVESTORS DESPITE VOLATILITY: SOME ANTICIPATE HIGHER PROSPECTS FOR GROWTH," USA TODAY, August 16, 2010.

  * Chu, Kathy, "EUROPEAN CRISIS FORCES ASIAN EXPORTERS TO SHIFT BUSINESS FOCUS," USA TODAY, December 13, 2011.

  * Chu, Kathy, "MORE U.S. COMPANIES EXPAND IN CHINA," USA TODAY, September 12, 2011.

  * Chu, Kathy, "MOST AMERICANS RATE CHINA'S ECONOMY FIRST: ACTUALLY THE USA IS, BY FAR, IN NO.1 SPOT," USA TODAY, February 14, 2011.

  * Chu, Kathy, "PHILIPPINES MAY ANSWER CALL: NATION PASSES INDIA IN CALL-CENTER JOBS," USA TODAY, January 10, 2011.

  * Chu, Kathy, "VIETNAM: A NEW LAND OF OPPORTUNITY: ECONOMIC BOOM LURES SOME WHO LEFT IN THE 1970s," USA TODAY, August 18, 2010.

  * Chu, Kathy, and Julie Schmidt, "HIGH-END U.S. HOMES LURE CHINESE BUYERS: THEY'RE NOW THE SECOND LARGEST FOREIGN BUYERS OF HOMES HERE," USA TODAY, April 4, 2012.

  * Cicelski, Paul A., "FCC COMMISSIONER MEREDITH BAKER LEAVING FCC FOR NBC-UNIVERSAL," www.commlawcenter.com, posted May 12, 2011.

  * Cline, William R., THE UNITED STATES AS A DEBTOR NATION, (Washington, D.C.; Institute for International Economics, Center for Global Development; 2005).

  * Congressional Budget Office (CBO), "FEDERAL DEBT AND THE RISK OF A FISCAL CRISIS," (Washington, D.C., Congressional Budget Office, July 2010).

  * Congressional Budget Office (CBO), Economic and Budget Issue Brief, AN OVERVIEW OF FEDERAL SUPPORT FOR HOUSING, www.cbo.gov, November 3, 2009.

  * Copeland, Larry, "MEXICAN TRUCKS TO HAUL FREIGHT ON U.S. ROADS: CROSS-BORDER AGREEMENT RAISES FEARS OF SAFETY, JOB LOSSES, DRUG TRAFFICKING," USA TODAY, August 3, 2011.

  * Corace, Don, GOVERNMENT PIRATES: THE ASSAULT ON PRIVATE PROPERTY RIGHTS – AND HOW WE CAN FIGHT IT, (NY, HarperCollins, 2008).

  * Davidson, Paul, "EXPERTS SEE FEDS TAKING AGGRESSIVE STEPS: POLICY MAKERS HAVE HINTED AT MORE BOND PURCHASES," USA TODAY, August 11, 2011.

  * Davidson, Paul, "SCIENCE, TECH JOBS PAY MORE, LEAD IN GROWTH," USA TODAY, July 14, 2011.

  * Davidson, Paul, and Tim Mullaney, "MANUFACTURING A STAR OF AN UPBEAT JOBS REPORT: U.S. SAW ALL EMPLOYERS ADD 243,000 JOBS IN JANUARY, REPORT SAYS," USA TODAY, February 6, 2012.

  * Davis, Diane E., DISCIPLINE AND DEVELOPMENT: MIDDLE CLASSES AND PROSPERITY IN EAST ASIA AND LATIN AMERICA, (UK, Cambridge University Press, 2004).

  * Davis, Susan, "CONGRESS IS ON PACE TO MAKE HISTORY WITH THE LEAST PRODUCTIVE LEGISLATIVE YEAR IN THE POST-WORLD WAR II ERA," USA TODAY, August 15, 2012.

  * Dent Jr., Harry S., THE GREAT DEPRESSION AHEAD: HOW TO PROSPER IN THE CRASH FOLLOWING THE GREATEST BOOM IN HISTORY, (NY, Free Press, 2008).

  * DiLorenzo, Thomas J., HOW CAPITALISM SAVED AMERICA: THE UNTOLD STORY OF OUR COUNTRY, FROM THE PILGRIMS TO THE PRESENT, (NY, Three Rivers Press, 2004).

  * Dinan, Stephen, "CBO: THE WEALTHY PAY 70 PERCENT OF TAXES," THE WASHINGTON TIMES, July 10, 2012.

  * DiSalvo, Daniel, GOVERNMENT UNIONS AND THE BANKRUPTING OF AMERICA, (NY, Encounter Books, 2011).

  * Dowden, Richard, AFRICA: ALTERED STATES, ORDINARY MIRACLES, (NY, Public Affairs, 2009).

  * Duncan, Arne, "WHY DREAM ACT IS RIGHT FOR U.S., YOUNG PEOPLE," USA TODAY, June 28, 2011.

  * Eagle et al eds., Jeremy, THE WORLD ALMANAC AND BOOK OF FACTS 2011, (NY, World Almanac, 2011).

  * Editorial, "10 TERRIBLE TAX BREAKS: THE INTERNAL REVENUE CODE IS A DISASTER. HERE ARE SOME PLACES TO START THE CLEAN UP," USA TODAY, May 31, 2011.

  * Editorial, "ALABAMA'S CRACKDOWN NETS MORE THAN ILLEGAL IMMIGRANTS," USA TODAY, December 5, 2011.

  * Editorial, "BOEING'S LABOR PAINS THREATEN $1 BILLION DREAMLINER INVESTMENT," USA TODAY, June 24, 2011.

  * Editorial, "DON'T LOOK NOW BUT MEXICAN MIGRATION IS SLOWING DRAMATICALLY," USA TODAY, July 15, 2011.

  * Editorial, "DUTCH TREAT – A MEDICAL SYSTEM WITH FULL COVERAGE, LOWER COSTS," USA TODAY, October 18, 2011.

  * Editorial, "IDEAS FROM AFAR: LESSONS FOR AMERICA," "HOUSING FINANCE: CANADA," USA TODAY, July 1, 2011.

  * Editorial, "LOBBYISTS WHO AREN'T LOBBYISTS," USA TODAY, March 9, 2012.

  * Editorial, "MYTHS AND MISINFORMATION MAR DEBT-CEILING DEBATE," USA TODAY, July 29, 2011.

  * Editorial, "OBAMA'S SPENDING PLAN LEAVES THE DEBT BOMB TICKING," USA TODAY, February 14, 2012.

  * Editorial, "RESTORE THE PAYROLL TAX; BUILD THE KEYSTONE PIPELINE," USA TODAY, December 21, 2011.

  * Editorial, USA TODAY, January 24, 2012.

  * Eggers, William D., and John O'Leary, IF WE CAN PUT A MAN ON THE MOON: GETTING BIG THINGS DONE IN GOVERNMENT, (MA, Harvard University Press, 2009).

  * El Nasser, Haya, "90-PLUS POPULATION TRIPLES IN 3 DECADES: CENSUS: NUMBER IS LIKELY TO QUADRUPLE BY 2050," USA TODAY, November 18, 2011.

  * El Nasser, Haya, "CENSUS DATA OPEN VIEW ON 1940: GOVERNMENT ALLOWS PUBLIC ACCESS TO RECORDS FROM TIME TO TIME THAT HAS PARALLELS TO TODAY," USA TODAY, March 30, 2012.

  * El Nasser, Haya, "CHARITABLE GIVING ON THE REBOUND: $291B DONATED IN 2010 AFTER 2 YEARS OF DECLINE," USA TODAY, June 20, 2011.

  * El Nasser, Haya, "FEWER ILLEGAL IMMIGRANTS ENTERING USA," USA TODAY, September 2, 2010.

  * El Nasser, Haya, and Paul Overberg, "CENSUS: ECONOMY PUT MORE PEOPLE UNDER ONE ROOF," USA TODAY, May 5, 2011.

  * Elkus Jr., Richard J., WINNER TAKE ALL: HOW COMPETITIVENESS SHAPES THE FATE OF NATIONS, (NY, Basic Books, 2008).

  * Financial Crisis Inquiry Commission, THE FINANCIAL CRISIS INQUIRY REPORT: FINAL REPORT OF THE NATIONAL COMMISSION ON THE CAUSES OF THE FINANCIAL AND ECONOMIC CRISIS IN THE UNITED STATES, (NY, Public Affairs, 2011).

  * Fishman, Ted C., CHINA INC.: HOW THE RISE OF THE NEXT SUPERPOWER CHALLENGES AMERICA AND THE WORLD, (NY, Scribner, 2005).

  * Fishman, Ted C., editorial, "GIVING CHINA THE BUSINESS: WASHINGTON TALKS TOUGH, BUT STATES AND CITIES SEE A FRIEND," USA TODAY, January 26, 2011.

  * Fishman, Ted C., editorial, "WHY THE JOBS ARE GOING OVER THERE: MULTINATIONAL COMPANIES ARE ESCHEWING THE OLDER, MORE COSTLY U.S. WORKFORCE. WHAT TO DO?" USA TODAY, May 18, 2011.

  * Fishman, Ted C., SHOCK OF GRAY: THE AGING OF THE WORLD'S POPULATION AND HOW IT PITS YOUNG AGAINST OLD, CHILD AGAINST PARENT, WORKER AGAINST BOSS, COMPANY AGAINST RIVAL, AND NATION AGAINST NATION, (NY, Scribner, 2010).

  * Flow of Funds Guide of the Federal Reserve, table "B.100 Balance Sheet of Households and Nonprofit Organizations," www.federalreserve.gov/apps/fof/DisplayTable.aspx?t=b.100.

  * Folsom Jr., Burton, NEW DEAL OR RAW DEAL? HOW FDR'S ECONOMIC LEGACY HAS DAMAGED AMERICA, (NY, Threshold Editions, 2008).

  * Fores, Betsi, "CHANGES IN GDP MEASUREMENT CREATE GROWTH OUT OF THIN AIR," www.dailycaller.com, posted April 30, 2013.

  * Friedman, Thomas L., and Michael Mandelbaum, THAT USED TO BE US: HOW AMERICA FELL BEHIND IN THE WORLD IT INVENTED AND HOW WE CAN COME BACK, (NY; Farrar, Straus and Giroux; 2011).

  * Galewitz, Phil, "STATES TO LIMIT HOSPITAL STAYS: SOME TO CUT MEDICAID COVERAGE TO 10 DAYS," USA TODAY, October 24, 2011.

  * Gelinas, Nicole, AFTER THE FALL: SAVING CAPITALISM FROM WALL STREET – AND WASHINGTON, (NY, Encounter Books, 2009).

  * Gokhale, Jagadeesh, and Kent Smetters, FISCAL AND GENERATIONAL IMBALANCES: NEW BUDGET MEASURES FOR NEW BUDGET PRIORITIES, (Washington, D.C., AEI Press, 2003), www.aei.org/docLib/20030723_SmettersFinalCC.pdf.

  * Gomez, Alan, "DREAM ACT PITCHED AS NEEDED ECONOMIC PATCH: CHILDREN OF ILLEGALS CAN CONTRIBUTE, DEMS SAY," USA TODAY, June 28, 2011.

  * Gomez, Alan, "NEW LAWS LOOK TO MAKE LIFE HARDER: STATES LESSEN APPEAL TO ILLEGAL IMMIGRANTS," USA TODAY, December 21, 2011.

  * Gomez, Alan, Jack Gillum and Kevin Johnson, "ON U.S. SIDE CITIES ARE HAVENS FROM DRUG WARS: ANALYSIS: 'SPILLOVER VIOLENCE' IS EXAGGERATED," USA TODAY, July 15, 2011.

  * Goyette, Charles, THE DOLLAR MELTDOWN: SURVIVING THE IMPENDING CURRENCY CRISIS WITH GOLD, OIL, AND OTHER UNCONVENTIONAL INVESTMENTS, (NY, Portfolio, 2009).

  * Greenhouse, Steven, THE BIG SQUEEZE: TOUGH TIMES FOR THE AMERICAN WORKER, (NY, Alfred A. Knopf, 2008).

  * Hacker, Andrew, and Claudia Dreifus, HIGHER EDUCATION? HOW COLLEGES ARE WASTING OUR MONEY AND FAILING OUR KIDS – AND WHAT WE CAN DO ABOUT IT, (NY, Times Books, 2010).

  * Harding, Robert, "U.S. ECONOMY TAKES OLYMPIC LEAP TO ADD 3% TO GDP," THE FINANCIAL TIMES, July 28, 2013.

  * Healy, Michelle, "DOCTORS SAY OVERTESTING IS COMMON," USA TODAY, June 29, 2010.

  * Heath, Brad, "JUSTICE DEPT. PROSECUTING FEWER CASES OF BENEFITS FRAUD: INDICATES A SHIFT IN FOCUS TO FINANCIAL, MORTGAGE SCHEMES," USA TODAY, June 28, 2011.

  * Heenan, David, FLIGHT CAPITAL: THE ALARMING EXODUS OF AMERICA'S BEST AND BRIGHTEST, (CA, Davies Black Publishing, 2005).

  * Hellmich, Nanci, "OFFICE WORK DOESN'T SIT WELL WHEN IT COMES TO CALORIES," USA TODAY, May 26, 2011.

  * Hendricks, Diane M., editorial, "GOVERNMENT NEEDS TO GET OUT OF THE WAY OF PEOPLE," USA TODAY, November 3, 2010.

  * Herring, George C., FROM COLONY TO SUPERPOWER: U.S. FOREIGN RELATIONS SINCE 1776, (NY, Oxford University Press, 2008).

  * Hilliker, Joel, "TRIUMPH OF THE SMALL-MINDED BUREACRATS: AMERICA IS REGULATING ITSELF TO DEATH," THE PHILADELPHIA TRUMPET, November-December 2011.

  * Hira, Ron, and Anil Hira, OUTSOURCING AMERICA: WHAT'S BEHIND OUR NATIONAL CRISIS AND HOW WE CAN RECLAIM AMERICAN JOBS, (NY, Amacom, 2008).

  * Howard, Phillip K., COLLAPSE OF THE COMMON GOOD: HOW AMERICA'S LAWSUIT CULTURE UNDERMINES OUR FREEDOM, (NY, Ballantine Publishing, 2001).

  * Huggins, Rachel, and Paul Trap, International Telecommunications Union data on global phone lines, USA TODAY SNAPSHOTS, USA TODAY, November 29, 2011.

  * Ingrassia, Paul, CRASH COURSE: THE AMERICAN AUTOMOBILE INDUSTRY'S ROAD TO BANKRUPTCY AND BAILOUT – AND BEYOND, (NY, Random House, 2010).

  * Jacques, Martin, WHEN CHINA RULES THE WORLD: THE END OF THE WESTERN WORLD AND THE BIRTH OF A NEW GLOBAL ORDER, (NY, Penguin Press, 2009).

  * Jayson, Sharon, "ALL TOGETHER NOW: EXTENDED FAMILIES: ECONOMY, IMMIGRATION ALTER LIVING ARRANGEMENTS," USA TODAY, November 23, 2011.

  * Jennings, Rob, "STATES GAMBLE ON WEB LOTTERY SALES," USA TODAY, June 10, 2011.

  * Jervis, Rick, "PIPES PUMPS TROUBLE BIG EASY: WATER, SEWAGE INFRASTRUCTURE SLOW RECOVERY," USA TODAY, December 17, 2010.

  * Johnson, Chalmers, NEMESIS: THE LAST DAYS OF THE AMERICAN REPUBLIC, (NY, Metropolitan Books, 2006).

  * Johnson, Kevin, "ANALYSIS: DENIALS OF WORK VISAS TO U.S. RISE: BUSINESS LEADERS SAY IT HURTS COMPANIES," USA TODAY, February 10, 2012.

  * Johnston, David Cay, FREE LUNCH: HOW THE WEALTHIEST AMERICANS ENRICH THEMSELVES AT GOVERNMENT EXPENSE (AND STICK YOU WITH THE BILL), (NY, Portfolio, 2007).

  * Joyce et al eds., C. Alan, THE WORLD ALMANAC AND BOOK OF FACTS 2009, (NY, World Almanac, 2009).

  * Kamdar, Mira, PLANET INDIA: THE TURBULENT RISE OF THE LARGEST DEMOCRACY AND THE FUTURE OF OUR WORLD, (NY, Scribner, 2007).

  * Karabell, Zachary, SUPERFUSION: HOW CHINA AND AMERICA BECAME ONE ECONOMY AND WHY THE WORLD'S PROSPERITY DEPENDS ON IT, (NY, Simon & Schuster, 2009).

  * Karmin, Craig, BIOGRAPHY OF THE DOLLAR: HOW THE MIGHTY BUCK CONQUERED THE WORLD AND WHY IT'S UNDER SIEGE, (NY, Crown Business, 2008).

  * Keen, Judy, "CITIES WRING CASH OUT OF UTILITIES: DEALS OVER WATER SEWAGE SYSTEMS PLUG BUDGET GAPS," USA TODAY, April 21, 2010.

  * Kelley, Mike, "THE BRINK OF BANKRUPTCY: UNFUNDED LIABILITIES THREATEN THE U.S. ECONOMY," THE GOOD NEWS, May-June 2011.

  * Kelly, Erin, "FUTURE OF FEDERAL SOLAR PROGRAMS IN DOUBT: INDUSTRY DEALS WITH FEWER SUPPORTERS IN GOP – MAJORITY HOUSE," USA TODAY, June 29, 2011.

  * Kennedy, Kelly, "2.5B RECOVERED IN HEALTHCARE FRAUD," USA TODAY, January 24, 2011.

  * Kennedy, Kelly, and Nanci Hellimich, "MEDICARE TO PAY FOR OBESITY PREVENTION: WEIGHT LINKED TO CHRONIC ILLNESSES," USA TODAY, November 30, 2011.

  * Kindleberger, Charles P., MANIAS, PANICS AND CRASHES, (NJ, John Wiley & Sons, 2005).

  * Kipling, Richard, "DOCTORS GO TO BAT FOR UNINSURED: FOR PATIENTS FACING HARD TIMES, PHYSICIANS FIND WAYS TO CONTINUE CARE," USA TODAY, September 13, 2011.

  * Klein, Naomi, THE SHOCK DOCTRINE: THE RISE OF DISASTER CAPITALISM, (NY, Picador, 2007).

  * Kotlikoff, Laurence J., and Scott Burns, THE COMING GENERATIONAL STORM: WHAT YOU NEED TO KNOW ABOUT AMERICA'S ECONOMIC FUTURE, (MA, MIT Press, 2004).

  * Krantz, Matt, "CHINESE INTERNET IPOs TAKE WING: INVESTORS CAN SEE GROWTH POTENTIAL IN THAT MARKET," USA TODAY, December 9, 2010.

  * Leuchtenburg, William E., FRANKLIN D. ROOSEVELT AND THE NEW DEAL 1932-1940, (NY, Harper & Row Publishers, 1963).

  * Liveris, Andrew N., MAKE IT IN AMERICA: THE CASE FOR REINVENTING THE ECONOMY, (NJ, John Wiley & Sons, 2010).

  * Lloyd, Janice, "THEY WON'T QUIT: SENIORS DECIDE QUIET RETIREMENT DOESN'T SUIT THEM, PREFERRING TO STAY ACTIVE IN THE WORKFORCE," USA TODAY, January 24, 2012.

  * Lowenstein, Roger, THE END OF WALL STREET, (NY, Penguin Press, 2010).

  * Lowenstein, Roger, WHILE AMERICA AGED: HOW PENSION DEBTS RUINED GENERAL MOTORS, STOPPED THE NYC SUBWAYS, BANKRUPTED SAN DIEGO, AND LOOM AS THE NEXT FINANCIAL CRISIS, (NY, Penguin Press, 2008).

  * MacLeod, Calum, "CHINA MAY RELAX ONE-CHILD RULE: MORE KIDS NEEDED TO WORK, CARE FOR AGING POPULATION," USA TODAY, September 9, 2010.

  * MacLeod, Calum, "CHINA SLOWS HIGH-SPEED RAIL BOOM: EXPANSION CUT BACK AMID CONCERNS OVER VALUE, SAFETY," USA TODAY, June 1, 2011.

  * MacLeod, Calum, "CHINA TOO CONNECTED TO IV MEDS: THE COUNTRY'S THREE YEAR OVERHAUL OF IT'S HEALTH SYSTEM TRIES TO TACKLE OVERUSE OF INTRAVENOUS DRUGS, BRIBES TO DOCTORS AND ACCESS TO CARE FOR THOSE IN REMOTE AREAS," USA TODAY, February 18, 2011.

  * Madrick, Jeff, AGE OF GREED: THE TRIUMPH OF FINANCE AND THE DECLINE OF AMERICA, 1970 TO THE PRESENT, (NY, Alfred A. Knopf, 2011).

  * Marcus, Mary Brophy, "STUDY: ERs SHRINK AS DEMAND RISES: 1 IN 3 HAVE CLOSED OVER TWO DECADES," USA TODAY, May 18, 2011.

  * Marklein, Mary Beth, "COLLEGE STUDY ABROAD SUFFERS A DIP: STUDY: GLOBAL ECONOMIC DECLINE AND H1N1 WERE AMONG FACTORS," USA TODAY, November 15, 2010.

  * Marklein, Mary Beth, "TUITION RISES 8% AT PUBLIC COLLEGES: INCREASE IS TWICE THE INFLATION RATE," USA TODAY, October 26, 2011.

  * Marklein, Mary Beth, "U.S. COLLEGES PUSH EFFORTS TO DRAW FOREIGN STUDENTS: IN JAKARTA, SCHOOLS VIE FOR A PLACE IN A LUCRATIVE MARKET," USA TODAY, June 23, 2011.

  * McCoy, Kevin, "WHO'S MAKING $180,000+? DOCTORS, LAWYERS AND DENTISTS TOP IN FEDERAL JOBS PAY RATE, DATA SHOW," USA TODAY, May 31, 2011.

  * McElvaine, Robert S., THE GREAT DEPRESSION: AMERICA, 1929-1941, (NY, Three Rivers Press, 2009).

  * McGregor, James, ONE BILLION CUSTOMERS: LESSONS FROM THE FRONT LINES OF DOING BUSINESS IN CHINA, (NY, Free Press, 2005).

  * McKinsey & Company, "THE ECONOMIC IMPACT OF THE ACHIEVEMENT GAP IN AMERICA'S SCHOOLS," April 2009. www.mckinsey.com/App-Media/Images/Page Images/Offices/SocialSector/pdf.

  * Medved, Michael, editorial, "CAN GOP WIN IF ECONOMY RISES? FORGET ABOUT POSSIBLE RECOVERY, AND FOCUS INSTEAD ON OBAMA'S BLOATED GOVERNMENT," USA TODAY, March 13, 2012.

  * Menzie, W. David, written testimony, U.S. – China Economic and Security Review Commission, HEARING ON CHINA'S GLOBAL QUEST FOR RESOURCES AND IMPLICATIONS FOR THE UNITED STATES, January 26, 2012.

  * Miller, Joel, SIZE MATTERS: HOW BIG GOVERNMENT PUTS THE SQUEEZE ON AMERICA'S FAMILIES, FINANCES, AND FREEDOM (AND LIMITS THE PURSUIT OF HAPPINESS), (TN, Nelson Current, 2006).

  * Mises, Ludwig Von, HUMAN ACTION: A TREATISE ON ECONOMICS, (IN, Liberty Fund, 2007).

  * Moyo, Dambisa, DEAD AID: WHY AID IS NOT WORKING AND WHY THERE IS A BETTER WAY FOR AFRICA, (Vancouver, Canada; Douglas & McIntyre; 2009).

  * Mullaney, Tim, "2000s HARDEST ON MIDDLE CLASS: 'LOST DECADE' WORST SINCE WORLD WAR II," USA TODAY, August 23, 2012.

  * Mullaney, Tim, "INTEREST RATES WILL STAY LOW, LOW, LOW: FED PLAN ACKNOWLEDGES RECOVERY REMAINS SLOW," USA TODAY, January 26, 2012.

  * Mullaney, Tim, "TRIO OF TRADE DEALS PASSED," USA TODAY, October 13, 2011.

  * Mullaney, Tim, "WHAT WILL IT TAKE TO BRING THE JOBLESS RATE UNDER 8%?" USA TODAY, March 7, 2012.

  * Murphy Ph.D., Robert P., THE POLITICALLY INCORRECT GUIDE TO THE GREAT DEPRESSION AND THE NEW DEAL, (Washington, D.C., Regnery Publishing, 2009).

  * Nilekani, Nandan, IMAGINING INDIA: THE IDEA OF A RENEWED NATION, (NY, Penguin Press, 2009).

  * O'Donnell, Jayne, "DEADLY DEBATE OVER CRIB BUMPERS: INDUSTRY REPORT BACKS THEM, BUT ADVOCATES INSIST THEY'RE UNSAFE," USA TODAY, April 25, 2011.

  * O'Donnell, Jayne, "STORES TRY TO ENSURE SAFE CRIB BUMPERS," USA TODAY, April 25, 2011.

  * O'Donnell, Jayne, "TOY STORES STRUGGLE WITH THE COST OF SAFETY: EXPENSIVE LEAD TESTING CAN BE A BURDEN FOR MOM AND POPS," USA TODAY, June 17, 2011.

  * Obama, President Barack, editorial, "JOBS AT TOP OF LATIN AMERICA AGENDA," USA TODAY, March 18, 2011.

  * Page, Susan, "FAITH IN SOCIAL SECURITY TANKING: MOST EXPECT CUTS OR LOSE HOPE FOR FUNDS," USA TODAY, July 20, 2010.

  * Paphitis, Nicholas, "GREEK MINISTERS APPROVE NEW AUSTERITY MEASURES," USA TODAY, June 10, 2011.

  * Paul, Ron, END THE FED, (NY, Grand Central Publishing, 2009).

  * Peterson, Peter G., RUNNING ON EMPTY: HOW THE DEMOCRATIC AND REPUBLICAN PARTIES ARE BANKRUPTING OUR FUTURE AND WHAT AMERICANS CAN DO ABOUT IT, (NY, Picador, 2004).

  * Phillips, Kevin, BAD MONEY: RECKLESS FINANCE, FAILED POLITICS, AND THE GLOBAL CRISIS OF AMERICAN CAPITALISM, (NY, Viking, 2008).

  * Pho, Kevin, editorial, "HOW DOCTORS CAN REDUCE MEDICAL ERRORS, LAWSUITS," USA TODAY, January 18, 2012.

  * Rector, Sylvia, "PANERA'S PAY-WHAT-YOU-CAN CAFES INSPIRE OTHERS: THEY'VE PROVED THAT THEY WORK, AND THE MODEL IS SPREADING," USA TODAY, February 27, 2012.

  * Reinhart, Carmen M., and Kenneth S. Rogoff, THIS TIME IS DIFFERENT: EIGHT CENTURIES OF FINANCIAL FOLLY, (NJ, Princeton University Press, 2009).

  * Rivlin, Alice M., and Isabel Sawhill eds., RESTORING FISCAL SANITY 2004: HOW TO BALANCE THE BUDGET, (Washington, D.C., Brookings Institution Press, 2004).

  * Rivlin, Alice M., and Isabel Sawhill eds., RESTORING FISCAL SANITY 2005: MEETING THE LONG-RUN CHALLENGE, (Washington, D.C., Brookings Institution Press, 2005).

  * Roney, Marty, "FEDS SUE TO COLLECT STUDENT LOANS: GOVERNMENT CAN GO AFTER WAGES, ASSETS – BUT THERE ARE OTHER OPTIONS," USA TODAY, May 3, 2011.

  * Rothermund, Dietmar, INDIA: RISE OF AN ASIAN GIANT, (New Haven, Yale University Press, 2008).

  * Salerno, Joseph T., "MONEY AND GOLD IN THE 1920s and 1930s: AN AUSTRIAN VIEW," IDEAS ON LIBERTY, October 1999, Volume 49, Issue 10.

  * Samons II, Loren J., WHAT'S WRONG WITH DEMOCRACY? FROM ATHENIAN PRACTICE TO AMERICAN WORSHIP, (CA, University of California Press, 2009).

  * Samuelson, Robert J., THE GREAT INFLATION AND ITS AFTERMATH: THE PAST AND FUTURE OF AMERICAN AFFLUENCE, (NY, Random House, 2008).

  * Savage, Charlie, "SEX, DRUG USE AND GRAFT CITED IN INTERIOR DEPARTMENT," www.nytimes.com, posted September 11, 2008.

  * Schmidt, Julie, "HOME PRICES HIT 2002 LEVELS: FORECLOSURES MEAN FURTHER FALL," USA TODAY, June 1, 2011.

  * Schmidt, Julie, "IN HOUSING BUST, A 'NEW NORMAL': AS EQUITY PLUMMETS, A CALIFORNIA COUNTY ADJUSTS TO LOWER EXPECTATIONS," USA TODAY, February 8, 2011.

  * Schouten, Fredreka, "CONGRESS TRAVEL JUNKETS CREEP UP: NON-PROFITS GET AROUND ETHICS RULES," USA TODAY, November 2, 2011.

  * Schouten, Fredreka, "SCANNER MAKERS BOOSTED LOBBYING: CASH AIMED AT INFLUENCE ON CAPITOL HILL DOUBLED," USA TODAY, November 23, 2010.

  * Schouten, Fredreka, "THE CHALLENGE OF BELT TIGHTENING: PENTAGON HAS TRIED FOR YEARS TO DROP ALTERNATE ENGINE FOR F-35, YET LAWMAKERS REFUSE TO CANCEL PROGRAM," USA TODAY, February 14, 2011.

  * Schuman, Michael, THE MIRACLE: THE EPIC STORY OF ASIA'S QUEST FOR WEALTH, (NY, Harper Business, 2009).

  * Shapiro, Daniel, IS THE WELFARE STATE JUSTIFIED? (NY, Cambridge University Press, 2007).

  * Sharma, Ruchir, "THE NEXT FRONTIER: AS GROWTH SLOWS IN CHINA AND INDIA, A FRESH GROUP OF MARKETS BREAKS OUT," TIME, May 14, 2012.

  * Shaviro, Daniel N., TAXES, SPENDING, AND THE U.S. GOVERNMENT'S MARCH TOWARDS BANKRUPTCY, (NY, Cambridge University Press, 2007).

  * Shell, Adam, "IT REALLY IS THE ECONOMY, STUPID: JOBS, STOCKS CAN SWAY ELECTIONS," USA TODAY, January 30, 2012.

  * Sherk, James, "GOVERNMENT JOBS: NICE IF YOU CAN GET'EM," USA TODAY, July 7, 2010.

  * Simons, Lewis M., editorial, "BACK IN THE 'SMART POWER' GAME," USA TODAY, April 6, 2011.

  * Sorkin, Andrew Ross, TOO BIG TO FAIL: THE INSIDE STORY OF HOW WALL STREET AND WASHINGTON FOUGHT TO SAVE THE FINANCIAL SYSTEM – AND THEMSELVES, (NY, Penguin Press, 2009).

  * Spangler, Todd, and Aaron Kessler, "OBAMA'S ECONOMIC PANEL APPLAUDS GM, CHRYSLER RESURGENCE," USA TODAY, June 2, 2011.

  * SQUAWK BOX, CNBC, March 3rd, 2011.

  * Stiglitz, Joseph, THE ROARING NINETIES: A NEW HISTORY OF THE WORLD'S MOST PROSPEROUS DECADE, (NY, W.W. Norton & Company, 2003).

  * Suh, Yong, editorial, "'WATSON' COULD TRANSFORM MEDICINE: THE SUPERCOMPUTER THAT WILL APPEAR ON JEOPARDY COULD PROVIDE A ROADMAP FOR MORE EFFICIENT AND BETTER HEALTHCARE IN THE USA," USA TODAY, February 9, 2011.

  * Swartz, Jon, "FOREIGN FIRMS TROLL FOR TECH GRADS: U.S. SUFFERS BRAIN DRAIN AS TALENT GOES OVERSEAS," USA TODAY, November 17, 2011.

  * Swartz, Jon, "FOREIGNERS ARE TAKING THEIR TECH TALENTS BACK HOME: SILICON VALLEY'S LOSS IS BRAIN GAIN FOR INDIA, CHINA," USA TODAY, May 11, 2011.

  * Szabo, Liz, "ANTIBIOTICS OFTEN UNNECESSARY FOR KIDS' EAR INFECTIONS," USA TODAY, November 17, 2010.

  * Szabo, Liz, "BLOGGING FOR THE GOOD OF KIDKIND," USA TODAY, December 6, 2010.

  * Szabo, Liz, "CANCER DOCTOR 'BREAKS RANKS' WITH THE SYSTEM: OTIS BRAWLEY MAKES HIS CASE FOR THE OVERTREATED AND THE UNDERSERVED," USA TODAY, January 31, 2012.

  * Szabo, Liz, "THIS SMART MAMA DIDN'T COME TO PLAY: JENNIFER TAGGART LEADS THE WAY IN GETTING THE LEAD OUT," USA TODAY, December 6, 2010.

  * The National Commission on Fiscal Responsibility and Reform, THE MOMENT OF TRUTH: THE FINAL REPORT OF THE NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND REFORM, (Lexington, KY, 2011). www.fiscalcommission.gov.

  * Thomas, Cal, and Bob Beckel, editorial, "MUST WE ALWAYS HAVE PARTISAN PRESIDENTS? BUSH AND OBAMA BOTH TRIED, OR SAID THEY TRIED, TO CHANGE WASHINGTON. AND BOTH FAILED MISERABLY. BUT WHY?" USA TODAY, February 9, 2012.

  * Vergano, Dan, "PROPOSED BUDGET CUTS TARGET SCIENCE: COULD LESS RESEARCH ENDANGER THE USA'S FUTURE?" USA TODAY, March 2, 2011.

  * Voegeli, William, NEVER ENOUGH: AMERICA'S LIMITLESS WELFARE STATE, (NY, Encounter Books, 2010).

  * Waggoner, John, "AS ECONOMY SEEKS BALANCE, BUSINESSES HOLD KEY: CONSUMER'S DEBT WOES WEIGH DOWN RECOVERY," USA TODAY, August 31, 2010.

  * Waggoner, John, "AS FEAR FLOURISHES, GOLD IS KING. FOR NOW," USA TODAY, June 21, 2010.

  * Waggoner, John, "IN THE DEBT-CEILING DEBATE, IS FAILURE NOW AN OPTION?" USA TODAY, July 1, 2011.

  * Waggoner, John, "INFLATION? NOT WITH A 9% JOBLESS RATE: DESPITE RISING FUEL AND FOOD COSTS, THE ECONOMY IS STILL TOO SLUGGISH," USA TODAY, June 9, 2011.

  * Waggoner, John, "MANY WILL NEED TO WORK PAST 65 – IF THEY CAN: MAKING ENDS MEET WILL BE A CHALLENGE," USA TODAY, December 7, 2010.

  * Waggoner, John, "WILL CHINA BOUNCE BACK AS GROWTH MARKET? FUNDS HAVE TANKED AS NATION TAPS THE BRAKES TO TAME SOARING PRICES," USA TODAY, November 14, 2011.

  * Walker, David M., COMEBACK AMERICA: TURNING THE COUNTRY AROUND AND RESTORING FISCAL RESPONSIBILITY, (NY, Random House, 2010).

  * Weise, Elizabeth, "FDA AIMS TO BOOST IMPORT SAFETY: PROPOSES GLOBAL COALITIONS TO POLICE FLOOD OF GOODS," USA TODAY, June 21, 2011.

  * Wessel, David, and Bob Davis, "PAIN FROM FREE TRADE SPURS SECOND THOUGHTS," THE WALL STREET JOURNAL, March 28, 2007.

  * West, Darrell M., BRAIN GAIN: RETHINKING U.S. IMMIGRATION POLICY, (Washington, D.C., Brookings Institution Press, 2010).

  * West, Darrell M., editorial, "7 MYTHS THAT HAVE CLOUDED THE IMMIGRATION DEBATE," USA TODAY, September 1, 2010.

  * Wicker, Elmus, BANKING PANICS OF THE GILDED AGE, (NY, Cambridge University Press, 2000).

  * Wilson, Dominic, and Anna Stupnytska, THE N-11: MORE THAN AN ACRONYM, Global Economics Paper No. 153, GOLDMAN SACHS, March 2007.

  * Wilson, Dominic, and Roopa Purushothman, DREAMING WITH THE BRICS: THE PATH TO 2050, Global Economics Paper No. 99, GOLDMAN SACHS, October 2003.

  * Wire reports, "AMERICA'S EQUITY IN HOMES NEAR RECORD LOW," USA TODAY, June 10, 2011.

  * Wiseman, Paul, "FEDS RETHINK SUBSIDIES FOR HOMEOWNERSHIP: WITH FANNIE, FREDDIE SHAKY, A RESTRUCTURING IS IN THE WORKS," USA TODAY, August 11, 2010.

  * Wiseman, Paul, "WATCHDOG CRITICIZES AIG RESCUE: SAYS FEDS SHOULD HAVE SOUGHT OTHER OPTIONS FIRST," USA TODAY, June 10, 2010.

  * Wolf, Richard, "ARE WE READY TO CUT THE U.S. DEFICIT? RISING ALARM OVER THE GOVERNMENT'S DEBT HAS CREATED A 'WINDOW' FOR MAKING SOME TOUGH CHOICES," USA TODAY, November 29, 2010.

  * Wolf, Richard, "FOR U.S., EUROPE DEBT STILL A THREAT: BANKING TO POLITICSz," USA TODAY, October 28, 2011.

  * Wolf, Richard, "IN JUST SEVEN WEEKS AMERICA COULD RUN OUT OF BORROWED MONEY...OR WOULD IT?" USA TODAY, June 16, 2011.

  * Wolf, Richard, "U.S. DEBT IS NOW EQUAL TO ECONOMY: $15 TRILLION RED INK PROJECTED TO SURGE," USA TODAY, January 9, 2012.

  * Woods Jr., Thomas E., MELTDOWN: A FREE-MARKET LOOK AT WHY THE STOCK MARKET COLLAPSED, THE ECONOMY TANKED, AND GOVERNMENT BAILOUTS WILL MAKE THINGS WORSE, (Washington, D.C., Regnery Publishing, 2009).

  * Wright et al eds., John W., THE NEW YORK TIMES 2011 ALMANAC, (NY, Penguin Books, 2010).

  * www.shadowstats.com.

  * www.usgovernmentspending.com.

  * Yarrow, Andrew L., FORGIVE US OUR DEBTS: THE INTERGENERATIONAL DANGERS OF FISCAL IRRESPONSIBILITY, (New Haven, Yale Univ. Press, 2008).

ACKNOLWEDGEMENTS

I am not sure if I would have started such an undertaking had it not been for my uncle, Shamim Malik's strong support in the matter. It was he who first encouraged me to put my thoughts on paper and who gave me valuable input on much needed improvements. It was my aunt, Dr. Maria Khan, to whom I owe a debt of gratitude for providing me with the means to do much of my research, research which helped me separate fact from popular rhetoric. Without it, I would have been stuck with a few dots and even fewer connections between them. I also owe a special thanks to my cousin, Tariq Malik, who went through the many stages of research, editing and re-editing with me, far more patient with me and generous with his time than I could have asked for, and never one to complain.

I am also grateful to my family, my parents Saifullah and Farhat Paracha, my sisters Muneeza and Zahra, and my brother Mustafa for bearing with me throughout.

Lastly, but most importantly, I am deeply grateful for the blessings that allowed it all to come to fruition, so much of it was due to opportunities far beyond my control.

 Money supply would include the currency in public hands along with savings with savings institutions like commercial banks.

 Tax rates for incomes between $100,000 and $150,000 were 56% and rates climbed as incomes rose.

 GNP or Gross National Product, which covers production by U.S. residents within and outside U.S. borders, was the official measure of the country's overall economy before 1991.

 These were under the Gold Reserve Act of 1934 and the Silver Purchase Act of 1934.

 Connally Hot Oil Act of 1935.

 This was through laws like the Bankhead Cotton Control Act, Tobacco Control Act and Potato Control Act.

 GDP or Gross Domestic Product which measures production of goods and services within the country was an official measure of the size of the economy since 1991.

 To get an idea of the privately employed workforce that grew from this strategy, according to Paul Light, NYU Professor of Government and federal service expert, in 2005 there were an estimated 10.5 million federal contract and grant jobs, over twice as many as in all three federal branches combined.1

 Medicare is a contributory program with a Social Security type payment model that provides federal health insurance to retirees. Its programs include Part A: inpatient hospital care, home health care, physical therapy, nursing care and related care; Part B: doctor care, outpatient care, lab and ambulance services; Part C: added benefits like eye exams through private contract firms; Part D: prescription medication.

Medicaid is a government health insurance program for the poor so its coverage is even more comprehensive than Medicare. Historically the federal government has shared the cost of Medicaid with the states in a ratio of 60:40.5 For the states Medicaid has been about 22 percent of their spending so it shows the priorities of the government at the federal and state level. 6

 The top five firms were Lockheed Martin, Boeing, General Dynamics, Northrop Grumman and Raytheon.

 Some of these defense expenses are non-discretionary in nature.

 The issue of intervention and its effects were covered in the first chapter.

 Economists and investors focus on the debt of the federal government so I have compared total debt of the central governments, however from the viewpoint of the American taxpayer state and local debt (roughly $2.4 trillion) must also be included, which puts the total debts of all levels of the government above 116% of the GDP. 7

 According to an estimate by billionaire investor Warren Buffett, America sells almost 2% of its own wealth each year for oil imports and foreign made goods. 13

 Some observers argue that a consumption focused economy is healthy because when a consumer buys a consumption item it gives the producers and sellers money to invest in machinery and buildings. Keeping aside that America's consumption was due to borrowed money, not a healthy sign, the above argument overlooks the fact that when the entire economy is focused on consumption it is not just consumers but also businesses and the government who are investing less and consuming more, so this line of reasoning does not apply here.

 As of mid 2011 the White House Office of Management and Budget's gross debt predictions for 2021 were at $26.3 trillion.20

 As of May 2011 the Treasury Department reported that mainland China held $1.16 trillion (however according to estimates by Stephen Green, head of greater China research for Standard Chartered Bank, China's total U.S. debt holdings – including those held by mainland China directly and through Hong Kong and the U.K. – were closer to $2 trillion), Japan held $912.4 billion, the U.K. held $346.5 billion and the oil exporters held $229.8 billion.24

 Here I should mention a popular misconception that America's lenders are far too reliant on the U.S. economy to risk weakening it by selling off U.S. debt. It is often explained as a situation in which if you owe your banker $5,000 it is your problem but if you owe him $50,000,000 it is his problem. This oversimplification of the relationship was disproven in earlier examples of indebted countries – historical evidence shows that lenders are in the stronger position to negotiate. I however have focused more on the ability of the lenders to fund future deficits which by all predictions will be quite large.

 The stated reason for the tax cut was to provide relief to taxpayers during an economic recession. But this did not change the fact that spending was increased while taxes were reduced which didn't get rid of the tax burden but passed it onto someone else in the future.

 State and local government revenues were growing till 2008 (9.8% in 2005, 7.4% in 2006, 5.2% in 2007 and 1.7% in 2008) and shrank by 5.5% in 2009.11

 For the government such projections are usually for the next 75 years.

 Please note that this is a ten year gap while the federal gap mentioned is a 75 year gap.

 The calculated federal obligations in this study were based on standard accounting rules in place since 2004 and data from Medicare and Social Security annual reports, plus an audited financial report of the federal government.

 Even President Calvin Coolidge, who was against confidence restoring intervention by the federal and state governments, believed that, "Local governments are justified in spending all the money necessary for the direct relief of distress. But the nation and the states will only increase the difficulties by undertaking to restore confidence through legislation."3

 Please note that the population of obese persons is included in the population of overweight individuals.

 For over a decade the University of Michigan Health System has a program whereby doctors disclose their mistake, apologize and compensate the injured patient (as mutually agreed) when it is appropriate to do so. Since then this has allowed the system to reduce the number of malpractice claims by 36% and could prove to be a viable model to curb lawsuits.37

 However consumable items like spices and grains have been used as currency in the past because they had properties which allowed them to be used as money in the absence of better alternatives.

 There are of course rare coins and currency notes that are bought at premium prices as collector's items but those are extremely rare.

 Recessions tend to be deflationary as economic problems (like job losses) push people to hold on to their money. As people stop spending, money leaves the economy bringing prices down in the process.

 When prices and wages start fluctuating governments start placing controls on them. It happened during the 1930s and the 1970s. Both times instability was caused by mismanaging the currency. But controlling prices and wages while flooding the economy with money at the same time was like cranking up the stove to full temperature while tightening the lid on a boiling kettle. Pressure from both sides only worsened the problem. The 1971 freeze on wages and prices was originally for 90 days but lasted nearly three years, beginning in August 1971 and not completely lifted until April 1974.

 Between 1995 and 1999 the M3 (a very broad measure of domestic money supply) increased by 41%, twice as fast as the GDP.23

 The most valuable contributions in explaining the effects of the banking system's credit expansion on the economy have been made by the Austrian school of economics.

 In chapter 1, I described the panic of 1893 as non-interventionary so I must explain the issue more clearly here. In 1893 the Treasury Department added $9 million in currency circulation during August, the last month of the panic. The government did not print new money, borrow money or engineer bailouts but simply repaid some of its debts to inject cash into the system during the shortage of money, as was the main practice.6 There was no intervention in the larger economy and the amount was far too small and far too late to have actually turned the panic around. Of the above mentioned attempts to intervene, only the one in 1890 actually changed the direction of the banking panic.

 Since this figure includes mortgage related securities also, the Fed's Treasury bonds make it the second largest lender to the federal government after China.

 In 2007 the five major investment banks – Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley were leveraged as high as 40 to 1, i.e. for every $40 in assets there was only $1 in capital to cover losses, so less than a 3% drop in asset prices could bankrupt a firm. Citigroup's total assets both on and off its balance sheet placed its leverage at 48 to 1 during that year while the government sponsored entities Fannie Mae and Freddie Mac had a combined leverage ratio (including loans they owned and guaranteed) at 75 to 1.31

 I chose the above 2000 figure over more recent ones because it shows the long-term change before the housing boom and bust. However, when prices peaked in 2006 a typical mortgage was worth nearly four times the typical annual salary with payments taking over 23% of one's yearly income and even after a historic bust, in 2010 a typical mortgage was still worth three times the typical annual salary with payments taking roughly 15% of one's yearly income.18

 Author David Cay Johnston has covered the issue of such subsidies in detail in his book, FREE LUNCH: HOW THE WEALTHIEST AMERICANS ENRICH THEMSELVES AT GOVERNMENT EXPENSE (AND STICK YOU WITH THE BILL).

 Moral Hazard: Behavior guided by the hope that if anything goes wrong someone else will step in to help out the owners, borrowers and lenders.

 In 1955 the American Federation of Labor merged with the Congress of Industrial Organizations to form the AFL-CIO.

 They were the AFSCME (American Federation of State, County, and Municipal Employees) as the top spender, the teachers' unions (American Federation of Teachers and the National Education Association) and the SEIU (Service Employees International Union.20

 In 2010 state and local employees got an average annual salary of $53,613+$17,533 in benefits = total compensation of $71,146. Private sector employees made an average of $62,757 in total compensation with $51,986 in average salary and $10,771 in average benefits in that year.35

 In her New York Times Bestseller, THE SHOCK DOCTRINE: THE RISE OF DISASTER CAPITALISM, author Naomi Klein has detailed the short-term and long-term consequences of economic shock treatment to countries over the past.

 Measured by 2009 estimates of exports as a share of GDP at official exchange rates.

 IPOs: Initial Public Offerings in which a company offers its shares to the wider public through the stock market.

 After a recessionary dip, manufacturing was 12% of the GDP according to recent figures.37

 In recent years economists have been placing emphasis on a new inflation measure called core inflation that excludes food and energy prices because of their volatility. To exclude the price of energy and food from an index that measures the rise in consumer prices is simply absurd. As Ken Goldstein, the economist for the Conference Board put it, "I was on a program a while back, talking about inflation (excluding) food and energy. I got an angry email saying, 'Hey, dummy, what the hell do you think we spend our money on?' It was from my brother."46

 I even saw this when I came across a piece of government data from the Bureau of Labor Statistics; one that economists, businesses and the media do not usually talk about. The common way to measure joblessness is to look at unemployment as a percentage of the labor force. Another way to measure joblessness is to count the number of jobless people as a percentage of the population of the country where total population numbers cannot be changed as easily as labor force numbers. The earlier mentioned u-3 bottomed at less than 5 percent in 2006, peaked at 10.2 percent in 2009 and fell to 8.1 percent in August of 2012. However the number of jobless people as a percentage of the country's entire population was around 33 percent in 2000, around 34 percent in the mid-2000s and kept rising until it was over 36 percent in 2012. Unlike the u-3 this shows that the workforce has been shrinking constantly for over a decade. 49

