There are many fascinating debates and arguments currently underway, regarding the future of the American — and by extension the global — economy. But that arena of discussion opens up only once you get past the tiresome mainstream pretence that the ongoing effort to restore the status quo existing prior to the crisis and crash is being successful and hence is worthwhile.Once you reject that stance, as this column has consistently done, then several important conclusions follow. First, the effort to put Humpty Dumpty back together is hopeless and pointless. That means that the finance-led economy in which the share of the financial sector in GDP grew constantly and voraciously, is not coming back. The financial sector will shrink and many more of the inefficient and corrupt behemoths that developed in the Old World will shrink, merge or simply disappear. So, too, will other sectors that came to rely on government handouts for survival in a world in which they and their business models were clearly incapable of surviving: the automobile industry – the Detroit model, not the Tennessee one – and the airline sector are two obvious examples.
Thus the first stage of the real debate about the American economy is between those who believe it is doomed in its entirety – because the many weak sectors will drag down the rest, thanks to their stranglehold on the politicians and thus on the public purse – versus those who maintain that the outcome will be exactly the opposite. In the end, and the sooner the better for the sake of the country and most of its citizens, the dead wood will be chopped off. The US will not emulate Japan to the bitter end and endure ten, twenty or more years of gradual but inexorable demise. It will muster the determination to let go of what cannot be revived and thereby allow resources – capital, labour and above all managerial know-how – to flow to the new and promising areas of the economy.
That there are such areas, and that they are numerous, cannot and should not be in doubt. Some of them are the ones we have heard of and know to declaim, parrot-like, even if we don’t know how they work or even what they are: nano-technology, clean technologies, bio-technology, etc. The key word, if you didn’t notice, is ‘technology’. The world is not standing still, let alone going backwards. On the contrary, the pace of scientific development is faster than ever and what the mavens can see coming down the road in these and other sectors is truly staggering. On top of that are all the things that are going to emerge ‘out of the blue’, in other words those technologies and the firms and industries that will commercialise them – but that no expert foresaw, or even dreamt of. Think ‘social networking’, from SMS onwards, as the ‘by-product’ of the mobile telephone, and check back to the early 90s to see if anyone had any inkling that that’s where telephony would go.
But you can accept that this vision of the future of the world economy is correct, yet disagree vis-à-vis its relevance to the US. Thus there is a school of thought that says that the US is doomed not because – or at least not just because – Wall Street is in unassailable control, but (also) because the tax system is now stacked against small businesses. Or because innovation is being crushed, i.e. disincentivised, not just by punitive taxes but by a much wider social change in which entrepreneurial spirit, the traditional driving force of the American economy, is spurned or vilified. Or because the US education system is broken and cannot produce either top-quality researchers or rank-and-file executives and employees to make and market the new products. An extra twist is imparted to this litany of woes by those who say “not only have we lost these abilities, but the Chinese (or Indians, or someone else) have them and/or are developing them”.
Yet there are those who claim – and cite evidence to support the claim – that the opposite is true: the US is still a dynamic and ambitious society, which can and will lead the world in the new technologies that will dominate the 21st century, as it did in the technologies that dominated the 20th century. Furthermore, not only is it “yes, we can”, but it’s also “no, they can’t” – a string of factors why neither China, nor India, nor Brazil nor any other putative rival cannot match the existing and potential strength of the US.
These are the real issues, for the coming year and for the next decade at least. The economic and financial crisis that began in 2007 is far, far from over. The cyclical recovery spurred by government intervention is fading and future efforts to “save” firms and industries that are beyond salvation will only delay the inevitable. The same applies to macro-economic concepts and policies and political structures based on them, which have proven to be unviable – such as the free flow of capital and labour, one of the central dogma of neo-liberal economics, or the provision of generous pensions to public-sector employees. The fire raging will destroy the forests of dead wood, of that there can be no doubt. What is unclear, but critical, is whether Schumpeterian ‘creative destruction’ will triumph – will be allowed to triumph – and how soon?