The world economics history book well recorded the fact that among the countries regarded as capitalist in their economic system, America is the one without match. American capitalism was one economic system which many countries aspire to emulate. In modern economic times, America has comfortably positioned itself as the number one economy on our planet.
Indeed America has been the world’s most important growth machine since the Second World War. In the 1950s and 1960s its GDP grew by 3% a year despite the economy’s maturity. In the 1970s it endured stagflation, but the Reagan revolution revived the entrepreneurial spirit and the growth rate returned to 3% in the 1990s. The machine was good for the world as well as America itself. It helped spread the gospel of capitalism and transform the American dream into a global dream.
Today America’s growth machine is in trouble. It all but exploded in the financial crisis of 2007-2008,but even before then it had been juddering. One can examine the machine’s three most powerful pistons – capital markets, innovation and the knowledge economy – and discover that they had been malfunctioning for a decade.
The United States once boasted the world’s most business-friendly capital market. Accumulation and investment of capital drives the production process, but in recent years the boast has rung hollow as Robert Litan and Carl Schramm point out in their new book, “Better Capitalism.” The American economy became the one in which the creation and expenditure of credit drives things.
America also used to have one of the most business-friendly immigration policies. All 18% of the Fortune 500 list as of 2012 including AT&T, DuPont, eBay, Google, Kraft, Heinz and Procter & Gamble, were founded by immigrants. Include the children of immigrants and the figure is 40%. Immigrants founded a quarter of the successful high-tech and engineering companies between 1995 and 2005. They obtain patents at twice the rate of American-born people with the same educational credentials.
But America’s immigration policies have tightened dramatically over the past decade, a period in which some rich countries like Canada have continued to woo skilled immigrants, while fabulous new opportunities have opened up in emerging markets like China and India.
America has long boasted the world’s most business-friendly universities. One-fifth of American start-ups are linked to universities, and great institutions spawn businesses by the thousands. But the university-business boom seems to be fading. University technology offices, which legally have first dibs at commercializing the faculty’s ideas, have evolved into clumsy bureaucracies.
These problems all bear more heavily on entrepreneurs than established companies. Foreign-born entrepreneurs are finding it harder to gain citizenship. Academics are finding it harder to commercialize their ideas.
Capitalism, it is worth recalling, is an economic system in which the private sector drives the economic process through savings, capital accumulation and investment. Therefore, the role of the government is very limited. However, contrary to all the rhetoric, the United States has not had that kind of economic system for decade.
Today, the United States federal government spends $24 out of every $100 spent in the economy. The United States central bank creates the money and manipulates its value. Almost all major United States industries are subsidized in one way or another by the government and almost half of all households receive some kind of government assistance.
As indicated previously, the economy itself is no longer driven by savings and investment. Instead, it is driven by credit creation and consumption. This is not an economic regime that can be called capitalism. Market forces no longer drive the economy. The current system is government-directed, but not planned. Government policy is determined through a process of compromises between the demands of competing power blocks such as big business, the banking industry, the military, the elderly and the general public, which, until recently, had grown to expect an ever-improving standard of living.
Deficit spending and fiat money which is money created by the government, allowed the government to satisfy all those competing demands for more than a generation. During that time, a key component of government policy has been to channel ever-greater quantities of credit to the household sector. As total available credit expanded 50 times in less than 50 years, it created wealth and kept the “American Dream” alive. That extraordinary expansion of credit, however, changed the nature of the economic system itself. As a matter of fact, American capitalism has become “Creditism”, for lack of a better word. This new credit-based economic system, which requires further credit growth to survive, is now in crisis because the household sector cannot bear any additional debt. The gap between its debt and its income has simply become too great to bear.
American economic pundits like Richard Duncan, argue that in order to support a large and prosperous economy like that of America, what is needed is a turnaround not towards austerity, but smart public investment. According to them, the first step toward finding a lasting solution to this crisis is to form a realistic understanding of the nature of this economic system, not as it used to be, and not as any particular group thinks it should be, but rather as it really is. Only then will it be possible to devise a strategy that can correct its faults.
The key question for America is not whether it is going to abandon capitalism and replace it with a different kind of economic system. Actually, America did that a decade ago. The question is can the American government allow the economic system now in place to collapse? Some economic analysts, thus, explained that this economic crisis marks a crossroads for the American civilization. The option for America is to grasp and fearlessly exploit the immense possibilities inherent in its new credit-based economic system, or else fail to grasp them and collapse into what could prove to be decades of misery.
To avert total economic breakdown, the United States will need to make use of the new policy tools that its new economic system has made possible. Since the private sector cannot bear any more debt, the public sector will have to. Since the financial crisis began in 2008, the United States government’s debt has increased by $5 trillion. It was this increase in government debt that kept the United States and the world from collapsing into a new “Great Depression”.
The world economy is now on government life support and that life support is going to continue. The only question is whether the money will be wasted or spent wisely. The sustainability of the entire economic superstructure depends on how this debt-financed government spending is used in the coming years. If it is used for consumption, then it will generate no return and the superstructure will collapse.
One of the most crucial measures to reverse this worrying trend is reviving America’s entrepreneurial spirit. The recent “Jobs Act” was a step in the right direction, not least because it suggested that the political elite are beginning to realize the seriousness of the problem. The act exempts new companies, for their first five years, from the onerous “Sarbanes-Oxley” (SOX) regulations passed in 2002, in response to a spate of corporate scandals. The act quadruples the numbers of shareholders that private companies can have before they have to go public. It also removes barriers to crown funding.
The government should give green cards to all foreigners who come to America to study science, technology, engineering or math. Some are more innovative. University technology offices should lose their monopolies, giving professors more freedom to exploit their innovations. They should also apply themselves to the everyday problems of real life entrepreneurs instead of differing into academic abstractions.
It is really understandable that it is hard to recommend such sensible ideas to the American government without a sense of foreboding. With the Republicans, who are controlling Congress, are intent on forgetting Ronald Reagan’s enthusiasm for immigration, and the Democrats, who are controlling the presidency and the Senate, and are intent on demonizing business people; America’s entrepreneurs are more endangered than ever.
However, there is always hope and optimism. President Barak Obama in his re-election victory speech last Wednesday said that, despite all the hardships caused by the economic crisis, the American people will hear the determination in the voice of a young field organizer who’s working his way through college, and wants to make sure that every child has that same opportunity and the pride in the voice of a volunteer who is going door to door because her brother was finally hired when the local auto plant added another shift. He also said that the American people want their kids to grow up in a country where they have access to the best schools and the best teachers as well as a country that lives up to its legacy as the global leader in technology and discovery and innovation and with all the new jobs and new businesses that follow.
It is true that, as it has for more than two centuries, progress will come in fits and starts; it’s not always a straight line and a smooth path. As he said, the American people voted for him not for politics as usual, but rather for concrete action. Indeed they elected him to focus on their jobs, not his. He really has got more work to do converting his “more hope about their future” into reality and the best to come soon in his second and last term as a leader of “capitalist” America.