Executive Summary

On Jan 31st, 2007, the President of the United States gave his speech on the “State of the Union” citing strong economic growth, record Dow Jones performance and low unemployment rate. This report depicts a different picture than the one announced. A deeper look into the economy reveals that the painted rosy picture is based on selective facts instead of a neutral assessment of all the relevant numbers and economic trends. According to the author of the white paper, "It is true that the U.S. Economy grew at 3.5 percent rate in 4th quarter of 2006, but that growth is unhealthy. The real economic growth is much less than advertised. Since 2001, the U.S. economic growth has been largely fueled by rapid increases in asset prices (housing bubble) and expanding consumer debt, rather than development projects, which result in non-sustainable debt-driven growth. In order to address the emerging socioeconomic risks, policy makers must acknowledge the economy's strengths, weaknesses, opportunities and threats. The U.S. Government must be candid in communicating with the American public and the approach must be direct."

This IIM white paper provides the following: 1). A neutral assessment of the current U.S. economic health, 2). An analysis of long-term consequences of current policy decisions 3). Emerging economic, social and geopolitical threats to U.S. financial prosperity 4). Risk mitigation strategies

The paper addresses the key challenges facing the U.S. Government's policies and attempts to answer the following critical questions:

1. The United States economy has been resilient, but for how much longer? Can the U.S. economy sustain unlimited economic growth?
2. Will the United States face another economic crisis and if so, when? How strong and how long will the negative cycle be?
3. How can the United States manage the financial costs of the aging baby-boom generation?
4. How can the United States compete with low-cost China, India, Mexico and other economies?
5. How can the United States fight and win the antiterrorism war and at the same time not lose international allies and economic partners?
6. How can the U.S. Government mitigate social, economic and geopolitical risks and reverse the negative trend?
7. What will be the price of recovery be from past and current policy mistakes?

The white paper summarizes the study in ten sections: 1). Historical perspective, 2). Economic risks, 3). Social risks 4). Geopolitical risks, 5). Root cause analysis 6). Government policy options and their price, 7). Recommended strategies 8). Best practices 9) Notes and 10). Resources.

1) U.S. Historical Perspective

No economy can sustain unlimited growth. The economy behaves in cycles; for every up cycle there is a down cycle, it is only a question of how long and how steep the curve is. The next decade is probably the most critical for U.S. socioeconomic prosperity. Let's start with a historical perspective:

2) U.S. Economic Risks

This section provides a quick assessment of the U.S. economic health status. The basic commonsense formula to assess the health of an economy is as follows:

• Over the long term, if government revenues continue to be more than expenditures (surplus), then the economic health of the country improves, because the government can afford to invest in development projects such as research and development, education and infrastructure. With more income, the government can also afford to lower taxes, which increases corporate profits and attracts more foreign investors, resulting in more economic activities, creating more jobs and enlarging consumer spending and government revenues despite income tax cuts. It is what I call a virtuous economic cycle.

• Over the long term, if government revenues continue to be less than the expenditures (deficit), then the economic health of the country worsens because this will result in accumulated debt. An increasing government debt will result in higher interest payments, and less money available for socioeconomic development. To pay for the debt, the government will have to raise taxes, which will reduce the competitive position of the country in the global economy and chase investors away resulting in less economic activities and more job losses. In order to avoid higher unemployment and social instability, the government has to raise more debt to fund spending and welfare support by raising the interest rate which will increase the cost of money, reduce corporate profits and slow economic investments, thus resulting in more job losses and reduced government revenues, despite income tax increases. It is what I call a vicious economic cycle.

But how good or how bad is the economy?

To properly assess the health of an economy, it is important to take note of the revenues, expenditure and debt numbers in relation to each other. Here is the big picture using bullet-point format:

• The size of the U.S. economy = $13 trillion. Commonly known as the Gross Domestic Product (GDP) - Mostly driven by inflated real estate and related asset pricing (housing and mortgage/financial bubble)

• US National Debt is about $10.5 trillion (actual numbers are much higher, since US government accounting rules do not meet private business accounting standards)

• Foreign Debtors hold about 45% of the US National Debt (Mainly China, EU, Japan and Oil producing countries)

Economic Growth

• The actual U.S. economic growth is much less than advertised. Since 2001, economic growth has been largely fueled by rapid increases in asset prices (housing bubble) and expanding consumer debt rather than spending on business investments and new income generation projects, this results in unsustainable and unhealthy growth.

• But how come the stock market is doing well? The short-term impact of the slowdown in real estate prices is to drive investors to move their money into the stock market for better returns. But as the dollar value drops and the interest rates increase, investors will move their money from stocks to bonds, gold or even to other international markets with competing currencies to avoid the depreciating dollar

• The investors are not aware of the highly inflated asset prices, especially the mortgage-backed securities promoted by Wall street as high-quality financial instruments, while in fact they are very high risk securities. Most investors base their investment on future expectations (speculation) rather than fundamental financial health.

• A careful analysis of the fundamentals of the US economy shows declining manufacturing, production and business competitiveness compared to other nations in the global economy

National Debt

• In 2000, the U.S. Government had a surplus (profit) of about $237 billion (the largest in U.S. history). In 2006, the budget deficit was about $390 billion (loss). For information on Whitehouse budget details please visit http://www.whitehouse.gov/omb/budget/fy2006/tables.html

• Although the 2006 budget deficit (loss) was only about 3% of GDP, the problem is the accumulation of losses over multiple years, hence the need for debt to finance the deficit. By the end of 2006 (over a period of 6 years), the accumulated national debt was about $8.3 trillion (the largest in U.S. history!). The U.S. Government has borrowed that money to pay for tax breaks, new Medicare drug benefits, the war in Iraq, foreign aid and other policies.

• A large national debt is bad. Why? The Government has to pay interest on the debt. As the debt and the interest payment grow, eventually all the Government can afford to do is pay the interest payments, with no money left over for other socioeconomic development investments or even critical expenditures. If uncontrolled, this could leads to states and national bankruptcy and major related socioeconomic crises.

• Suring the 2006 fiscal year, the U. S. Government spent $406 Billion of its budget on interest payments to the holders of the national debt. Compare that to Education at $61 Billion, and Department of Transportation at $56 Billion. When interest payments become larger than other critical socioeconomic budgets, this calls for major concern.

Consumer Debt

• Consumers are the main engine of any economy, the less money the consumer has to spend or invest, the less is the economic growth. By the end of 2006, the U.S. consumer debt was about $11 trillion

• According to the Commerce Department, the personal savings rate for 2006 was a negative 1 percent; the worst in 73 years!. This is the lowest level since the Great Depression, which could be a problem for the millions of retiring baby boomers and for the job market.

• U.S. home mortgages debt = $8.2 trillion. Due to the housing bubble in recent years, U.S. homebuyers took on more debt to buy overpriced homes, thus reducing share of disposable income. Many Americans refinanced their homes during the real-estate boom to pay for living expenses. With the expected housing bubble bust, Americans could lose a significant part of their wealth and savings.

• The slowing economy will lead many small businesses and consumers to go bankrupt. Foreseeing this, U.S. lenders have lobbied the Government to make changes to the bankruptcy laws, to make it more difficult to get rid of debt.

• The banks will suffer from huge losses and will have liquidity and credit problems resulting in additional limitations on economic activities.

Interest Rates

• To stop the free-fall of the housing and financial sectors the Federal Reserve will reduce the interest rates close to zero, but the continuing decline of the US dollar value will force the US to raise interest rates to prevent a currency crash (major devaluation in US dollar).

• The higher the debt and the interest rate, the more costly the financing will be and the less money is available for investing in economic development and business growth.

• In 2006, the average return on equity investment (stocks) was 8% while the bonds interest rate was 5%. With major financial market losses, investors will flee to more secure investments. Higher interest rates result in lower investment activities, because investors will buy gold and more secure bonds than risky stocks, thus hurting the stock market and impeding economic recovery.

Foreign Debt & Investment

• In early 2006, overseas investors held $13.6 trillion in U.S. stocks, bonds, real estate, businesses and other assets.

• About 45% of the U.S. public debt is owed to foreign holdings (up from 40% in 2005). China, Japan, the EU, Saudi Arabia and Oil Exporters are the largest creditors. They financed the U.S. economy expenditures by buying U.S. Government and corporate bonds and mortgage-backed securities. They are the United States' biggest bankers, any of which could cause the United States serious financial problems, if they so desired.

• According to the Commerce Department, the United States paid more to its foreign creditors than it took in from its overseas investments. The gap was about $2.5 billion for the last quarter - the first time that has happened in more than 90 years! (Are you noticing the negative trends in numbers?)

• For fiscal year 2006, investment flows turned negative by $7.3 billion from a surplus of $11.3 billion in 2005. It was the first time investment income has been negative on records going back to 1929. That means foreigners earned more on their US holdings than Americans earned on their overseas investments.
   

Balance of Trade & Global Competitiveness

• The U.S. 2005 balance of trade deficit was $723 billion. The number for 2006 is expected to be higher. In other words, foreign companies are better at competing than domestic U.S. companies. With the improvement of IT & Telecom technologies, offshoring will increase and knowledge networks will expand. In other words, the U.S. businesses will decline in international competitiveness. The United States is not the only economic superpower any more. In a global economy, the name of the game is global competition: Boeing vs. Airbus, Intel vs. AMD, GM vs. Toyota, and so on. The U.S. cannot compete with China’s low-cost manufacturing or India’s low-cost services. Several of U.S.’s largest companies such as Intel, Boeing, GM and Ford are closing local factories and laying off workers due to slowing demands and increased global competition. In 2005, the U.S. lost more than 500,000 jobs. Similar numbers are expected for 2006, higher numbers for 2007 and 2008

• According to Commerce Department (March 15, 2007) the imbalance in the current account jumped 8.2 percent to $856.7 billion, representing a record 6.5 percent of the total economy. It marked the fifth straight year the current account deficit set a record.

Oil Prices

• The rapid growth of China, India and other developing countries will create major demands for oil, thus depleting the energy supply. This will result in an inevitable increase in oil prices, thus negatively impacting transportation and energy costs, raising the cost of local products and services and reducing company profits and household disposable income. Soaring energy costs, combined with negative personal savings rates create strong negative forces that impede U.S. economic growth.

• With the shortage in world supply of oil, some analysts claim that this is the main driver behind the U.S. policy towards Iraq, Sudan and Iran - that is to control as many oil supply sources as possible and pre-empt EU, China and India.

Dollar Exchange Rate

• In the past few years, the U.S. dollar has slipped about 40% against the Euro and other major currencies. In other words, U.S. citizen's buying power is reduced significantly. The weaker dollar causes the price of imports to rise (Wal-Mart buys about $20 billion in goods from China alone). The low-income sector has not felt the price increase because of the intervention of the Chinese Central Bank to prevent the floating of its Yuan currency. If China allows the Yuan to float freely, then the prices can increase 50% or more. Not only would the price of imports increase, but local goods will increase as well, due to the following; (1) the increased cost of imported raw material and components (2) the increased price of foreign products, will provide coverage for local producers to increase their prices, in order to make more profit.

Economic Confidence

• What is the U.S. economic outlook? If you compare the global economy to the stock market and the U.S. economy to a company listed on that market, then the real question is: Would you invest in a company that is losing money and increasing its debt for several years in a row? Or would you invest in one of its competitors which shows increasing market share and profit (surplus)? Granted that "USA Inc." is the largest company in the global market, but the global investors put more weight on profitable growth and performance trends than the size.

• The worst thing that could happen to an economy is the loss of confidence. If the U.S. Government does not commit to reducing federal budget deficits, control financial markets greed, and investors speculations, at some point in time foreign banks and investors could panic and rush to dump their dollars to be the first out of a sinking currency, thus making the economic crisis far worse and recovery more difficult. China has already signaled its intention to decouple the currencies, which could lead to the loss of trillions of dollars in U.S. Treasury value. In order to minimize that loss, the Chinese will have to sell off some of their U.S. holdings. The real danger is how much and how fast China will do so. If they decide to do it quickly, they will prompt huge panic by other lending countries. Investors will have to copy China’s moves, resulting in a disaster to the dollar value, interest rate, stock market, homeowners and the U.S. economy as a whole.

3) U.S. Social Risks

• Social Security payments go in the Social Security Trust Fund. The purpose of any surplus payments to Social Security is to pay future benefits. But the U.S. Government has spent all of the money in the Social Security Fund. That's part of the national debt.

• By 2025, nearly a quarter of Americans will be over 60, a shift with huge implications for the U.S. social services budget and economy. Those baby boomers will be a major voting force and will influence Government decisions to raise taxes to support Social Security and Medicare, which will reduce individual salaries, companies' profits, investments and domestic competitiveness.

• With lower Social Security payout and higher healthcare and living costs, many seniors will have to go back to employment to support themselves, thus competing with the younger generation for the already declining number of jobs. The higher labor supply and lower demand for employees will create intense competition and increase work stress on the individual and the society. Think of the younger generations resenting the baby boomers, blaming them for a falling standard of living.

• I would not be surprised if many senior and richer U.S. citizens start emigrating to other more affordable countries, taking their savings and wealth with them so they can live there for the rest of their lives, or simply to invest in stronger economies with stronger currencies. Because of the extremely high US healthcare costs, some Americans are already traveling overseas to get treated and buying their prescriptions bills from foreign pharmacies via the internet.

• Lower federal and state budgets will result in higher cost of education, this will lead to less access to equal opportunities and will increase the socioeconomic gap.

• Think of the impact of thinning middle-class layer and the increase in an economic distribution gap. That can result in a major social and political crises, further complicating recovery.

• The deteriorating economic conditions can stress the social fabric of the nation. Extreme socioeconomic situations are more likely to produce racial, religious and political extremism. Blaming other groups is a classic response to the times of hardship, especially when others practice a different religion or belong to another race or economic class.

4) U.S. Geopolitical Risks

• No one disputes the right of the United States to defend itself against terrorism, however, the way it is conducting the war on terrorism is a highly controversial issue inside and outside the country. Regardless of one's positive or negative opinion of the current U.S. foreign policy, the launch of the U.S. war on Iraq with "a fabricated WMD threat report" or "bad-intelligence”, without the support of the international community, the 600 thousand Iraqi civilian casualties, the extensive infrastructure destruction in Iraq, the Abu Ghuraib torture scandal, the Haditha's civilian massacre scandal, the Iraqi sectarian war, the Guantanamo prison camp, the disregard of the Geneva Convention's agreement on torture and the treatment of prisoners of war and the ignoring of the Middle East peace process have all hurt the U.S. fight against terrorism and destroyed the American international goodwill and trust.

• The common international perception is that the Iraq war is driven primarily by the U.S. interest to control Iraqi oil resources and that the current U.S. Government foreign policy is driven by an ideology of domination and exploitation rather than peace and collaboration (regardless if it it is true or not, perception is reality). Both trust and goodwill are critical elements of productive diplomatic and business relationships. Without those elements, it is much more difficult to promote the U.S. global socioeconomic agenda and this will seriously hinder the collaboration  with foreign central banks and investors for the needed economic recovery.

• In addition to the Iraq war, the U.S. financial, political and weapon support of Israeli war on the Palestinian territories and Lebanon in 2006 have increased anti-American sentiments and fueled terrorist recruitments, thus providing more future risk to the U.S. stability and economy and increasing expenditures on security and defense. War policies take away from Government's time, effort and budget and are almost always at the expenses of socioeconomic development initiatives such as education and infrastructure development.

• The U.S. media and foreign policies are erecting major psychological and political barriers to socioeconomic exchange between the U.S. and about 1.5 billion Muslim in more than 30 countries, further fueling extremists' agenda for driving the situation into the clash of civilization, another future World War or "Armageddon" which is driven by, and hoped for, by extremist religious groups on both sides of the conflict.

• The onslaught of post 9/11 negative media toward Arab and Islamic countries is having a major impact on U.S. foreign policies and economic relations. An example is the rejection of Dubai's winning bid to manage the U.S. ports. It is worth noting that Dubai (UAE) is a moderate Arab country and a U.S. ally. As a normal psychological reaction to those policies, many of the rich Arab and oil investors are considering investing elsewhere (rather than traditional U.S. markets). Arab countries are awarding lucrative national development projects to competing European and Chinese companies. For example, the development of Sudan's oil industry is now dominated by the Chinese oil companies instead of the traditional American companies. Many of the elite and rich Arab families, tourists and businesses are going to competing European schools and economies to spend their money and build stronger investment and business partnerships.

• While the U.S. politics, army and media were busy with the Middle East hostilities, China, Russia and the EU were busy building stronger socioeconomic relations with Middle Eastern countries though joint economic development initiatives and open cultural dialogues. It is a known fact, "people do business with people they like". Why else do you think Dubai lost the U.S. port deal after they won it? Why else do you think Sudan choose China instead of the U.S. as its primary oil investor and partner? Who do you think has a better global competing strategy the U.S. or the EU, Japan & China?

• The Palestinian-Israeli conflict and the U.S. animosity with Iran has led the Iranian Government to plan Euro-Perto Bourse in an effort to weaken U.S. dollar domination on oil trade. The new Bourse will compete with New York's Mercantile Exchange (NYMEX) and London’s International Petroleum Exchange (IPE) for international oil trades. It should be noted that both the IPE and NYMEX are owned by U.S. corporations. The IPE was bought in 2001 by a consortium that includes BP, Goldman Sachs and Morgan Stanley. In fact if there was peace in the Middle East, the Iranian nuclear energy project would actually help the U.S. economy, because it allows Iran to export more oil, thus reducing the price of oil.

• In 2005, U.S. dependency (in dollar amounts) on imported oil was half of imported manufactured goods. If the U.S. launches another war or an attack on Iran, that would most definitely lead to a sharp increase in oil prices and further risk for the U.S. economic recovery. Not to mention the ability of Iran to finance and support attacks on the U.S. anywhere in the world.

• Tensions with Russia, Iran, North Korea, Syria, Venezuela and other Latin American countries can lead to an escalation that may unify these countries to build a major force against the U.S. causing further damages.

• Except in a few isolated cases, history shows that the fight against terrorism cannot be won by military force alone. Only political solutions can result in a lasting peace. By watching how people and organizations adapt to conflicts and improve their fighting weapons and tactics, one can see that it is only a matter of time before the opponents of the United States will acquire or develop much more dangerous terrorizing weapons, such as dirty bombs (biological, chemical or nuclear). Another 9/11- scale attack or several other smaller attacks could result in major havoc on the U.S. economy and cause investors to flee to more stable business environments.

• The continuation in the current foreign policy direction may risk some creditors getting back at the United States through economic measures. That could cause major economic damage.

5) Root Cause Analysis

So what led to the current situation?

Let's explore the possible causes of the economic crisis:

• A series of short-term-gain policies by incompetent or corrupt politicians?
  Although no one can judge the intentions behind any policy, the competency is easily judged by the results.

• Ideologically driven policies, rather than pragmatically driven policies?
  This can be judged by the politician's own statements, and again, by the results.

• Bought-and-paid-for analysts and lobbyists promoting foreign or private interests over national or public interests?
  Analysis of foreign and local media watchdog reports will always reveal the hidden agendas and the beneficiaries from each new policy.

• Misinformation promoted by media analysts and commentators have led the country in the wrong direction?
  Again, the best way to judge the competency of the media commentators is by the review of media archives and the final results.

• Ivory-tower economists not in touch with real business challenges?
  To be fair, that may not be the case here; the U.S. Federal Reserve has done a good job so far in controlling and pacing interest rates changes, but there is not much that they can do beyond that. A better policy is to educate the public and address the threats openly and directly. That does not mean that they cannot make bad decisions in the future.

• Tax policies?
  Not increasing taxes was a wise measure that helped businesses and investors, however, the Government has no other choice but to raise future taxes in order to balance the budget and pay for national debt.

• Uncontrollable external events?
  While 9/11 was a major negative event, it is the reaction to that event that counts. The U.S. Government cannot blame everything on 9/11, especially the failed U.S. foreign-relations and economic policies.

• The pitfalls of the powerful?
  If the American public does not stop the foreign wars for ethical and humanitarian reasons, there are few politicians who have the incentives to do so. Many U.S. politicians consider Iraq to be a military success. Their unstated logic is that they lost about 3000 Americans (2006 Data) since the start of the Iraq war in 2003. In their the minds they are thinking, "So what! About 40,000 Americans die every year on the highways from auto accidents".  When politicians have such superior power, they are tempted to use it every time things don't go their way. Especially, if there is no other major constraining force. - The saying absolute power corrupts absolutely is not far fetched.

• Last but not least, could it be that the U.S. consumer culture has resulted in a huge consumer debt, thus weakening the economic engine?
  That seems to be the general consensus.

6) Economic Recovery Policy Options

A scientific economic fact: Any economy that is built on uncontrolled debt will eventually crash. An increasing debt is a vicious cycle that can only be broken through a strategy shift and operations restructuring. In IIM's opinion, the conditions for a crash were not met in 2006, however, attention must be paid early to avoid coming closer to the tipping point. The more the current Administration waits to make a change, the stronger the downward momentum and the more the inertia will be to reverse the direction. In other words, the  socioeconomic and political pains that will result from the necessary reforms will be much more painful.

So what policy options are available to the U.S. Government to help it overcome the above listed challenges?

To pay the bill for the annual economic expenses, Social Security deficit (care for baby boomers), debt financing, and economic growth, the U.S. Government will have to resort to a combination of the following options:

• Allow the dollar value to fall so that it can pay debts more cheaply. That may increase inflation and will lower the real purchasing power of U.S. citizens and businesses, but at the same time, this may improve price competitiveness with other countries. With the new currency exchange rate, salaries of the American worker become more competitive with their European counterpart. That will reduce the salary gap with China and India, thus slowing offshoring).

• Increase interest rates to attract enough money back to the United States. That is a poor choice, as it will make it tougher and more costly to raise capital. Also, increasing interest rates will result in savers investing less in the stock market, thus slowing economic growth. Increased interest rates will result in lower demand on the housing market and thereby a major loss in home values.

• Increase taxes. That is another difficult option, which will reduce business profits and U.S. ability to attract foreign investments.

• The U.S. has to sell more assets (telecom, utility infrastructure, and other assets) to overseas investors. Buyers look for a bargain and this will result in foreign control of major national assets -- A high price to pay.

• Reduce the U.S. Government budget across all major sectors, including defense, education, health and other social programs. That option will cause major layoffs in public and private sectors and will face major challenges from the strongest union lobbies and the public.

• Relax immigration policies, which will provide U.S. with more competitive labor (competing with China and India) and at the same time it will create a larger consumer base (helping in economic growth). Most likely that option will be opposed by the white majority, fearing cultural and political change. Not forgetting that the U.S. itself is a nation of immigrants and its economic prosperity is credited to the hard work of these emigrants. The U.S. Government can manage immigration policies in such a way as to attract productive immigrants and minimize negative impact on the culture. One such example is open immigration doors to doctors and nurses to reduce the cost of labor in the health care sector. The opening of the US insurance and pharmaceutical markets to global competition should bring the cost of healthcare significantly down. Healthcare costs are a major burden on US consumers and businesses

• Recharge the U.S. innovation engine and generate new unique products and services to for exports, make more profits to pay off debt and attract foreign investments. That is the best possible solution and would offer the U.S. the most competitive advantage. The U.S. has given the world the most valuable modern innovations including atomic energy, computers and the Internet. Future bets are on nanotechnology, alternative energy, bioengineering and medical innovations to mention a few.

The U.S. will resort to the use of more than one option. All options except the last one will have a heavy socioeconomic price tag.

7 ) IIM Recommended Strategies for the Economic Recovery

The U.S. Government must formulate a new economic strategy to address the two most critical challenges: debt and competitiveness.

Before formulating a new strategy and launching reform initiatives, U.S. policy makers and the American public must acknowledge and accept that the solution must be long-term and cannot be pain-free. Leaders must make tough decisions rather than push them on to the next presidency. The Government must be honest in communicating with the public and the approach must be direct.

Problem 1: National Debt

• The U.S. Government must commit to reducing the federal deficit, i.e. the U.S. Government must tighten its belt to reduce expenditures and operational costs.

• The U.S. Government should not increase interest rates or taxes, however, this a highly debatable issue. Yes, that may lead to inflation, but the policy priority should be healthy economic growth over any other issue. Economic growth avoids many other social and economic crises.

• Institute new energy policies to promote better energy performance standards and to provide energy-saving tax incentives to reduce energy waste. Promote the development of alternative energy sources and technologies to help reduce the demand for oil.

• Both Government and business leaders need to exit and divest losing economic sectors (where U.S. cannot compete). Government bailouts of failing industries is counter productive and rewards bad management behavior. Let the free markets correct themselves and produce new industries. The only exception for government intervention is to invest in star industries through R&D subsidies and tax holidays for new startup businesses.  

• Encourage major reductions in pharmaceutical, healthcare and insurance costs. Reform liability laws and open the market for international competition to reduce prices and become more competitive.

• Encourage the development of the quality of education and lower its costs by reducing accreditation bureaucracy, ending state education monopolies through unnecessary regulations and removing competitive barriers for the entry of private education instituttions.

• Reduce foreign and military aid to other countries and re-invest the money in the local economy. When necessary, invest in foreign joint-development projects sharing the risks and the rewards rather than just giving the money away.

• Re-prioritize expenditure from space exploration and defense to other economic development and small business creation

• The U.S. Administration must consider the historical lessons of falling empires. One of the main reasons for the decline of early empires was the wasting of their national resources on wars and conflicts. The problem with conflicts is that they are made of vicious and expanding cycles. They are high-risk ventures that take a lot of time, effort and money to win. One need not go far to see the evidence. Just consider the U.S. cost of the Israeli-Palestinian conflict in terms of the financial aid, military aid, cost of combating terrorism, U.S. foreign relations and the Administration time and effort. What would have happened if the U.S. had spent half the amount of time, money and effort to reach a peace agreement?

Problem 2: National Competitiveness

The U.S. Government must formulate short-term and long-term policies and build institutions to strengthen the nation's competitive advantage through better education, innovation, technology and entrepreneurship development. The U.S. can compete with other economies using one or more of the following strategies:

• Invest in Innovation development and enterprise creation. A good example to learn from is the competitive model of European Innovation FP7 Initiatives

• Education and research budgets: Budgets should be redesigned to help investments in revenue-generating economic sectors and to provide incentives for new globally competitive products and services. Reform the U.S. education system to increase competitiveness and provide education and retraining resources for displaced U.S. workers

• Competitive tax policies: Tax policies should be redesigned to encourage innovation and industry. One simple, but highly effective measure, would be to shorten the depreciation schedules on capital investment and research spending, and increase short-term capital gains taxes to discourage short-term thinking. Dubai's industrial tax-free zones are good examples to examine.

• Make it simple: Simplify business management for entrepreneurs by simplifying the tax code and Government transactions. Simplify, automate and eliminate bureaucracy. A sales tax is more likely to increase savings and investments than income tax.

• Reduce insurance and legal costs by reviewing the legal system to minimize frivolous lawsuits.  Consider the model of the Japanese legal system

• Promote positive culture re-engineering: Promote transformation from consumerism to investment-oriented culture, from leisure society to education and entrepreneurship. This can be done through public education and media programs.

• Manage Globalization: The U.S. can slow globalization and offshoring through protection policies. However, The U.S. Government cannot stop globalization and will lose to competitors in the long-run. The only way is to manage the process by enforcing fair trade and joint investment agreements.

• Low cost Labor: If you can't beat them, join them. The U.S. can partner with neighbor countries, such as Canada and Latin American countries as low-cost labor sources.

• Immigration Policy: Bring more investors and competitive labor through more attractive immigration policies to attract foreign investors, intellectual capital and low cost labor.

• Hostile takeover (War):  That is an unethical option and has been proven to be a high risk, high cost and unprofitable foreign policy option.

• Friendly Merger: Acquire new labor, natural resources and markets. Learn from the European Union expansion model and consider the formation of new unions with other North American countries such as Canada and Mexico.

• Build stronger global socioeconomic networks: That will help favor American products and services. In order to build strong international relationships, the U.S. must refrain from acting as the world police and stop attacking other countries and cultures. Instead, the U.S. can promote American values by encouraging cultural exchange, open dialogues and economic partnerships. Transformation through education and positive exchange takes more time, yet is far more effective and lasting.

• Build stronger partnerships with other nations: That can be done through shared investments which will improve U.S. favoritism and trade relations over competitors (through shared interest in profit and loss).

• Build Peace: Shift the focus of foreign policy from combating threats with military force to building peace in Africa, Asia, Latin America and the Middle East. It does not help to take sides and create more enemies. Empower the United Nations and World Court to handle international conflicts, thus treating the root causes of terrorism and the U.S. hatred. That will eliminate most of the U.S. security threats and related socioeconomic liabilities. U.S. can gain much more through peace, and partnership activities than hostilities.

• When solving problems, U.S. Leadership needs to adopt the attitude of being smart vs. being right. Religious, ideological or egotistical policies create more problems than they solve. A pragmatic approach is far more productive domestically and internationally. The key challenge with this recommendation is the personal and subjective elements of the leadership.

8 ) Management Best Practices

Probably the best way the U.S. Government can implement the change effectively and efficiently is to adopt the private-sector management best practices. The simplest way to understand IIM proposed solution is to compare the country to a company:

• The President as its CEO

• The Congress as its board of directors

• Multiparty subcommittees as the independent audit committee

• The Citizens as the shareholders

• Industry experts and the media as the company performance/investment analysts

USA Inc. is competing with other countries in a global economy. The CEO's mandate is the socioeconomic prosperity of the country. If the leadership team cannot meet their stated-objectives in their 4-years term, then they should be replaced. (Although non-democratic, Dubai is on such example of an economy run as a global corporation). To help manage U.S. Government policies better, it is worth to considering the following reforms or new policies:

• A group of nationally respected technocrats including academic researchers, socioeconomic experts, and representatives from all political parties could establish a comprehensive set of socioeconomic metrics as the main election agenda and set the performance goals for elected or appointed officials. This allows better informed-decisions by the public when electing the executive team. This set of socioeconomic metrics can be used as the criteria for democratic competition and election. One such basic example is IIM's Second Generation Gross National Happiness (GNH) metrics.

• Provide financial/political performance incentives and penalties tied to the complete set of socioeconomic performance measures. This will ensure tying of the interest of the elected officials to public interest as opposed to the interest of private lobbies.

• Establish better technical qualifications for the candidacy nominations

• Establish better governing standards for the separation of duties to eliminate the conflict of interest

• Institute a new format of an annual status report to the American public with far more details showing the performance of the Government using various socioeconomic measures

Although it maybe too much and too early for the implementation of some of the above mentioned reforms, they are worth stating for future intellectuals and leaders. In my opinion, such reforms would better inform and educate the public and would promote more responsibility and efficiency in addressing national challenges and opportunities.

9) Paper Notes and Corrections:

A) This paper is not intended to be an academic research paper. To make the paper accessible to a wider audience, the format and the language of the paper were simplified to read like an article. For example: statistical numbers are rounded for simplicity, citations were minimized and key concepts are mostly stated in bullet-point format. Readers can verify the stated facts from the Internet and listed data sources in section ten.
B) When writing this paper, some of the quoted numbers were actual reported number and some were forecasted numbers for FY 2006.
C) The goal of this white paper is not to provide a complete solution; the goal is to draw attention to the true picture of the economic health and to shed  light on the emerging risks and available mitigation strategies.
D) Some of the above mentioned recommendations are drastic, socially expensive and cannot be implemented at this time. However, the purpose of a neutral study is to explore as many options as possible. From my knowledge of the human behavior, some of the best and most effective strategies will be discarded for ideological rather than pragmatic reasons. It’s a human and political tendency to reason what we love rather than love what we reason.

10) Statistical and economic data sources

U.S. Department of Commerce (DoC), European Commission (EC), United Nations (UN), Organization for Economic Cooperation and Development (OECD), International Monetary Fund (IMF), World Trade Organization WTO, Central Intelligence Agency (CIA) World Book, World Economic Forum (WEF), MSN Encarta, The Economist, Business Week, Financial Times, FederalBudget.Com , The White House, and International Institute of Management (IIM)

About the Author

Med Jones is the president of International Institute of Management (IIM). IIM is a management best practices research and education institute. IIM has 55 universities and research partners in 40 countries. Mr. Jones is an international expert specializing in the global economy, business strategy, and leadership development.  For more information about IIM, please visit Med Jones Profile at www.iim-edu.org

What are IIM White Papers?

IIM white papers provide businesses and Government leaders with a list of questions, terminologies and discussion-points that can be used to address emerging challenges and opportunities. IIM white papers are succinct work documents designed for communication and problem-solving by the leadership team. The structure of the white paper includes three main sections: 1). A statement of the problem or opportunity 2). Analysis of root causes and driving forces 3). Proposed solution and implementation best practices.

Copyright License

Royalty-free license is granted for using or publishing for educational purposes provided that the user/publisher include a clear reference to the author(s) and International Institute of Management www.iim-edu.org  (Please include the active hyperlink for electronic publishing)