On Jan 31, 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 the 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 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 and direct in communicating with the American public."
This 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:
- The United States economy has been resilient, but for how much longer?
Can the U.S. economy sustain unlimited economic growth?
- Will the United States face another economic crisis and if so, when? How
strong and how long will the negative cycle be?
- How can the United States manage the financial costs of the aging
- How can the United States compete with low-cost China, India, Mexico and
- How can the United States fight and win the anti-terrorism war and at the
same time not lose international allies and economic partners?
- How can the U.S. government mitigate social, economic and geopolitical
risks and reverse the negative trend?
- What will be the price of recovery be from past and current policy
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 or two are probably the most critical
for U.S. socioeconomic prosperity. Let's start with a historical perspective:
||U.S. stock market crash
||U.S. stock market crash, followed by
the Great Depression
||U.S. stock market crash
||U.S. financial crisis
||U.S. dot-com bubble burst
||September 11 + Iraq war +
Globalization + Offshoring + Real estate bubble + Highest budget and
trade deficits in U.S. history
||What are the prospects for the U.S.
economy? Financial Meltdown? Economic Crisis? Currency Crisis?
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 will
increase corporate profits and attract 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
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, resulting 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 rates and social instability, the government would to raise
more debt to fund spending and welfare support by raising the
interest rate which would
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
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, expenditures 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
(Mainly China, EU, Japan and oil producing countries)
The actual U.S. economic growth is much less than
advertised. Since 2001, the 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, resulting 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
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
Although the 2006 budget deficit (loss) was only about 3% of
the 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 lead to states and national bankruptcy and major related
Ensuing 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
Consumers are the main engine of the 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%; 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
To stop the free-fall of the housing and financial sectors
the Federal Reserve will reduce the interest rates close to zero, but if there
is a risk of continuing decline of the US dollar value, this can force the US to raise
interest rates to prevent a currency crash.
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 may 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
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
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, and even higher numbers for 2007
According to the Commerce Department (March 15, 2007) the
imbalance in the current account jumped 8.2% to $856.7 billion,
representing a record 6.5% of the total economy. It marked the fifth
straight year the current account deficit set a record.
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
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 allow local producers to increase
their prices, in order to make more profit.
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
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, leading to less access to equal opportunities and will
increase the socioeconomic gap (inequality).
Think of the impact of a 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 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 which could 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
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 civilizations,
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
hostilities in the Middle East, China, Russia and the EU were busy building
stronger socioeconomic relations with Middle Eastern countries through 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 have led the Iranian Government to plan Euro-Perto Bourse in an effort
to weaken the 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
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
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
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
Although no one can judge the intentions behind any policy, the
competency is easily judged by the results.
Ideologically driven policies, rather than pragmatically
This can be judged by the politician's own statements, and again, by the
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
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.
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 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
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 the Institute'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.
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
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 would a poor choice, as it will make it tougher and more
costly to raise capital. Also, increasing interest rates will result in
savers becoming less interested 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. Yet another difficult option, which will
reduce business profits and U.S. ability to attract foreign investments.
The U.S. would have to sell more assets (telecom, utility
infrastructure, and other assets) to overseas investors. Buyers look for a
bargain, resulting 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
create a larger consumer base (helping in economic growth). That option will
most likely 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
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 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 name 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 ) Recommended Strategies for the Economic
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
Problem 1: National Debt
The U.S. government must commit to reducing the federal
deficit, i.e. it must reduce
expenditures and operational costs.
The U.S. government should not increase interest rates or
taxes, however, this is 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
Institute new energy policies to promote
better energy performance standards and 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 are counter-productive and reward 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
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 educational institutions.
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 and technolog entrepreneurial
development. The U.S. can compete with other economies using one or more of the
Invest in Innovation development and enterprise creation. A
good example to learn from is the competitive model of European Innovation
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
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
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
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
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
effectively and efficiently implement the
change is to adopt the private-sector management
best practices. The simplest way to understand the 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
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 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 the Institute's
Gross National Happiness
/ Well-being (GNH / GNW) 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
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
grouped at the end and key concepts are mostly
stated in bullet-point format.
cite this paper for the analysis and conclusions, but cite the data and the stated facts from
original 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
The author and the Institute do not claim
ownership of presented statistical data or facts, but only of the
analysis and the conclusion. The public data sources are the 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
About the Author
Med Jones is the president of the International Institute of Management, a management best practices education and consulting organization. The Institute has 55
universities and research partners in 40 countries.
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