SPEECH TO THINK TANK ON THE ECONOMY.
January 2004
The past can not be changed. Yet nothing changes more constantly than our understanding of the past. “The past cannot be changed. Yet nothing changes more constantly than our understanding of the past. For the past, that influences our lives, does not consist of what actually happened, but how we now perceive what has happened. ..
How far can you look into the future? Not too far. Perhaps days, months or rarely years. Our view of the past, however, is unlimited. While we cannot change the past, we can better understand it; so that we can better understand the future and change it.” (THE DUAL PALINDROME)
When we talk about the economy we can only judge it by comparing it to the past. We discover that the past is not as germain as we thought because 2+2 is no longer 4. Let me give you the example of transformation of telecommunications from national network monopolies to a new system, the network of networks, and the glue that holds it together, interconnection. By their very nature, monopoly-owned networks provided a small number of standardized, nation-wide services. Over the past two decades, however, new forces in the world economy began to unravel this traditional system. The driving force behind the change was the shift toward an information-based economy. Especially for large organizations, the price, control, security, and reliability of telecommunications became variables requiring organized attention. Thus, monopoly began to give way to the `network of networks,' the foundation of today's telecommunications and Internet infrastructure.
Whether they bind computers, economies, or terrorist organizations, networks are everywhere in the real world, yet only recently have scientists attempted to explain their mysterious workings.
How do networks matter? Simply put, local actions can have global consequences, and the relationship between local and global dynamics depends critically on the network's structure.
We must now replace `cause and effect' approaches to decision making in favor of an approach that thrives on ambiguity and unpredictability.
We must now start using the principles of complexity theory to transform any business, large or small, into one that can consistently redefine itself to keep pace with today's ever-changing marketplace.
Emerging control and order as opposed to predetermined
order is dominates today’s economy. We must understand that history is irreversible, and the future is often unpredictable. (Soros, Popper) The late 1990s appear to have been a golden age produced in part by the favorable convergence of unsustainable factors such as the stock-market boom, the post-Cold War "peace dividend," and a consumer borrowing binge of historic proportions. (Today, three years after the stock-market bubble burst, we are still suffering something of a hangover from the excesses of that giddy era.) But as accidental as that brief golden age may in some ways have been, and as irrational as the exuberance that propelled it was, the underlying forces at work in the late 1990s were real, and they began to reshape the economy in fundamental ways. We can now begin to see the enduring effect of those forces.
In the short term—let's say the next couple of years—the majority of Americans can expect to keep improving their economic lot; however, a significant minority—mainly the newly jobless in certain old-line industries—will watch their already dim prospects darken even further. And over the longer term—let's say ten years or more—a much broader swath of the American population will have reason to be very concerned about the economic future.
The "jobless recovery" has hardly been jobless: the unemployment rate—which stood at 5.9 percent in November—is lower than the average for the past thirty years, and is right at the threshold that most economists as recently as the mid-1990s believed was the lowest it could go without triggering inflation. In fact, there is a wide gap between how most people feel the economy in general is faring (poorly) and how they feel they themselves are doing (quite well). (CLINTON The economy stupid)
What is overlooked when we discuss unemployment is that when workers who lost their jobs finally found new ones, the gap between their new wages and the wages they would have earned (had they been able to stay in their old jobs) was nearly triple what it would have been almost a decade ago. The gap is greatest for highly educated workers.
The share of jobs lost owing to the abolition of positions rather than to lack of work, plant closings, or other reasons has doubled since the early 1980s. The main reason higher unemployment has lingered so long into the current recovery is that most lost jobs have been restructured out of existence. Workers whose jobs have been eliminated outright often cannot find anything directly comparable, either because the work they do has become obsolete or because their skills are company- or industry-specific, and not easily transferable elsewhere. These displacements are still not exceedingly common, but they are quite damaging to individuals when they occur.
In short, we have entered what might be called a "reverse-lottery economy." The broad majority of American workers continue to do well; yet in any given year—even in boom times—a few workers hit the negative jackpot and must accept lengthy or even permanent reductions in living standards.
Among these are jobs in financial analysis, research, accounting, and graphic design are among those expected to be moved offshore.
Productivity growth is the bedrock of a healthy economy over time. In fact, continued rapid growth in productivity is certainly the best—and arguably the most important—feature of the U.S. economy today.
In 2002, the most recent year for which complete data are available, productivity grew by 4.8 percent—the highest annual increase since 1950. The advances in information technology—particularly in computer processing power—that helped launch the boom have not slowed. Meanwhile, productivity growth in nontechnological industries, which remained low through much of the mid-1990s, has accelerated, as managers begin to integrate cheaper, more powerful information technology into their businesses. (Indeed, the real example is Wal-Mart, the ubiquitous discount chain that has pioneered ways of using information-technology advances to cut costs.) High productivity growth in recent years has also allowed most Americans to enjoy wage growth even as unemployment has risen. And relatively high employment levels and continued wage growth most likely contributed to relatively strong consumer demand throughout the recession, mitigating its effects.
Over the longer term broad-based productivity gains should mean not only higher incomes for most Americans but also cheaper products and more-competitive U.S. industries. The widespread diffusion of new technology will probably continue to give rise to products and services that would have been neither technologically feasible nor widely affordable just a few years ago. (Recent examples of such products include cell phones and iPods.) The combination of higher incomes and new products should spur both demand and production—and over the long run these will produce new jobs.
There is, however an erosion of bargaining power among low-income and middle-income workers. Better information technology and more-sophisticated robotics have significantly reduced job opportunities for many types of "routine" laborers, such as factory workers and middle managers, especially as globalized production has allowed U.S. companies to move many jobs—particularly low- and middle-skilled jobs—to countries where wages are lower. Increased immigration of low-skilled workers since 1970 has disproportionately increased the labor supply at the lower end of the economy, probably depressing wages for less skilled workers.
This story—told repeatedly in recent years—is clearly reflected in the numbers. Between 1973 and 1995, while real wages for the top five percent of Americans rose (and while total income for the top five percent of American households increased by about 30 percent), the bottom half of the American work force experienced an outright decline in real wages. Median hourly wages declined from $12.54 to $10.44 per hour. The poor have done well, relatively speaking, in this economic environment. Jobs in such sectors as retail sales, hotel services, and basic health-care provision have proved tough to automate, and so haven't been substituted out of existence. Moreover, because jobs in the service sector—where the most low-skilled jobs have been created in recent years—are less affected by recession than are jobs in manufacturing, employment has been remarkably stable for the poor. And real wages for "McJobs," though still low in absolute terms, rose during the late 1990s as rapid economic growth tightened the labor market. Job growth and wage growth at the lower end of the economy—along with welfare reform—helped lift millions of people out of poverty since the mid-1990s; and a large portion of them have stayed out, even through the recent recession.
As a result the rich are likely to continue to pull away economically (and perhaps culturally and socially, as well) from the rest of society. While productivity growth has helped keep wages rising for the employed, immigration and the continued movement of jobs to offshore locations weakens the labor market and depresses wages. "Wage insurance" would make up a portion of the difference between old and new incomes for up to two years, so that the transition to a lower-income lifestyle would be more gradual. (A pilot program already exists for workers displaced by the movement of jobs overseas.) But wage insurance has potential as more than just a safety net; if unemployed workers knew they could more easily afford to take lower-paying jobs, they might feel freer to jump into whole new industries or career tracks; this would help the economy grow faster (by increasing the speed at which new industries grow) and might also ultimately increase the long-term income prospects of individual workers.
In 2000, though expectations of what the stock market and the economy in general could produce were wildly unrealistic, there was genuine cause for optimism. Ideas and innovations were proliferating. Investment in these ideas and the technologies they created was considerable. And a flexible, highly educated work force stood ready to adopt new technologies quickly, and to generate still more innovations for the future.
The long-term picture, however, may be bleaker. Two key factors that have historically given the U.S. economy a competitive advantage—a superior education system and an attractive investment climate—now appear to be eroding.
In most other economically advanced countries the average number of years people stay in school is now growing faster than it is in the United States—and young adults in a handful of those countries are now more highly educated, on average, than their U.S. counterparts. Ever since the launch of Sputnik, in the late 1950s, Americans have been concerned—perhaps excessively so—with the quality of the education that U.S. citizens receive. But only more recently has the United States seen its relative advantage in quantity of education begin to decline.
The long-term fiscal crisis facing the United States comes primarily from a growing imbalance between what the government spends—primarily on Medicare and Social Security—and what it reaps in taxes, which were not high enough to sustain current entitlements even before the series of sharp tax cuts enacted since 2000. Today we're simply foisting the many costs of this imbalance—rising debt, slower growth, and ultimately either higher taxes or broken promises—onto future generations.
A reasonable observer might conclude that all these problems are the ingredients for national economic decline. Historically, America has been an adaptable, resilient nation; decline is not inevitable. But unless we devote more attention to education and fiscal balance, two issues that are absolutely central to long-term prosperity, the conditions that have produced widespread growth will dissipate. As weak as today's economy may look relative to that of 1999, at the rate we're going we may look back on 2003-2004 in ten or twenty years with wistful longing.
The growing trade deficit threatens U.S. living standards and makes the country dangerously vulnerable to economic extortion. The way out is to make foreigners act more like us.
Despite its unchallenged military might, the United States has an Achilles' heel: its economy depends on foreign capital. Though hardly anyone acknowledges this publicly, China and Japan already hold so much American debt that, theoretically, each could exert enormous leverage on American foreign policy. So far, the economic dependence of these countries on American consumers has kept them from exercising such power. But what would happen if, for instance, Washington changed its one-China policy and officially recognized Taiwan? Or if the Bush Administration threatened to invade North Korea? Simply by dumping U.S. Treasury bills and other dollar-denominated assets, China—which holds more federal U.S. debt than any other country—could cause the value of the dollar to plummet, leading to a major crisis for the U.S. economy.
China and Japan wouldn't have to be consciously hostile to wreak havoc; they could create a currency crisis by accident, through either bad policy decisions or instability in their own economies. Both countries have weak banking systems that are burdened by bad loans that will never be repaid. Economists have long warned that the collapse of Japan's banking system could devastate the United States. A Chinese banking crisis could cause equally severe problems.
America is like no other dominant great power in modern history—because it depends on other countries for capital to sustain its military and economic dominance. In comparison, consider the British Empire. At the height of its imperial reign, in 1913, Britain was a net exporter, or investor, of capital; it invested the equivalent of nine percent of its gross domestic product in foreign countries that year, helping to finance the infrastructures of the United States, Canada, Australia, and Argentina. Even long afterward Britain was able to retain a prominent international role in large part because it earned interest and dividends on the enormous investments it had made during its heyday. In contrast, the United States today is a net importer, or borrower, of capital—not only from China and Japan but also from Europe and emerging economies, at a rate of more than $500 billion a year, or approximately five percent of our GDP.
The British Empire eventually declined, of course, and in 1956 it endured the humiliating demise of its great-power status in a clash over the Suez Canal. U.S. policymakers should take note: Britain was brought to its knees not by a military defeat but by an economic one—specifically, America's refusal to support the British pound, which created a monetary crisis for the British government, forcing it to call off its ill-advised campaign with France and Israel to recapture the Suez Canal after nationalization by Egypt. As its international debt grows, the United States becomes ever more vulnerable to its own Suez moment. Americans save too little and consume too much. But it is exacerbated by the behavior of our closest trading partners in Asia and (to a lesser degree) Europe, who are our fiscal mirror opposites: they save too much and consume too little. America and its trading partners are locked in co-dependency. In the short term this co-dependency has actually worked reasonably well: our principal trading partners lend us money to buy their cheaper goods with a strong dollar. In return they have access to a stable market for their products, enabling their economies to grow at an impressive rate.
if the dollar declines, we will have to pay other countries more for their goods. This will lead to declining standards of living for most Americans. The growing trade deficit threatens U.S. living standards and makes the country dangerously vulnerable to economic extortion. The way out is to make foreigners act more like us.
The rest of the spech was based on this outline:
2+2=?
EMERGING VS. PREDETERMINED
`cause and effect' VS ambiguity and unpredictability.
POPPER- SOROS
CLINTON 16B 1.2 T
TODAY 2.T
NETWORK OR NETWORKS
SUEZ
CHINA-JAPAN TRADE BALANCE ECONOMIC EXTORTION
US EDUCATION + INV CLIMATE QUALITY-QUANTITY
SWISS FRANK
GOLD
GROWING TO MAKING TO MANAGEMENT – INFORMATION
JOB RESTRUCTURING
INTEREST RATES WILL RISE
LOW INTEREST=HOME SALES-APARTMENT-MOBILE HOMES
