The Short Term Myopia of the United States

Working in urban neighborhoods can be a very disheartening experience. There are so many problems that at times they can seem overwhelming.

One of the most discouraging problems that one runs into over and over again is the myopia that exists within some of these communities, a myopia that results in people making decisions as if there is no tomorrow.

Often these decisions can be captured within the context of game theory, specifically the “Prisoner’s Dilemma” game. The solution to a one-shot, simultaneous Prisoner’s Dilemma is for all players to default to the action that results in the worst decision for each player.

Researchers will explain the deterioration of housing within certain neighborhoods in terms of this kind of Prisoner’s Dilemma game. No one maintains, or “keeps up” their house because that is not the best decision given how they expect everyone else to act. And, there is no communication between actors so that people fail to “co-operate.”

People within the United States, as a whole, have become very myopic. This myopia grew in the latter part of the 20^th century and stands behind many of the problems we face today. We constantly read about two areas that have produced damaging results in the United States, yet, as with most one-shot, simultaneous Prisoner’s Dilemma games, most are barely aware of the role that this myopia plays. I would contend that these two major areas have to do with employment and the environment.

The United States has such a short-run view of employment that its governments throw billions of dollars into efforts to put people to work “right now” or to put people back to work “right now”. The emphasis on achieving “full employment” in the United States going back into the 1930s and 1940s has tended to get people employed as early in their lives as possible and to keep them in their same jobs throughout their working careers.

The consequence of this emphasis is that unemployment and underemployment have trended upwards in the latter half of the last century. Now, roughly one out of every ten individuals of working age are unemployed and one out of every four is underemployed.

The current solutions for reducing this unemployment and underemployment just advise “more of the same.” That is, more fiscal stimulus and printing more money.

These are just myopic attempts at resolving employment problems, myopic attempts that result from the myopic behavior of the politicians. After-all they have to get re-elected every two years…or every four years. So they must continue to pump up the economy.

But, this behavior just exacerbates the problem. And, it creates massive amounts of debt or money for the economy to absorb.

It has taken us a long time to get where we are and it will take a long time to get us out of this mind-set and out of this situation. A lot of what needs to be done relates to education and to everything that surrounds education…parents and teachers…and society itself.

Thomas Friedman has written several columns in the New York Times about the situation that exists in the education front in the United States and how it not only impacts us internally but how it impacts of relative to other nations. (His latest can be found here: http://www.nytimes.com/2010/11/21/opinion/21friedman.html?partner=rssnyt&emc=rss.)

Friedman reports of a speech from the secretary of education Arne Duncan: “One-quarter of U. S. high school students drop out or fail to graduate on time. Almost one million students leave our schools for the streets each year.” And Duncan comments on a report from a group of retired generals: “75% of young Americans, between the ages of 17 to 24, are unable to enlist in the military today because they have failed to graduate from high school, have a criminal record, or are physically unfit.”

America’s youth are now tied for ninth in the world in college attainment.

How are these young people going to fill jobs in companies that must face competitors that draw from a better prepared and better educated body of potential employees? How are companies going to develop and train people throughout their careers that do not have the appropriate base of skills? And, if these people do not seem to be coming along the pipeline, why shouldn’t the companies “outsource” to other countries where they have the educated workforce and will even have a more prepared workforce in the future?

Continual efforts to re-stimulate the economy and put under-employed people back into the jobs they formerly held is no solution to either the employment problem or the happiness of the worker. Unfortunately, the solution is a longer-run solution. For another look at the situation see “The Baseline Scenario” https://mail.gv.psu.edu/exchange/jmm27/Inbox/[BULK]%20%20The%20Baseline%20Scenario.EML?Cmd=open.

And, the same myopia applies to treatment of the environment and the efforts to develop sustainable business practices. Businesses are forced to focus just on the near-term, on their ability to grow and produce continually increasing profits. And, in doing so these businesses “mortgage” the future. Again, we have another one-shot, simultaneous Prisoner’s Dilemma game where most of the players default to the actions that will produce the worst results for all.

A great deal of the effort to produce a “green” outcome also, in my mind, tends to produce short-term fixes and look as if they just add costs to the accounting for the firm.

Again, education is crucial in environmental understanding. We are not talking here about knowing what the ecological problems are. We are talking about understanding what decisions are available and the externalities and network effects that surround the decisions we make.

But, as with the education, the consequences of our actions extend over many years and our decisions must take this future into account.

It is my experience that the decisions and actions surrounding these longer term decisions produce better results over time and also produce better managements because they take more factors into the making of decisions and the taking of actions.

In both of these cases, the emphasis on the “short-run” end up hurting individuals as well as hurting the economy. We get into situations like the one surrounding the resolution of the government debt problem. The argument is made that we need to spend more creating more debt so as to put people back to work. Yet, the additional deficits just create a “debt crisis” that interferes with putting people back to work.

Speeded up spending on solutions to ecological problems is a top-down approach that seems to substitute for companies changing their own behavior and decision-making processes.

Short-run America is losing out on the longer-term competitive battle. As Friedman continually reminds us, we continue to slide in all the measures of what makes a modern economy more competitive and live-able. The chances for becoming more competitive? Highly unlikely given the myopic behavior of our politicians.

Plenty of Work Still to Do

The United States economy lost only 11, 000 jobs in November and the unemployment rate dropped to 10.0% from 10.2%. Good news!

There is still plenty of work left to do, however.

President Obama held a summit on jobs yesterday, bringing together many leaders from business, economists, labor leaders, and others to discuss the state of the jobs market and what can be done about it. To the President, this was just an “idea seeking” exercise.

Thomas Freidman, editorial writer for the New York Times, was in attendance at this jobs forum. I just happened to catch his appearance on Chris Matthews’ “Hardball” program yesterday afternoon.

Matthews asked Friedman what impression he took away from the summit. Friedman replied that the impression he walked away from the summit with was one of the uncertainty that existed among the participants. People didn’t know what health care reform was going to be and going to cost; people didn’t know what would be the full cost of the added troops going to Afghanistan; people didn’t know what carbon emissions were gong to cost; people didn’t know what more economic stimulus was going to cost; people didn’t know how the financial system was going to be regulated; and he mentioned two or three other unknowns.

Friedman argued that so much was being done and none of it was fully defined and none of it was fully costed. As a consequence, people didn’t really know what to do. They didn’t know what direction to move in.

We read that the President, himself, presented another problem: he said that “our resources are limited.” We only have so much money.

Unfortunately, I take this statement with the same seriousness that I do the statements of Treasury Secretary Geithner and Fed Chairman Bernanke when they say that they are for a strong dollar.

Washington D. C. seems to have adopted the wisdom of the world famous philosopher Winnie-the-Pooh who, when asked, “What will you have, Honey or Milk?” replied “Both!” This attitude is just another sign of the hubris of the leadership of the United States. They believe that they can go after anything they want and there will be no consequences.

We are near the end of a 50-year period in which the government of this country, Republican as well as Democrat, has constantly advocated a bias toward inflation. This bias has distorted the economy in such a way that we have plenty of excess capacity in our businesses and a labor force that is trained for jobs that existed years ago but are not trained for where things need to go. (There were several newspaper articles this week about plant closings and employees that had no where to go because they only had “one skill.”)

The inflationary bias has encouraged individuals, families, businesses, and governments to “leverage up” and this drive to achieve additional leverage has underwritten the growth of the financial industry to its present size.

The structural changes in the economy that have resulted from this bias are substantial. A lot of the uncertainty that exists, both in the private sector as well as the government, is a consequence of these changes that have taken place in America.

Even now, another structural shift in the society is being recognized. Elizabeth Warren, Professor of Law at Harvard and Chair of the Congressional Oversight Panel, overseeing bank bailouts, has highlighted another change needing consideration. See her “America Without a Middle Class,” http://www.huffingtonpost.com/elizabeth-warren/america-without-a-middle_b_377829.html. .

“Families have survived the ups and downs of economic booms and busts for a long time, but the fall-behind during the busts has gotten worse while the surge-ahead during the booms has stalled out. In the boom of the 1960s, for example, median family income jumped by 33% (adjusted for inflation). But the boom of the 2000s resulted in an almost-imperceptible 1.6% increase for the typical family.

Today, one in five Americans is unemployed, underemployed or just plain out of work. One in nine families can't make the minimum payment on their credit cards. One in eight mortgages is in default or foreclosure. One in eight Americans is on food stamps. More than 120,000 families are filing for bankruptcy every month. The economic crisis has wiped more than $5 trillion from pensions and savings, has left family balance sheets upside down, and threatens to put ten million homeowners out on the street.”

Our leaders are uncertain because they are facing something they have not faced before. And, the problems that are being faced are numerous. But, the old thinking and the old policies just don’t work like they used to, if they ever did work the way they were supposed to. As a consequence, they are running around looking for an answer, but everything they do is incomplete and unfinished.

On one side, people are saying that we are trying to do too much. On the other side, people are saying that we are not doing enough. It is not surprising that a “jobs summit” like the one held yesterday can result in someone like Thomas Friedman saying that people really didn’t know where the train is heading.

The economy seems to be improving but everyone is still very cautious. There are just too many dark clouds that are hanging over the horizon. Readers of this column know that I am still very anxious about the health of the banking industry. Also, profits, in general, have risen, but the improvement has been because of cost cutting. Little strength has been registered in revenues, for the reasons given above by Elizabeth Warren. And, the value of the United States dollar continues to slide. The rest of the world is telling us that our “Winnie-the-Pooh” philosophy of government debt creation cannot go on forever.

Yes, there is still plenty of work to do in the economy. However, right now, our leaders don’t seem to have a very good focus on what it is that needs to be done.

The World has changed: When will American realize it?

Two recent articles by well-known authors are particularly insightful, yet particularly troubling. These articles are the work of Fred Bergsten, director of the Peterson Institute for International Economics, and Thomas Friedman, on the editorial staff of the New York Times. Bergsten’s article in the May 20 Wall Street Journal: http://online.wsj.com/article/SB121124379355805567.html?mod=todays_us_opinion. Friedman’s article in the May 21 New York Times: http://www.nytimes.com/2008/05/21/opinion/21friedman.html?hp. The nature of these articles is troubling because they both deal with what is happening in the world these days and how the United States government, all parts of the government, seems to be missing the boat.

Whereas these articles are not directed toward areas that I generally deal with, they are very important because they paint a picture of how the world has changed and is continuing to change and the failure of those in leadership positions in the United States to recognize the changes and productively deal with them. Both of these articles relate to the rising power of other nations in the world order.

Bergson is interested in world trade and the role that the United States is to play in this world trade. He is particularly concerned with the move in Congress to change the rules relating to congressional action on trade legislation. His concern is specifically in reference to the free trade agreements with Columbia, South Korea and Panama. The move of the Democratic leadership in Congress, Bergson argues, is leading to a collapse in the credibility of the United States and a decline in international trust. It relates to the willingness of the United States to negotiate faithfully with other sovereign nations. The United States has seemingly developed a bi-partisan approach to international relations, from both the Bush administration and Congress, that others in the world community can only label as unilateral.

Bergson contends that this will “remove the U. S. from any significant international trade negotiations for the foreseeable future.” Given the “large and dynamic economies of Asia”, the strength of the European Union, and the wealth amassed in the Middle East, there is a good possibility that trade pacts will be negotiated within and between these trading centers, pacts that will discriminate against rather than include the United States. The world has changed and the United States is going to have to adapt to it.

Friedman approaches the situation from another direction, but he starts off his essay by stating that a new President may not have to worry about who the United States should talk with because, “The real story is how few countries are waiting around for us to call.” Again, the picture is one of an America that has gone off on its own, believing that it can act as the sole super-power in a world in which it can always get its way. The world has changed and we, the Americans, have not been paying attention.

“It is hard to remember a time,” Friedman goes on, “when more shifts in the global balance of power are happening at once—with so few in America’s favor.” He focuses on three of these shifts that he considers to be the major changes that have taken place. First, due to the failure to develop an energy policy large, transfers of wealth have been channeled toward “petro-authoritarians” and from this wealth, power will follow; second, the “rise of the rest”—BRIC and other rapidly growing nations—is resulting in growing “clout and self-assertion” that is being felt throughout the world; and third, the changing nature and location of leadership which is resulting in changing networks of communication and action.

I don’t want to get bogged-down in the negative aspects of this and I believe that there is enough blame to go around so that finger-pointing will not get us anywhere. The crucial issue, to me, is that the world is different from the one most of us believed existed and something needs to be done about it.

The United States is still a superpower, the only superpower. Yet within the globalized world that it desired and fostered, this power has become diffused. A lesson that has been learned in other areas is that a true monopoly is only local. Businesses have seen that they can dominate a geographic region because of the barriers to enter a market and the economies of scale that they can achieve within this area. However, when the local monopoly places an emphasis on growth and expansion into larger and larger areas it often finds that the expansion does not always produce the results it had anticipated. The larger market area contains more competitors that are not prevented from fiercely competing with the former monopoly and, due to the larger size of the market, the economies of scale that the firm relied on in the past are now not sufficient to differentiate the former monopoly from these other organizations.

The United States, rightly, I believe, pursued a policy of globalization. The success of this globalization can be observed throughout much of the world with many rapidly growing dynamic economies providing evidence that open trade can benefit many, many people and reduce poverty in major ways. But, as the rising level of economic performance has spread throughout the world, this globalization has rebounded back on the United States. As the rising levels of wealth and power among these nations has resulted in increasing self-confidence and authority, these nations have begun to talk with one another and have become more self-assertive. And their success has fostered a rising self-respect and willingness to stand up for themselves. Most believe that this trend will not end any time soon.

The economic policies of the United States in the last seven years have also contributed to the growing independence connected with the “rise of the rest.” Because of the monetary, fiscal, and regulatory policies followed by the United States during this time, the trends that were already in place, but that were unrecognized by the leadership, were stimulated and even encouraged. Whereas other nations around the world had come to the conclusion that they could not run their economic policies independent of the rest of the world, the United States acted as if this knowledge did not apply to them. The result was that the United States, economically and financially, got further and further into a hole. The leadership did not seem to realize that more of the same was not the answer. As Friedman concludes his essay, “The first rule of holes is when you’re in one, stop digging.” But, it still remains to be seen when we in the United States will understand this.

Others are moving, even if the United States is not. For example, Friedman reports on the testimony of Gal Luft, an energy expert, before Congress where Luft says that with oil at $200 a barrel, “OPEC could ‘potentially buy Bank of America in one month worth of production, Apple computers in a week and General Motors in just 3 days.” As many know, the purchase of United States assets has already started. With a continuing rise in the price of oil…it will just accelerate if nothing else is done.

Another example pertains to the decline in the value of the dollar. In the Financial Times on Monday, May 19, Harold James writes about the possibility that the Eurodollar will become “the world’s hegemonic currency.” This may result from the weakness in the value of the US dollar and the fact that the eurozone is overtaking the United States as the world’s largest economic area. Unless things change, James surmises, this could result in a passing of the baton. You can read his article at http://www.ft.com/cms/s/0/f698f360-253b-11dd-a14a-000077b07658.html.

One final example is the suggestion of France’s finance minister who recently urged action by central bankers to reduce the “misalignment” in the world’s major currencies…especially “the low American dollar": http://www.nytimes.com/2008/05/22/business/worldbusiness/22franc.html?_r=1&adxnnl=1&oref=slogin&ref=business&adxnnlx=1211456973-DG0knDNuyxqPLLpAcNwaRA.

The world that the new President is going to inherit is not the world that the candidates are now talking about in the campaign for the presidency. In one sense we can be thankful that the political discourse seems to have moved from that dominated by the attitudes of the 1960s. Hopefully, we can move the discussion about economic possibilities, policies, and programs into the 21st century.