The Daily Reckoning PRESENTS: For hundreds of years now, China, India and Russia have sat and watched as America took the lead in the world economy – but it looks as though these nations on our periphery are ready to take their place in the sun. Read on…
For the first time in two hundred years, the West (including Westernized Japan) faces real competition. The world’s largest nations – China, India, and Russia – sat on the sidelines for most of the nineteenth and twentieth centuries. They were too remote and too backward to participate in the great boom that lifted living standards during the reign of the British Empire in the nineteenth century. GDP per capita rose from barely over $1,000 (in 1990 dollars) in the United States at the beginning of the nineteenth century to more than $5,000 by its end. China, on the other hand, had a GDP per capita of about $600 when the nineteenth century began.
By its end, the figure had fallen to around $525. Indian numbers were about the same, but in the other direction, with a small gain in the nineteenth century – probably the result of British colonial development. In the twentieth century, Russia, China, and India all became victims of self inflicted wounds; various forms of socialist claptrap took them out of economic competition.
But now they are back, and it is a whole new ball game, as they say. These countries are either on the periphery of U.S. imperial protection, or beyond the pale altogether. Either way, they benefit from the order created by the U.S. imperium. Foreign workers seem to be able to make anything we can make – but at much less cost. India is growing at 8 percent a year, China at 9 percent – Russia is booming too. In addition, they are turning millions of young people who can make things – graduates in the practical arts and sciences – better and cheaper than we do in the United States or Europe. What’s more, the foreigners take the old virtues seriously.
They save their money – the saving rate in China is as high as 40 percent of the national income, according to off icial sources. These savings give them huge piles of capital with which to build more modern factories and more convenient infrastructure. The price of labor in the rich countries is too high. The average cost of an hour of someone’s time in the United States – including social charges – is $20.73. The average cost of someone’s time in China, on the other hand, is somewhere between 13.5 and 65 cents, depending on the source. As long as capital, expertise, and finished products are free to move around, it is likely that the two numbers will grow closer together.
The consumer doesn’t particularly care who assembled his gadget; he only cares that he can buy it at the lowest possible price. Labor is a big component of the price of most things, so both manufacturers and consumers appreciate lower labor prices. Our old incompetent enemies have learned how to compete.
We were told that America became much richer because of Reagan’s improvements, but if that is so, why did real wage rates not rise? A man sweats, humps, busses, totes, and schleps today, on average, for about the same wage he got before the Reagan revolution fired its first shot. But that is not to say that everything is just the same. Far from it.
Today, people own less of their own homes – homeowner equity (the portion not mortgaged) has fallen from nearly 70 percent in the late 1970s to less than 55 percent in 2005. Plus, the average person owes more money to more people than ever before. Household debt in the fall of 2005 is 113 percent of annual income on average; prior to1980, it was 58 percent. Today, fewer people have secure sources of money for their retirement. More than two-thirds of older households – those headed by people 47 to 64 – had someone earning a pension in 1983. By 2001, fewer than half did.
The Reagan Era came with relatively new idea, that people should be responsible for their own pension. Companies stopped offering fixed-benefit pension plans. But by 2000, old people were feeling the effects. They were not as well off as they had expected to be. When the holdings of typical households were analyzed, today’s near-retirees turned out to be a little poorer, in constant dollars, than the previous generation was when it approached retirement in 1983.
Edward Wolff, an economist at New York University, looked at 18 years of household financial data from the Fed. Somehow he retained his sanity long enough to discover that “the net worth of the median older household …declined by 2.2 percent, or $4,000, during the period [1983-2001] to $199,900.” We look on that fact in shock and awe. How could it be that after the biggest explosion of wealth-creation in the history of man, the average man is not richer, but poorer?
We recall the Carter years: The nation was at peace. Despite inflation, Americans were still getting richer. Wages were rising. The country still enjoyed a positive balance of trade, and the rest of the world still owed it more than it owed to foreigners. But in 1980, stocks had been going down for 14 years and bonds had been in a bear market that began in 1945. With eyes in the back of their heads, people must have looked out and seen nothing but trouble. The Vietnam War was still in the near background. And Richard Nixon. And Jimmy Carter himself. Americans were discouraged, we are told; they had lost confidence in themselves.
Then, along came Ronald Reagan with a message of hope, optimism, and something-for-nothing. The supply-side, the Laffer Curve! Suddenly it seemed possible to spend more… and still have more! Government could cut taxes – and get more revenue, said Laffer. Forget the deficit; it will take care of itself. Somehow. The average man f igured he could do the same: borrow more, spend more, and he would get rich. Pensions were out. Free people could look out for themselves. They could set up their own 401(k) plans and make money in common stocks.
All you had to do was buy the companies you liked. And the companies themselves no longer had to worry about their employees. Managers could focus on cooking the books to give the impression of maximizing shareholder value. America soon became “Shareholder Nation” – a whole country of capitalists, all getting rich in the freest, most dynamic economy the world had ever seen.
Now we see that the whole thing was a huge swindle. Supply-side policies never really increased the supply side. Government never actually lightened up to let people live their own lives in their own ways. Employees never quite got around to putting money into their 401(k) plans; they were too busy trying to keep up with the credit card bills. And managers soon realized that maximizing their own incomes with stock options, bonuses, and rich retirement plans was more rewarding than looking out for shareholders.
The shareholders themselves – the millions of lumpen pseudo-investors who owned mutual funds – couldn’t tell the difference. They had neither the time, the money, nor the training to be real capitalists; they were merely chumps for Wall Street. And now, here we are, a quarter-century since Reagan won the White House: We are at war, with the biggest trade deficit, the biggest federal debt, the biggest financing gap, the lowest interest rates in 45 years, and the most consumer debt ever. In real terms, the average man earns less per hour worked than he did in the Carter years. And the typical household approaches retirement poorer than it would have been in 1980.