The Persistent Myth of American Economic Dominance

“The great enemy of the truth,” John F. Kennedy declared in a 1962 commencement address at Yale University, “is very often not the lie – deliberate, contrived and dishonest – but the myth – persistent, persuasive and unrealistic.”

Fifty years later, a Yale education, itself, may be one small part of a vast American myth – the idea that America is forever and always the land of the free; the land of opportunity; the land of true capitalism. A degree from Yale, like so many other facets of the American economic myth, may possess more prestige than genuine economic value. But the declining value of a college education is a mere sub-plot to the de-mythologizing of American economic prowess.

Increasingly, the land of the free is the land of the fettered. Although a vestige of entrepreneurial dynamism continues to operate within the American economic system, this dynamism faces a growing number of impediments and antagonistic forces. The familiar anti-entrepreneurial elements – like punitive tax laws and debilitating regulations – are not only multiplying, they are combining into a toxic brew of hostile economic policies and attitudes.

Many capitalistic ventures manage to succeed anyway. But the government’s (misad)ventures always seem to “succeed” even more. Thus, as the government increases its awkward, counter-productive intrusions into the private sector, the only certain result is rising national indebtedness.

America is no longer the potent, manufacturing-based superpower that it was when President Kennedy addressed the Class of ’62 at Yale University. Instead, the America of 2010 is a frail impostor of that long lost superpower.

America is still strong, no doubt about it. But her strength is in decline. And as that strength declines, the myth of American economic omnipotence becomes as exposed as a naked swimmer at low tide. In 1962, US GDP totaled a whopping 46% of world GDP. Today, the US percentage of world GDP is only half as large: 22.9%.

This relative decline is both the result of other countries imitating American virtues, and America imitating other country’s flaws. America, to an important extent, has lost her way. She has diverged from the path that produced her prosperity.

Typically, successful capitalistic economies facilitate the failure of faulty ventures so that successful ventures can emerge in their place. But the Hank Paulson/Tim Geithner bailouts of 2008 and 2009 perverted this essential process of creative destruction. Instead of allowing incompetent financial institutions to fail, Paulson initiated mega-billion-dollar bailouts of a privileged few, deemed “too big too fail.”

The Paulson/Geithner “Doctrine” advanced the necessity of rescuing banks that posed a “systemic risk.” Left unsaid was that this multi-trillion-dollar version of “too big to fail” rendered thousands of potential businesses too small to succeed. For example, because Fannie Mae and Freddie Mac will collectively drain $1 trillion of taxpayer money into the black hole of their legendary incompetence and mismanagement, hundreds of potential banking entrepreneurs will never receive the opportunity to bid for the distressed assets of Fannie Mae and Freddie Mac, and then utilize these assets as the core of a successful new banking operation. This is not capitalism; it is, to quote a friend, “crapitalism.”

Goldman Sachs, Bank of America and many other bailout recipients are still standing, despite making the identical strategic errors that have doomed more than 200 smaller banks since late 2008.

When small banks fail, the FDIC dismantles them, relieves management of its duties (and its paychecks) and sells the remaining assets to a stronger operator. This system works pretty well. And it probably would have worked just fine if, for example, Goldman Sachs had failed.

When Lehman Bros. failed, competitors fought over its carcass. The bankruptcy process worked. There is no good reason, therefore, why a failing Goldman Sachs could not have become a division of Bank of New York Mellon, or a division of Jefferies…or even “Scottrade Goldman Sachs.”

But that’s not what happened. Somehow, at the end of all the bailouts and the “lending facilities” and “stimulus programs,” $1.5 trillion deficits have become the new norm. (For perspective, just two years ago, the Bush Administration posted a then-record deficit of $438 billion. Nine years ago, the outgoing Clinton Administration posted a $128 billion surplus).

Soaring government indebtedness is the ultimate “anti-stimulus.” Soaring indebtedness leads directly to soaring tax burdens, rising interest rates, weakening currencies, and many other impediments to capital formation.

In short, America’s entrepreneurial vigor may not be able to endure much more help from the government.

Eric Fry
for The Daily Reckoning

The Daily Reckoning