American Exceptionalism gives us a faith-based public policy. Our confidence might be our weakness.

Larry Kummer, Editor

12 years ago

Summary: We have come to believe we are exceptional, not just morally, but also operationally. We act as if we are beyond the need to plan and prepare for possible problems. It is faith-based public policy. Here we review how we came by this delusional belief, and examine how it plays out on a potentially serious problem: the growing US debt.

A brilliant insight, but likely to fail us if we depend upon it:

“Men and nations behave wisely when they have exhausted all other resources.”
— Abba Eban (Israel’s Minister of Foreign Affairs), quoted in the 19 March 1967 New York Times

Note how this aphorism about people has become one about us (It was not said by Winston Churchill; details here). Rather than assume success, we should take this advice:

“Success breeds complacency. Complacency breeds failure. Only the paranoid survive.”
— Andy Grove, CEO of Intel 1987 – 1998

Two centuries of success have taught us complacency, confidence that we are not only exceptionally moral as the “city on a hill” in Matthew 5:14, but also exceptional in an operational sense. We assume success as our due, without the necessity for preparation, planning, or even effort. Energy, climate change, demographic challenges, underfunded pension plans, the next wave of automation, growing inequality — we assume success vs all problems, so take few precautions. It’s an odd kind of faith-based public policy.

Success has brought us the “victory disease” (senshobyo in Japanese, a term coined in the 1930s by novelist-turned-strategist Chuko Ikezaki ).

A people more aware of cycles might prepare for a period of hard times, much as darkness follows light (and lean years follow the good ones). It could be painful yet not like the Long Depression of 1873-1879 or the Great Depression of 1929-1939.

Let’s look at one example: our high Federal debt load, destined to rise as the boomers retire. We are confident that growth will easily fix these, as growth solved the massive debts the UK accumulated from the Napoleonic Wars. As growth solved our massive debts from the Civil War and WW2. This confidence is delusional.

Those debt loads were made manageable by several factors in the decades that followed the wars:

A key button on the national keyboard, but we can’t predict what it does

massive population growth from high fertility, improved public health, and immigration,
the industrial revolutions’ productivity booms
in the 19th century: by conquest and development of vast new lands, and
in the 20th century: by massive increase in education levels.

Let’s see how these played out in the post-WW2 boom.

Growth in US Total Factor productivity averaged aprox 2%/year from 1950-1964 (the last spurt of the great 1870-1920 science breakthroughs). That was the highest sustained burst since good data starts ~1870.
The great education boom began after WW2. Average years of schooling for those 25+ years old was ~8 years in 1940s, rising to ~12 in 1970s (and ~13.5 now).
The great rise in women’s labor force participation began in 1932. It was ~30% in 1950, then steeply grew to ~50+% by 1980. It’s now ~60%.
The rapid increase in US population after WW2 from births and immigration. The US population was ~120 million in 1950, its ~320 million today. Growth hit 1.8%/yr in 1957, working its way down in fits and starts to about ~0.7% now.

The result was spectacular economic growth, allowing us to pay down the debt from the New Deal and WW2 (the latter far larger) to a manageable level by 1980, after which the spending plus tax cuts of Reagan and then Bush Jr put the debt on the upward trajectory that continues today.

None of these factors look likely to help us during the next few decades. And, unlike those debts from wars, much of our fiscal problem lies ahead of us as liabilities come due from our aging population.

Worse, there is a possibility of slower — not faster — GDP growth over the next few decades, as described recently by these economists — plus a CATO review paper:

“Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds“, Robert J. Gordon, National Bureau of Economic Research, August 2012
The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better, an e-book by Tyler Cowen (Prof Economics at George Mason U), 2011. Only $4 from Amazon link here
“Productivity and Potential Output before, during, and after the Great Recession“, John Fernald, Federal Reserve Bank of San Francisco, September 2012
“Economic Growth in the Information Age: A Prototype Industry-Level Production Account for the United States, 1947-2010”, Dale Jorgenson et al, 2013
When the Money Runs Out: The End of Western Affluence, Stephen D. King (chief economist at HSBC), 2013
“Why Growth Is Getting Harder“, Brink Lindsey (JD from Harvard), CATO, 8 October 2013

Let’s look at their forecasts. The average annual growth of US per-capita real GDP during 1870 – 2010 was 1.96%.

“Why Growth Is Getting Harder” by Brink Lindsey, CATO, 8 October 2013

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These differences might look small, but over decades, as the boomers age, would create serious problem for America. Since we’re exceptional, we feel no need to worry — let alone start to prepare now for this possibility.

Clap your hands if you believe we are exceptional!