Cashing Out

America's status as the world's banker has shielded it from harsh economic realities for more than half a century. Not anymore.

The honor of printing the world's reserve currency did not come accidentally, or easily, to the United States; the dollar's post-World War II ascent to global primacy would not have happened had America not demonstrated the unrivaled economic, military, and technological power to back it up. But being the world's banker comes with benefits as well as obligations -- and first among them is that the whole world wants to make sure you don't default on your debt. If you are in a position to repay your obligations by just printing more money, you might never default.

What is a blessing in the short run, however, could turn out to be a curse in the long run. A country that controls the international currency runs less financial risk when it borrows, but is thus likely to be less alert to the risk of financial bubbles. Costs can be underestimated, and problems undiscovered, for a long time. The United States is now learning this lesson in a very big way.

For many countries, such as Argentina and Vietnam, a budget deficit of more than 3 percent of GDP or a 5 percent current account deficit has been enough to plunge them into a financial crisis. The United States, by contrast, maintained about the same figures on its balance sheet for a decade while enjoying a period of economic expansion. The result was overconfidence and a flawed vision of limitless potential growth, as if Americans could keep spending without saving to no one's detriment. Some economists even claimed this was a result of the "super-efficiency" of the U.S. economy.

You can see the logical consequences of this illusion in today's overleveraged, debt-plagued U.S. economy, the major cause of both the 2008 global financial crisis and the current concerns over U.S. government debt. The lesson is clear: The United States may enjoy a greater line of credit than everyone else in exchange for providing the dollar, but even the most forgiving balance sheet in the world has its limits. America's long experiment with ballooning debt and an ever-expanding financial sector has left the country with other problems, too. Wall Street's disproportionate size in comparison with "real" sectors of the U.S. economy such as manufacturing has resulted in deteriorating industrial competitiveness, growing trade deficits, and unemployment.

We cannot and should not attribute all of America's current problems to the dollar's special status and the illusions that come with it. But without it, we cannot explain why the United States did not make the hard economic choices that less-privileged countries would have had to make, and long ago. Today, even the world's banker can't put off the reckoning any longer.

Javier Jaen


Left Behind

Americans created the knowledge economy. So why can't they keep up with it anymore?

America today is akin to the Ottoman Empire at the end of its days. Immensely important, commanding huge global influence, badly run under mounting debt, it is not the leader of the world, but the sick man of it.

At the root of America's problems today is one that Americans themselves created: the knowledge economy. That economy and its associated technological advances, from outsourcing to Internet telephony, has displaced many Americans from work even as it has made firms like Apple among the world's richest and most admired companies.

The three-year-old economic crisis has only accelerated that process, but in no way started it. As in Europe's transition from an agrarian economy to an urban powerhouse during the Industrial Revolution, there will be many whose skill sets just won't be needed in this new age.

But the likes of Amazon, Apple, Facebook, and Google put together cannot employ the people laid off by Ford and General Motors. According to the U.S. Bureau of Labor Statistics, the manufacturing industry's employment numbers went from 17.6 million in 1998 to 13.4 million in 2008; they are projected to decrease to 12.2 million by 2018. The IT industry's employment numbers are projected to grow to only 3.1 million by the same year. Designing more Facebook clones and iPad apps won't close this gap.

And that's at least in part because, for all the incredible quality of U.S. discourse, the American education system is in an abysmal state. Its universities are still the envy of the world, but the United States has a 30 percent high-school dropout rate and recently ranked 31st of 65 countries in math proficiency in a ranking compiled by the OECD. What will those people do? How will they live? No wonder America's Ph.D. students, especially in science and engineering, come increasingly from overseas.

If the United States continues to look to the tech sector to lead it out of recession while maintaining unemployment close to 10 percent, it may well have nothing more than a feudal recovery, one in which those who have the immediate skills or the wealth to take part in it do so and those who don't remain unemployed -- a techno-aristocracy of sorts.

I recently asked an American businessman what many unemployed Americans will do if they can't find new jobs comparable to their old ones. "Go back to farming," he said. And it didn't entirely sound like a joke.