The Dangerous Structure Of the American Economy

Human Beings Are the Cause of Instability

News about the economy keeps getting worse, and there is no recovery on the horizon. When trying to find a thesis that points out the causes of the illness, I looked to Herbert A. Simon, the 1978 Nobel Prize winner for economics, and his work “The Sciences of the Artificial.”

Simon was an economist of rational expectations who supported liberalization and used humans as his topic for discussion. People under the traditional school of thought at the time wrote that it was safe to engage in speculation, given the information that was widely available to the public. But Simon himself criticized that idea and argued that speculative actions can create instability.

In the other words, we should not forget that human beings are a source of the current instability.

Despite various academic warnings, the field of financial engineering was developed, and a financial product called the sub-prime loan bond was invented, which in turn created the current global economic crisis. A variety of IOUs were sold cheaply, depending on how high the risk was.

The idea was that one could buy by on credit, without funds, and the loan risk was transferred from the person using the loan to the person who bought the bond. In this way the market expanded with no limit.

Amplifying Desire for Wealth

America as whole let foreigners buy the bills of what the American people bought through trade as national bonds or the sub-prime loan bonds, meaning that the trade deficit was offset by capital transaction.

Both Japan and China maintained their economic activities by selling goods to consumers in the U.S., and they would lose balance if speculative capital did not always flow into the U.S. That is why the yen was always cheap against the dollar, and the interest rate in Japan was kept lower than that of in U.S. The value of industrial stocks goes down even now when the value of yen gets stronger against dollar.

By the way, the total amount of consumption of energy resources in the U.S. is 5.4 tons per capita, compared with 2.67 in the U.K., 2.92 in Germany, 2.85 in France, and 2.82 in Japan. The American energy consumption is the twice amount of other developed nations, and more than tenfold of the 0.47 tons per capita in China and 0.17 in India.

But it is not true to say that the Americans are blessed with the twice amount of wealth compared with an average citizen in other developed nations. According to Paul Krugman, the winner of the Nobel Prize for economics in 2008, the income of the top 0.1 percent of the American population has increased fivefold in the last 30 years, while the top 0.01 percent has increased sevenfold. The wealth distribution among the American people has continued to widen the income gap.

As seen in the case of the huge bonuses handed out by one major insurance corporation, America’s top elites only get excited about bringing home a bonus of more than a hundred million yen (or roughly a million dollars) and would never work for ten million yen a year (100,000 dollars). Huge wealth is used as an incentive.

Overly Optimistic Outlook for Economic Recovery

The tendency of American society to waste resources and its huge income gap are linked. The general polls substantiate the theory that the American poor continue to dream about turning opportunities to success and becoming rich. Society continues to believe that dreaming about being rich will contribute to social stability.

Recovering the trade balance, escaping from a tendency to waste resources, and narrowing the social gap: Without implementing these three successfully, the American economy will not be able to rebuild itself completely.

It is possible for President Obama to take one step forward in next four years. He has to revive the dangerous structure, now in place, where the U.S. compensates for its trade deficit by absorbing speculative global capital. It will be impossible to fix within four years anyway, even if the global economy recovers by that time.

It took a decade for Japan to get back on its feet after the collapse of a financial bubble. At this time, it is crucial for the U.S. to initiate a long-term plan to give aid to those who are vulnerable and to operate under the assumption that this recession will last a lot longer. It is too optimistic to assume that economy will be revitalized internally by enlarging effective demand using tax cuts. According to economist Lester C. Thurow, it takes about eight years to see good recovery signs in a capitalist society. For this situation, it is probably essential to initiate a plan that spans at least two decades.