A Megatrend

The following definition of a megatrend is from the Council of State Governments:

A megatrend is a large, social, economic, political, environmental or technological change that is slow to form. Once in place, megatrends influence a wide range of activities, processes and perceptions, both in government and in society, possibly for decades. They are the underlying forces that drive trends. (i.e. aging population)

One such megatrend has been affecting every category of life, particularly in the United States, for the past 70 years, and even though the causes for the trend have evaporated, the lingering effects will dominate the economic and political landscape for decades to come.

I am speaking of the rise of American manufacturing and economic hegemony in the aftermath of World War II. 

This will only be a short introduction and will not dwell on the details of the “military-industrial complex”, world reserve currency or American geopolitical influence, but will instead focus on the rise of the middle class, economic prosperity, and the faltering financial system from the loss of the supporting pillars of the American economy.

I recommend the book by Ken Phillips, “American Theocracy”, for some of the related megatrends that the present megatrend encompasses.  Specifically, he outlines the potential problems associated with military “global overreach”, militant religion and resource problems (e.g. oil) that have been the causes for the downfall of many great civilizations throughout history.  

The Start

World War II was undeniably devastating to the economies of the countries involved, but more so to the infrastructure and manufacturing capabilities of those countries – with the exception of the United States.  We suffered from the bombing of Pearl Harbor, but this was an almost exclusively military attack intended to weaken our ability to combat Japanese expansion in the Pacific.  Beyond that, we had losses of soldiers and equipment, but no direct loss of our manufacturing abilities or infrastructure.

In fact, the opposite was true.  We had factories converted for military use, but these were later available for use as a manufacturing foundation.  Our policies regarding recovery of the European and Asian economies were sufficiently successful that these countries rapidly developed demand for products manufactured in the United States.

We maintained a positive trade balance until the 1970s and gradually began to import more than we exported.  Much of this deficit was due to the importation of oil, but eventually the economies of Europe and Asia recovered sufficient manufacturing capacity that they could compete with the United States.

Compete may not be the correct word.  They won. 

As the United States experienced an increase in manufacturing, we also had many benefits bestowed upon our workers that ultimately made our goods less competitive.  Salaries in other countries were lower, state supported manufacturing made costs cheaper, and they concentrated on improving the quality to the point that even in the United States, many foreign manufactured goods were preferred to those manufactured in this country.

In brief, the rest of the world caught up to us, and many parts surpassed us. 

As the world economy continued to improve, American manufacturing jobs increased until a peak was reached in about 1980.  For a variety of reasons including automation, wage competition, the decline of unions, the reliance on foreign made goods, and the global nature of manufacturing, American manufacturing jobs then started to decline and, for those jobs remaining, wages stagnated or decline from about 1975 forwards.

The graph above illustrates the problem of inflated values for houses that ultimately led to the recession of 2008.  Wages were supplemented by unrealized gains from housing equity predicated on the presumed value of the home.  In other words, people borrowed against their home’s value to supplement their income.  This was related to the housing bubble, but in real terms indicates that the median wages have, in fact, declined.  Taking away the housing bubble leaves American wages significantly lower than may have been reported.

Automation and the use of foreign labor became more prevalent as time went on, and the result has been a decline in manufacturing jobs to the lowest point since before World War II.

Profits from manufacturing started to drop even before the actual jobs leveled off and started to decline as the following graph shows:

In order to maintain the status of the United States, continue to provide the same level of government service, and fuel the economy, government spending increased and government revenues were unable to keep up – in part because the government was unwilling to raise taxes sufficiently to continue to support government expenditures.

As a result, the United States borrowed more and more.  Since the deficit is equal to the expenditures minus the revenue, and each year this deficit is added to the national debt, the result is a rise in the national debt that has truly been extraordinary.  The graph below only shows the debt through 2005, but the trend has continued along the same lines to the present.

The United States had run national debts in the past, but even going back to before World War I, the debt had always been relatively low as this graph, which carries the data through 2010, shows:

The megatrend of American manufacturing dominance has expired and did so in about 1980.  Our standard of living has been protected by the borrowing of the United States.

The tail end of this megatrend seems to be happening now.  Even taking into account inflation and changes in GDP, it should be obvious that sustaining this level of borrowing is impossible. 

The end of a megatrend can be ugly.  Nationalism, political infighting, refusal to acknowledge that any problems need to be addressed, and the ultimate relinquishing of privileged position seem inevitable.  We can no longer claim to be exceptional in the sense of having capacities or resources that other countries do not have.  Eventually, we will not be able to borrow our way towards prosperity.

The Wall Street Journal Opinion page from August 11, 2011, had a depressing assessment of our situation entitled "America as Less Than No. 1".

"So this is a taste of what it will be like when the American superpower starts shrinking.  Enjoying it yet? 

After the humiliation of the United States losing its AAA credit rating; after watching the American stock market descend into chaos; after living for two years in a $15 trillion economy unable to grow beyond 2% with unemployment rates rarely experienced in the U.S., Americans have their first whiff of inhabiting an empire in decline."

The economy, and the country as a whole, is slowly drifting towards the mean.  Our wages are dropping while those of other nations have been rising.  Our infrastructure is crumbling while that of other nations has been improving.  Our middle class has been slipping while other countries build their middle class.

Solutions seem fleeting and attempts to implement solutions have been unsuccessful.  For example, our attempt to build a “green economy” has led to the manufacture of windmills and solar panels – in China.  And our dependence on foreign energy sources has not improved despite an attempt at using ethanol to supplement our gasoline.

This is very likely to be a hard landing.  For many Americans, there is no other way to think of America except as “The Greatest Nation On Earth.”  Choices from this point forward will be difficult.  And painful.

The time for half-measures is past, or quickly passing.  It will take drastic action that will affect many if not all segments of the economy.  A failure to act can only exacerbate the coming storm.

Even choosing between bad options can be done wisely.   It can also be done foolishly.  The fate of the country and its citizens depends on the wisdom of the leaders.

While many of the politicians bemoan the need for our children and grandchildren to be saddled with this debt and the need to repay it, it seems clear that we are those children and grandchildren, and we need to face our debt and begin the process of living on our revenues.

If you can look at a graph of our national debt and not be frightened, you haven’t been paying attention.  The level of debt is bad enough, but the amount of the deficit and the prospects for seriously addressing these problems are killers.

And that’s why our credit rating was downgraded.