The Cart and the Horse: The values that built America are needed today
By Tony Allison, October 1, 2007
The epic World War II documentary “The War” currently airing on PBS has certainly been an emotional history lesson for millions of Americans too young to remember its significance. The war affected every man, woman and child in America, and pulled the country closer than at any time in our history. It is important to not only remember and honor their sacrifice, but to consider that the values of the WW II generation may still be useful today.
The United States grew from a widely spread-out rural economy in the 1850’s to the most powerful country in the world in just one century. In historic terms, that’s a blink of an eye. The horses that drove that epic growth were savings and industrial production. The ultimate source of this horse-power was the hard work, sacrifice, frugality and risk-taking of millions of Americans, looking for a better life. Consumption, as represented by the cart, has been happily pulled along as the nation’s savings and production steadily grew over that century. The horse has pulled the cart up some immense mountains (wars, depressions, inflation, natural disasters etc.) during that century. But over the last 30+ years, the cart has been riding downhill without much help from the horse. Consumption has grown tremendously as a % of GDP, and now comprises approximately 70% of the economy.
An Age of Financial Alchemy
Economic pundits now claim we are a “consumer” economy, and we no longer need the horse power provided by savings and industrial production to propel us into future prosperity. Many Wall Street sages seem to believe that saving, sacrifice and frugality are old fashioned ideas that are clearly not necessary in an age of financial alchemy. In today’s modern economy, Fed-driven liquidity levels, deal-making, and clever derivative instruments are supposedly the horses that will lead us into this new century. Growing the economy on the back of higher debt levels is politically an easy choice, but incredibly destructive to future generations. The structural deindustrialization of America has taken decades to accomplish, but its future effects may last even longer.
Our parents, grand-parents and great grand-parents built our great national wealth, and their sacrifices allowed the consumer economy to greatly expand over the last three decades. When the next crisis appears unexpectedly on the road ahead, the overweight, tricked-out consumption cart will find the going challenging without the brute strength of savings and production. The cart will one day need the horse again, only to find the old nag out to pasture, and not in any shape to pull us where we need to go.
Squandering our inheritance
As it stands now, the hard-won inheritance of our forefathers is gradually being squandered. The reason we must borrow 2.5 billion dollars a day from foreigners is because we don’t have the savings necessary to finance our immense and growing national debt (currently $9 trillion, with future unfunded obligations over $60 trillion.) Eventually foreign creditors are likely to begin cashing in their trillions of depreciating dollar reserves and begin buying tangible American assets; tangible assets built from a century of savings and production. Protectionist conflicts are a likely result, as we have seen already with the Dubai ports controversy.
The Infrastructure Mountain
One looming mountain dead ahead is the rapid decaying of our national infrastructure. This would include roads, bridges, dams, electrical grids, ports, water and sewer systems, hazardous waste, refineries, schools etc. etc. Most of our national infrastructure was built prior to 1970, and much of it well before that. If our nation is to remain economically vital and continue to be a magnet for global capital, then our infrastructure situation must be addressed, and soon. A 2005 study by the American Society of Civil Engineers put the price tag at $1.6 trillion. With dollar inflation and further infrastructure deterioration, the price tag today likely would exceed $2 trillion. Of course that’s in today’s dollars. By the time the country actually deals with the issue, the price tag will be much, much higher. And judging from the underestimates and cost overruns of rebuilding infrastructure from Hurricane Katrina, the road will be difficult.
No simple solutions
National savings have traditionally financed these immense expenditures. Unfortunately, our consumer-based economy has left us with little individual savings beyond our homes (and that’s another story) and is not equipped to finance this huge undertaking. Raising taxes to pay for infrastructure improvements would be a tough sell politically. What about education, health care, crime, pollution and a dozen other critical problems. Why not raise taxes for those as well?
Simply printing the money is hardly a solution. The result would be yet more inflation and a badly depreciating currency. If we sell infrastructure construction bonds to the Chinese, are we also selling our political independence? And would any country want to buy trillions upon trillions our debt after the dollar has treated foreign investors so rudely? The infrastructure mountain is a challenge so large, complicated and expensive that our current crop of politicians is likely to punt and defer any action until the inevitable crisis forces their hand. Politicians can only hope the breakdowns occur after they are out of office.
A National Priority
However, if this issue became an urgent national priority, it could become a means to rally the country and bring us closer. It could also put millions of people to work building something of lasting and productive value for everyone. The key question becomes, do we have the political will and sense of shared sacrifice to tackle this issue?
This is the problem of the cart and the horse, and which should take priority. There are no easy solutions to complicated issues. But without more saving, more sacrifice, and more productive growth, the challenges we face become that much tougher. With the coming train wreck of Medicare edging closer, how will we climb that mountain? By consuming more and creating more debt? By cleverly engineering new financial instruments to spread out risk? No, we need a strong and vital horse, built on the values of those that came before us, to confidently carry us into a changing future. Americans are adaptable and willing to work. But change of this magnitude is usually precipitated by crisis. My hope is we will pull together in a time of crisis, as we did during World War II, and the sum of our efforts and shared sacrifice will help us become a stronger, more united country.
U.S. stocks rallied Monday, pushing the Dow to record heights to start off the fourth quarter. Wall Street showed optimism after Citicorp warned of a steep drop in profits, believing the worst of the credit crunch is over and that further interest-rate cuts are ahead.
The Dow Jones Industrial Average closed up 191.92 at 14,087.55. The S&P 500 Index closed up 20.29 at 1,547.04. The Nasdaq gained 39.49 to finish at 2,740.99.
The ISM index came in below expectations, but investors appeared to brush the news aside, with the major indexes only adding to their gains after the Institute for Supply Management released its manufacturing index for September. The measure registered a reading of 52.0%, down from 52.9% in August.
Gold futures climbed to their highest point in almost 28 years Monday, with palladium and copper also posting strong gains. Gold for December delivery rose $4.10 to finish at $754.10 an ounce on the New York Mercantile Exchange.
Crude oil for November delivery dropped $1.42, or 1.8%, to end at $80.24 a barrel on the New York Mercantile Exchange.
© 2007 Tony Allsion