Posted on 17 January 2011.
The following paper was written by Allen Rosenstein, founder of Pioneer Magnetics and member of CPA’s Policy Committee.
According to Dr. Rosenstein:
The enclosed paper, “An American Tragedy, Demise of the American Dream,” was written to offer the required practical, time-proven roadmap [to save our country].
Ø Chapter II: Describes the policy failures that converted the world’s leading economy into a post industrial nation
Ø Chapter III: Outlines steps necessary to achieve:
U.S. manufacturing domination of our domestic market – the world’s largest
Ø Financial Responsibility: Notes, pages 15 through 20
America cannot afford to hemorrhage money and assets at the present rate. A 4-part program is described to balance all U.S. deficits within 5 years or less. The viability of each section has been proven in the U.S. or abroad by our major trading competitors.
Success of any rational proposal ultimately is based upon a set of fundamental ideas (assumptions). Societal principles are not as precise as those of the physical sciences. However, the effectiveness of any societal action program will flow from an array of beliefs. The rise, fall and potential future of the American democracy can be chronicled in three brief chapters and explained by two governing root causes (principles). The basic root causes – trade policy and technology delivery – provide the tools to analyze the past and explore realistic future alternatives.
Beginning in the 1850’s, America’s spectacular one hundred year economic rise, sixty year accelerating fall and grim future, are analyzed in three chapters. The analysis is based upon only two root causes: trade policy and technology delivery.
Today, America is at a crucial crossroads. Our nation faces a choice between taking the path of least political resistance and do nothing or return to the time-proven root causes of an enlightened self-interest trade policy and a vibrant technology delivery system. As a first step, the President/Congress must find the foresight and courage to pass a balanced trade policy bill. With a level international trade playing field, provided by balanced trade policy, America can successfully rebuild competitive domestic manufacturing to recapture the domestic market. Implementation of a National Policy and Technology Foundation is essential to assuring coherent industrial policy and a world-class technology delivery system.
“Reality Economics” is used as a pragmatic tool to choose between competing economic paradigms. For example, the current debate between “free trade” and “mercantilism/protectionism” is resolved by comparing economic performance over decades of large nations following either of the two paradigms.
“Notes” are appended to challenge the rationality of some of our most cherished, conventional wisdom.
A simple internationally proven, Financial Responsibility is offered to allow the United States to be deficit free within five years. (Pp. 15-19)
Chapter I – The Rise
COMMENTS: Industry frequently analyzes the reasons for any type of significant failure in terms of their basic “root causes.” Less frequently but equally useful is the application of root cause analysis to understand success. These are commonly drawn from documented real life results rather than abstract unverified theory. In this paper, economic conclusions are proposed and verified by recorded international performance.
ROOT CAUSES: In 1850, America was largely an agrarian nation. One hundred years later, by 1950, the United States had become the world’s uncontested, dominant financial and manufacturing power. This unprecedented ascent is attributed to two well-defined root causes.
Trade Policy: Unadulterated mercantilist protection and support of American industry.
Technology Delivery: The uniquely American land grant college/extension system.
Together, the above fueled America’s phenomenal growth until their inadvertent replacement beginning sixty years ago.
Trade Policy – The American System
Adam Smith had argued that America’s role was to supply raw materials to more advanced British manufacturers. In contrast, Alexander Hamilton and George Washington believed that America should adapt Britain’s mercantilist industrialization practice in what became known as the American System. Protected subsidized industry with adequate financial support, quickly expanded to achieve the economies of scale, which made for more competitive prices.
As early as 1816, Thomas Jefferson promoted “Buy American” protective tariffs of 30% on iron and 25% on clothing. Even further, Clyde Prestowitz observed, “From the Civil War to WWI, U.S. tariffs never fell below a 40% rate . . . tariffs were substantially raised again in 1922.” (1)
Tariff protection was accompanied by direct and indirect government subsidies for struggling American industry. Government investment in the nation’s physical and human infrastructures provided a favorable, efficient industry-operating environment. Transportation and communication facilities were improved. Harbors, roads and bridges were constructed. Massive land grants provided the financial basis for the transcontinental railroads. The national highway grid was built with public defense funds. In the 1930’s, struggling airlines, bolstered by Post Office Air Mail contracts, survived to form an efficient air transport system.
Britain’s mid-19th century Industrial Revolution forever changed the international trade equation. Technology became as important as tariffs, exchange rates and monetary policies, in building a nation’s trade competitiveness and life quality. With the 1862 passage of the Morrill Land Grant College Act and the subsequent addition of extension information distribution, the U.S. invented a comprehensive technology delivery system. (2)
The land grant colleges laid America’s higher education foundation for technology leadership. The great state universities were basically professions schools, turning out the practitioners of teaching, engineering, manufacturing, management, etc. needed to build a nation.
The tradition of low-cost quality education for all its citizens was extended to higher education. Land grant college fees were quite low. Any motivated youth could easily work his/her way through college to acquire a first degree with negligible personal debt. After WWII, the G. I. Bill furthered this tradition.
The role of the federal government was critical to manufacturing. Government, in cooperation with industry and academia, gave vital support and often promoted fundamental industries and manufacturers. New industries were brought to light and older industries revitalized. In spite of the Wright Brothers’ genius, America entered WWI without an aviation industry. U.S. pilots fought in borrowed French and British aircraft. After the war, the government established the National Advisory Council on Aviation (NACA) whose wind tunnels and generic development supplied the technological foundations for America’s leadership in military and commercial aviation. After WWII, America’s national laboratories joined with industry to create an entirely new energy industry for nuclear power.
II: The Fall
COMMENTS: After 100 years of growth, the United States abruptly and inadvertently began drastic changes in the two root causes credited with the nation’s phenomenal growth. Beginning in the 1950’s, there was a slow perceptible loss of world leadership continuing over the past sixty years. U.S. domination of trade, manufacturing, finance, technology, life-quality, GDP, etc. has faded. A factual comparison of the recorded performance of America’s economy and technology during the 1850-1950 period with that of the last sixty years is telling. (3,4) America has effectively eliminated the engines of its success.
As America weakened, the rate of decline increased. Annual average wages have fallen. Life quality has been reduced. The American Dream is dimming for the average citizen. Current account trade deficit, federal budget deficit, offshore manufacturing and massive job losses, etc., cannot be sustained for many more years without endangering our democratic government. Historically, democracies unable to provide jobs and satisfactory life quality for their populations have given way to totalitarian regimes: Russia, Germany, Italy, Cuba and now, Venezuela.
Trade Policy: The American System Discarded
Mercantilism/protectionism is no longer intellectually or politically acceptable in the U.S.A. Enlightened self-interest trade policy/manufacturing has been replaced by “free trade” which depends upon enforcement of international trade rules that are not accepted by competitors.
One can observe that with the possible exception of the oil-rich nations, there is no case of any major free trading nation, such as the U.S., maintaining even balanced trade with mercantilist major trading nations such as China, Japan, Germany, etc. The myth of free trade in international competition has been carefully explored and found inoperable. (5) The 2006 current account trade balance tells the sad story. (6)
The university has responsibility for collecting, extending and teaching society’s collective wisdom and knowledge. These are organized and presented within three great categories and their corresponding responsibilities:
Technology – Professions – Societal Resources
Science – Research
Humanities – Societal Values
As mentioned, from the mid-1800’s, the land-grant college/extension system was a prolific American technology delivery conduit. The National Science Foundation (NSF) was created in 1950 to improve U.S. scientific research and delivery. Shortly thereafter, the Arts and Humanities Foundation was established.
The National Science Foundation (NSF) has served the nation well. A comprehensive science delivery system has been developed. That system continuously surveys science frontiers, picks future program winners and funds them from initial investigation through large-scale, multi-discipline projects. Responding to its charter, the NSF has been successful by measures such as Nobel Science Awards, publications, world status, etc. Our nation has been grateful.
While U.S. Nobel Prize winning scientific delivery awards have been growing, there have been unfortunate side effects. The research university’s science delivery system rapidly replaced America’s land grant college/extension technology delivery system. Declining U.S. technology leadership and trade competitiveness have contributed to the world-class trade deficits that undermine the nation’s financial stability. (7)
Both science and technology delivery have essential societal roles. However, technology and science are two entirely different but mutually complimentary, animals. Science seeks answers to the nature of our universe, from the sweep of the most remote galaxy to the microscopic causes of infectious diseases. Science produces knowledge that is a universal free good. Technology creates the “know-how” to effectively utilize societal resources for the improvement of the nation’s quality of life .
A nation’s technology delivery system is its instrument for envisioning the future and the policies needed to acquire the world’s best technology. Technology delivery systems continuously work to improve their citizens’ life quality and particularly to compete in a very competitive world. (7, 17)
The sheer power of technology to improve manufacturing productivity, is well documented. When the land grant colleges were established in the mid 1800’s, it took 50% of the U.S. working population to feed our nation. After the turn of the 21st century, it took less than 4% to produce 120% of the nation’s food and fiber needs. Technology has continued to drive manufacturing productivity. Today, U.S. manufacturing employs barely 10% of the working population. It is projected that within 10 to 15 years, manufacturing, agriculture and mining, together will occupy no more than 10% of the gainfully employed population. The remaining 90% will be found in services, government, recreation, etc.
R & D vs. D & R: It should be noted that most of the U.S. research budget goes into R & D – research leading to subsequent development. An overwhelming percentage of China, Japan and Germany’s reported research budgets, are in reality, D & R market technology/development driven economies followed by research where needed. (6, 18)
United States’ conventional wisdom now holds that a Scientific Research Driven Economy (R & D) will prevail in international trade. (8) Our trade competitors believe just the opposite. James C. Fletcher, head of NASA, in discussing the rapid industrial development of Japan with business members of the Japanese, Keidarnen was told:
“. . . it was very simple. We made a conscious decision after WWII to develop new technology wherever we could find it; if we had to borrow it, fine; or if it made sense to develop it ourselves, that was also quite acceptable. We did this at the expense of the more basic sciences. As a result, you will notice that the Nobel prizes all went to the United States, whereas the new technology was nearly always applied first, or at least best in Japan.”
After WWII, modernized versions of the U.S. land grant/extension system were invented by Japan’s MITI and Germany’s Fraunhofer Gesellsehoft (FhG), to provide and implement national policy for industrial competence and trade competitiveness. Their success cannot be denied. Within eighteen years, war-ravaged Japan had become the world’s second largest industrial nation and Germany the third. Most developing nations, including China, followed Japan and Germany’s mercantilist lead. The original British and American export-enhancing policies and domestic industry subsidization, were reinforced with predatory exchange rates, printing money to buy U.S. debt to maintain these rates and state capitalism.
Germany and Japan’s comprehensive, well-funded long-term technology-delivery programs were instituted to develop their domestic industries or “kidnap” entire American and other nation’s industries and their supporting technology: robotics, semiconductors, solar cells, plasma screens, computers, printers, semi-conductor processing machinery, cell phones, energy, green technology, space communication satellites, lithium-ion batteries and pharmaceuticals, among others. The list of lost manufacturing and jobs continues to grow. (3, 4, Appendix I, p. 15).
State capitalism, backed by government funding, appears to have effectively challenged traditional market capitalism competing with limited private funding (the U.S.). In this contest for the massive manufacturing plants of the future, state capitalism is winning. As but one example, the current building of new semiconductor manufacturing plants in Asia greatly exceeds that in the western nations. Individual technology/manufacturing opportunities are now so large and so expensive that government participation is essential. Although, America calls them “bailouts” the U.S. has a long history of large emergency government cash infusions to critical industry: finance, banking, insurance, automotive manufacturing, etc.
Chapter III – The Future – Alternatives
COMMENTS: America faces a choice between two realistic but starkly different alternatives. These are:
1. Take the path of least political resistance and do nothing! Thus, follow the past sixty-year trajectory of national decline, marked by ideological conflict and ruthless partisan politics, to arrive at the third-world graveyard of former democracies.
2. Return to time-proven root causes, (Chapter 1). Reclaim and dominate our own domestic market – the world’s largest. Resurrect American trade and technology delivery systems to re-ignite the American Dream. In a few years, protected/nurtured U.S. industry can recapture the economies of scale and productivity that have always ensured domestic manufacturing competitiveness.
Trade Policy – The American System
The magnitude of the current trade deficit threatens the very financial future of our nation and overshadows all other political, financial, federal budget and economic considerations. Using the same profitable trade tactics Britain and America had practiced for decades (but abandoned after WWII), trading competitors are now waging aggressive economic war for world markets. (6)
Competition unilaterally erected a thicket of rules, regulations, tariffs, predatory exchange rates, monetary policies, state capitalism, etc., to enhance their exports, discourage imports and incidentally, destroy, cripple and often seduce U.S. manufacturing. The American System has employed these same logical, self-serving tactics to advance U.S. trade. It is illogical and hypocritical to continue to whine about the same trade tactics that the U.S. inadvertently abandoned. If current account trade balances are any measure, nations using America’s time-proven trade strategies have won the economic war. Nations with coherent economic/industrial strategies and state-managed economies lead the world with record trade surpluses. Safely ensconced at the very bottom of the trade competition is the USA – a capitalistic free-trade democracy. In essence, successful competitors have a rational trade and economic strategy. We do not.
For the U.S. to continue as a stable democracy, its present outflows of capital assets, manufacturing jobs and technology are unsustainable. There have been six decades of counterproductive policies. America cannot afford even another half decade before it alters course. (7, 8 )
BALANCED TRADE: The President and/or the Congress, must find the foresight and courage to pass a balanced trade policy bill informing the world that the present trade unbalance is unacceptable for world prosperity. The U.S. Constitution gives the Executive and Legislative branches the power to manage trade: Article I, Section 8.
With a return to a modernized American system, the U.S. will, once again, aggressively nurture and protect its domestic manufacturing and markets. The U.S. will also correct the restrictions unilaterally imposed by American trade competitors. Effective tools must be created and utilized to balance trade quantitatively. Current account trade deficit can be subdivided into goods and services vs. foreign energy.
Energy Independence: Energy independence is quietly taking its place, along with global warming and the current account trade deficit in the pantheon of U.S. fiscal issues. The increasing U.S. foreign fuel bill is now over 50% of the total U.S. 2006 trade deficit.
There are a large number of promising technologies, including nuclear power, but there is no single energy independence silver bullet. The ultimate answer will probably be found in a combination of improved technologies. However, time is growing short. The energy problem is every bit as large, complex and expensive, as the Apollo Moon and Manhattan Atomic programs. The United States also has little chance of sharing in the growing energy equipment manufacturing market without a stand-alone, adequately funded:
Energy Independence Agency: U.S. energy efforts are a decade behind our competitors. Every significant (non-oil producing) trading nation already consumes 35% to 50% less oil per day per capita, than the United States. Time proven technology and policies are available for immediate U.S. application. We have only to adopt them. (10)
The Untied States is the only major nation that now lacks the means for timely rational development and implementation of long-term economic/technology policy. (15)
A show-stopping song in the musical “South Pacific,” asked: “If you don’t have a dream, how you gonna’ have a dream come true?” To realize a desired national future, there must be means to create a vision of that future and the policies for its realization.
Without exception, our trade competition has built upon permanent, well-funded and respected institutions charged with providing a credible vision of the nation’s desired life quality and the policies and technologies to realize that dream, i.e. market/technology “winners.” These nations frequently systematically select and acquire promising U.S. industry/technology. (Appendix 1, p. 14)
To provide a 21st century replacement for the lost land grant college/extension technology delivery system, an early study was made of four successful delivery systems:
1. U.S. Land Grant College/ Extension: Technology Delivery (2)
2. Japan’s Ministry of Economy, Trade & Industry: Technology Delivery (9)
3. Germany’s “Fraunhofer Gesellsehoft , FhG”: Technology Delivery (20)
4. U.S. National Science Foundation (NSF): Science Delivery (13)
Comparison Among National Technology & Science Delivery Systems
(China was not a major trading nation when this study was conducted)
|China||#1||+$363 Billion||–||Technology||–||–||1,339 Million|
|Japan||#2||+$206 Billion||METI||Technology||8,629||$12.29 Billion||127 Million|
|Germany||#3||+$185 Billion||FhG.||Technology||17,000||–||82 Million|
|U.S.A.||#163||-$747 Billion||NSF||Science||1,390||$7.424 Billion||310 Million|
Staff and budget comparisons may be misleading. However, the trade performance of much smaller nations with a fraction of the U.S. population (Germany 25%, Japan 40%), call for further mission examination:
Japan’s – METI Mission Statement: (11) Expanding the national wealth, constantly examining and promoting reform of the economic and industrial systems required to ensure a bright future for Japan, including:
Ø Becoming a center for world innovation
Ø International industry strategy
Ø Creating quality job opportunities
Ø Improving productivity
Ø Service industry innovation
Ø Fostering future diversified local industry
Germany’s – FhG Mission Statement: “Our efforts are geared entirely to peoples’ needs: Health, Security, Communications, Energy and the Environment. As a result, the work undertaken has a significant impact on people’s lives. We are creative. We shape technology. We design products. We improve methods and techniques. We open up new vistas. In short, we forge the future.” (12, 20)
United States’ – NSF Mission Statement (13): To promote the progress of science, to advance the national health, prosperity and welfare; to secure the national defense.
In 1986, engineering was accorded equal status with science:
Ø Basic scientific research and research fundamental to the engineering process
Ø Programs to strengthen scientific and engineering research potential
Ø Science and engineering education programs at all levels
Ø Programs that provide a source of information for policy formulation
Ø Promote the discovery, integration, dissemination and employment of new knowledge and service to society
The 2011 NSF budget request for research and related activities totals $7.424 Billion. This is distributed among selected Directorates. The three largest are:
Mathematics & physical sciences $1,409.9 Million
Geosciences $955.3 Million
Engineering $825.7 Million
The NSF has given the United States unquestionable science preeminence. On the other hand, METI and Fraunhofer Gesellsehoft market/technology delivery systems, have afforded Japan and Germany decades of financial, manufacturing and technology leadership. The sixty-year competitiveness decline of the United States, cannot be stemmed without a comparable world-class policy/technology delivery system*. Briefly described on the following page is such an entity to be known as:
The National Policy & Technology Foundation
* Laura Tyson, in her 1992 book entitled, “Who’s Bashing Whom?” stated, “. . . a defensive trade policy cannot substitute for supportive domestic policies. . . Despite its pitfalls an industrial policy approach is also required. If the United States fails to choose, the semiconductor industry as a winner, American producers may well become long-run losers in the rigged game of international competition.” – AND SO THEY HAVE BECOME, TODAY.
The National Policy & Technology Foundation
A large 1955-68 UCLA Ford Foundation Study, recognized the genesis and magnitude of the continuing U.S. decline. From 1973 to 1987, eight bills were introduced into the Congress.
The National Policy and Technology Foundation Act (NPTF) – 1987, was submitted by George E. Brown, Jr. (D) and Claudine Schneider (R), with fifty-four bipartisan cosponsors. to correct the institutional void that ensured the loss of U.S. competitiveness during the past six decades. (7, 14)
NPTF highlights include creation of the:
Ø National Information Office to provide a comprehensive international database supplying a reliable factual information foundation for American decision making; individual, corporate, labor, business, industry, technology, science, trade, customs, etc.
Ø National Office of Policy, Analysis and Assessment to offer comprehensive analysis for future U.S. policy, structure and structural interrelations. Functions of the highly successful Office of Technology Assessment and ARPA, would be included to restore Congressional technology vision. The Policy office would offer an early warning system to identify emerging national and sectorial problems, opportunities and needs, such as energy independence and global warming. Alternative policies and technologies would be subjected to impartial feasibility analysis and assessment for legislative/executive consideration. (19)
Ø A World-class Technology Delivery System, building upon the U.S. Land Grant/Extension system tradition, to identify, procure and deploy industrial/commercial winners. Appropriate consortia of participating industry, government, academia and national laboratories would be established. Adequate financing would be provided for the entire delivery process from initial exploration through production, adequate capitalization and mass distribution. Particular consideration would be given to small and medium-size business.
Ø Councils serving as deliberative public forums for national policy are the crucial links to the public and the keys to successful functioning of the Foundation. Essentially, every major Congressional decision-making, resource-allocating responsibility would have a standing nonpartisan Public Council.
Our nation’s commitment to its citizens’ future life quality is embodied in three great societal entitlements: Health delivery, Social Security and education. The recent Health Delivery debate would have benefited from the process followed in the 1992-1993 National Commission on Social Security Reform. That commission’s proposal extended Social Security for an additional thirty years, when it must be reset again. This process should be followed for all NPTF Councils, including societal entitlements.
Japan’s 1981 Plan to Kidnap The Robotic Market: (9)
Policy Implementation – National Project
Example: Flexible Manufacturing System Complex Provided with Laser
Policy: The industrial structure of Japan in the 1980′s (Summary). Future Outlook and Tasks, May 1981; BI-44, P. 45. Based on materials furnished by the Industrial Structure Division, Industrial Policy Bureau, MITI.
“Processes. Areas of automation will expand through utilization of industrial robots, with greater flexibility to adapt the operations to the need for producing larger varieties of products in smaller quantities.”
Object: To establish a complex manufacturing system that offers rapid and flexible production of machine components in small batches.
Project Manager: Agency of Industrial Science and Technology, MITI.
Duration: Seven years.
Participation: Three government Laboratories, Twenty Private Companies
Organization: Five technical subcommittees include four R&D groups organized to address critical technology problems.
Advanced Robotics was invented in the United States. By 1980, America had a flourishing world-leading robotics industry. Japan had nothing comparable. But, Japan’s 1981 plan was highly successful. A complete line of advanced robotics was developed. The government then set up a corporation that gave very low cost loans to their domestic industry to buy Japanese robots. As a consequence, Japan now has the world’s largest robotics manufacturing industry and domestic usage
Today, America has little robotics manufacturing and no mechanism to formulate industrial policy to bring robotics back. The old American system would not have hesitated. Our domestic market is large enough to comfortably support a competitive robotics manufacturing industry.
FOR A BETTER FUTURE
Financial Responsibility (17)
A successful, rational economic industrial strategy, can build upon a prosperous growing economy. After one hundred years of continuous growth (Chapter I) the United States was the world’s premier financial and industrial nation. In 1950 (Chapter II), America abandoned the two basic root causes of its phenomenal growth and began the present sixty-year decline. Particularly damaging has been the loss of financial responsibility that must be regained for our nation to recover.
In spite of the bleak picture, there is every reason to believe, that within five years the damage can be repaired by a conservative but aggressive financial responsibility program. Although only four critical economic paradigms must be addressed, the feasibility and practicality of the following changes have been fully demonstrated over decades.
Accompanying each proposed action, is a first estimate of expected annual national returns to be reached within five years. Re-aligning just a modest amount of America’s current conventional economic wisdom to conform to international reality, offers a path to an early return for a fully balanced economy, fiscal stability and prosperity. No assumptions have been made of the sacrifices our nation will assume for a five-year program of financial responsibility.
Balanced Trade – The current account trade imbalance is, by far, the nation’s greatest financial millstone. It is three times the total 2006 federal operating budget deficit. Chapter III has considered trade balance correction in two categories:
Ø Goods, Services, etc. (except energy). The U.S. has traditionally maintained a comfortable trade surplus. Countering the unilateral trade practices of trade competitors and rebuilding domestic manufacturing, will eliminate the current account trade deficit.
Trade deficit = 0
Ø Energy: Lulled by initial abundant domestic energy sources, America has missed the energy independence boat. In the year 2010, our foreign energy bill exceeded $400 billion and is rising. Many competitors have had long-standing programs to reduce energy consumption and build a manufacturing capability for future energy conservation equipment. (10)
The U.S. is busily inventing promising technologies such as lithium ion batteries, advanced solar cells, nuclear power plants, etc. that are going overseas to be manufactured. With a dedicated five-year effort, America can cut its foreign energy bill in half and also regain the manufacturing of energy equipment.
Foreign Energy Deficit = $200 billion
2. Federal Operating Budget Surplus – Can be accomplished without new taxes or reduced benefits. From a deficit of $269 billion in 1992, an eight-year bipartisan effort produced a $236 billion surplus in 2000. The same bipartisan fiscal policies, including low-cost, readily available patient capital, will provide identical results in five years. (17)
Federal Budget Surplus = $250 billion
Treasury Note Interest Expense Reduction – For the payment of federal obligations, printing interest bearing Treasury Notes is actually more inflationary than printing money (dollar bills). Treasury notes have an obligation to repay a loan and interest with federal currency. Thus, at the end of the day, Treasury notes are more costly than the simple printing of equivalent paper money. There are substantial advantages to reduce or eliminate Treasury note interest, i.e. long-term interest rates are pushed down. The nation’s public and private interest expenses are reduced. The dollar may depreciate to help the trade balance. The threats of foreign refusal to lend money for U.S. government needs are no longer meaningful.
Tom Petruno, Los Angeles Times columnist, October 20, 2010, reported a federal process called quantitative easing (or QE), has already begun to create money out of thin air. “The Fed creates money at will and uses that cash to buy Treasury bonds or other assets . . . It did so in 2009, to the tune of about $1.75 Trillion in treasury and mortgage bonds.” (16)
Financial history is, once again, repeating itself. From the mid-1930’s through 1947, industry enjoyed a 1.5% prime rate. The Federal Reserve discount rate was 1.0%. Prime rate remained below 3% until the early 1950’s, when industry hobbling prime rates skyrocketed to 18.8%.
At the same time, creation of a formal U.S. mechanism to manage state capitalism must be undertaken. There will be no reason for the unnecessary sell-off of U.S. assets, ports, businesses, patents, industry, technology, etc., at bargain-basement prices. We have entered a new era, which requires a form of “State Capitalism” that the U.S. had invented nearly two hundred years ago. At that time, federal land was given to build the U.S. transcontinental railway system. Today, our leading trade competitors have reinvented a sophisticated form of state capitalism to build their export trade and buy America. Led by Japan and China, nations subsidize their domestic industries by maintaining a favorable exchange rate and printing money to buy U.S. obligations and assets. Since they control their domestic economy, exchange rates and prolific printing of money have little effect upon internal or external inflation.
Reducing or eliminating Treasury note interest, will have an immediate effect on debt service costs. Assuming at least a 50% reduction of today’s federal Treasury note interest rates and, therefore, interest payments:
Five-year Target Reduction = $150 billion
Capital Investment Budget – Long-term infrastructure financing, including stimulus: Every human societal system from the largest, such as government and business, down to subsystems such as local health, recreation, transportation, etc., must have means to continuously anticipate and prepare for future needs, disasters, technology, etc. (See Chapter III) This is particularly important at the national level, which must anticipate human and physical infrastructure growth and maintenance for life quality improvements. (NPTF).
Any growing organization, government and/or private, must increase its annual return on its assets to meet growth cost. The U.S. population increases every year with an attendant increased demand for delivery of housing, food, education, transportation, etc. In the simplest form, government provides physical and human infrastructure to increase the GDP and the tax base to finance the infrastructure investments.
Although, its need has been recognized by past administrations, the U.S. has a very limited long-term infrastructure budgeting process. Highways deteriorate, bridges collapse, the efficiency of new technologies are not recognized, provisions for life quality improvements are often not realized without emergency stimulus programs. All of these real factors would be better served with a Federal capital investment budget. It should be apparent that both private and public institutions require extensive cooperation. The U.S. government has a long history of stimulus of major institutions from civil aviation, Chrysler, General Motors, and more recently, the largest U.S. financial institutions. Obviously, there are less costly and more efficient processes than administering a last-minute stimulus.
For normal capital improvements, budget consideration would be given to the magnitude of investment, return on investment, obsolescence, maintenance and the possibility of failure. As a first attempt to size such a budget that would promote improvement in GNP and national life quality, an initial annual $500 billion per year capital budget, is assumed with a 40% allowance for maintenance and program failures. This would give.
Capital investment budget deficit = $200 billion
SURPLUS – SAVINGS
|II. Federal budget||$250 billion|
|III. Treasury interest||$150 billion|
|IV. Capital budget||$200 billion|
|TOTAL||$400 billion||$400 billion|