Imagining the American Future

Back to the future

Freeimages.com / Julia Borysewicz

Recently a friend asked me,  “What do you think life and economics will be like in 100 and 200 years, if no catastrophe derails the progress of civilization and technological development?” To this question about the American Future, I replied,

As you might expect from what I have written in the past, I think your premise about civilization avoiding catastrophe to be problematic. Nevertheless, if I accept your premise, I would have to say I have very little clue. However, whatever its shape, the economy should be largely independent of government management and control. The reason why I expect this is that this is the only way your premise could be true. Without a free-market economy, government-induced catastrophe would inevitably hit us. Witness the economic stagnation of most of Western Europe and the United States over the past several decades, the dissolution of the Soviet Union, modern day Venezuela, Cuba, North Korea, etc., etc.

Nevertheless, one can think of various possible trends for the American Future of differing plausibilities. Let us take a look at what I think are the more probable possibilities. Before we do that, however, let us think of the binding constraints reality puts on these thought experiments, and how we should go about conducting them.

The Use of History for this Exercise

With the future being such a blank slate, why should we speculate on various scenarios? The most obvious answer is to forewarn ourselves about possible disasters we are creating for ourselves. History has already given us a large number of object lessons on successes and failures from the past, which might help guide us. Unfortunately, all too few of us seem to pay any heed to those lessons. Even university students seem to have a shaky knowledge of the history of the past few centuries. Or even of the past few decades, as can be seen in the Watters World video below.

Or consider this display of student ignorance.

Good luck if you expect university students to know much about social contract theory, or of any of the other developments of the Age of Enlightenment. How many Americans know about Thomas Hobbes, John Locke, the Baron de Montesquieu, and their contributions to the thought of Thomas Jefferson, James Madison, and the other founders of our nation? How many know about the history of the Progressive Movement, or about the path on which Woodrow Wilson and Franklin D. Roosevelt placed it?

Yet, history provides us a powerful tool for thinking about how our country might develop given the present political and intellectual forces shaping it. Economic history, both of the development of economic ideas and of the effects of those ideas on countries, can particularly guide us in thinking about possible ways in which we might evolve. The fact so few Americans possess much knowledge of this history gives one the shaky feeling of being on the edge of a precipice. Just one little misstep taken through an ignorance that might have been avoided can send us over the edge into the abyss.

Should you feel a lack of historical perspective on our world’s current state and the direction it is going, you might find the following posts useful.

Not everything is possible, and what humanity has already experienced gives us guides on what we can do. Moreover, what reality allows us to do is very much dependent on our current conditions.

Where We Start From: The Present as Gateway to The Future

Notwithstanding  the U.S. economic improvements in the first year of Donald Trump’s administration, the United States — like most other Western nations — faces the future in a very parlous situation. Since any future we might forge must be consistent with our present conditions, we must be very clear-eyed about the circumstances in which find ourselves. They are not especially encouraging.

The most dangerous threat to our continuing existence as a country is due to our own stupidity as a people. We have allowed  politicians in past decades to squander the social security taxes collected for our retirements to spend on their pet projects to buy votes and on expanded welfare benefits. As a result, Social Security payroll taxes are no longer sufficient to pay Social Security benefits and the increasing difference must be paid for from the general fund. At the same time, the politicians have increased federal obligations for Medicare and Medicaid, the other major contributors to mandatory entitlement spending, to the point that the mandatory entitlements absorb about two-thirds of the federal budget each year. In addition it is the fastest growing part of the federal budget, as demonstrated in the plot below.

Fig. 1: Mandatory and discretionary federal spending from 1974 through 2014.
Wikimedia Commons / Farcaster

These observations motivated me to fit the two time data sets of mandatory entitlements (plus interest on the national debt), and of total government revenues to two exponential growth curves, with the results extrapolated to the year 2045. [For those who frequently read this website and who are growing bored with my using this plot so often, I offer apologies. However, the fact I keep trotting it out emphasizes how important I think it is.]

Exponential fits to government revenues and expenditures on entitlements + interest on the national debt

Fig. 2: Exponential fits to government revenues and expenditures on entitlements + interest on the national debt
Data Source: Historical Tables 2016, U.S. Government Budget

I must immediately offer the standard warning about extrapolations that it assumes nothing will change with either government spending habits or the growth of federal revenues. Yet, what the plot predicts is that if nothing changes, then by April 2031, just the expenditures on mandatory entitlements plus interest on the national debt alone would be enough to absorb every single penny of government revenues. However, if the government continues to fund other discretionary expenditures, e.g. for the Defense Department, then we could probably expect the federal government to become insolvent sometime between 2025 and 2030. There would be nothing left over to defend the country, to fund the federal court system, to fund the Congress, or to do anything else!

Some Republicans have offered the vision of accelerated economic growth stimulated by the new Tax Cuts and Jobs Act as staving off the disaster of federal government insolvency. Certainly, we have every reason to believe tax cuts, both to individual households and to companies, but especially to companies, will quicken the growth of the GDP. We also know from Hauser’s Law that increased GDP means increased government revenues. Certainly, the tax reform act will aid the government and help postpone government insolvency. It would do this by increasing the growth rate of the green curve in figure 2, pushing it upwards to intersect with the blue mandatory expenditures curve at a later date than April 2031. However, the growth rate of the expenditures curve is so much greater than that of the revenues curve, that hoping for an increase in GDP growth sufficient to solve the problem seems highly unrealistic. Absent spending reductions by the mandatory entitlements, there would appear to be nothing to stop the financial self-destruction of the federal government.

The challenge to U.S. government solvency is only the first of the existential threats to the United States. There are also the naked military threats of Russia, Iran, China, North Korea, and Islamic jihadists. After the dissolution of the Soviet Union and the end of the Cold War in 1991, Western security did indeed get better for a time. This encouraging situation led one incautious analyst, Francis Fukuyama, to declare “The End of History”, meaning the end of international ideological conflict. It also motivated U.S. President George H. W. Bush and U.K. Prime Minister Margaret Thatcher to begin a decline in defense spending as a “peace dividend.” As a percent of GDP, U.S. defense spending fell fairly steadily throughout the 1990s until Islamic jihadists told us on September 11, 2001 that lethal world ideological conflict had not ended after all.

Recent U.S. defense spending from FY 1990 to FY 2020

Fig. 3: Recent U.S. defense spending as a percentage of GDP
Source: USgovernmentspending.com

As a response to the “911” attacks, the U.S. invaded first Afghanistan and then Iraq, causing defense spending to increase to a peak of 5.7% of GDP in 2010.

Then came the Barack Obama administration, which believed the U.S. to be the cause of most of the world’s problems. Rather than depend so much on our armed forces, Obama would rely more on diplomacy and trust on the ultimate good will of those who ruled adversarial regimes. One consequence was the decline beginning in 2011 of defense spending, not just as a percent of GDP, but in actual dollars as well.

Consider the following table with data for fiscal year 2010 taken from Wikipedia and the 2016 data taken from The Washington Post. The dollar amounts are in billions of current dollars.

Service FY 2010 FY 2016
Army: $244.9 $146.9
Navy: $379.8 $168.9
Air Force: $170.6 $161.8

What budget reductions like this mean in terms of operations can be seen in the following YouTube video on Air Force aircraft maintenance.

The revisionist powers of Russia, China, and Iran were quick to respond to this decay of U.S. military and naval power, and to Obama’s weak responses to their military probes at the peripheries of our alliances. Russia invaded Georgia and Ukraine, annexed the Crimea, and threatened the Baltic states. In addition, the Russians have established both a naval base and a military airbase in Syria to threaten the southeastern flank of NATO. For its part, China is claiming the South and East China Seas as its private property, and threatening its neighbors, particularly our allies South Korea and Japan. Iran is using its assets released under the Iran nuclear deal to make an imperial push for Middle Eastern suzerainty, all the while likely continuing its development of nuclear weapons. Including China’s client North Korea and its newly developed arsenal of ICBMs and nuclear weapons among the threats, we seem to have no shortage of enemies ready to kill us.

Scenes of Alternative Futures

What can we guess  about what awaits us in that strange, unknown land, the Future? The few speculations below are hardly an exhaustive list of possible futures. The human mind is extremely fertile and inventive, and one can think of many possibilities, some very believable and even more highly implausible. The ones I list below are merely what seem to me to be the most highly probable. Also, you will quickly discover an immense lack of detail. For example, what will happen with automation of industries and the future outlook for jobs? How about trade between the nations? Then again, we can only scratch the surface in an essay of only about 4000 words.

Future #1:  The Status Quo continues and Everyone ignores the growing U.S.  Government insolvency until too late.

Many would consider this the most probable outcome, consistent with the current political deadlock between progressives and neoliberals. It is really a continuation of our present condition. So long as the American electorate can not decide which of the two major ideological sides has a better understanding of reality, we will have a few elections won by neoliberal Republicans followed by a few won by progressive Democrats. In such an environment, neither side can build on its accomplishments over time. As soon as one side advances its policies, the other side succeeds them in power to tear down the previous regime’s policies to erect their own. The Trump succession of Obama could be merely the latest evolution of this scenario.

One consequence of this constant inconclusive ideological warfare is that the warriors on either side become wary of particularly sensitive issues, such as that of the increasing mandatory entitlement expenditures. Even now, with a Republican holding the White House and Republicans possessing majorities in both houses of Congress, there are few Republicans outside of House Speaker Paul Ryan who even want to bring the issue up, lest it be used as a political sledge hammer against them. The result is the continuing studious disregard of the mandatory entitlement problem.

Progressives probably view the coming entitlement crisis as an opportunity to persuade voters to give them lasting power. For that reason, they will not discuss it and would disparage any discussion of solving the problem as a heartless GOP attempt to gouge the poor, the retired, and the soon-to-be retired.

However, the entitlement problem can not be disregarded for much longer. The exponential growth of mandatory entitlement expenditures  is so much faster than the rate of growth of total federal revenues that the federal insolvency will become the dominant political fact within a decade. If the country waits that long to react, we will be able to eliminate the insolvency only with a terrible amount of pain for everyone.

It is hard to believe we would allow all discretionary spending to halt to allow for continuing entitlement payments. While they are labeled as financially “discretionary”, there are some federal activities necessary for our continued existence as a nation. Given the present hostile challenges of Russia, China, Iran, North Korea, and Islamic jihadists, we can hardly face the world without our armed forces. Without federal courts, how could contracts be enforced and the rights of citizens be upheld? Without federal flight controllers, how could we fly safely? Yet these and many other federal activities we regard as absolutely necessary are considered discretionary spending.

Even if we did allow entitlements to  monopolize spending (which is patently absurd and impossible), soon after April 2031 (or some date close to it) we still would not have enough revenues to meet all the claims for entitlements. In some way, we would have to find a way to make mandatory entitlements not so mandatory after all. This can be done by reducing entitlement benefits and/or by increasing the retirement age. The pain involved for many beneficiaries would be excruciating.

Future #2:  Progressives solve the growing U.S. insolvency by seizing control of the economy.

However in another possible vision of our future, progressives are successful in persuading the electoral majority that it is progressives who have a better vision of reality. If this decision is decisive and progressives have control for election after election, they would have to solve the government insolvency problem consistent with their views on government controlling the economy.

In fact the coming entitlement crisis might well be the trigger to finally bring the majority of the public decisively to the progressive side. Voters would be told that by increasing taxes enough to support entitlements, all the pain of reducing them could be avoided. Progressives would claim they could accomplish this by repealing Hauser’s law. As discussed in the post Can Hauser’s Law Be Repealed?, they would be able to accomplish this following the European example of lowering the income level at which the maximum tax rate is assessed to the lower middle class, and by adding a Value Added Tax (VAT) on top of the income tax.

However, they would achieve this at a tremendous and ultimately suicidal price. If progressives were to follow the European example on taxes, they would probably be gathering on the order of 35-50% of GDP in taxes. If they tax that much, they would have to take up the roll that private investors play today in allocating resources to economic needs. Would they make wise investments in the economy to insure economic growth? History from a wide range of countries, including modern European history, strongly suggests no. The Soviet Union dissolved primarily because they could not solve what is generally called the “economic calculation problem.” This is the problem of figuring out how an economy’s available economic assets are to be allocated among the various needs to best satisfy demands and thereby maximize output. A free-market does this through the price mechanism and Adam Smith’s Invisible Hand. Centrally planned economies have alway failed at this job that free-markets do so naturally.

Even the recent history of the United States, which many may be surprised to learn is no paragon of a free-market economy, bears this out. After many decades of economic power being accumulated by the federal and state governments, the U.S. capacity to grow economically has gradually been stultified. This was shown by a Gallup Organization economist, Jonathon Rothwell. You can download a PDF with his report here. Part of his analysis was to produce a moving time-average of the growth rate of the U.S. GDP per capita, averaged over 10 year periods. Doing this, Rothwell was able to average over the business cycle to show long term trends.

Plot of U.S. GDP growth in percent averaged over ten year periods

Fig. 4: Plot of U.S. GDP growth in percent averaged over ten year periods
The Gallup Organization

Clearly, the dashed linear trend line since 1966 has negative slope, with the actual 10-year average in 2016 getting fearfully close to zero. One can argue that from the Reagan regime until the beginning of the Great Recession in 2008 the decay plateaued, but the trend outside that time period is definitely downwards. Should progressives drive economic policies even farther to the Left, we could expect the long-term secular growth to actually become negative. With a contracting economy, it is hard to see how a welfare state could be long maintained, or how we could continue to deter the existential military threats of Russia and China.

Future #3:  Neoliberals persuade American voters of the necessity of free-markets, but fail to persuade them on the necessity for reducing mandatory entitlement expenditures.

Then again, maybe the neoliberals can gain ideological ascendency with the electorate. Perhaps, the results of neoliberal Republican policies, especially considering the disastrous results of the progressive Obama era, will convince the majority of voters of the superiority of the neoliberal view of things. The portents from Trump’s first year in office are certainly encouraging. The second and third quarters 2017 are the first two quarters of consecutive back-to-back GDP growth greater than 3% in a long time. Companies are already responding to the promised stimulus of the newly passed Tax Cuts and Jobs Act with announcements of new investments, salary and wage hikes, and bonuses. This is quite unlike the Obama era, when the usual corporate practice was not to invest free capital but to buy back their own stock and pay dividends instead. For a look back at what the economy was like at the end of the Obama era, consult the post U.S. Economy and Stock Markets, August 2016.

In addition, recent economic statistics show manufacturer’s new orders for non-defense capital goods and new orders for durable goods — indisputable measures of new investment— to have picked up dramatically during Trump’s first year. Moreover, the velocity of M2 money for the first time in a long time has begun increasing in a noninflationary environment, demonstrating a real increase in economic demand. The capstone to this economic good news is that the rate of change of personal income less personal current transfer payments (e.g. welfare payments) has begun to slightly increase again, after almost steady decreases during the Obama administration. It should be emphasized all of this economic good news occurred before the passage of the Tax Cuts and Jobs Act, based only on Trump’s partial deconstruction of the regulatory state. Now that the tax reform act has been passed, we can expect this economic good fortune to grow in intensity.

Perhaps this evidence contrasted with the dismal results of the previous eight years of progressive governance will be enough to have voters grant neoliberals the power to rule, election after election. That is the premise of this future scenario.

However, given heavy political pressure from the electorate, neoliberal government might refuse to bite the bullet and do what is necessary to reduce mandatory entitlement expenditures. After all, in past periods of neoliberal rule, they acquiesced  to the entitlement  status quo. In fact some among the Republicans seem to think increasing economic growth alone will overcome the growth of entitlement expenditures. That is, they believe they can increase the exponential growth of GDP enough, that in conjunction with Hauser’s Law, they will raise the growth rate of the green revenue curve in figure 2 enough to keep it from ever intersecting the blue entitlement expenditures curve. (Keep in mind from figure 1, that growth in entitlement expenditures dominates the growth in total federal expenditures.) As a result, for a time many neoliberal politicians along with the general population might delude themselves that nothing need be done about the entitlements.

Yet, the exponential growth of the blue expenditure  curve in figure 2 is so much faster than that of the revenues curve, it is extremely hard to believe GDP growth can be accelerated enough — even with neoliberal policies — for revenues to outrun expenditures within a decade-and-a-half. Keep in mind, we do not have much time to be deluded, approximately a decade, before some combination of discretionary and mandatory expenditures overwhelms total revenues.

Future #4:  Neoliberals persuade American voters of the necessity of free-markets, and to reduce mandatory entitlements.

This, unfortunately, is the least probable of the possible futures I am reviewing. It starts off like Future #3 above, but in it neoliberals are also able to convince both their doubting comrades and the general population that we must do a lot more than increase GDP growth to stave off government insolvency. In this future, somehow neoliberals will be able to convince everyone we must also decrease the growth rate of the blue entitlement expenditure curve in figure 2. Decreasing its growth rate by, say, increasing the age of retirement and/or reducing benefits, and at the same time increasing GDP and revenue growth through massive deconstruction of the regulatory state and through tax cuts, we could then save the federal government from insolvency. Government would then be able to continue its absolutely necessary role in protecting the social contract.

 


Of the four listed possible futures, only the last one has a (mostly) happy ending. Without a doubt, senior citizens such as myself would be very unhappy and uncomfortable under future #4, but then we would find ourselves in exactly the same condition under the three previous scenarios as government falls apart and is forced to reduce entitlement expenditures even more harshly. Yet of the four possibilities, the last is also the least likely since it would first require a massive reorientation of the American people away from the progressive faith, to which they have grown addicted over the past century since Woodrow Wilson. They would have to understand government can not usually be the solver of most social and economic problems. It would also require the understanding we have no choice but to reduce entitlements. Winning over a majority of the population to these propositions is a very tall order indeed.

 

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