The emergencies are over. As our current president might put it, it's a war of attrition now. His administration hasn't made anything worse—and we have to admit that early on his ease and confidence were like a balm. But he hasn't made anything better, either. If not fully tired of him, the public has grown as fatalistic about the Republicans' ability to make any real difference as it already was about the Democrats'. The two-party system had been in trouble for decades. It was rigid, polarizing, and unrepresentative. The parties were pawns of special interests. The one interest group they neglected was the vast center of the American electorate, which kept seeking split-the-difference policies. Eight years of failure from two administrations have finally blown apart the tired duopoly. The hopes of our nation are bleeding away along with our few remaining economic resources.
Here is the challenge:
To deal with these problems once in office, we must point out basic truths in the campaign.
These truths involve the past sources of our growth: savings, investment, education, innovation. We've thrown away every one of these advantages. What we would do right now to have back the $1 trillion that Congress voted away in 2008 with the Freedom From Death Tax Act!33 A relatively small share of that money might have kept our aerospace programs competitive with Europe's34—to say nothing of preparing us for advances in other forms of transportation. A little more might have made our road and highway system at least as good as China's.35 With what was left over, our companies might have been able to compete with Germany's in producing the superfast, quiet, efficient maglev trains that are now doing for travel what the jet plane did in the 1950s. Even if we couldn't afford to make the trains, with more money at least some of our states and regions might have been able to buy them, instead of just looking enviously at what China, India, and Iran have done.36
Or we could have shored up our universities. True, the big change came as early as 2002, in the wake of 9/11, when tighter visa rules, whatever their effect on reducing terrorism, cut off the flow of foreign talent that American universities had channeled to American ends.37 In the summer of 2007 China applied the name "twenty Harvards"
Or we could at last have begun to grapple with health-care costs. We've managed to create the worst of all worlds—what the Democrats call the "30-30 problem." Thirty percent of our entire economy goes for health and medical costs,38 but 30 percent of our citizens have no regular contact with the medical system. (Except, of course, during quarantines in avian-flu season.) For people who can afford them, the "tailored therapies" of the past decade represent the biggest breakthrough in medicine since antibiotics or anesthesia. The big killers—heart disease and cancers of the colon, lung, breast, and prostate—are now manageable chronic diseases at worst, and the big moral issues involve the question of whether Baby Boomers are living "too long." But the costs are astronomical, which raises questions of both efficiency and justice. Google's embedded diagnostic technology dramatizes our problem: based on nonstop biometric testing of the thirty-seven relevant enzymes and organ-output levels, it pipes into cell-phone implants instructions for which treatment, pill, or action to take next. The system is extremely popular—for the 10 million people who can afford it. NetJet flights to the Bahamas for organ replacement illustrate the point even more sharply, although here the breakthrough was less medical than diplomatic. The World Trade Organization, after the most contentious proceeding in its history, ruled that prohibiting commerce in human organs for transplant was an unjust trade barrier. The ruling may have caused the final, fatal split in the Republican Party (libertarians were jubilant, religious conservatives appalled), but it became the foundation of an important Caribbean industry after threats of violence dissuaded many transplant centers from operating within the United States. Meanwhile, despite the Strong America-Strong Americans Act of 2009, which tied income-tax rates to body-mass index and cigarette consumption, smoking and eating junk food have become for our underemployed class what swilling vodka was for the dispossessed in Boris Yeltsin's Russia.
All these issues involve money, and we can't avoid talking about money in this campaign. But your ability to address an even harder issue will largely determine whether you can succeed in the job the voters are about to give you.
That problem is the sense of sunset, decline, hopelessness. America has been so resilient as a society because each American has imagined that the sky was the limit. Obviously it was not for everyone, or always. From the beginning we've had a class system, and a racial-caste system, and extended periods—the 1890s, the 1930s, the 1970s, the past few years—when many more people than usual were struggling merely to survive. But the myth of equal opportunity has been closer to reality here than in any other society, and the myth itself has mattered.
My father, in explaining why it was so painful for him to see a lifetime's savings melt away after the Venezuelan crisis, told me about a political speech he remembered from his own youth. It was by Daniel Patrick Moynihan, a Harvard professor who later became a politician. In the late 1960s, when American prosperity held despite bitter political turmoil, Moynihan told left-wing students why preserving that prosperity should be important even to them. We know Europe from its novels, Moynihan said: the old ones, by Austen and Dickens and Stendahl, and the more recent ones, too. We know it as a static society. Young people, seeking opportunity, have to wait for old people to die. A whole life's prospects depend on the size of an inheritance. People know their place. America, Moynihan said fifty years ago, must never become a place like that.
That is the place we have become. Half this country's households live on less than $50,000 a year. That sounds like a significant improvement from the $44,000 household median in 2003. But a year in private college now costs $83,000, a day in a hospital $1,350, a year in a nursing home $150,000—and a gallon of gasoline $9. Thus we start off knowing that for half our people there is no chance—none—of getting ahead of the game. And really, it's more like 80 percent of the public that is priced out of a chance for future opportunity. We have made a perfect circle—perfect in closing off options. There are fewer attractive jobs to be had, even though the ones at the top, for financiers or specialty doctors, are very attractive indeed. And those who don't start out with advantages in getting those jobs have less and less chance of moving up to them.
Jobs in the middle of the skill-and-income distribution have steadily vanished if any aspect of them can be done more efficiently in China, India, or Vietnam. The K-12 schools, the universities, the ambitious research projects that could help the next generation qualify for better jobs, have weakened or dried up.39 A dynamic economy is always losing jobs. The problem with ours is that we're no longer any good at creating new ones. America is a less attractive place for new business because it's a less attractive place, period.40
In the past decade we've seen the telephone companies disappear. Programming, data, entertainment, conversation—they all go over the Internet now. Pharmaceuticals are no longer mass-produced but, rather, tailored to each patient's genetic makeup. The big airlines are all gone now, and much of publishing, too. The new industries are the ones we want. When their founders are deciding where to locate, though, they'll see us as a country with a big market—and with an undereducated work force, a rundown infrastructure, and a shaky currency. They'll see England as it lost its empire. They'll see Russia without the oil reserves, Brezhnev's Soviet Union without the repression. They'll see the America that Daniel Patrick Moynihan feared.
This story is now yours to tell, and later I'll turn to notes for the stump speech. But remember that the reality of the story reaches backward, and that is why I have concentrated on the missed opportunities, the spendthrift recklessness, the warnings America heard but tuned out. To tell it that way in public would of course only make things worse, and we can't afford the recriminations or the further waste of time. The only chance for a new beginning is to make people believe there actually is a chance.
2. Also, though I never thought I'd say it, thank God for the Electoral College. In only two states, Michigan and Maine, are you polling above 50 percent of the total vote—in Michigan because of the unemployment riots, in Maine because that's what they're like. But you will probably have a strong plurality in at least forty other states, yielding a Reagan-scale electoral-vote "mandate."
3. Nothing in history ever quite "begins." Did America's problems with militant Islam begin in 2001? Or twenty years earlier, when we funded the anti-Soviet mujahideen in Afghanistan, who later turned their weapons against us? Or sixty years before that, with the breakup of the Ottoman Empire after World War I? Or during the Crusades? Similarly, warning signs of today's economic problems were apparent in the mid-1960s. But the big change started fifteen years ago, at the beginning of this century.
4. The federal debt consists of bills, notes, and bonds that come due at different periods—thirteen weeks, five years, twenty years. The main way to retire debt is to pay off holders on the due date. Only $2 trillion worth of debt would have matured within a decade, so only that much could be paid off. That is why the Bush administration's first budget message said, "Indeed, the President's Budget pays down the debt so aggressively that it runs into an unusual problem—its annual surpluses begin to outstrip the amount of maturing debt starting in 2007."
6. Late in January of 2005 the CBO calculated that policy changes during Bush's first term had increased the upcoming year's deficit by $539 billion. Of that amount about 37 percent could be attributed to warfare, domestic security, and other post-9/11 commitments; 48 percent resulted from the tax cuts; and the rest came from other spending increases.
From 1962 to 2002, when federal revenues were low they were around 17.5 percent of GDP, and when they were high they neared 20 percent. Once, they went even higher: to 20.8 percent in Clinton's last year, driven there by higher tax rates and by capital-gains revenue from the bubble economy. The 2001 changes pushed tax receipts down toward 16 percent—the lowest level since 1959.
8. In 2003 Congress approved a second round of tax cuts. In 2005, after a fifty-fifty deadlock, the Senate failed to enact a "pay as you go" provision, which would have required the administration to offset any tax cuts or spending increases by savings in the budget.
9. Through the early 2000s the Government Accountability Office issued warnings about the consequences of extending the tax cuts. This chart, from 2004, showed what would happen to the budget if the tax cuts were locked in.
Its main point was that the basic operating costs of the federal government (interest payments, Social Security, and Medicare and Medicaid—the unglamorous long-term payments it is legally committed to make) were growing, and the money to cover them was not. As the GAO had predicted, our tax revenue in 2015 left only a small margin after covering fixed costs. From that remainder comes the Pentagon, the national parks, and everything else. Soon revenues won't cover even the fixed costs.
10. "In the last year, the net national savings rate of the United States has been between one and two percent," the economist and then president of Harvard Lawrence Summers said in 2004, a year before the rate hit its nadir. "It represents the lowest net national savings rate in American history and, I believe, that of any major nation." Summers gave the speech five years after his appointment as Treasury secretary and five years before his nomination as chairman of the Federal Reserve Board.
11. Robert Shiller, an economist at Yale, was ahead of most other observers in predicting the collapse of the tech-stock bubble of the 1990s and the personal-real-estate bubble a decade later. In a paper for the National Bureau of Economic Research, published in 2001, he and two colleagues observed that the housing boom intensified the savings collapse. Every time homeowners heard that a nearby house had sold for an astronomical price, they felt richer, even if they had no intention of selling for years. That made them more likely to go out and spend their theoretical "gains"—and not to bother saving, since their house was doing it for them. "The estimated effect of housing market wealth on consumption is significant and large," Shiller and his colleagues concluded. If people felt rich, they spent that way.
In normal circumstances economic markets have a way of dealing with families, companies, or countries that chronically overspend. For families or companies that way is bankruptcy. For countries it is a declining currency. By normal economic measures the American public was significantly overspending in the early 2000s. For every $100 worth of products and services it consumed, it produced only about $95 worth within our borders. The other $5 worth came from overseas. Normally an imbalance like this would push the dollar steadily down as foreigners with surplus dollars from selling oil or cars or clothes in America traded them for euros, yuan, or yen. As demand for dollars fell and their value decreased, foreign goods would become more expensive; Americans wouldn't be able to afford as many of them; and ultimately Americans would be forced to live within the nation's means.
That is in fact what happened in America's trade with Europe—and to a large extent with the oil-producing world. The euro skyrocketed in value against the dollar, and oil prices—which until the crisis of 2009 were fixed in dollars—went up too, which preserved Saudi and Kuwaiti buying power for European goods.
It didn't work this way with China. Americans bought and bought Chinese goods, and Chinese banks piled up dollars—but didn't trade them back for yuan. Instead China's central bank kept the yuan-to-dollar exchange rate constant and used the dollars to buy U.S. Treasury notes. That is, they covered the federal budget deficit. (Since Americans, on average, were saving nothing, they couldn't cover it themselves.) To a lesser extent Korean and Japanese banks did the same thing.
This was different from the situation in the 1980s and 1990s, when foreigners earned dollars from their exports and used those dollars to buy American companies, real estate, and stock. In those days foreigners invested heavily in America because the payoff was so much greater than what they could get in Frankfurt or Tokyo. In an influential paper published in 2004 the economists Nouriel Roubini, of New York University, and Brad Setser, of Oxford University, demonstrated that this was no longer the case. Increasingly it was not individuals or corporations but foreign governments—in particular, state-controlled banks in Asia—that were sending money to America. And America was using it to finance the federal budget deficit.
14. We now know from the memoirs of his eldest son, Fidelito, that Castro never moderated his bitter view of the Kennedy brothers—Jack for authorizing the Bay of Pigs invasion, Bobby for encouraging the CIA to assassinate Castro—and, by extension, their Democratic Party. Castro told his children that if the United States and Cuba ever reconciled, he dreamed of doing two things: throwing an opening-day pitch at Yankee Stadium, and addressing a Republican convention in prime time. (From Mi Papa: The Castro I Knew, Las Vegas: HarperCollins, 2009.)
15. The first one, starting in 1973, transformed the world more than most wars do. It empowered
16. After the first oil shock U.S. oil consumption actually fell in absolute terms. In 1973, as the first shock began, Americans consumed 35 "quads," or quadrillion BTUs, of oil. Ten years later, with a larger population and a stronger economy, they consumed only 30. But from that point on total consumption moved back up. In 2003 Americans consumed 39 quads—and two thirds of that oil was for transportation. Consumption for most other purposes, notably heating and power generation, actually went down, thanks to more-efficient systems. Industrial consumption was flat. So bigger cars and longer commutes did make the difference.
17. Every oil field follows a pattern of production: Its output rate starts slow and keeps getting faster until about half the oil has been pumped from the field. Then the rate steadily declines until the other half of the oil is gone. Since total world production is the aggregate of thousands of fields, it is presumed to follow a similar pattern. In 2005 the research and engineering firm SAIC released a report commissioned by the U.S. government on best guesses about the worldwide peak and what would happen when it came. "No one knows with certainty when world oil production will reach a peak," the report said, "but geologists have no doubt that it will happen." Of the twelve experts surveyed for the report, six predicted that the peak would have occurred before 2010, and three more that it would happen by 2020.
The world was not going to "run out" of oil—at least not immediately. Even at the peak, by definition, as much as had ever been pumped in history was still there to be extracted. But the rate of production, barrels per day and per year, would steadily lessen while the rate of demand kept increasing. The report was released when oil crossed $50 a barrel; we are long into the era of oil at 30 euros, or $90.
19. What happened to America almost exactly repeated what had happened ten years earlier to Thailand, Indonesia, and other countries during the Asian panic of 1997-1998. South Korea lost 50 percent of the value of its currency in two months; Indonesia lost 80 percent over the course of a year. As in America, the collapse of each currency led to equally deep stock-market declines. The Asian crash also turned into a foreign-policy nightmare for the United States, with Prime Minister Mahathir of Malaysia leading the denunciation of U.S.-based financiers, including the "moron" George Soros, for the "criminal" speculations that destroyed the economies of smaller nations like his. Since Malaysia and Indonesia are largely Muslim, and the financiers could be cast as part of the great shadowy U.S.-Zionist cabal, the crash worsened U.S. relations with the Islamic world.
20. Once the foreigners knew that the dollar had hit bottom, they came back to buy shares at bargain prices. But the currency run of 2009 showed the same pattern as the tech-stock crash of 2000 and, indeed, the generalized market panic of the 1930s: prices stayed depressed for years, because investors who had suffered heavy losses were understandably slow to return.
When interest rates go up, these things go down: stock-market prices, bond prices, housing prices, overall economic growth rates, overall investment, overall job creation.
The most important thing that goes up when interest rates rise is the value of the dollar. We'll save the cause and effect for our policy guys, but make sure the writers have these points straight.
For the speechwriters' benefit, let's spell this out too: Why did the dollar panic raise interest rates? Two related reasons. First, interest rates are ultimately set by supply and demand. If the Treasury can't sell enough notes at four percent to cover the deficit, it will keep raising the rate—to five, six, ten percent—until it gets the money it needs. Second, the main way a government can keep up the value of its currency is to raise interest rates, hoping to attract investments that would otherwise be made in yuan, euros, or yen.
22. In the spring of 2005, as stock averages slid week by week, W. Bowman Cutter, a managing partner of the investment-banking firm Warburg Pincus, asked, "Why are we not in a bull market now?" He said that if you looked at the traditional measures of economic strength—high corporate investment, rapid productivity improvements, strong overall growth rates—"you would have to say that 2004 was the best year of the past twenty." Interest rates at the time were still very low. "If you transposed this to any other era in history," Cutter said, "you would have a very strong bull market. Why not now? Because the market is looking to the long-term structural problems." If the market couldn't go up when conditions were promising, it had no cushion when the crisis began.
23. Jobs in the airline industry had been plummeting for years. In 2000 the eight largest carriers employed 432,000 people. Four years later a third of those jobs were gone. That meant the loss of 136,000 mainly unionized, mainly high-wage jobs, offset by a small increase in lower-paid jobs at regional and discount airlines.
24. U.S. auto companies and the U.S. auto-buying public suffered in different ways from the "slowness" of America's industry compared with Japan's, China's, and Korea's. It took Detroit companies three years to shift production from trucks and SUVs to hybrid cars; by that time the Asian brands owned the market. Also, it took the American fleet as a whole a surprisingly long time to change. The average car on America's roads is nine years old, and in the course of a decade only half of all cars are replaced. It takes a long time to work the older gas-guzzlers out of the system.
25. The rising value of the euro and the troubled state of the airline market might well have made Boeing a similar target for the new Airbus-Mitsubishi consortium—but for the Transformational Air Mobility Industrial Base Act of 2011, which converted Boeing's factories to national-defense production facilities on a par with Navy shipyards.
26. Through the boom years speculators would borrow the entire cost of a house. If they could "flip" it in a year or two, the profit on the sale would offset the interest they'd paid. But after mortgage rates "floated" up above 10 percent, the calculation changed. The house's value was heading down, and the cost of covering the mortgage was heading up. If the house were just another asset, the rational choice would be to move out and give it back to the bank. But houses aren't normal assets, and that's not what people did.
27. The pattern goes back to the very beginning of the modern primary system, after World War II, and it has no exceptions. If an incumbent faces a serious, vote-getting rival for his party's nomination, he goes on to lose the White House. If not, he stays in.
28. State and local governments tax income, which was falling; property, whose value was plummeting; and retail sales, which were down as well. The blue states were somewhat cushioned against the shocks in comparison with the many red states that had declined to impose state income taxes. Those states depended on property taxes, a fast-disappearing revenue source. Also, since the Nixon years red and blue states alike had relied on federal revenue sharing. This was slashed as part of the Emergency Budget Act of 2012.
29. In 2002 the Rockefeller Institute of Government projected budget trends for the states through 2010, and found that forty-four of them were headed for long-term deficits like the ones plaguing the federal government. The difference, again, is that many states were obliged to change their policies to avoid the deficits.
30. This accelerated a trend that had begun a decade earlier in California. For instance, when the 2003 school year began, some 175,000 students could not find space in community colleges—which, like K-12 public schools, had previously offered enrollment to all eligible students.
31. Gwinnett County, near Atlanta, opened many school administrators' eyes to this possibility in 2004, when it brought in twenty-seven teachers from Hyderabad. In 2005 an examination board in England outsourced the grading of high-school achievement exams to workers in India.
32. For "high-altitude, low-opening" parachute jump. The jumpers leave the plane at 30,000 feet, free-fall for nearly two minutes, and open their chutes at 1,000 feet, a few seconds before impact. Because the airplanes are so high, they cannot be seen or heard from the ground; and the jumpers spend almost no time with their chutes visibly deployed.
33. In the spring of 2005 the Congressional Joint Committee on Taxation estimated that ending the estate tax would directly cut federal revenue by $72 billion in 2015. Other groups calculated that the total impact on the budget, including higher interest payments on a larger federal debt, would be $100 billion a year, or $1 trillion over a decade. All this tax relief flowed to the wealthiest one percent of Americans.
34. In 1990 the American aerospace industry employed 1,120,000 people. By 2004 that number had fallen by nearly half, to 593,000. During those same years the European aerospace industry was growing in both sales and work force. In 2003 Airbus overtook Boeing in world market share for commercial airliners.
35. In 2005 the American Society of Civil Engineers released a "report card" on the state of America's infrastructure—roads, dams, bridges, aviation, and so on. The overall grade was D, with the highest mark being C+, for solid-waste handling. According to the report, the most dramatic underinvestment involved the nation's roads. Simply maintaining the roads at the same level would cost $94 billion, the report said—or half again as much as actual yearly investment levels. Improving the roads would require about twice as much as the United States was spending.
36. In 2003 the city of Shanghai opened the world's fastest maglev line, whose trains average 267 miles per hour and arrive on schedule 99.7 percent of the time. An editor's note in the Journal of the American Society of Civil Engineers pointed out that half a dozen maglev proposals for American cities were "stalled in one stage or another of planning, permitting, or budgeting." The result, the journal's editor observed, was this: "Traffic congestion on U.S. roads worsens, energy prices fluctuate unpredictably, and, at least for the moment, China pulls ahead of the United States on the path to a safe, reliable, fast, and efficient means of transporting passengers."
39. It's hard to remember or even to believe, but not that long ago the school system was a valuable social equalizer. More important, it was seen that way. Through the three golden decades, from the late 1940s (when the GI Bill kicked in) to the late 1970s (when Proposition 13 passed in California), the federal government and the states put more money than ever before into elementary schools, high schools, and universities. More students than ever before finished high school; more finished college; more felt they could go further than their parents had. Proposition 13 was the California ballot measure that cut property taxes by 30 percent and then capped their future growth. It prefigured the federal tax cuts of the early 2000s, because it pushed the level of revenue below its historic "band." Before Proposition 13 California's per capita spending on public schools was high, like Connecticut's or New York's. Twenty years later it was well below the national average, just ahead of Arkansas's.
40. In the early 2000s one third of American public high school students failed to graduate on time. Niels Christian Nielsen, a member of several corporate boards in Europe and the United States, said at the University of California in 2005, "The big difference between Europe and America is the proportion of people who come out of the system really not being functional for any serious role. In Finland that is maybe two or three percent. For Europe in general maybe fifteen or twenty. For the United States at least thirty percent, maybe more. In spite of all the press, Americans don't really get the education difference. They generally still feel this is a well-educated country and work force. They just don't see how far the country is falling behind."