Thoughts on Merediths Book and Policy Recommendations

In many ways Robyn Meredith’s 2007 book The Elephant and the Dragon portends many of the financial hardships and burdens of the financial market the U.S. is facing today in 2008, in light of the rise of China and India. The book does a great job documenting China and India’s rise to global prominence, appearing more like a statistical review at times rather than an analytical approach to globalization and its implications. Nevertheless, Meredith manages to highlight several problems the U.S. faces with the rise of China and India. The first and most obvious is the use off-shoring and outsourcing practices by American corporations to save money. In my opinion, however, the most disconcerting and important obstacle the U.S. faces in light of the rise of China and India is her perennial budget deficit and shoddy monetary policy. It is remarkable how the U.S. went from the world’s largest creditor country (in the 50s-70s) with monumental foreign projects like the Marshall Plan, to the world’s largest debtor country in a matter of one generation. As of 2005, the U.S. has perpetually had a negative savings rate (-0.4%), yet the Federal Reserve continues to keep interest rates hovering around 1.5-2%. Pulling up interest rates is imperative in combating inflation and encouraging savings—after all, capital comes from savings, not the printing of money out of thin air. Besides, the market would never set interest rates at 1.5-2%, and the only way to effectively have artificially low interest rates is to print money, i.e. inflation (a direct increase in the supply of money). Meredith talks about the erosion of the middle class in America, but I feel that she neglects the monetary aspect of the issue. Inflation acts as a second tax on the citizenry and it is the most regressive tax of all, disproportionately affecting the middle and lower classes. People are quick to notice their cost of living go up, manifest in the Department of Labor’s monthly calculation of the Consumer Price Index (CPI) and Producer Price Index (PPI). Though the markets are quick to adjust for inflation, daily wages and thus yearly salaries are the slowest to adjust; therefore, the middle and lower classes find themselves having to spend more of their money on daily items for sustenance and hence less on savings and retirement. This contributes to a severe case of “status anxiety”—a more subtle, yet pervasive type of class warfare whereby members of the middle class will “lash out” at any attempt by others at social mobility, for fear that there place will be usurped (as if it were a zero-sum game). Tocqueville called this “the constant search for place”, or “place hunting.” Perhaps the most unfortunate aspect of the U.S. debt, however, is the fact that we have nothing to show for it. The government has borrowed trillions of dollars and told consumers to do just that—consume. We have no improved infrastructure, restored manufacturing base, improved education, increased research in science and technology, or increased service sector to show for it; we only have new cars, more plasma televisions, and bigger homes to show for it. I am optimistic that the U.S. can turn its economy around, but first it must do several momentous things: 1) reign in federal spending and fix the national deficit, 2) pass a constitutional amendment requiring a balanced budget to ensure that we groom Congressman that value sound budgets and monetary policy (currently we have the most fiscally irresponsible Congress in the world), 3) decrease our global empire and thereby reign in military spending, 4) fix social programs like Social Security and Medicare (part D) to ensure that they do not bankrupt our country, 5) transform our phony economy into one that actually produces things or provides services instead of merely consuming, 6) reform monetary policy so that inflation is curbed and therefore increase incentives to save (right now there is no incentive to save if one knows that there money will not be worth anything when they want to take it out—the time value of money), and 7) transform the notion of the American dream from one that values riches and material possessions to one that values living within one’s means and values the notion of constant evolution, not necessarily measured in material wealth.