Thanksgiving Day is right around the corner. My favorite holiday of the year brings back fond memories of family gatherings at my grandmother’s house. Stepping inside we were greeted with the appetizing aroma of turkey basking in the oven, along with a host of scrumptious Syrian dishes like shideeya. The anticipation and excitement of a feast soon to be enjoyed, was hard to contain as a young boy.
2012 is also right around the corner. Sadly, I doubt very seriously that the New Year will be greeted with a similar level of anticipation or excitement. Instead of mouth-watering smells we are surrounded by the unpleasant odor of America’s decline.
Back in August, the U.S. lost its AAA credit rating for the first time in its history due to its unprecedented level of debt and government’s inability to do anything about it. Meanwhile, The U.S. has slipped one notch to #5 in the World Economic Forum Global Competitiveness Index. China meanwhile has jumped from #29 to #26. According to Andrew Liveris, CEO of Dow Chemical, China is becoming an R&D powerhouse, and will continue to gain ground on the U.S. America has become over burdened with bureaucracy, litigiousness, and excess regulation. Given the difficult economy of recent years, it is not surprising that nearly 70% of Americans believe the decline of America is inevitable.
But it wasn’t always this way… The birth of America and its commitment to individual and economic freedom unleashed the most powerful wealth creation engine in the history of the world. Supported by the rule of law, minimal governmental regulation, a sound monetary system, and promotion of international trade, the U.S. grew from less than 1% of world GDP to nearly 25% of the global economy over the last 200 years, despite having less than 5% of the world’s population.
But recent trends are not promising… According to the Heritage Foundation, the U.S. has fallen dramatically in the Index of Economic Freedom, now ranking 9th, behind the likes of Australia, New Zealand, Canada, and Denmark. Despite this decline, we score highly in terms of business and labor freedom. Our lowest mark by a wide margin is for government size.
John Mackey, co-founder and co-CEO of Whole Foods Market, offers a few very interesting statistics about the size of government in a November 16th Wall Street Journal article. Over the last 100 years the cost of government has grown from 8% of GDP to 40% of GDP. In the not too distant future the interest on government debt will exceed the entire cost for social security, and unless debt is reduced the interest alone will represent over 41% of GDP before the turn of the next century, according to the Congressional Budget Office. By any measure, these are staggering and quite alarming figures.
The remedy for what ails us… I know no one on either side of the political aisle that thinks better days are ahead for our country unless we can find a way to significantly reduce spending on the four costliest government programs: Defense, Social Security, Medicare, and Medicaid. Beyond that we need meaningful corporate and individual tax reform, relief from suffocating regulation and special interest politics.
Ultimately, the political debate next year will largely represent a battle to determine the appropriate size of the federal government. Based on data from the Small Business Administration, government regulation costs $1.7 trillion every year, a figure that exceeds the amount of individual income tax collected. The explosion in the size and cost of government spending is unsustainable and is the leading cause of the decline in our global competitiveness, as well as the cause for our slow economic growth and stubbornly high unemployment.
Which brings us to the real issue… Do we have the will, both politically and individually, to solve these fundamental, far-reaching problems? I mean really solve them, not talk endlessly about them, promise solutions that won’t be kept, or blame the “other guy” to score political points. We’ve been stuck there too long and it is time to work together, make tough choices, and get the job done. But will we?
And what will it mean for the rest of the world if we no longer lead the global economy, or can no longer afford to serve as the policeman for the world as we have for the last 60 years? Are we ready for this? Is the rest of the world ready for this?
Despite all these alarming facts, trends and questions, there is hope. For 2012 and perhaps the next several years there are two likely scenarios. The most negative scenario and unfortunately also the most likely, is that America will continue to struggle as a result of its dysfunctional political process and unmanageable governmental bureaucracy. Under this scenario we will plod along, yet make little progress in any of the aforementioned areas desperately in need of major reform. Subsequently, the markets will remain volatile and unpredictable.
The positive scenario is that somehow America will begin a process of political, cultural and moral reformation. Of this I have written many times before. Yet, despite all our seemingly insurmountable challenges I remain hopeful. Importantly, one can remain hopeful in this regard, but invest in a way that balances hope and reality. I suspect, in 2012, and perhaps years to follow, opportunities to be aggressive or cautious will occur sporadically. Discipline and patience, as well as the ability to balance
potential reward and risk, will drive investment success.
In future Willingdon Views I will have more to share about America’s standing in the world. In the meantime, during these uncertain times investors should not be too fearful when others panic, nor too enthusiastic when others get greedy. America’s inevitable decline, or hopeful reformation, will be a long, arduous process unfolding for many years to come.
Michael Kayes, CFA
