On Jan 31, 2007, the President of the
United States gave his speech on the State of the Union citing strong
economic growth, record Dow Jones performance and low unemployment rate.
This report depicts a different picture than the one announced. A deeper
look into the economy reveals that the painted rosy picture is based on
selective facts instead of a neutral assessment of all the relevant
numbers and economic trends. According to the author of the white paper,
"It is true that the U.S. Economy grew at 3.5 percent rate in the 4th
quarter of 2006, but that growth is unhealthy. The real economic
growth is much less than advertised. Since 2001, the U.S. economic
growth has been largely fueled by rapid increases in asset prices
(housing bubble) and consumer debt, rather than development projects,
which result in non-sustainable debt-driven growth. In order to address
the emerging socioeconomic risks, policy makers must acknowledge the
economy's strengths, weaknesses, opportunities and threats. The U.S.
government must be candid and direct in communicating with the American
This white paper provides the following:
1). A neutral assessment of the current U.S. economic health, 2). An
analysis of long-term consequences of current policy decisions 3).
Emerging economic, social and geopolitical threats to U.S. financial
prosperity 4). Risk mitigation strategies
The paper addresses
the key challenges facing the U.S. government's policies and attempts to
answer the following critical questions:
- The United
States economy has been resilient, but for how much longer? Can the
U.S. economy sustain unlimited economic growth?
- Will the United
States face another economic crisis and if so, when? How strong and
how long will the negative cycle be?
- How can the
United States manage the financial costs of the aging baby-boom
- How can the
United States compete with low-cost China, India, Mexico and other
- How can the
United States fight and win the anti-terrorism war and at the same
time not lose international allies and economic partners?
- How can the
U.S. government mitigate social, economic and geopolitical risks and
reverse the negative trend?
- What will be
the price of recovery be from past and current policy mistakes?
The white paper
summarizes the study in ten sections: 1). Historical perspective, 2).
Economic risks, 3). Social risks 4). Geopolitical risks, 5). Root cause
analysis 6). Government policy options and their price, 7). Recommended
strategies 8). Best practices 9) Notes and 10). Resources.
1) U.S. Historical Perspective
No economy can
sustain unlimited growth. The economy behaves in cycles; for every up
cycle there is a down cycle; it is only a question of how long and how
steep the curve is. The next decade or two are probably the most
critical for U.S. socioeconomic prosperity. Let's start with a
U.S. stock market crash
U.S. stock market crash, followed by the Great Depression
U.S. stock market crash
U.S. financial crisis
U.S. dot-com bubble burst
September 11 + Iraq war + Globalization + Offshoring + Real
estate bubble + Highest budget and trade deficits in U.S.
What are the prospects for the U.S. economy? Financial
Meltdown? Economic Crisis? Currency Crisis?
2) U.S. Economic
provides a quick assessment of the U.S. economic health status. The
basic commonsense formula to assess the health of an economy is as
long-term, if government revenues continue to be more than
expenditures (surplus), then the economic health of the country
improves, because the government can afford to invest in development
projects such as research and development, education and
infrastructure. With more income, the government can also afford to
lower taxes, which will increase corporate profits and attract more
foreign investors, resulting in more economic activities, creating
more jobs and enlarging consumer spending and government revenues
despite income tax cuts. It is what I call a
virtuous economic cycle.
Over the long-term, if government revenues continue to be less than
the expenditures (deficit), then the economic health of the country
worsens, resulting in accumulated debt. An increasing government
debt will result in higher interest payments, and less money
available for socioeconomic development. To pay for the debt, the
government will have to raise taxes, which will reduce the
competitive position of the country in the global economy and chase
investors away resulting in less economic activities and more job
losses. In order to avoid higher unemployment rates and social
instability, the government would to raise more debt to fund
spending and welfare support by raising the interest rate which
would increase the cost of money, reduce corporate profits and slow
economic investments, thus resulting in more job losses and reduced
government revenues, despite income tax increases. It is what I call
vicious economic cycle.
But how good or
how bad is the economy?
To properly assess
the health of an economy, it is important to take note of the revenues,
expenditures and debt numbers in relation to each other. Here is the big
picture using bullet-point format:
The size of the
U.S. economy = $13 trillion. Commonly known as the Gross Domestic
Product (GDP) - Mostly driven by inflated real estate and related
asset pricing (housing and mortgage/financial bubble)
US national debt
is about $10.5 trillion (actual numbers are much higher, since US
government accounting rules do not meet private business accounting
hold about 45% of the US national debt (Mainly China, EU, Japan and
oil producing countries)
The actual U.S.
economic growth is much less than advertised. Since 2001, the
economic growth has been largely fueled by rapid increases in asset
prices (housing bubble) and expanding consumer debt rather than
spending on business investments and new income generation projects,
resulting in unsustainable and unhealthy growth.
But how come the
stock market is doing well? The short-term impact of the slowdown in
real estate prices is to drive investors to move their money into
the stock market for better returns. But as the dollar value drops
and the interest rates increase, investors will move their money
from stocks to bonds, gold or even to other international markets
with competing currencies to avoid the depreciating dollar
are not aware of the highly inflated asset prices, especially the
mortgage-backed securities promoted by Wall Street as high-quality
financial instruments, while in fact they are very high-risk
securities. Most investors base their investment on future
expectations (speculation) rather than fundamental financial health.
analysis of the fundamentals of the US economy shows declining
manufacturing, production and business competitiveness compared to
other nations in the global economy
In 2000, the
U.S. government had a surplus (profit) of about $237 billion (the
largest in U.S. history). In 2006, the budget deficit was about $390
billion (loss). For information on Whitehouse budget details please
2006 budget deficit (loss) was only about 3% of the GDP, the problem
is the accumulation of losses over multiple years, hence the need
for debt to finance the deficit. By the end of 2006 (over a period
of 6 years), the accumulated national debt was about $8.3 trillion
(the largest in U.S. history). The U.S. government has borrowed that
money to pay for tax breaks, new Medicare drug benefits, the war in
Iraq, foreign aid and other policies.
A large national
debt is bad. Why? The government has to pay interest on the debt. As
the debt and the interest payment grow, eventually all the
government can afford to do is pay the interest payments, with no
money left over for other socioeconomic development investments or
even critical expenditures. If uncontrolled, this could lead to
states and national bankruptcy and major related socioeconomic
Ensuing the 2006
fiscal year, the U.S. government spent $406 billion of its budget on
interest payments to the holders of the national debt. Compare that
to Education at $61 billion, and Department of Transportation at $56
billion. When interest payments become larger than other critical
socioeconomic budgets, this calls for major concern.
the main engine of the economy, the less money the consumer has to
spend or invest, the less is the economic growth. By the end of
2006, the U.S. consumer debt was about $11 trillion
According to the
Commerce Department, the personal savings rate for 2006 was a
negative 1%; the worst in 73 years. This is the lowest level since
the Great Depression, which could be a problem for the millions of
retiring baby boomers and for the job market.
mortgages debt = $8.2 trillion. Due to the housing bubble in recent
years, U.S. homebuyers took on more debt to buy overpriced homes,
thus reducing share of disposable income. Many Americans refinanced
their homes during the real-estate boom to pay for living expenses.
With the expected housing bubble bust, Americans could lose a
significant part of their wealth and savings.
economy will lead many small businesses and consumers to go
bankrupt. Foreseeing this, U.S. lenders have lobbied the government
to make changes to the bankruptcy laws, to make it more difficult to
get rid of debt.
The banks will
suffer from huge losses and will have liquidity and credit problems
resulting in additional limitations on economic activities.
To stop the
free-fall of the housing and financial sectors the Federal Reserve
will reduce the interest rates close to zero, but if there is a risk
of continuing decline of the US dollar value, this can force the US
to raise interest rates to prevent a currency crash.
The higher the
debt and the interest rate, the more costly the financing will be
and the less money is available for investing in economic
development and business growth.
In 2006, the
average return on equity investment (stocks) was 8% while the bonds
interest rate was 5%. With major financial market losses, investors
may flee to more secure investments. Higher interest rates result in
lower investment activities, because investors will buy gold and
more secure bonds than risky stocks, thus hurting the stock market
and impeding economic recovery.
Foreign Debt &
In early 2006,
overseas investors held $13.6 trillion in U.S. stocks, bonds, real
estate, businesses and other assets.
About 45% of the
U.S. public debt is owed to foreign holdings (up from 40% in 2005).
China, Japan, the EU, Saudi Arabia and oil exporters are the largest
creditors. They financed the U.S. economy expenditures by buying
U.S. government and corporate bonds and mortgage-backed securities.
They are the United States' biggest bankers, any of which could
cause the United States serious financial problems, if they so
According to the
Commerce Department, the United States paid more to its foreign
creditors than it took in from its overseas investments. The gap was
about $2.5 billion for the last quarter - the first time that has
happened in more than 90 years! (Are you noticing the negative
trends in numbers?)
For fiscal year 2006, investment flows turned negative by $7.3
billion from a surplus of $11.3 billion in 2005. It was the first
time investment income has been negative on records going back to
1929. That means foreigners earned more on their US holdings than
Americans earned on their overseas investments.
Balance of Trade &
The U.S. 2005
balance of trade deficit was $723 billion. The number for 2006 is
expected to be higher. In other words, foreign companies are better
at competing than domestic U.S. companies. With the improvement of
IT & Telecom technologies, offshoring will increase and knowledge
networks will expand. In other words, the U.S. businesses will
decline in international competitiveness. The United States is not
the only economic superpower any more. In a global economy, the name
of the game is global competition: Boeing vs. Airbus, Intel vs. AMD,
GM vs. Toyota, and so on. The U.S. cannot compete with China's low-cost manufacturing or India's low-cost services. Several of U.S.'s largest companies such as Intel, Boeing, GM and Ford are closing
local factories and laying off workers due to slowing demands and
increased global competition. In 2005, the U.S. lost more than
500,000 jobs. Similar numbers are expected for 2006, and even higher
numbers for 2007 and 2008
According to the
Commerce Department (March 15, 2007) the imbalance in the current
account jumped 8.2% to $856.7 billion, representing a record 6.5% of
the total economy. It marked the fifth straight year the current
account deficit set a record.
The rapid growth
of China, India and other developing countries will create major
demands for oil, thus depleting the energy supply. This will result
in an inevitable increase in oil prices, thus negatively impacting
transportation and energy costs, raising the cost of local products
and services and reducing company profits and household disposable
income. Soaring energy costs, combined with negative personal
savings rates create strong negative forces that impede U.S.
shortage in world supply of oil, some analysts claim that this is
the main driver behind the U.S. policy towards Iraq, Sudan and Iran
- that is to control as many oil supply sources as possible and
pre-empt EU, China and India.
Dollar Exchange Rate
- In the past few
years, the U.S. dollar has slipped about 40% against the Euro and
other major currencies. In other words, U.S. citizen's buying power
is reduced significantly. The weaker dollar causes the price of
imports to rise (Wal-Mart buys about $20 billion in goods from China
alone). The low-income sector has not felt the price increase
because of the intervention of the Chinese Central Bank to prevent
the floating of its Yuan currency. If China allows the Yuan to float
freely, then the prices can increase 50% or more. Not only would the
price of imports increase, but local goods will increase as well,
due to the following; (1) the increased cost of imported raw
material and components (2) the increased price of foreign products,
will allow local producers to increase their prices, in order to
make more profit.
What is the U.S.
economic outlook? If you compare the global economy to the stock
market and the U.S. economy to a company listed on that market, then
the real question is: Would you invest in a company that is losing
money and increasing its debt for several years in a row? Or would
you invest in one of its competitors which shows increasing market
share and profit (surplus)? Granted that "USA Inc." is the largest
company in the global market, but the global investors put more
weight on profitable growth and performance trends than the size.
The worst thing
that could happen to an economy is the loss of confidence. If the
U.S. government does not commit to reducing federal budget deficits,
control financial markets greed, and investors speculations, at some
point in time foreign banks and investors could panic and rush to
dump their dollars to be the first out of a sinking currency, thus
making the economic crisis far worse and recovery more difficult.
China has already signaled its intention to decouple the currencies,
which could lead to the loss of trillions of dollars in U.S.
Treasury value. In order to minimize that loss, the Chinese will
have to sell off some of their U.S. holdings. The real danger is how
much and how fast China will do so. If they decide to do it quickly,
they will prompt huge panic by other lending countries. Investors
will have to copy China's moves, resulting in a disaster to the
dollar value, interest rate, stock market, homeowners and the U.S.
economy as a whole.
3) U.S. Social Risks
payments go in the Social Security Trust Fund. The purpose of any
surplus payments to Social Security is to pay future benefits. But
the U.S. government has spent all of the money in the Social
Security Fund. That's part of the national debt.
By 2025, nearly
a quarter of Americans will be over 60, a shift with huge
implications for the U.S. social services budget and economy. Those
baby boomers will be a major voting force and will influence
Government decisions to raise taxes to support Social Security and
Medicare, which will reduce individual salaries, companies' profits,
investments and domestic competitiveness.
Social Security payout and higher healthcare and living costs, many
seniors will have to go back to employment to support themselves,
thus competing with the younger generation for the already declining
number of jobs. The higher labor supply and lower demand for
employees will create intense competition and increase work stress
on the individual and the society. Think of the younger generations
resenting the baby boomers, blaming them for a falling standard of
I would not be
surprised if many senior and richer U.S. citizens start emigrating
to other more affordable countries, taking their savings and wealth
with them so they can live there for the rest of their lives, or
simply to invest in stronger economies with stronger currencies.
Because of the extremely high US healthcare costs, some Americans
are already traveling overseas to get treated and buying their
prescriptions bills from foreign pharmacies via the Internet.
and state budgets will result in higher cost of education, leading
to less access to equal opportunities and will increase the
socioeconomic gap (inequality).
Think of the
impact of a thinning middle-class layer and the increase in an
economic distribution gap. That can result in a major social and
political crises, further complicating recovery.
deteriorating economic conditions can stress the social fabric of
the nation. Extreme socioeconomic situations are more likely to
produce racial, religious and political extremism. Blaming other
groups is a classic response to the times of hardship, especially
when others practice a different religion or belong to another race
or economic class.
No one disputes
the right of the United States to defend itself against terrorism,
however, the way it is conducting the war on terrorism is a highly
controversial issue inside and outside the country. Regardless of
one's positive or negative opinion of the current U.S. foreign
policy, the launch of the U.S. war on Iraq with "a fabricated WMD
threat report" or "bad-intelligence , without the support of the
international community, the 600 thousand Iraqi civilian casualties,
the extensive infrastructure destruction in Iraq, the Abu Ghuraib
torture scandal, the Haditha's civilian massacre scandal, the Iraqi
sectarian war, the Guantanamo prison camp, the disregard of the
Geneva Convention's agreement on torture and the treatment of
prisoners of war and the ignoring of the Middle East peace process
have all hurt the U.S. fight against terrorism and destroyed the
American international goodwill and trust.
international perception is that the Iraq war is driven primarily by
the U.S. interest to control Iraqi oil resources and that the
current U.S. government foreign policy is driven by an ideology of
domination and exploitation rather than peace and collaboration
(regardless if it is true or not, perception is reality). Both trust
and goodwill are critical elements of productive diplomatic and
business relationships. Without those elements, it is much more
difficult to promote the U.S. global socioeconomic agenda which
could hinder the collaboration with foreign central banks and
investors for the needed economic recovery.
In addition to
the Iraq war, the U.S. financial, political and weapon support of
Israeli war on the Palestinian territories and Lebanon in 2006 have
increased anti-American sentiments and fueled terrorist
recruitments, thus providing more future risk to the U.S. stability
and economy and increasing expenditures on security and defense. War
policies take away from Government's time, effort and budget and are
almost always at the expenses of socioeconomic development
initiatives such as education and infrastructure development.
The U.S. media
and foreign policies are erecting major psychological and political
barriers to socioeconomic exchange between the U.S. and about 1.5
billion Muslim in more than 30 countries, further fueling
extremists' agenda for driving the situation into the clash of
civilizations, another future World War or "Armageddon" which is
driven by, and hoped for, by extremist religious groups on both
sides of the conflict.
The onslaught of
post 9/11 negative media toward Arab and Islamic countries is having
a major impact on U.S. foreign policies and economic relations. An
example is the rejection of Dubai's winning bid to manage the U.S.
ports. It is worth noting that Dubai (UAE) is a moderate Arab
country and a U.S. ally. As a normal psychological reaction to those
policies, many of the rich Arab and oil investors are considering
investing elsewhere (rather than traditional U.S. markets). Arab
countries are awarding lucrative national development projects to
competing European and Chinese companies. For example, the
development of Sudan's oil industry is now dominated by the Chinese
oil companies instead of the traditional American companies. Many of
the elite and rich Arab families, tourists and businesses are going
to competing European schools and economies to spend their money and
build stronger investment and business partnerships.
While the U.S.
politics, army and media were busy with the hostilities in the
Middle East, China, Russia and the EU were busy building stronger
socioeconomic relations with Middle Eastern countries through joint
economic development initiatives and open cultural dialogues. It is
a known fact, "people do business with people they like". Why else
do you think Dubai lost the U.S. port deal after they won it? Why
else do you think Sudan choose China instead of the U.S. as its
primary oil investor and partner? Who do you think has a better
global competing strategy? The U.S. or the EU, Japan & China?
Palestinian-Israeli conflict and the U.S. animosity with Iran have
led the Iranian Government to plan Euro-Perto Bourse in an effort to
weaken the U.S. dollar domination on oil trade. The new Bourse will
compete with New York's Mercantile Exchange (NYMEX) and London's International Petroleum Exchange (IPE) for international oil trades.
It should be noted that both the IPE and NYMEX are owned by U.S.
corporations. The IPE was bought in 2001 by a consortium that
includes BP, Goldman Sachs and Morgan Stanley. In fact if there was
peace in the Middle East, the Iranian nuclear energy project would
actually help the U.S. economy, because it allows Iran to export
more oil, thus reducing the price of oil.
In 2005, U.S.
dependency (in dollar amounts) on imported oil was half of imported
manufactured goods. If the U.S. launches another war or an attack on
Iran, that would most definitely lead to a sharp increase in oil
prices and further risk for the U.S. economic recovery. Not to
mention the ability of Iran to finance and support attacks on the
U.S. anywhere in the world.
Russia, Iran, North Korea, Syria, Venezuela and other Latin American
countries can lead to an escalation that may unify these countries
to build a major force against the U.S. causing further damages.
Except in a few
isolated cases, history shows that the fight against terrorism
cannot be won by military force alone. Only political solutions can
result in a lasting peace. By watching how people and organizations
adapt to conflicts and improve their fighting weapons and tactics,
one can see that it is only a matter of time before the opponents of
the United States will acquire or develop much more dangerous
terrorizing weapons, such as dirty bombs (biological, chemical or
nuclear). Another 9/11- scale attack or several other smaller
attacks could result in major havoc on the U.S. economy and cause
investors to flee to more stable business environments.
in the current foreign policy direction may risk some creditors
getting back at the United States through economic measures. That
could cause major economic damage.
5) Root Cause
So what led to the
Let's explore the
possible causes of the economic crisis:
A series of short-term-gain policies by incompetent or corrupt
Although no one can judge the intentions
behind any policy, the competency is easily judged by the results.
Ideologically driven policies, rather than pragmatically driven
This can be judged by the politician's
own statements, and again, by the results.
analysts and lobbyists promoting foreign or private interests over national
or public interests
foreign and local media watchdog reports will always reveal the
hidden agendas and the beneficiaries from each new policy.
Misinformation promoted by media analysts and commentators have led
the country in the wrong direction?
best way to judge the competency of the media commentators is by the
review of media archives and the final results.
Ivory-tower economists not in touch with real business challenges?
To be fair, that may not be the case here; the U.S. Federal Reserve
has done a good job so far in controlling and pacing interest rates
changes, but there is not much that they can do beyond that. A
better policy is to educate the public and address the threats
openly and directly. That does not mean that they cannot make bad
decisions in the future.
increasing taxes was a wise measure that helped businesses and
investors, however, the government has no other choice but to raise
future taxes in order to balance the budget and pay for national
Uncontrollable external events?
While 9/11 was a major negative event, it is the reaction to that
event that counts. The U.S. government cannot blame everything on
9/11, especially the failed U.S. foreign-relations and economic
The pitfalls of the powerful?
the American public does not stop the foreign wars for ethical and
humanitarian reasons, there are few politicians who have the
incentives to do so. Many U.S. politicians consider Iraq to be a
military success. Their unstated logic is that they lost about 3000
Americans (2006 Data) since the start of the Iraq war in 2003. In
their minds they are thinking, "So what! About 40,000 Americans die
every year on the highways from auto accidents". When
politicians have such superior power, they are tempted to use it
every time things don't go their way. Especially, if there is no
other major constraining force. - The saying absolute power corrupts
absolutely is not far fetched.
Last but not least,
could it be that the U.S. consumer culture has resulted in a huge consumer
debt, thus weakening the economic engine?
That seems to be the general consensus.
6) Economic Recovery Policy Options
economic fact: Any economy that is built on uncontrolled debt will
eventually crash. An increasing debt is a vicious cycle that can only be
broken through a strategy shift and operations restructuring. In the
Institute's opinion, the conditions for a crash were not met in 2006,
however, attention must be paid early to avoid coming closer to the
tipping point. The more the current Administration waits to make a
change, the stronger the downward momentum and the more the inertia will
be to reverse the direction. In other words, the socioeconomic and
political pains that will result from the necessary reforms will be much
So what policy options are available to
the U.S. government to help it overcome the above listed challenges?
To pay the bill for the annual economic
expenses, Social Security deficit (care for baby boomers), debt
financing, and economic growth, the U.S. government will have to resort
to a combination of the following options:
Allow the dollar
value to fall so that it can pay debts more cheaply. That may
increase inflation and will lower the real purchasing power of U.S.
citizens and businesses, but at the same time, this may improve
price competitiveness with other countries. With the new currency
exchange rate, salaries of the American worker become more
competitive with their European counterpart. That will reduce the
salary gap with China and India, thus slowing offshoring).
interest rates to attract enough money back to the United States.
That would a poor choice, as it will make it tougher and more costly
to raise capital. Also, increasing interest rates will result in
savers becoming less interested in the stock market, thus slowing
economic growth. Increased interest rates will result in lower
demand on the housing market and thereby a major loss in home
Yet another difficult option, which will reduce business profits and
U.S. ability to attract foreign investments.
The U.S. would
have to sell more assets (telecom, utility infrastructure, and other
assets) to overseas investors. Buyers look for a bargain, resulting
in foreign control of major national assets -- a high price to pay.
Reduce the U.S.
government budget across all major sectors, including defense,
education, health and other social programs. That option will cause
major layoffs in public and private sectors and will face major
challenges from the strongest union lobbies and the public.
immigration policies, which will provide U.S. with more competitive
labor (competing with China and India) and at the same time create a
larger consumer base (helping in economic growth). That option will
most likely be opposed by the white majority, fearing cultural and
political change. Not forgetting that the U.S. itself is a nation of
immigrants and its economic prosperity is credited to the hard work
of its emigrants. The U.S. government can manage immigration
policies in such a way as to attract productive immigrants and
minimize negative impact on the culture. One such example is open
immigration doors to doctors and nurses to reduce the cost of labor
in the health care sector. The opening of the US insurance and
pharmaceutical markets to global competition should bring the cost
of healthcare significantly down. Healthcare costs are a major
burden on US consumers and businesses
U.S. innovation engine and generate new unique products and services
for exports, make more profits to pay off debt and attract foreign
investments. That is the best possible solution and would offer the
U.S. the most competitive advantage. The U.S. has given the world
the most valuable modern innovations including atomic energy,
computers and the Internet. Future bets are on nanotechnology,
alternative energy, bioengineering and medical innovations to name a
The U.S. will resort to the use of more
than one option. All options except the last one will have a heavy
socioeconomic price tag.
7 ) Recommended Strategies for the Economic Recovery
The U.S. government
must formulate a new economic strategy to address the two most critical
challenges: debt and competitiveness.
Before formulating a
new strategy and launching reform initiatives, U.S. policy makers and
the American public must acknowledge and accept that the solution must
be long-term and cannot be pain-free. Leaders must make tough decisions
rather than push them on to the next presidency. The government must be
honest in communicating with the public and the approach must be direct.
government must commit to reducing the federal deficit, i.e. it must
reduce expenditures and operational costs.
government should not increase interest rates or taxes, however,
this is a highly debatable issue. Yes, that may lead to inflation,
but the policy priority should be healthy economic growth over any
other issue. Economic growth avoids many other social and economic
energy policies to promote better energy performance standards and
provide energy-saving tax incentives to reduce energy waste. Promote
the development of alternative energy sources and technologies to
help reduce the demand for oil.
and business leaders need to exit and divest losing economic sectors
(where U.S. cannot compete). Government bailouts of failing
industries are counter-productive and reward bad management
behavior. Let the free markets correct themselves and produce new
industries. The only exception for government intervention is to
invest in star industries through R&D subsidies and tax holidays for
new startup businesses.
reductions in pharmaceutical, healthcare and insurance costs. Reform
liability laws and open the market for international competition to
reduce prices and become more competitive.
development of the quality of education and lower its costs by
reducing accreditation bureaucracy, ending state education
monopolies through unnecessary regulations and removing competitive
barriers for the entry of private educational institutions.
and military aid to other countries and re-invest the money in the
local economy. When necessary, invest in foreign joint-development
projects sharing the risks and the rewards rather than just giving
the money away.
expenditure from space exploration and defense to other economic
development and small business creation
Administration must consider the historical lessons of falling
empires. One of the main reasons for the decline of early empires
was the wasting of their national resources on wars and conflicts.
The problem with conflicts is that they are made of vicious and
expanding cycles. They are high-risk ventures that take a lot of
time, effort and money to win. One need not go far to see the
evidence. Just consider the U.S. cost of the Israeli-Palestinian
conflict in terms of the financial aid, military aid, cost of
combating terrorism, U.S. foreign relations and the Administration
time and effort. What would have happened if the U.S. had spent half
the amount of time, money and effort to reach a peace agreement?
The U.S. government
must formulate short-term and long-term policies and build institutions
to strengthen the nation's competitive advantage through better
education, innovation and technolog entrepreneurial development. The
U.S. can compete with other economies using one or more of the following
Innovation development and enterprise creation. A good example to
learn from is the competitive model of European Innovation FP7
research budgets: Budgets should be redesigned to help investments
in revenue-generating economic sectors and to provide incentives for
new globally competitive products and services. Reform the U.S.
education system to increase competitiveness and provide education
and retraining resources for displaced U.S. workers.
policies: Tax policies should be redesigned to encourage innovation
and industry. One simple, but highly effective measure, would be to
shorten the depreciation schedules on capital investment and
research spending, and increase short-term capital gains taxes to
discourage short-term thinking. Dubai's industrial tax-free zones
are good examples to examine.
Make it simple:
Simplify business management for entrepreneurs by simplifying the
tax code and Government transactions. Simplify, automate and
eliminate bureaucracy. A sales tax is more likely to increase
savings and investments than income tax.
and legal costs by reviewing the legal system to minimize frivolous
lawsuits. Consider the model of the Japanese legal system
culture re-engineering: Promote transformation from consumerism to
investment-oriented culture, from leisure society to education and
entrepreneurship. This can be done through public education and
Globalization: The U.S. can slow globalization and offshoring
through protection policies. However, the U.S. government cannot
stop globalization and will lose to competitors in the long-run. The
only way is to manage the process by enforcing fair trade and joint
If you can't beat them, join them. The U.S. can partner with
neighbor countries, such as Canada and Latin American countries as
low-cost labor sources.
Policy: Bring more investors and competitive labor through more
attractive immigration policies to attract foreign investors,
intellectual capital and low-cost labor.
(War): That is an unethical option and has been proven to be a
high-risk, high-cost and unprofitable foreign policy option.
Acquire new labor, natural resources and markets. Learn from the
European Union expansion model and consider the formation of new
unions with other North American countries such as Canada and
global socioeconomic networks: That will help favor American
products and services. In order to build strong international
relationships, the U.S. must refrain from acting as the world police
and stop attacking other countries and cultures. Instead, the U.S.
can promote American values by encouraging cultural exchange, open
dialogues and economic partnerships. Transformation through
education and positive exchange takes more time, yet is far more
effective and lasting.
partnerships with other nations: That can be done through shared
investments which will improve U.S. favoritism and trade relations
over competitors (through shared interest in profit and loss).
Shift the focus of foreign policy from combating threats with
military force to building peace in Africa, Asia, Latin America and
the Middle East. It does not help to take sides and create more
enemies. Empower the United Nations and World Court to handle
international conflicts, thus treating the root causes of terrorism
and the U.S. hatred. That will eliminate most of the U.S. security
threats and related socioeconomic liabilities. U.S. can gain much
more through peace, and partnership activities than hostilities.
problems, U.S. Leadership needs to adopt the attitude of being smart
vs. being right. Religious, ideological or egotistical policies
create more problems than they solve. A pragmatic approach is far
more productive domestically and internationally. The key challenge
with this recommendation is the personal and subjective elements of
8 ) Management Best
Probably the best
way the U.S. government can effectively and efficiently implement the
change is to adopt the private-sector management best practices. The
simplest way to understand the proposed solution is to compare the
country to a company:
The President as
The Congress as
its board of directors
subcommittees as the independent audit committee
The Citizens as
and the media as the company performance/investment analysts
USA Inc. is
competing with other countries in a global economy. The CEO's mandate is
the socioeconomic prosperity of the country. If the leadership team
cannot meet their stated-objectives in their 4-years term, then they
should be replaced. (Although non-democratic, Dubai is such example of
an economy run as a global corporation). To help manage U.S. government
policies better, it is worth to considering the following reforms or new
A group of nationally respected technocrats including academic
researchers, socioeconomic experts, and representatives from all
political parties could establish a comprehensive set of
socioeconomic metrics as the main election agenda and set the
performance goals for elected or appointed officials. This allows
better informed-decisions by the public when electing the executive
team. This set of socioeconomic metrics can be used as the criteria
for democratic competition and election. One such basic example is
Gross National Happiness / Well-being
(GNH / GNW) metrics.
financial/political performance incentives and penalties tied to the
complete set of socioeconomic performance measures. This will ensure
tying of the interest of the elected officials to public interest as
opposed to the interest of private lobbies.
technical qualifications for the candidacy nominations
governing standards for the separation of duties to eliminate the
conflict of interest
Institute a new
format of an annual status report to the American public with far
more details showing the performance of the government using various
Although it maybe
too much and too early for the implementation of some of the above
mentioned reforms, they are worth stating for future intellectuals and
leaders. In my opinion, such reforms would better inform and educate the
public and would promote more responsibility and efficiency in
addressing national challenges and opportunities.
9) Paper Notes and Corrections:
A) This paper is not
intended to be an academic research paper. To make the paper accessible
to a wider audience, the format and the language of the paper were
simplified to read like an article. For example: statistical numbers are
rounded for simplicity, citations were grouped at the end and key
concepts are mostly stated in bullet-point format. Researcher may cite
this paper for the analysis and conclusions, but cite the data from
original data sources in section ten.
B) When writing this paper,
some of the quoted numbers were actual reported number and some were
forecasted numbers for FY 2006.
C) The goal of this white paper is not to provide a complete solution;
the goal is to draw attention to the true picture of the economic health
and to shed light on the emerging risks and available mitigation
D) Some of the above mentioned recommendations are
drastic, socially expensive and cannot be implemented at this time.
However, the purpose of a neutral study is to explore as many options as
possible. From my knowledge of the human behavior, some of the best and
most effective strategies will be discarded for ideological rather than
pragmatic reasons. It's a human and political tendency to reason what we
love rather than love what we reason.
and Economic Data Sources
The author and the Institute do not claim ownership of presented
statistical data or facts, but only of the analysis and the conclusion.
Sources of data is publicly available data from the U.S. Department of
Commerce (DoC), International Monetary Fund (IMF), The World Bank, The
Federal Reserve Bank, World Trade Organization WTO, Central Intelligence
Agency (CIA) World Book, MSN Encarta, Yahoo Finance, The Economist,
Business Week, Financial Times, FederalBudget.Com, The White House, Wall
Street Journal, and International Institute of Management
Med Jones is the president of the International
Institute of Management, a management best practices education and
consulting organization. Mr. Jones is an international expert
specializing in the global economy, business strategy, and leadership
development. For more information about the Institute, please
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