The future of American Exceptionalism

So what about the future of our nation? Are we really not “great” anymore? I believe the emerging mindset is primarily a psychological issue.

In the book “Why Nations Fail”, Daron Acemoglu and James Robinson claim that the existence of inclusive political institutions is the major factor that determines whether or not a country fails or succeeds in the modern world. The authors discuss how extractive political institutions hurt progress as authoritative rulers discourage creative destruction in fears that any advances will threaten their political bastions. Inclusive institutions have what they call a “virtuous circle”, where any problems that exist in a pluralistic society will be addressed because its citizens will exercise their liberties to recognize and force the issue. The system of checks and balances that characterize inclusive institutions prevents extractive rulers from destabilizing the system. Think of the Progressive Era from the late 19th century where citizens exposed many shortcomings in their daily lives and as a result policy makers were driven to make adjustments that improved the country’s overall well-being. Another example is FDR’s attempt to pack the Supreme Court the checks and balances system prevented the executive branch from taking complete control.

So what do inclusive institutions have to do with all of our present day ailments? Now more than ever people have platforms to speak out on issues, and since our nation encourages freedom of speech, all citizens who want to say something will say something. If there is a problem in the US, chances are a good that some group of people has recognized the issue and is taking steps to raise its awareness. The interactive link to a New York Times article below shows how people have viewed issues in the country over time. I encourage the reader to look for any patterns in the data.

https://www.nytimes.com/interactive/2017/02/27/us/politics/most-important-problem-gallup-polling-question.html

My biggest takeaway from the piece was what I call “an irony of crises”. Think about present day society: are we currently at war or in the midst of a deep financial recession? The answer is a resounding no! When big issues like war or the economy emerge, people tend to forget about the smaller issues that seem to slowly wear us down. Wars and financial crises are also issues that tend to impact everyone to some degree, and so it is easier to sympathize with one another since we all share similar misery; but during times of peace and economic stability like the present-day people revert to their polarized political views and thus look at society with a more scrutinizing eye. I am in no way advocating for a war or financial meltdown to “promote unity” but rather offering a potential theory to describe why it feels like so many issues exist in today’s society.

Another takeaway from the interactive is that issues that exist today aren’t really new. Take any issue found in today’s society and you’ll almost always find it to have existed in some previous time period. The biggest difference is that we now have every shortcoming of our society on camera and at our fingertips. The ability to communicate online will lead to increased to polarization: you are free to hear whatever sides of the issues you prefer and naturally will want to hear from those who believe the same things as yourself. Our society has sadly become less open-minded as moderation has faded.

Another takeaway from the interactive is that issues that exist today aren’t really new. Take any issue found in today’s society and you’ll almost always find it to have existed in some previous time period. The biggest difference is that we now have every shortcoming of our society on camera and at our fingertips. The ability to communicate online will lead to increased to polarization: you are free to hear whatever sides of the issues you prefer and naturally will want to hear from those who believe the same things as yourself. Our society has sadly become less open-minded as moderation has faded.

Polarization is problematic for two key reasons: the populist movement has threatened the process of creative destruction that has powered American Growth, and polarization make it harder for the government to pass legislation that solves a few enormous issues that are on the horizon.

I like to believe that Economists know what is best for people whereas Populists know how to make people think they are getting what is best for them. A common theme that shows up in political debates is that concentrated costs will scream louder than dispersed benefits, even if the benefits are greater than the costs. Think of globalization: it is very easy to look at individual cases where a person’s job was directly lost a result of a globalized economy, but the benefits usually come in the form of cheaper goods and more technological progress. But the concentrated costs, like those who lost their jobs, will protest loudly while those who benefit from globalization (which in reality is almost everyone), don’t have as obvious ways of pointing to their gains. It’s easy for someone to complain “I lost my job because it was outsourced!” but you’re not going to convince anyone by saying “I saved 75 cents on all my clothes purchases in the past year and have had a little bit more happiness from the increased technological gains that came from globalization!”.

To the well-educated student it is evident that globalization has more benefits than costs; the progress is simply a product of our economy evolving to do what it does best. Economies typically evolve from agriculture to manufacturing and then services/human capital based labor. We are simply in the midst of the next transition that will bring about greater advances for all.

When society shifted from agriculture to a machine run economy there were definitely those who protested the technological gains (think Luddites), but I don’t think anyone today in their right mind would say that our nation would be better off if we didn’t embrace the Industrial Revolution.

The rise of Populism and political polarization will prevent our nation from accepting the creative destruction that has generated the engine of progress. Yes, it’s unfortunate that people who manufactured CDs lost their jobs because of the digital revolution, but the advances helped society move forward as a whole. We adapt and accept that times will change. If our country continues to advance protectionist policies then it will risk falling behind in global progress; the slowdown would then call for greater protectionist policies that would create a dangerous feedback loop.

As Alan Greenspan and Adrian Wooldridge write in their book Capitalism in America, the primary driver of economic growth is capital stock or cumulative net investment.

The main explanatory variable of capital investment has been found to be the federal surplus or deficit; deficits tend to curb investment whereas surpluses have historically led to greater business confidence and advances. The rise of entitlements (Social Security, Medicare, Medicaid, etc.) over the last several decades has raised deficits and consequently hindered private investment. Politicians have avoided the entitlement issue for a while and in some cases have used their platforms to please voters with entitlement promises: what easier way to get support than by telling people that you will cover their retirement needs and other health issues with government spending?

I am not completely dismissing entitlements or calling for their abolishment; there is without a doubt a need for some level of government handouts. Rather I believe the policies have been mismanaged ever since Lyndon B Johnson declared a war on poverty in the 1960s. The system is in need of considerable overhaul; if deficits keep swelling the nation will be more vulnerable to the types of debt crises that destabilize financial systems and discourage investment. Unfortunately, polarized politics, particularly from conservatives, are focused on federal deficits with hopes that increased spending and reduced revenues (in the form of lower taxes) will keep them in power.

Political polarization offers one last threat to American exceptionalism. At the end of the day you can believe America is amazing and exceptional even if some metrics say it has slowed down; nobody is stopping you from believing whatever you want. Likewise, nobody but yourself is stopping you from thinking America is disgraceful and embarrassing. You could probably find statistics and “experts” who will argue for each side, so there is no definitive case-closing answer; the goal of these papers was to provide the facts and allow you to decide which ones were most important to you.

Thank you to all of those who have followed this series; I have genuinely enjoyed writing each article and hope that the data presented has helped the readers gain a greater appreciation for the economic history of the United States.

Bryan Proferes (MCG)