Mohan Guruswamy | What is the prescription for America’s many ills?

About a decade ago, Tom Friedman and Michael Mandrelbaum wrote a long lament titled “That Used to be US. What Went Wrong With America -- and How It Can Come Back”. Friedman and Mandelbaum are well- known people. Friedman, a New York Times columnist and a three-time Pulitzer Prize winner, is the world’s foremost globalisation evangelist. A kind of Billy Graham of globalisation. Michael Mandelabaum is a prominent international relations scholar and holds a chair at the Johns Hopkins University. His writings are basic reading for IR students in most prominent American universities.

Both come with great credentials, but they have the problem wrong in the first place. The problem is not about the United States sliding into oblivion because its education system is faltering, or its R&D is flagging, or because Americans have ceased to be innovative and finally that China and India are beating it at all of this.

Far from being the competitors of the United States, China and India are still its under-economies, serving it with cheap labour working on repetitive jobs and repetitive number crunching. The problem with the US is that it lives far beyond its means and its profligacy has left it as a debtor, unable to pay its bills by endeavour, but by printing new banknotes. The problem with unlimited printing of banknotes is that the more you print, the less they can do. This is at the core of the American crisis, and why the Friedman/Mandelbaum analysis is weightless and full of froth.

The American crisis began unfolding when Richard Nixon disengaged the US dollar from the gold standard. Remember how we in the ex-colony of the empire upon which the sun never set used to refer to the UK pound as sterling? That was because every British pound was linked to a gold equivalent in weight. That's how the world’s currencies were valued then. That was the basis of exchange rates. In one fell swoop, President Richard Nixon, unable to finance his twin wars in Vietnam and Cambodia, found a way out. Delink the US dollar from the gold standard and put the printing presses at its five Federal Reserves to full use. This had gone on for over 40 long years and the birds came home to roost in the wake of George W. Bush’s wars in Afghanistan and Iraq, leaving Barack Obama to reap the wages of profligacy and to bail out the US banks. The Donald Trump who followed didn’t really understand the American malaise and didn’t have the ideation skills to deal with the morass. Joe Biden has rediscovered the American talisman of a wartime economy to drive growth. The Ukraine war has come to his rescue. The US has already pumped in $53 billion into Ukraine as arms. Then the US has begun to invest in manufacturing computer chips to eliminate the dependence on China.

When Bill Clinton left office, he left the United States’ books in a much-improved position than what he had inherited. Mr Clinton was a policy wonk and he could see right away what the problem was. He cut down expenditure, reduced the fiscal deficit to a bare minimum and jawboned the trade deficit to a very manageable level. He essentially did this by not going to war with anyone.

Despite his budgetary prudence, Mr Clinton sowed the seeds of the crisis that visited America. Candidate Clinton, while accepting the Democratic Party’s nomination, promised a home for every American, and vowed that he will make the banks make available credit for first home buyers. President Clinton set about fulfilling that promise and eased home loan restrictions on banks. The resultant housing boom propelled the US economy further and globalisation got the credit. But it was hardly globalisation that took the US economy into a boom period. It was US domestic spending spurred by a home owning binge.

Globalisation began in earnest with George Bush II. The prosperity he inherited led to a spending binge. His two wars in Afghanistan and Iraq plunged the budget deep into the red. On the other hand, the domestic spending binge led to huge trade surpluses piling up with the Chinese. They promptly put them in US banks who then lent them to US citizens. When the economic boom began tapering off, as everyone who read Paul Samuelson’s two introductory economics books knew, home prices began to drop due to oversupply and loss of wages. Loans then turned toxic. These too were the wages of globalisation. Friedman and Mandelbaum do not attribute the US situation to this. Not really. They do it in all of one page (Page 219) and that too by quoting part of an article in the Washington Post by Neil Irwin.

The error in the Friedman and Mandelbaum analysis is that declining education standards, declining spending on R&D and productivity has led to the American crisis. Assuming that the US sets right its high school education and the maths proficiency of its kids came on par with that of Indian or Chinese kids, would that stop US jobs from leaving for Bengaluru or Nanjing? As long as Indian and Chinese workers work for less than two or three dollars an hour when US workers will not work for less than $16.50 an hour, jobs will continue to flow across the deep oceans. That’s how Friedman’s friend Nandan Nilekani made his multi-billion dollar killing. By becoming a labour contractor.

At the end of the day, that is precisely what Infosys is. Or for that matter TCS or Wipro. The only way the US is going to beat India’s IT is to educate its kids in maths like ours and then pay them $2 an hour. That will never happen. Ditto for the shirt maker in New York, or the artificer in Newark. India’s and China’s newfound relative prosperity is based on labour costs and the consequent manufacturing efficiencies, and not on some superior social and political systems.

Despite what Friedman/Mandelbaum write, the US will never cede the innovation crown to either China or India. The US will innovate. China and India will turn the innovation into goods and services. That is the wave of the future. And all the King’s men and all the King’s horses will not put Humpty-Dumpty together again.