All told, finance, insurance, real estate, automobiles, energy, and health care account for about one-third of the U.S. economy. Reconfiguring these industries to conform to political calculations, and not market-driven decisions, is likely to transform American economic life. And the fiscal consequences of the spending involved will be enormous. The federal budget deficit for 2009 was about 11% of gross domestic product, which is far higher than any the United States has experienced since World War II.
Transform it, indeed. Obama's stimulus package has had an enormous impact on all of the sectors mentioned above. In fact, only about 5 percent of the federal stimulus funds went to things like roads and bridges. The rest went into the banking industry, the automotive industry, schools, food stamps and health care. One could argue that much of this funding was needed in anticipation of possible economic collapse. But this sort of spending carries with it great risks.
The Congressional Budget Office projects that existing laws will now lock in a structural budget deficit of more than 3% of GDP every year for the foreseeable future. And this assumes we will escape the current global economic situation without further financial catastrophe (and that America won't be forced into a war or other unanticipated major contingency over the next several decades). The CBO states flatly that this long-term budget path is "unsustainable."
The basic character of America's financial position is changing before our eyes. One year ago, federal government debt held by the public was 41% of GDP. Today, it is about 54% of GDP. The CBO projects that it will approach 70% of GDP by 2020, which is a level not seen since the immediate aftermath of World War II.
Clearly, not good. So what are our options?
According to Manzi, there are three: raise taxes, default on debt, or devalue our currency. I highly doubt the last two are going to happen so, more than likely, it's going to be raise taxes. Manzi talks of a value added tax but an easy fix would be to raise the top tax rate. Of course, this will never happen because raising taxes in this country is akin to going on a shooting spree at an elementary school.
An option that Manzi doesn't mention is cut spending. Does anyone out there think that is going to happen considering our government? But let's suppose it did. Where would we cut spending?
We begin to see a fairly apparent direction.
The end result would be an America much closer to the European model of a social-welfare state, which prioritizes cohesion over innovation. Of course, the European model is not an inherently terrible way to organize human society. It is, however, a model very poorly suited to America's current strategic situation, and would leave us in a far worse position to deal with the challenge of balancing innovation and cohesion. We do not have the luxury of drowning our sorrows in borrowed money while watching our power and influence wane.
He's right. We can't move towards a European model of socio and political economics. It won't work here and it will leave us vulnerable to our enemies in a plethora of ways.
Before I get to Manzi's solution, does anyone have any idea at all how to achieve the balance between innovation and social cohesion? Obviously, I have a few ideas of my own but would like to hear from you first.









