Monday, July 04, 2005

The “Latinization” of the U.S. Economy

In Latin American countries, there is an enormous difference between the rich and the poor. Wealth is concentrated in the hands of a small number of wealthy families while a large segment of the population lives in poverty. Between the rich and poor, there is a struggling but relatively small middle class whose members have almost no chance to attain wealth but who face a very real chance of falling into poverty. A few years ago, Forbes Magazine reported that Mexico had more millionaires than Germany and recently it reported that the world’s fourth-richest man in 2004 was Mexico’s Carlos Slim Helú, who had amassed a fortune worth $23.8 billion. (

The United States was the first major country to create a large middle class. Thanks in large part to the unionization of the work force in the first half of the Twentieth Century, factory workers acquired middle-class incomes, and the term working class began to disappear from the American vocabulary. There was a feeling of living in a “classless” society in which anyone could become wealthy through education and hard work. Coal miners and railroad workers sent their children to universities. Harry Truman, who started as a Missouri farmer and later acquired a haberdashery in Kansas City, became president of the United States. What Harry Truman had done, anyone could do. Upward mobility acquired a name: The American Dream.

However, for many Americans today, the American Dream is just that—a dream. The U.S. economy is moving toward the Latin American model with more and more of the country’s wealth in the hands of fewer and fewer people. Of course, the same phenomenon is occurring in most industrialized countries, including most of Western Europe, but according to statistics compiled by the Organization for Economic Cooperation and Development (OECD), the difference between disposable income of the upper third and lower third of the population is greater in the United States than in any other country that it surveys.

It looks increasingly unlikely that a small farmer will ever again become president of the United States. The last presidential election featured two candidates from elite New England families, both graduates of Ivy League universities (although one of them managed to market himself as a humble Texas boy).

One symptom of the economic decline of the working class in the U.S. is the inability to afford health care. In my youth and into my middle age, almost all jobs came with “benefits’ that included health insurance that was largely paid for by the employer with a smaller monthly contribution from the employee. That insurance paid most of the cost of healthcare. Now some employees of such large corporations as Wal-Mart, Dunkin’ Doughnuts, and McDonald’s have no healthcare insurance at all. Wal-Mart has been accused of offering its employees “rock bottom healthcare” so that it can afford to offer its customers “rock bottom prices.”

Healthcare and the insurance that should pay for it have become very expensive in the U.S., and a company can save big money by not providing insurance and letting its employees fend for themselves. When one company reduces costs at its employees’ expense, other companies follow suit to remain competitive. A single medical emergency can overwhelm an uninsured worker’s financial resources and send him or her into a downward financial spiral that can end in poverty and homelessness.

What is responsible for the growing gap between the rich and poor in the United States? Part of the blame can be laid at the feet of George Bush’s economic program. The Bush administration lowered the tax burden on the wealthy, leaving the middle class to bear more of country’s financial burdens. Its policies have also drastically raised the cost of higher education, making it more difficult for lower and middle-income families to educate their children.

However, the main culprit for the growing wealth gap is the U.S. trade policy, which was largely put into place before Bush became president. The United States has the most open market to foreign goods and services of any large country in the world. This open market coupled with Americans’ almost insatiable desire for cheap goods has resulted in a flood of products from low-cost producer companies, most notably from China. The U.S. does not export enough to pay for these imports. They are paid for by printing money and by borrowing. One result has been a loss of well-paid manufacturing jobs in the U.S.

A well thought-out trade policy should enable a country to sell its products abroad as well as give its citizens access to goods that can be made better or more cheaply elsewhere. The United States’ trade policy is not well thought-out. It gives imported goods and services almost unfettered and untaxed access to our markets, but it does little to encourage other countries to purchase our products.

The difference between the amount of money that a country earns from abroad and the amount that it spends abroad is called the current account balance. For the U.S., the current account balance is a large deficit. The U.S. sends much more money abroad to pay for its imports than it earns from exports, the sale of investments, etc. The U.S. government borrows and prints money to make up the difference. In other words, the U.S. is running up a huge debt with the rest of the world to pay for American consumption, and it has no plan to pay off that debt.

According to the Central Intelligence Agency’s World Fact Book ( the U.S. current account deficit in 2004 amounted to $646.5 billion, and the deficit has continued its rapid growth in 2005. The current account deficit in the first three months of 2005 was $195.1 billion, 3.6% greater than during the fourth quarter of 2004. While a country whose money is the main international tender has the luxury of running a modest current account deficit in order to keep the world supplied with its currency, the enormous and growing U.S. current account deficit is unsustainable. The sooner it is reduced, the better off the U.S. and much of the rest of the world will be.

The job of getting the U.S. back on its economic feet will require some hard choices. We must gradually reduce our addiction to cheap foreign goods. This will require us to renegotiate some of our international trade agreements and perhaps even to withdraw from the World Trade Organization. Countries with which we have an enormous current account deficit must buy more from us, or we must buy less from them. Progress must be measured by results, not by promises to end restrictions on the importation of U.S. goods and services, and if goals for a specific country are not met, imports from that country must be decreased gradually, by tariffs, by import restrictions, or by negotiation. Such measures will not be popular domestically or internationally, but they are necessary. A healthy U.S. economy is not only important to the U.S., it is also in the best interest of our major trading partners.

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