Daniel Gross. Better, Stronger, Faster: The Myth of American Decline . . . and the Rise of a New Economy. Free Press, 2012, pp. 260, $26.00 Is the United States is economic decline? There certainly have been enough commentators and pundits who have made this point in one form or another. Even a cursory glance [...]
Daniel Gross. Better, Stronger, Faster: The Myth of American Decline . . . and the Rise of a New Economy. Free Press, 2012, pp. 260, $26.00
Is the United States is economic decline? There certainly have been enough commentators and pundits who have made this point in one form or another. Even a cursory glance at the news would lead most observers to conclude that this country faces some entrenched, systemic, and nearly unsolvable economic problems. In June 2012 alone, news outlets have reported that the trade deficit is at its highest in the past three years, employment for 16-to-19 year olds is at the lowest level since the Second World War, and that foreclosures are on the rise. All of this data hardly inspires optimism about America’s ability to recover from the Great Recession. In addition, there is a growing worldwide perception that China is a stronger economic power than the United States.
Despite this doom and gloom, however, one economics writer has chosen to see past the constant pessimism that seems to pervade the nation’s policy discourse. In Better, Stronger, Faster, Daniel Gross (Yahoo! Finance) seeks to challenge what he perceives as the conventional wisdom that the United States is in a state of economic decline. According to Gross, many on the political left and right, as well as those in the center, have succumbed to economic declinism. While Keynesians consider President Obama’s response to the economic crisis as too passive, the Tea Party sees the current occupant as the White House as a socialist. All the while, academics published works detailing how American glory days are over.
Gross refuses to accept the narrative of American decline and challenges it at every turn. Indeed, the vast majority of the information presented in Bigger, Stronger, Faster is intended to build the case against declinism. The title of the author’s most recent work is an allusion to The Six Million Dollar Man, the 1970s television show in which doctors rebuilt the character Steve Austin, an injured astronaut, as the world’s first bionic man. In the show’s opening credits, it was stated that the doctors could rebuild the wounded Austin, played by Lee Majors as better, stronger, faster.
“And like Steve Austin,” writes Gross, “the U.S. economy can bounce back from its catastrophic wipeout. In fact, the process has already started.” This is the central thesis of Gross’s work, and one which he goes to great lengths to support. He marshals a vast array of evidence in the form of both statistics and anecdotal observations. Significantly, in his point of view, when trying to understand why things may not be as bad as they first appear, American Exceptionalism matters. “The reality-based case for optimism rests in large measure on an understanding of America’s core competencies and competitive advantages; attitudes, habits, and capabilities that, even in this age of globalization remain unique.” In the American context, adaptability is key.
Gross delineates three internal factors that, in his estimation, lend credence to his argument against declinism: policy decisions, including the bailouts and stimulus, which, in the author’s estimation, succeeded in preventing a second Great Depression and laying the groundwork for a recovery; the speed by which the private sector responded to the crisis by restructuring; and a move toward efficiency. That said, Gross considers that external forces matter even more than internal ones. “And while these efforts [government policy decisions, business restructuring, and efficiency] were vital and useful, the main forces that have helped propel growth came from external sources, not internal ones.” The United States, Gross reminds us, ranks first in foreign direct investment (FDI) and is the world’s top exporter, including in service exports.
In the book’s conclusion, Gross does rightfully concede that the United States does indeed face some daunting challenges. “There’s no question,” he writes, “the United States has a very long way to go to make up for the lost ground in the economy at large, in housing, and in jobs.” But he also contends that the United States has experienced “a huge comeback.” There is nothing necessarily inaccurate about Gross’s thesis that we are on our way to an economic recovery.
Better, Stronger, Faster does provide ample evidence against the declinist faith. But the more salient question might be what the American economy would look like today but for the Great Recession? Coming back from the brink of disaster is one thing; having avoided the debacle in the first place is a different thing entirely.
In my estimation, Gross, in his zeal to prove the declinists wrong, somewhat overstates his case. Although he does acknowledge the debt and the deficit, he gives them short shrift. In addition, nary a word is said about the plight of the Millennials, many of who are in debt, are living back at home with their parents after graduation from college, and have bleak job prospects outside of unpaid internships. The American economy may have recovered better, stronger, and faster, but this means very little to those saddled with tens, if not hundreds, of thousands of dollars in non-dischargeable student loans.
In conclusion, Better, Stronger, Faster is a largely accessible and an engaging study that seeks to combat the pervasive narrative that the United States is in economic decline. Whether one agrees with the author’s thesis is perhaps situational, in the sense that a graduate-educated, gainfully employed technology professional in Silicon Valley would agree that things are getting better, while an underemployed college graduate in the Sun Belt saddled with student debt would think Gross highly mistaken. Whatever the case may be, the debate about whether or not America is in economic decline likely will continue to rage throughout the next year.
Jonathan Eric Lewis (c) 2012
Enrico Moretti. The New Geography of Jobs. Houghton Mifflin Harcourt, 2012, pp. 294, $28.00 If you worked in a bookstore, but had dreams of possibly going to law school and eventually buying a home close to the city where you resided, where would you rather live: Nashville, Tennessee, or the Boston suburbs? Each individual, based [...]
Enrico Moretti. The New Geography of Jobs. Houghton Mifflin Harcourt, 2012, pp. 294, $28.00
If you worked in a bookstore, but had dreams of possibly going to law school and eventually buying a home close to the city where you resided, where would you rather live: Nashville, Tennessee, or the Boston suburbs? Each individual, based on his own personal preferences, would have to weigh the choices carefully. If one absolutely could not live without access to country music, Nashville would be the logical choice. Similarly, a Boston Bruins fan might prefer to live in southern New Hampshire than in a small town in Tennessee. But if one were more concerned solely with one’s long-term economic prospects, what city would be a better choice? Indeed, is there a clearly better choice? And what data would one employ to make that decision?
In The New Geography of Jobs, Enrico Moretti (University of California, Berkeley) contends that, when it comes to prosperity, where you live matters more than you might think. “America’s new economic map,” writes Moretti, “shows growing differences, not just between people but between communities.” He calls this divide the Great Divergence, and argues that it has its roots in the 1980s when the character of different American cities began to be defined by the educational levels of their residents. Indeed, he posits that, at the same time that American communities are desegregating along racial lines, they are becoming more segregated in terms of education and income. Moretti’s argument is that, “the growing economic divide between American communities is not an accident but the inevitable result of deep-seated economic forces.” Think of the differences between Boston and Silicon Valley, on the one hand, and Detroit and Bakersfield, California, on the other.
If one has been paying even scant attention to American demographic trends, one would certainly realize that, over the past ten to fifteen years, cities like San Jose, Seattle, and Austin have become attractive destinations for graduate-educated professionals. Oklahoma City, Cleveland, and Flint, Michigan, are not typical destinations for the same demographic. What explains the difference? In a word: innovation. According to the author, cities that have become centers of innovation, broadly construed, have become magnets for educated professionals whose presence in a city has a positive multiplier effect on those in the service industries around them. Indeed, Moretti posits that, “the best way for a city or state to generate jobs for less skilled workers is to attract high-tech companies that hire highly skilled ones.” In other words, innovators are the new engines of economic growth. Human capital is what matters.
In the book’s fourth chapter, Moretti first notes that there is no obvious explanation in terms of natural advantages to explain why innovative companies are located in particular locations. “As it turns out, in the world of innovation, productivity and creativity can outweigh labor and real estate costs.” Three forces, collectively known as the forces of agglomeration, are responsible for the aforementioned Great Divergence, the process that is separating American communities from each other in terms of education and income.
These three forces are: thick labor markets, specialized service providers, and, in the author’s opinion, most important, knowledge spillovers. Put simply, innovation hubs such as the Bay Area remain so because those with special skills move and remain there, because of the close proximity to venture capitalists, and because skilled innovators in a city enhance innovation and prosperity. Innovation, it turns out, is actually a fairly local phenomenon. “In the end, geographical proximity to venture capitalists still matters. Skype and cell phones have not changed this simple fact. This is one of the reasons that the world of high tech is and will remain geographically concentrated.” Where you live and work and, more importantly, whom you interact with, matters deeply for both a city’s and an individual worker’s economic prospects.
Earlier in the book, Moretti directly challenges Friedman’s world-is-flat theory, by noting that the opposite of a flattening world is occurring. “In innovation, a company’s success depends on more than just the quality of its workers—it also depends on the entire ecosystem that surrounds it. This is important, because it makes it harder to delocalize innovation than traditional manufacturing.” Indeed, one of the highlights of Moretti’s work is his willingness to challenge shibboleths on both the left and the right. While he calls for more government financial support for scientific academic research, and private R&D through tax credits, he also rightly calls out those who falsely claim that greedy bankers killed blue-collar jobs by pointing to the real, structural culprits responsible: globalization and technological progress.
If Moretti’s thesis about the divergence of American communities is valid, then what can, or should, be done to remedy the situation? Specifically, he notes two different policy approaches that will help the United States continue to lead in innovation and economic prosperity: drastically reform the immigration system to allow for more college- and graduate-educated workers to come to the United States and, alternatively, increasing human capital at home through spending programs that would revamp secondary education and greatly increase higher education.
Overall, The New Geography of Jobs is a well-written and engaging work of scholarship. Moretti does an excellent job at making complex economic concepts accessible. The work does, however, contain a strong bias toward Silicon Valley and northern California. Perhaps this is due to, at least in part, the author’s position in the Economics Department at Berkeley. As the debacle surrounding the Facebook IPO demonstrates, innovation hubs are not without potential pitfalls. I do not mean to suggest that Silicon Valley will be displaced anytime soon. Rather, it suggests that one should always be skeptical of any overarching thesis regarding American economic trends. Moretti is correct in pointing out that long-term economic trends matter more than the short-term policy thinking that dominate contemporary policy discussions would have us believe. “Our ethos of immediate reward and our almost structural inability to take responsibility for long-term problems is leading us to underinvest in our future.” Sobering thoughts indeed.
In conclusion, The New Geography of Jobs is filled with interesting data and is well worth consideration. Intuitively, one feels as if Moretti is largely correct in his assessment about the diverging fortunes of American cities. A larger question, and one beyond the scope of his work, is whether the people in those cities with large salaries are truly happy and doing work that they love, or whether they are there because of nearly insurmountable student debt. Whatever the case may be, it is very likely the case that Boston, New York, and Seattle won’t be displaced anytime soon.
Jonathan Eric Lewis (c) 2012
Robert J. Schiller. Finance and the Good Society. Princeton University Press, 2012, pp. 288, $24.95 The financial sector has gotten a bad rap of late. Indeed, as referenced in this recent work, the emergence of both the Tea Party, which argued against the massive taxpayer bailouts of large financial institutions, and the Occupy Wall Street [...]
Robert J. Schiller. Finance and the Good Society. Princeton University Press, 2012, pp. 288, $24.95
The financial sector has gotten a bad rap of late. Indeed, as referenced in this recent work, the emergence of both the Tea Party, which argued against the massive taxpayer bailouts of large financial institutions, and the Occupy Wall Street movement, which condemned the capitalist system, signified that large segments of the American populace are not happy with Wall Street and investment professionals. As the economy has shown signs of improvement, the public anger has seemed to lessen. That said, it is still too soon to tell whether the news about J.P. Morgan’s losses will have the effect of rejuvenating the public’s distrust of Wall Street and of finance, in general.
In Finance and the Good Society, Robert J. Schiller (Yale University) argues that the world of finance, in its best incarnation, has the potential to improve peoples’ lives. “What I want most for my students . . . to know is that finance truly has the potential to offer hope for a more fair and just world, and that their energy and intelligence are needed to help serve this goal.” Schiller is cognizant of the problems in our current financial system. The solution to these problems, however, is not to castigate financial capitalism as a system for producing wealth, or to denigrate the profession of finance in which many Americans make their living.
The financial crisis, contends the author, cannot easily be blamed “on a sudden outbreak of malevolence” on the part of those employed in the financial sector. The causes of the crisis can be traced to “fundamental structural shortcomings in our financial institutions,” rather than to greed or dishonesty. Schiller further posits that the post-crisis legislation and regulations have not solved our financial system’s real problems. That said, he does not think the answer to our current woes is to restrain finance.
In fact, he believes the opposite to be true. “It seems a paradox that the very financial system that is the facilitator of some of our greatest achievements can also implode and create such a disaster. Yet the best way for society to proceed is not to restrain financial innovation but instead to release it.” In order to reduce the likelihood of future financial crises, contends Schiller, we need “better financial instruments, not less activity in finance.” Indeed, as he rightly acknowledges, there does not appear to be a realistic alternative to financial capitalism.
An expanded and further democratized financial system will allow more people to benefit from finance’s ability to improve people’s lives. Indeed, Schiller, as the title of the book suggests, believes that finance can help build a good society. Finance, he argues, is “the science of goal architecture—of the structuring of the economic arrangements necessary to achieve a set of goals and of the stewardship of the assets needed for that achievement.”
Finance, which is not a goal in itself, can help allow for the creation of the good society, a philosophical notion regarding an aspiration goal for an egalitarian society in which all people are valued. The implication is that finance should not be synonymous with greed. Rather, it is a mechanism which, when working correctly, allows for prosperity. As examples, Schiller cites the funding of a new medical research project and the construction of a new subway system as two goals that finance can help achieve.
Finance and the Good Society is divided into two distinct parts. The first, “Roles and Responsibilities,” details the various careers in finance. He devotes chapters to, among other careers, chief executive officers, lawyers and financial advisers, and regulators. The book’s second section, “Finance and Its Discontents,” borrows its title from Sigmund Freud’s 1930 work, Civilization and its Discontents, in which the famed Austrian-Jewish psychologist noted that many seemed to be discontented with civilization as it existed, but that ultimately it was not so easily improved. Schiller contends that we cannot go back to a simpler time; we can only move forward.
While there is a plethora of interesting material in Finance and the Good Society, there remains something uneven about the work as a whole. Perhaps this is due to the fact that the book is divided into thirty distinct chapters, some of which are only several pages long. It could also be due to the (overly?) ambitious nature of the book, in which Schiller interweaves finance with history and philosophy. For instance, in his discussion of speculative bubbles, he posits China’s Great Leap Forward to have been an “investment bubble that took place in the absence of financial markets” and that “World War I was in a sense a bubble.” These arguments, while thought provoking, are ultimately unconvincing.
In conclusion, Finance and the Good Society is a further edition to the vastly growing corpus of scholarly literature on the financial crisis and the role of finance in society. In many ways, this could prove to be an excellent introduction to the subject of finance for liberal arts-oriented undergraduates. This is particularly true given the fact that many current undergraduates may be skeptical of pursuing careers in finance.
Jon Lewis (c) 2012
Simon Johnson and James Kwak. White Housing Burning: The Founding Fathers, Our National Debt, and Why It Matters To You. Pantheon Books, 2012, pp. 352, $26.95 The two constants in the upcoming 2012 general election likely will be an inordinate amount of negative campaigning and vigorous disagreement about how to best foster economic growth. Implicit [...]
Simon Johnson and James Kwak. White Housing Burning: The Founding Fathers, Our National Debt, and Why It Matters To You. Pantheon Books, 2012, pp. 352, $26.95
The two constants in the upcoming 2012 general election likely will be an inordinate amount of negative campaigning and vigorous disagreement about how to best foster economic growth. Implicit in any discussion about the nation’s economic woes is the national debt, which as of May 7, 2012, was $15,671,202,480,642.98. While the political center-left has highlighted the perils of rising consumer and student debt, the Tea Party movement and political libertarians have ensured that the perils of this country’s rising national debt remain in the public consciousness. But what should be done about the country’s debt? Should we enter into an age of austerity in which public spending at the federal level is significantly curtailed and once-cherished safety net programs such as Social Security and Medicare are quasi-privatized? How did we get ourselves into debt to begin with? At a more theoretical level, should we be asking ourselves whether debt is always such a bad thing for a country?
In White House Burning, Simon Johnson (Massachusetts Institute of Technology) and James Kwak (University of Connecticut School of Law)* argue that the debate over the national debt comes down to how Americans want to respond to risk, either on their own volition, or through government-run insurance programs. The same is true for the deficit. “The great deficit debate,” write the authors, “is about how much risk people should bear themselves and how much they should pool with each other via the government.” The authors contend that it is indeed possible to maintain a sustainable level of debt and simultaneously have the federal government continue to play its role as an insurer against risk. Indeed, in chapter seven, they delineate what they believe to be the best method for achieving this goal. While most conservatives would likely not agree with their recommendation that the Bush tax cuts expire, others surely will appreciate their preference that tax expenditures, including the mortgage interest deduction, be eliminated or reduced.
While the direct policy sections of White House Burning are somewhat dry reading and do not break substantially new ground, the book’s earlier chapters do merit attention, particularly by those readers interested in economic history. In their Introduction, they discuss how the country’s fiscal weakness during the War of 1812 led to the burning of the White House by British troops in 1814, “the low point of the war, a moment of national humiliation that remains an iconic image in U.S. history” and, one should note, accounts for the title of the book. The problem during the War of 1812, contend the authors, was that Great Britain had money, while Congress opted for “higher spending without higher taxes.” Today, the approaching fiscal crisis comes not from the threat of a literal land invasion, but by a greying population and rising health care costs.
In Chapter 1, entitled “Immortal Credit,” Johnson and Kwak provide an overview of how the United States dealt with its national debt prior to the end of the gold standard in the Nixon era. Not surprisingly, Alexander Hamilton, America’s first Treasury Secretary, and the man responsible for enacting the country’s earliest fiscal policies, plays an important role. In the book’s second chapter, “End of Gold,” the authors posit that the changing relationship between gold and money over the past three centuries has had important consequences for the national debt. The breakdown of the Bretton Woods system for international finance in the early 1970s, led to a growth of American national indebtedness. “Under the Bretton Woods system, the capacity of the world to buy American bonds was limited by American gold reserves; today it is limited only by market demand, which has turned out to be much more forgiving.” Indeed, international investors still consider Treasury bonds to be safe assets. But, as the authors aptly warn, markets could turn against the United States should the world begin to doubt Washington’s ability to manage the dollar effectively.
In conclusion, White House Burning is a useful primer for those readers interested in learning about the national debt and what drives it. Although not as compelling as the authors’ previous work, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, in which they argued that the close ties between Washington and Wall Street are not healthy for the American economy and polity, this most recent publication is still worth reading. This is particularly true for readers interested in how the federal government acts as an insurer against risk for a large segment of the population. Whether their work will have any impact on the gridlock in Washington remains yet to be seen.
Jon Lewis (c) 2012
* I received my J.D. from the University of Connecticut School of Law prior to Professor Kwak taking the position at the law school.
Daron Acemoglu and James A. Robinson. Why Nations Fail. Crown Publishers, 2012, pp. 529, $30.00 Why are some nations prosperous, while others remain mired in poverty? Is it culture, geography, or leaders and advisers who are ignorant of good economic policy that best explain why some nations succeed economically, while others fail miserably? In Why [...]
Daron Acemoglu and James A. Robinson. Why Nations Fail. Crown Publishers, 2012, pp. 529, $30.00
Why are some nations prosperous, while others remain mired in poverty? Is it culture, geography, or leaders and advisers who are ignorant of good economic policy that best explain why some nations succeed economically, while others fail miserably? In Why Nations Fail, Daron Acemoglu (Killiam Professor of Economics at the Massachusetts Institute of Technology) and James A. Robinson (David Florence Professor of Government at Harvard University) contend that none of the aforementioned factors adequately explains economic disparities between nations. The focus, they contend, should be on various nations’ economic and political institutions, specifically those that give people proper incentives, allow people to choose their careers freely, and engage in the democratic process.
Early in this engaging recent work, the authors take the case of the city of Nogales, divided by the U.S.-Mexico border, with a Nogales, Arizona and a Nogales, Sonora. Nogales is a metaphor for the authors’ thesis. Both cities have the same geography. Culturally, they aren’t all that different. What, then, explains the difference? Different economic and political institutions that provide individuals with different incentives do.
Similarly, the stark differences in the standards of living between the two Koreas, the totalitarian North Korea and the democratic, capitalist South Korea, can be explained by different economic and political institutions. “The economic disaster of North Korea, which led to the starvation of millions, when places against the South Korean economic success, is striking: neither culture nor geography nor ignorance can explain the divergent paths of North and South Korea. We have to look at institutions for an answer.” After all, the institutions of communist North Korea are about as far as one can imagine from what one would expect to provide incentives for individuals to work, to invest productively, and to motivate people to prepare for the future.
The authors distinguish between inclusive, and extractive, economic and political institutions. Inclusive institutions allow for broad economic opportunities, promote secure property rights, and create inclusive markets, wherein people have economic opportunities to choose their own paths in life. They allow for mass participation in electoral democracy, allowing voters to replace their leaders. They also allow for technology and education. By contrast, extractive institutions do not allow for freedom. Rather, “such institutions are designed to extract incomes and wealth from one subset of society to benefit a different subset.” Politics matters.
Inclusive institutions, along with some centralized form of state power and public services, will provide for greater prosperity than deeply fragmented polities in which leaders extract wealth from the population and deny them economic opportunities. Thus, political leaders of a nation may actually prefer extractive institutions because this would allow them, or their clan, to retain political power. This can be seen in nations in which a small elite uses highly non-democratic political institutions to control a country’s wealth.
“The central thesis of this book,” write the authors in Chapter 3, “is that economic growth and prosperity are associated with economic and political institutions, while extractive institutions typically lead to stagnation and poverty.” They qualify their thesis and note that this does not “imply that neither extractive institutions can never generate growth nor that all extractive institutions are created equal.” The Soviet Union, for instance, is an example of a nation that did grow under extractive institutions. Those who say that government can never foster rapid economic growth, even for decades, have a prime counterexample in the U.S.S.R. between the first Five-Year Plan in 1928 and the 1970s. This was done, of course, at a great cost to human life.
The authors wrote How Nations Fail for a general audience and contend that their work has real-world implications. After all, if geography is the determinant factor in shaping a nation’s prosperity, then why bother doing anything to change the status quo? If institutions matter as much as the authors believe, then one can’t change a poor country’s economic trajectory without first changing the country’s economic and political institutions.
Overall, the authors make a very convincing case for their thesis that institutions, rather than geography, culture, or ignorance of the best policies best explain why some nations fail, while others succeed. For those have been academically trained either as historians or as lawyers, much of the material will not be particularly groundbreaking. Those who devoted their careers to studying the Soviet Union, for instance, are well aware that economic and political institutions matter for understanding the country’s rapid economic ascent and industrialization, as well as its decline and ultimate collapse under its own weight. Furthermore, lawyers understand that property rights, as well as an impartial system to adjudicate property disputes, matter greatly in allowing for economic growth.
In conclusion, Why Nations Fail is a solid work of scholarship. It is particularly well written. The authors do an excellent job of demonstrating how political institutions can determine a country’s economic success or failure. Still, one is left wondering whether the world is simply too complex and history too fluid for any overarching thesis, or grand narrative, that attempts to explain why some nations fail. Maybe, in some cases, geography actually is the determinant factor. And maybe culture and religion aren’t as unimportant as the authors think. That said, the authors should be commended for writing a work that surely is to provoke considerable debate in the days and months ahead.
Jon Lewis (c) 2012