American Missive

ATLANTA— I just finished the book I.O.U.S.A. by Addison Wiggin and Kate Incontrera.  The purpose of the book is to highlight the many things that are wrong with the United States economy as well as to provide potential solutions for those problems. Both authors are editors and contributors to The Daily Reckoning, a publication about events and circumstances impacting the global economy.  The book I.O.U.S.A. was written during the production of a feature-length film of the same name. The film was nominated for the Grand Jury prize at the 2008 Sundance Film Festival. 

In summary, I would recommend this book to anyone who is interested in the state of our economy and who does not have much of a background understanding of economic matters.  It is written on a level that should appeal to a broader readership.  The terminology used throughout is adequately defined and the concepts are thoroughly explained in a simple, understandable way.  This is very deliberate, as the point of the book and movie is to spread a concern for the state of our economy to as many people as possible.  It is a very easy read- it is around 260 pages, but I finished it in a matter of hours (and I am not an overly fast reader).   It is not the best book I have read on the economy, but it is definitely interesting and informative and a good read for those who are interested.

Overview

The purpose of the book is to describe the various threats facing the United States economy.  According to the authors, the principle issues our economy faces are summarized in the form of four “deficits”: 1) the budget deficit, 2) the savings deficit, 3) the trade deficit; and 4) the leadership deficit. The first third of the book describes these four deficits at a high level, supporting each with facts and relevant historical anecdotes.  Each is adequately discussed and described in a manner that convinced me these are serious issues.  Further, because the book was published this summer, it is very relevant and up-to-date.

The authors’ goal was to discuss the glaring problems facing our economy in a “non-partisan” manner.  In essence, they hope to spread the blame for our predicament between both parties.  I believe on balance that the book remained largely non-partisan.  They did not rail against specific parties.  However, I believe they were more heavily critical of Republican Administrations than Democratic ones.  However, this may be warranted, since recent Republican administrations have added substantially more to government spending and government debt than did the only Democratic one in the past 28 years.  (I believe Barack Obama is about to turn this all around, however). 

The best and most useful part of this book for me was the interviews at the end. These comprise the final two-thirds of the book.  The interviews allowed prominent individuals to flesh out their views of these four deficits and their predictions for where we may be headed as nation economically.  Among those interviewed were Warren Buffet, Ron Paul (great interview with him!), Alan Greenspan, Arthur Laffer, and Steve Forbes, among others.   Each interviewee was very engaging, very different and extremely informative.  The book is worth it for these interviews alone.

Things I Learned From the Book

Here is a summary of the interesting facts and perspectives I learned from the book (in no particular order).

Interesting Facts

1. Largely because of Social Security and MediCare, the United States has unfunded obligations that already exceed $53 trillion, or $175,000 for every person living in the United States.
2. The US government borrows approximately $1.8 billion each day to fund its operations.
3. By 2020, at current rates, the government will have to stop performing 1 in 4 of the basic services it currently provides, because of the growth in financing obligations (interest costs) and the growth in obligations under Social Security and MediCare, due to the retirement of the baby boomers.
4. The current federal debt as a percentage of GDP  (approximately 65%) is the highest since World War II (approximately 122%).  In that respect, the current debt level is the second-highest in our history, exceeding the peak debt levels during the Great Depression (44%), World War I (35%) and the Civil War (27%).  At current levels of borrowing, it would be 244% of GDP by 2040.
5. In America, the savings rate amounts to approximately 2% of the GDP.  By comparison, that rate is 40% in China.
6. In 2007, the United States threatened to impose trade tariffs on China in order to lower our trade deficit with them.  In response, China threatened to dump their $1.3 trillion of holdings in US treasuries on the financial markets.  Knowing that this would destroy the value of the dollar, the US backed off of the tariffs.  By holding so much of our debt, China wields enormous power over us.  (I generally disagree with trade tariffs, but I thought the way China negotiated to avoid them was frightening).
7. In 2007, the United States borrowed 65 percent of all of the money borrowed in the world, more than 10 times as much as the next biggest borrower.  Wow!
8. The Budget Act of 1997, struck after harsh negotiations between the Clinton Administration and a Republican Congress was the one that pushed the budget deficit to surplus (however briefly).  This shows the marvels of the checks-and-balances in a two party system (and makes me fear our current mess with Democrats controlling everything).
9. The Roman Empire collapsed in part under the weight of the excessive debt it incurred in order to keep up with promises and entitlements it gave to the Roman citizenry.  In fact, the book states that no other republic in world history has survived for this very reason- they have all collapsed in a heap of debt and financial ruin, to be conquered by new rulers or to be replaced by a new form of government (and generally a bad one).  If America were to overcome its excessive borrowing tendencies and to survive long-term, it would be a first in world history for republics.
10. Inflation in a country begins to occur partly when people and countries cease to invest in that nation’s debt because they become afraid the nation will be unable to pay it off.  The most dramatic example is the hyper-inflation in Germany in 1923.  The book speculates about when this may occur for the United States (no one is sure, but it may not be that far off at our current rates).

Interesting Perspectives:

1. “The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin.” (Ernest Hemingway)
2. “Inflation is immoral because it’s theft. Think about it this way: If you or I had a printing press and we could print the money just like the government does, we would be arrested and put in jail for a long, long time because we’ve stolen value.”  (Ron Paul)  In effect, by increasing the monetary supply, the government reduces the value of people’s savings (thereby stealing from them, in Ron Paul’s view).
3. “It is immoral… for one generation to spend the next generation’s money.” (Thomas Jefferson)
4. Arthur Laffer believes Bill Clinton was a better “supply-sider” than Ronald Reagan and credits Bill Clinton for much of the boom of the 1990′s. (I am no Bill Clinton fan, but the more I read about that period of time, the more I am forced to confess he did some good things for the economy- apart from pushing subprime lending, obviously).
5. Steve Forbes believes monetary supply should be governed off of a set price of gold.  That is, the Federal Reserve should define a range of gold prices that are acceptable and manage money supply such that gold prices denominated in US dollars fall within that range.  He believes this would stabilize the US currency (and hold government in check in terms of borrowing). 
6. Steve Forbes favors privatizing social security accounts, similar to George W. Bush’s plan.  He makes the correct point that currently, the government has too much leeway to dip into the Social Security reserves to finance other government projects.  In fact, they have done so repeatedly.  Mr. Forbes states that if accounts were privatized, we could ensure that the government does not take from our “retirement.”  He thinks if the plan was marketed to the American public in this way (i.e. as a means to prevent the government from taking our retirement), it would have a very broad appeal. I agree!

Conclusion

Despite all of the substantial issues with the US economy that the book identifies, I thought it was extremely interesting that every person interviewed in this book agreed that our situation is not hopeless.  All were very positive on the inherent strength and vitality of the United States economy, even as we struggle through our current recession.  They just think a new direction needs to be taken by the country.

The real thrust of the book was that we as voters should actively encourage our representatives to no longer promise more government spending than they can reasonably deliver. It encouraged elected officials to treat the current deficits with extreme seriousness and to be willing to make difficult choices- including raising taxes and cutting Social Security and/or MediCare benefits for younger generations.  

In the end, I come away from the book even more convinced that increased government intervention through new spending programs is unhelpful and unsustainable.  I also come away convinced that we need to actively reduce current spending and entitlements.  I would hope increased taxes are not in store- but I might could be persuaded to begrudgingly support them if it appears the budget situation is becoming so dire that they are needed.

In conclusion, I highly recommend this book to anyone who is interested in our current economic crisis.