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US Economy: False Diagnoses and False Solutions

by Helke Buchter Tuesday, Sep. 06, 2016 at 4:59 PM

Hillary Clinton's and Donald Trump's economic plans are too simplistic. Innovations and ideas are lacking. Many people despair. Washington did not always ignore the middle. FDR's New Deal built 165K public buildings.


Hillary Clinton's and Donald Trump's economic plans are too simplistic. Innovations and ideas are lacking. Many people despair.

By Helke Buchter

[This article published on August 12, 2016, is translated from the German on the Internet,]

The democratic presidential nominee Hillary Clinton presented her economic program a few days after her republican rival Donald Trump. Both want to create many jobs. However their plans – tax cuts for Trump and taxation of the rich for Clinton – are much too simplistic. America's real problems cannot be solved with these ideas.


The New Economy is suddenly here after a decade of delay. The digital economy has long been marked by its prominent representatives Apple, Google and Facebook that will ultimately replace the Old Economy. This change was announced so often since the Dotcom bubble burst that the actual change was nearly unnoticed. However, the signs are now immense. Online retailers – with Amazon leading the way – are taking down traditional department stores like Macy's and the Wal-Mart supermarket chain. After 200 years, the past rivals Dupont and Dow Chemical hope to at least ward off the twilight of the former US industry icons. They can hardly prevent their twilight.

The new economy is completely changing the labor market. The discussion about the 1% vs. the 99% gives way to the Digital Divide. The creative technology elite profits from progress and simultaneously creates short-term jobs at low wages at the lower end for which the use of robots or computers would be too expensive or too awkward: cleaning, cooking, and nursing. Jobs in the middle become fewer. Thus an imbalance arises on the labor market that is much more threatening for the economy and society than the crassly unequal distribution of wealth and income.


The democratic presidential candidate Hillary Clinton reproaches her republican opponent Donald Trump for forgetting the American middle class in his economic program. She rejects the TTIP free trade agreement.


The misguided free trade policy cost American steelworkers their jobs, Trump repeated again in his economic speech. He promised: "We will bring good wages and a good living to American steelworkers and their coal buddies." His solution is more protectionism. US industry certainly lost many jobs after China was accepted into the World Trade organization in 2001. But the trend in the steel industry started already in the 1960s as a study of economic professors Allan Collard-Wexler and Jan DeLoecker showed.

The branch lost 400,000 jobs over the decades. Still, steel production only fell 20%. The collapse would have been much clearer if the transfer of production to low-wage countries had been the deciding factor. An innovation was more decisive for the loss of jobs. Steel plants began to recycle junk. That was less expensive than the completely new manufacture of steel. The thousands of workers employed in the steel mills in the past were not needed. The remaining jobs are better paid than in earlier times.


The problem is not only that good-paying jobs like the steelworker jobs have become rare. The problem is that security was mainly organized through the employers… Health insurance cannot be transferred to another employer. So the loss of a job often means the loss of health insurance.

In old age pensions, the employer plays a more important role than in Europe. The US state pension social security only covers basic needs. Up to the 1980s, the pension funds of businesses often guaranteed a stable pension to former workers. This changed with the rise of "401 K savings accounts" in which the employer only contributed and did not guarantee pensions. With that, the risk increasingly passed over to the employee. Only large companies could offer their workers social security. Whoever works for small or medium-size businesses is left to him- or herself.


With the New Economy, the number of persons who work freely or for sub-contractors has dramatically increased. Young employees combine several jobs to make ends meet. This trend will intensify, Bo Cutter, an economic expert at the liberal Roosevelt Institute, predicts. "Long-term working conditions are becoming rare. Citizens are responsible for needs like health care and old age provisions that were managed by employers in the past, he wrote in an essay on the future of the American economy. Past social securities are canceled and new securities are not on the horizon. President Obama's health reform was a final attempt at tackling this problem

However, Obama-care was politically toxic and an unsatisfactory compromise. American once passed through a comparable transformation. At the beginning of the 20th century, the land changed from an agrarian nation to a land of mass production. This did not happen without bitter conflicts. In the 1914 Ludlow Massacre, John D. Rockefeller attacked a camp of striking miners; 26 persons were killed including 11 children. The growing power of the unions and the boom of the US economy after the world wars created the prerequisites for new social structures and the rise of a broad middle class. Now America urgently needs an appropriate answer to the New Economy.


Both candidates want to invest in the infrastructure to create jobs. "We will build streets, bridges, tunnels, railroads and airports," Clinton announced in her speech. As president, she will lead the country to its former splendor once built by past generations. There is certainly an enormous need for repairs. America's highways, bridges, energy- and water systems are crumbling. According to the Association of Mechanical Engineers, around .6 trillion must be spent up to 2020 to rehabilitate the infrastructure.

While reinvestment is important, the restoration of the status quo is the priority. Clinton only mentioned in a half-sentence what America needs and Trump ignored it entirely: innovation to remain internationally competitive. The US still leads in research and development as in the iPhone, rockets that Elon Musks' Space X will soon send to Mars or the new cancer medicines that come on the market almost every month. Nevertheless, US leadership is being undermined and threatened. Compared to other industrial countries, the US spends less than Korea, Israel and Japan measured by the share of its gross domestic product. Germany is also narrowly ahead of the US.


The budgets for basic research on which many companies later depended for their commercial success have shriveled for years. President Obama emphasized the importance of these investments in the future. Still, cuts were made in the budgets for public research centers in quarreling with the Republican opposition. American businesses owe their dominance in many high tech areas to the work in these institutes.

Google's first algorithm financed by the National Science Foundation is an often cited example. The public cuts could be better handled if private businesses had not constantly reduced their basic research spending. The Bell research laboratory, a division of the telecommunication giant AT&T, once had an icon status. Bell produced eight Nobel Prize winners. The transistor that rang in the electronic age was developed there. However, shareholders measure managers today by more short-term goals than research and development. Billions flow in buying back their own shares so stock prices shoot up – along with the bonuses of managers.


Even in Silicon Valley, innovation is mainly in areas that promise quick profits. Almost 40% of risk capital funds flow in software. With a few clever programmers, an app can be carefully worked out that announces meal times on Smartphones or reminds subjects to wash their dirty socks. Breakthroughs in alternative sources of energy are far more difficult. Hardly surprisingly, investors who want to see results in their lifetimes promote innovations that are less risky and capital intensive. What America lacks are ideas that transform and do not only repair the land.

The success of Trump who addresses the rage and frustration of a large part of the population surprises many Americans but stuns coastal residents. The middle of the country suffers especially under the consequences of de-industrialization: dilapidated small towns and decayed factory buildings, a job as security personnel at minimum wage instead of working at a repair shop, a job at McDonalds instead of a manufacturing plant. America's heartland experiences the destruction of families by drugs, depression, and suicide.

The afflicted provoke mockery and contempt instead of sympathy. The majority cling to their weapons and religion. President Obama remarked in an unconsidered moment that critics on the conservative side are not less scornful or contemptuous. This is an astonishing attitude for a representative of a party devoted to social progress. "The truth about these dysfunctional, decaying communities is that they deserve to die. Seen economically, they are a burden. Morally, they cannot be justified. Forget the Bruce Springsteen rubbish and the conspiracy theories about Asians who steal our jobs," a conservative polemicist recently wrote in The National Review. Trump is like a drug for them.


Describing people in mobile homes as white trash is considered legitimate. The recession has clearly upended minorities, blacks, and Latinos more than whites. According to a new analysis, black families will need 288 years to catch up to the prosperity level of average white households. This does not make the despair in the heartland less real. People there feel they are abandoned to their fate. In 1980, the average per capita income in Washington was 29% above the average income. In 2013, the disparity climbed to 68%, the political journal Washington Journal reported.

Washington did not always ignore the middle. After the Great Depression, there was a series of development projects for rural areas including the Tennessee Valley Authority that built whole cities and did not openly build dams and power supply systems. America can only be strong when it takes along the weak. A strong America is important for a strong Europe.

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