City Journal Summer 2014

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Guy Sorman
A Brief History of American Prosperity « Back to Story

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"...the normal, publicly accepted form of American production has always been free-market capitalism."
Nonsense. The citizens of the US have managed to create wealth not because of the institution of government, but in spite of the institution of government. Virtually every industry in the US is highly and completely regulated, ranging from agriculture to the production of pornography, and has been so for many, many years. This article is loaded with misleading propositions and displays a shocking ignorance of historical fact. Certainly City Journal may do better than this.
Sorman says, "The ultimate American economic invention was standardization."

That is what globalization has been about, standardizing the world so it could do business as one. And that is one reason why communism collapsed as an economic alternative, because it stood in the way of glodal standardization.

Perhaps one of the best essay I've read on the unique traits that make up the American entrepreneur mindset. Thank you Mr. Sorman for a very inspiring and well written article. Your words give hope to those of us who continue to take personal risks as American entrepreneurs.
New York City, hoping to spur New Growth, has just awarded Cornell University the right to open an applied-science campus on Roosevelt Island in the East River.
You neglected to inform the reader that Cornell's partner in this high endeavor is the Technion, hailing from America's alter ego - Israel.
What do you mean democracy? We don't have a
democracy! We have a constitutional republic!
Intellectuals and journalists let it just roll
off their tongues...er pens, fingers? We have
rule of law, not rule of emotion. It possible
to use another term for "democracy"? Show me
how it's used in the constitution. Oh it's not?
Guy’s supposition on the strength of the USA economy is almost perfect and should be made compulsory reading by every politician taking up an elected office. Where Guy has failed in his brilliant analysis is to make sense of the propensity of most countries (what has happened in Europe and now in the USA) to always impose a welfare burden – protect an underclass who are unable to attain an economic value. In other words, why are Black Americans and a group of Hispanics at the bottom end whereas every other immigrant group attained reasonable success? Guy has failed to see that in every country including the USA there is a political coalition (in the case of the USA) the Democrats who have created an enterprise of business dependent on tax receipts – they take good money from tax payers and procure unproductive assets and services. Why do we economist fail to quantify this negative wealth creation that is now eating the very existence of the European Union. Why in a system where we understand such failure we continue to justify this wastefulness? That is what we should address.
Just as the author observes that those who immigrated to America were risk-takers, it stands to reason that those who remained in their own countries were conservative, tradition bound, and not as likely to be entrepreneurial. There was an energy drain, where the most capable people left the old country and those countries were deprived of their energy. This is another reason why Europeans as a whole have less get up and go than Americans. In the US it's still sink or swim. In Europe, the comfortable safety net encourages entropy.
Thank you for a remarkable article that goes to the heart of why America became great and Europe slumbered. Economic freedom is at the heart of progress and wealth.
This is an excellent article that articulates the fundamental ideas that propelled the U.S. to prosperity. However, Prof. Sorman lumps together Europe's economies when in point of fact there are major differences between the redistributionist models of countries like France, from those of the Scandanavian countries. Some of these nations have HIGHER output per capita than the U.S.(Denmark's GDP per capita, for example, is over $10,000 higher than the U.S). This contradicts the party line of American conservatives that a large state sector and the higher taxes that come with it inevitably bring economic stagnation.

An excellent article on Project Syndicate by Brigitte Granville describes the differences between the French and Scandanavian approaches:

http://www.project-syndicate.org/commentary/the-french-government-s-economic-challenges-and-responses-by-brigitte-granville

Basically, the Scandanavian model rests on a social compact between citizens and the state, where individuals understand that they will be subjected to high levels of taxation, but in return will receive higher levels of social services (examples: extended maternity leave, generous unemployment benefits, free college in some countries). This is combined with pro-business policies that encourage investment and innovation. France, in contrast, taxes it's citizens at lower rates, but has draconian levels of taxation and regulation directed at business. French politicians, overall, view the business world as a brutal, zero-sum game, a war of all against all, that enriches the few at the expense of the many. This attitude most likely derives from the Marxist orientation of thinkers like Jean Paul Sarte and Maurice Merleau-Ponty, whose ideas heavily influenced French society (and the current generation of leaders, no doubt) up through the 1980s.

It would be great if Professor Sorman wrote an article on this topic (the Scandanavian model) and it's merits / shortcomings vs the American model.

Great article, Guy.

One other element that no doubt contributed to America's economic growth explosion in the latter half of the 19th century was the existence of a nationwide transportation and communication infrastructure. At the time, that was the railroads and telegraph. This set America apart from other large countries that were rich in natural resources, like Brazil and Russia. By 1860, for instance, the miles of railroads in America numbers in the thousands. By contract, Russia had under 600 miles of railroad at that point.
We are always publishing in internet libertarian insight so that the people from Brazil whose government politics is statist and follows the disguised socialism from Keynes theory can have an alternative way of thinking based on freedom, property right, and on federalism without states, where cities would be the cell with the weakest possible central government. I hope as an activist, making public al libertarian stuff. thank you.Dam Herzog. I have some books of this authors, and I love reading them.
Its time to tax imports based on the trade imbalance with each country, what good is it to save thousands of dollars a year shopping at Wall mart but have to pay more than that in taxes to take care of the unemployed as a result of exporting jobs.

China sells us hundreds of times more stuff than we sell to them, they would pay the highest rate. If a country buys more than we buy from them they would be tax free.
We are always publishing in internet libertarian insight so that the people from Brazil whose government politics is statist and follows the disguised socialism from Keynes theory can have an alternative way of thinking based on freedom, property right, and on federalism without states, where cities would be the cell with the weakest possible central government. I hope as an activist, making public al libertarian stuff. thank you.Dam Herzog
Two quick issues:

1. America had its highest growth during its period of most "excessive taxation". There has been little to no correlation between taxes on upper income individuals and economic growth. Rather our economy has grown the most when the middle class has grown larger which has come about almost solely through laws protecting workers and redistribution.

2. We have remained ahead in the realm of ideas because our government gives far more and far greater grants to universities AND private corporations than any other country, a decidedly non free-market system.
The reason that Repubicans are reluctant to name the programs that should be cut is that Democratic media uses that as a way to claim that Republicans are uncaring, unfeeling, even to the point of showing "examples" of people who would be affected by those cuts - in some instances sham examples.

But, the fact is, we are on a path to national, state and local bankruptcy and the only solution is to cut somewhere. Where do YOU think we should cut?

The fact that Republicans have asked the Democrats to name it, only reflects being burned over and over again in the past. Don't think the government collects enough taxes? How much more is enough then - should gov't collect every dime of private money? An example I've given over and over again: my father paid $21,000+ in property taxes to live in a house that was worth about $650,000 - although he bought it 25 years before that for less than $150,000. naturally he was forced to move, but someone else has that burden. This is property taxes alone - in my area $10,000 property tax bills for modest homes are common, and considered low. Add federal income taxes, social security FICA taxes, state income taxes, estate taxes, sales taxes, license fees, registration fees, enormous traffic fines, special taxes, penalties, tolls everywhere you look, yet somehow there isn't enough money? Where is it going?

When we have public sector workers now making more than private sector counterparts, get undreamed of benfits and work practically not all? (yes, some do, but I worked for government in a variety of places, and as someone told a fellow worker at one state job, "don't forget to keep your golf clubs in the trunk" - you think anyone could get away with that, or a hundred other examples I could give based on personal experience in the private sector - ask me about the time I used to be sent off campus to get bottles of "red" for the workers so they would have something to drink while they played poker - all on the gov't payroll. I'm not even mentioning the time spent while working one summer addressing envelopes for the County officials re-election bid - all done while 'on the clock'). As another person told me - there is always one guy - or gal - in public employment doing the work while the rest of the place lays around and does nothing. I'll match these stories with anyone).
@mulp - Say what you want about Reagan, but he has been one of only a handful of elected official who championed the cause of the little guy who wanted to get ahead. The rest of these guys take care of their constituencies and in the process have created a society full of zombies that don't have their wits about them and don't have enough common sense to fend for themselves. That's the main reason why things are such a mess today. What's gone is the old school rural mentality. Those guys had their wits about them and they had the common sense that most people today seem to lack.
The 21st century in the US economy has been dominated by speculation in money markets with deregulation and tax cuts generating pump and dump asset price inflation churn as a substitute for productive investment of idle labor.

Tax cuts that were promised to spur the economy and pay for themselves in higher revenue have led to steadily declining rates of employment from the beginning of the tax cuts.

The IP has served to ensure Disney and other corporation need little creativity to maintain high profits - everything out of Hollywood seems to be derived from WWII superheroes and cold war spy novel characters and plots.

The US transportation system was once the unquestioned leader in the world, build as a consequence of government policy, whether the rail roads or the highways, but it has been deteriorating by refusal to invest to maintain and improve it - the small privatization efforts in the US have not proved popular because the costs go up with only marginal improvement, but hiking taxes are blocked by Republicans who won't privatize to collect more revenue (and profits) from users.

The US was destined to fail in 1786. The Continental Congress could not hike taxes just as today to pay debt or fund government. This led to a new pact between the States with on critical feature, its reason for existing:
the first enumerated power of Congress is the power to tax to pay for defense, general welfare, and debt.

For 25 years, the Republicans have rejected the first power of Congress and only Democrats have taxed. Republicans however, refuse to name the functions of government to cut. Given a deal that automatically cuts government spending, Republicans are screaming that those cuts will kill jobs. But Republicans refuse to tax to pay for the spending. Basically the Republicans reject the idea of a market, where one pays for the things you want.

Since Reagan, the US has been diving deeper and deeper in debt in both the private and public sectors. This is claimed to be market focused public policy. Not only does government spending require the payment of taxes, but neither does private spending need to be paid for by income. Reagan ushered in the era of free lunches, not free markets.
Mr. Sorman makes some very interesting and believable observations. But he's still describing America as a closed system, as if the rest of the world doesnt exist inside the same space and system as the USA>
1. If immigration is good for USA, then why isnt Mr. Sorman recommending the REST of the WORLD immitate OUR standard? Why isnt the rest of the world opening THEIR borders to US??
2. Productivity in the US only appears high, because our economists fudge the number by defining paper pushing beauraucracy as "productivity". Also "financial products and services" are NOT productive, they do not add real value to any tangible good. If these two factors were removed, USA productivity would probably look a lot worse.
us became an economic powerhouse because its major competitors tore themselves to pieces in a series of major wars. There were other advantages in the past, like vast growth potential of the "new world", but in the last half century this was the main story. This advantage is gone. The us succumbed to the siren song of unregulated free markets which, in contemporary world, means exploitation of cheap labor coupled with (temporary) market preservation through issuance of fraudulent debt. US pioneered this effort, Europe followed through. Without some means of protecting incomes of labor, there are no markets. When the author, and people of his persuasion, add this part to their mantra of fundamental principles, we may start making progress again. For how to do it without going too far in the opposite direction is an important issue which does not lend itself to automated solutions that can be left to an invisible hand.
Much of this sounds nice, and our nation should have a ribbon around it, but what that ribbon surrounds is something that is being eaten by a cancerous growth of deficit spending, and non-participation by an enormous number of people in the labor force, as well as dependence ogn government that saps the will of those affected. A substantial number of people in the country expect the rest to pay their bills, that entire groups have been suborned through induced dependence policies that have esentially ruined them culturally, in large part. The educational system has likewise been suborned and is turning out people who are not educated, and with all the rest, what we have isn't quite so rosy.

These are not typical societal ills that you could point to at any time in the last 40 or so years, these are general trends, conditions that are unlike anything the United States faced before.

This time it is different. Our elders and ancestors may have done the work to bring us what appears to be prosperity, but we are now feverishly doing everything possible to destroy it. I'd love to blame the Democrats for everything, but certainly the Republicans - W Bush and "deficits don't count" Rove share in the blame. Quite a bit, in fact - these two (very sorry to use the term, but it fits perfectly) morons are more or less responsible for intitating everything going on today.

How could anyone look at the promises made to spend the wealth of the country for years into the future and paint a rosy picture of the present? Yes, this article contains warnings for the future, but with all due respect the context provided may as well be considered ancient, especialy since while all this was and is going on those in charge politically were and are doing everything possible to destroy what was being built?

My thinking on the solution to all of this has evolved, I'm at the point now where it seems that the way to go is, ironically enough to consider the formerlay unthinkable. It's better than slowly strangled and poisoned by an overreaching central government. It's not a popular concept in the sense that those who espouse it are considered crackpots. But, sooner of later the perception will become that the ties that separate are stronger than the ties that bind. And when that day comes events may happen fast, and the unthinkable will be reality.
Great article!

I would add two more factors (that you touched upon briefly when referring to the Stanford incubator).

1. The unique higher education system of public and private universities and colleges in the US that offers great freedom of choice and variety in course and curriculum selection, producing a highly skilled and diverse workforce.

2. The culture of research and innovation in academia, again aided by public and private funding, and the unique collaboration between industry and academia that has yielded a wonderfully productive combination of fundamental scientific discoveries and breakthrough technological advances.
I have an issue with the generally accepted notion of creative destruction. A related concept is the rule of thumb in finance that says you ignore sunk costs.

I think blind application of some of these theories is way off. If you look at the things as would in your personal life, when you buy a new refrigerator, the old one typically goes into the garage or basement. It still has a use, and you paid for it. Most likely, you aren't going to scrap it like a corporation would. That's another reason small business can often succeed where big business can't.

I look at "creative destruction" and the way this concept is sometimes applied in the same way. One example surrounds the debate about whether Chrysler should have been liquidated or not. The traditional "creative destruction" view of finance would have scrapped it for the quick buck. But three years later, this is a viable entity. Furthermore, I don't think the "market" adequately factors in the years and years of intellectual property in the form of processes, procedures, work flow, customer relationships that time and money was spent on to create.

I scratch my head sometimes at other examples of this same phenomenon that are finance driven. One example is Sears, where Edward Lampert thinks he can make more money (and he probably can) scrapping the company instead of reestablishing what is still a pretty good brand. Just think of all the wasted effort that went into building Sears that is being thrown out the window because of the finance-driven nature of our economy today.

Another issue I see about the finance-driven nature of things these days is that it seems that a lot of things these days are driven by capitalizing a stream of cash flows, grossing up the value, and taking your piece of the pie by either selling or securitizing. This is true whether we talk about leases, or how oil futures affect the price of gasoline. The finance guys seem to make their killing up front, leaving the worker bees to spin their wheels to pay off the debt incurred/lease payments, etc.

I'm not saying all "creative destruction" is bad. I'm just saying that I question whether this entire mantra of management by the numbers and what Wall Street wants has been good for the economy. I'll put it another way: a family owned business like White Castle restaurants has lots of 25-year employees behind the counter. When was the last time you saw a 25-year employee at a corporate restaurant?

In summary, I agree with most of the article. The thing I question, however, is that I simply do not believe that we lived in a finance-driven economy to the extent we do today. That is what I see being the big difference and why the entire economy might be choking today.
Very good article overall, but the statement
"In statist France, it’s worth noting, the freeway system is privately run, funded by tolls, and in better condition than its American counterpart."
As far as I knew a "Freeway" is just that, a limited acces road with NO tolls
The United States produces a staggering 22 percent of the world’s output....where, in China? This makes no sense, China is the #1 exporting country in the world, Germany #2, they don't consume as much, so they export their products. The US is definitely the #1 consuming country in the world, but everything we concume is made overseas, from oil to consumer goods. When was the last time you went into a store and saw "made in the USA"?
"Thanks to its relative independence from the government, the Fed—except during its brief Keynesian periods, such as the late seventies and the current stimulus era—has been able to protect the dollar from politically expedient inflationary pressure". Richard Nixon appointed Arthur F. Burns Chairman of the Fed and he was a politically motivated keynesian failure. Served from 1970 to 1978. Replaced by Paul Volcker the slayer of inflation. Very dishonest to state the late 70's as the highly Keynesian period, Nixon was wrong in his choice for the Fed. Carter was right and Reagan got the credit, evan with huge deficits
this is a decent article but how can the fact that World Wars ,especially WWII, totally spared up any damage and "only" resulted in 300K US deaths. Since the total death toll was 70 million we only lost 1/200 of the toll of WWII, mostly working age men. Even the other victors were rebuilding into the 60's the loser Japan/German rebuilt into the 70's.
Guy, thank you for this outstanding article. It is such a succint, yet spot-on, explanation of American propserity. Agree with another poster that this should be required reading for all Americans - certainly everyone in Congress!
je ne pense pas que jean-luc melanchon aimerait votre article...
Great article I would only take a moment to point one thing out. While America as a country was bigger than Britain in the 1830's thus justifying the resource argument of the article, the British were an Empire in the 1830's. This means simply that they had access to vast resources of their colonies such as those in Africa, the Caribbean, Asia, and a bigger colony than America that was right here in North America . . .Canada. The Brits were more resourced than we were, it was our innovation and work ethic that got us here and sadly that is what we have seem to have lost.

James
That may all well be true - IN THE PAST. It is a totally different animal this time around, in the form of a huge strategic blunder of an industrial policy, which allows powerful banksters to hijack the entire American political process.

Most nations have industrial policies. Beijing has be rather conservative on this count, and has been successful in planning and executing plans to propel many of the nation’s industries to No. 1 in the world.

America, in contrast, with bipartisan political support, already chose ultra-highly leveraged FINANCIAL ENGINEERING as a post-industrial era “industrial policy”, and in the last 20 years has staked the policy with the full faith and credit of the nation, and the best minds the country can offer. Today the best of the best American college grads do not go into science or engineering – almost to a man (less so for women) they aspire to become Masters of the Universe on Wall Street. The work product of all that brain power is more convoluted “financial engineering” that really are just sophisticated and well packaged fraud. There are consequences that flowed and will flow from that decision.

Derivatives are rigged gambling. The “contracts” are typically crafted by the best Wall Street prospectus writers, and not even the salesmen can really explain them. The suspicion is unavoidable that if they are truthfully explained, nobody would buy them. The products are typically sold on the age old “confidence” basis – “Hey, this is a sophisticated business instrument coming from one of the world’s largest financial institutions, what can possibly go wrong? Just trust me.”

Thus risk spreading (hedging) turned into sheer gambling. The derivatives gambling grew to over $600 Trillion by 2008, then a couple of big players keeled over or almost did (e.g., Lehman Bros., AIG), and the failure of the big counterparties threatened the continued existence of the large banks and Wall Street itself. The rest, as they say, was history. More recently we saw MF Global (died) and JP Morgan Chase (stumbled, billions).

Some would argue that since gambling is a zero sum game (not like War, which is destructive of value) – some win, some lose, so at the end it does not matter from the macro point of view. NO SO. The risks are several fold:

1. You never know who is going to fold next – it may well be one or more of the too big to fail’s, thus implicating public resources to bail them out.

2. Too much (95%?) resources are sucked from Main Street to support this habit, and as we observe, the real economy suffers painfully.
3. It is fraud, no matter how prettily you dress it up.

“Democracy” is completely hapless at getting rid of such complete take over of the political process. Multiple sets of elites vying for power will always end up, through competition, to be ALL BOUGHT OUT by the special interests in order to survive in the process.