What Can We Actually Afford?

My last three blogs dealt with the three economic “circles” that have sustained the American economy since 1920. There have, in that period of time, also been two major wars—1914-1918 and 1939-1945 that kept our factories humming.
The first two circles consisting of us taking our “lottery” (war spoils) winnings and loaning them to other countries who, in turn, used the money to buy from us. The third and current circle involved other nations loaning money to us with which we bought from them.
The fact that we have depended on deficit spending, loans from others and spoils of war for our livelihood over the past ninety years strongly suggests that we haven’t lived within our means during that period of time. Let’s be boring and lay out a time line:
WWI (’14-’18) deficit financed. First Circle (’20-‘-’28) spoils of war New Deal (’33-’39) deficit financed. WWII (’39-’45) deficit financed. Cold War (‘45/49-’91) deficit financed & spoils of war. Third Circle (’47-’08?) financed by our deficits and other nations’ loans.
Nowhere in that line is there a period in which the United States lived on what it actually earned in foreign trade or by local industry. In other words, there is no time in the past ninety years in which it can be definitively said we were living within our means.
If this is true, then President-elect Obama faces some stark choices. To maintain current American living standards—and that’s really what the 2008 campaign was all about, with both sides promising to do just that—he must do one of four things.
One) He must find a truly profitable war—like World War I and World War II. It can be argued that this is precisely what George Bush thought he was doing in 2003 when he invaded oil rich Iraq. It is hard to look at the present world and see any significant pots of gold that can easily be made available as spoils at an acceptable cost in American blood and treasure.
Either the cost would be too high or the return too low. (How much did we get out of Vietnam, Korea or are we getting out of Afghanistan?) Another nasty question: living as we do in a technology and service oriented economy, do we still have the basic manufacturing capability to win a major war?
(The foundries of West Michigan that provided so many tens of thousands of engines blocks for tanks, trucks, jeeps and planes in World War II are empty lots today. Nobody’s building any new ones. The “tank factory” in Muskegon now turns out a few ambulances and fire trucks. Half its buildings are torn down or empty.)
The last time such an absurd strategy was actually suggested to an American President was in 1861 when William Seward (Secretary of State) suggested to Lincoln that the best way to avoid a Civil War was to declare war on Super Power England. Lincoln sensibly demurred.
Two) He can somehow talk China, Japan, the Arab World, and a shrinking number of willing players into keeping the Third Circle going. This assumes they have the money, the will—and the trust in the American dollar and economy needed to encourage massive loans.
Three) He can find a way to create some new “Fourth Circle”—new players with new motivation to invest hugely in the American retail sector. As I look around my globe, I don’t see where these new players are going to come from. Australia? Antarctica? Paraguay? Nigeria? Very iffy.
Four) He can commit political suicide.
That’s what often happens to national leaders who find themselves in deep financial doo-doo (don’t you just love George H.W.Bush?) and have to tell their constituents that they must now live on what they can actually afford.
Can you imagine the fury of the American voter if he were told that he must downsize his home, give up one of his two or three autos, forego snowmobiling or luxury camping? It’s a sight I wouldn’t want to see from the vantage point of the White House!
We don’t even know what an affordable life style would be in the country. We haven’t lived one in the life time of almost anyone alive today. (I don’t think any of us really want to find out.) The question: What can we really afford? hasn’t been answered—perhaps ever.
We’ve always been a booming, high rolling nation. We’ve always lived on other peoples’ money (we bankrupted investors all over Europe with our crashes in 1819, 1837, 1857, 1873-77 and 1893—but we just rolled on.) We fought the American Revolution to avoid paying justly owed taxes and just walked away. We’re called an optimistic nation—and we certainly have been in matters of finance!
We’ve always found another sucker out there willing to pay our way. If Obama gets really lucky, he will again. And then, we can defer one more time that nagging query, what CAN we really afford?