Why Have Living Standards Declined in the United States?
The simple and short answer is: declining capital investment. Let me explain.
Several things have happened during the last fifty years to reduce the capital investment in the United States:
1. Fiat currency printing:
Since 1971, when the U.S. went off the gold standard, the U.S. government has lost control of its spending. It has spent trillions of dollars on everything from wars to foreign aid, to welfare (both corporate and individual). By printing the money to pay for these items, it has inflated the money supply, which in turn has caused prices to rise. This makes it very difficult to save and invest in the capital needed to increase productivity…the cost of the capital goods continue to rise, often making it necessary to move off-shore, where costs are lower.
2. Legal liability risks:
The legal lottery has developed in the name of consumer protection (at the cost of capital protection). What’s worse is that the outcome is never certain. The outcome may depend on political connections, the skill of the attorney, or the judge’s world view, not on a pre-determined statutory result or equal treatment before the law. This uncertainty has scared capital away.
3. Government taxes, tariffs, regulations, debt, and waste:
U.S. taxes fluctuate depending on which party is in power. Sometimes federal taxes go up. Sometimes state and local taxes go up. Sometimes taxes go down. Tariffs, which are the latest cost, raise costs for consumers. Mostly the quantity of regulations goes up. The greater the number of regulations, the greater the drag on businesses and productivity. As government debt goes up, there is less money for businesses to borrow, as governments (especially those with a printing press) are considered to be more creditworthy. This debt also inspires governments to tax more, borrow more, and (when possible) print more.
4. Foreign competition for capital:
Other parts of the world are awakening to the benefits of capital investment and the higher standards of living that flow from it. Even China, with its communistic political system, has adopted a more capitalistic economic system. The name of the new game is to accumulate more economic resources around the world to ensure a more productive economic future. Many countries are starting to play this game while the U.S. is still trying to be the world’s policeman, rather than a capital magnet. Higher interest rates were a temporary magnet, but now that the Fed has changed its course, that may no longer be the case.
Conclusion: Because the United States has become a riskier (and thus more expensive) place in which to do business, capital has moved elsewhere. It has moved to places where it is cheaper to produce the consumer goods that people want (cheaper labor and friendlier rules for capital investment). In fact, it has become so much cheaper elsewhere, that companies can produce those goods and ship them around the world more cheaply than they can be produced in the United States. U.S. labor is still more expensive than labor in China or Thailand or India, for example, and not commensurately more productive. And as long as goods can move freely from one country to another, the labor rates paid in China will attract more capital (with the goods then being shipped to the U.S.) than the rates paid in the U.S. In the long run, if capital continues to flee the U.S., labor rates in the U.S. will have to drop to an average world-wide labor rate (or lower) while labor rates in Mexico, China, etc. will rise to an average world-wide labor rate. This is still a long way off in the future. There are millions of poor people around the world who would love to earn more money and would do just about anything to earn it.
The remedy: More capital investment. How to do this? 1. Supply a sound money; i.e., a currency backed by gold or silver. 2. Reduce the risks of the current legal lottery. 3. Reduce government meddling, taxes, tariffs, and spending. This three-pronged approach will go a long way toward halting the declining standards of living in the United States.
Unfortunately, too many people are benefitting from the “cheap” money that can be printed in unlimited quantities for any of this to happen.
Robert F. Sennholz