It has been a year since I published my book The Decline and Fall of the American Entrepreneur: How Little Know Laws and Regulations are Killing Innovation. The book explains that the only way to increase real per capita income is by increasing our level of technology. This can be accomplished by capital equipment purchases, which upgrade plant and equipment with newer technologies or by creation of inventions. Since the United States is a leader in technology, we do not have the choice of just upgrading to new technologies produced in another country. So we must create new technologies if we want our economy to grow. There are two ways to encourage the creation of new technologies; government funding or private investment in inventions. Government spending on research and development is not nearly as effective as private spending for all the same reasons that government spending is always wasteful. A study by the Small Business Administration shows that most emerging technologies are invented by small entrepreneurial start-ups. Unfortunately, since 2000 the U.S. has undermined the three foundations on which technology start-ups are based. Those three foundations are intellectual capital, financial capital, and human capital. We weakened the intellectual capital foundation by weakening our patent system, we weakened the financial capital foundation with the passage of Sarbanes Oxley, and the human capital foundation was weakened by the accounting rules that required the expensing of stock options.
Since my book was published the financial capital foundation has been further undermined by the passage of the financial reform bill. There has been no change on the human capital front. There is mixed news on the intellectual capital front. The good news is that David Kappos replaced the incompetent and traitorous Jon Dudas as the head of the Patent Office. The bad news is that Supreme Court again illustrated their utter incompetence in the Bilski decision. For more information, see The US Economy and the State of Innovation.
These problems are being exacerbated by the budgetary issues associated with aging baby boomers. The Obama and Bush administrations compounded these problems by expanding Medicare to prescription drugs and the passage of Obama Care. Presently, Medicare/Medicaid and the Children’s Health Insurance Program (CHIP) represent 21 percent of the federal budget. Social Security represents about 20 percent of the federal budget and interest payments represent about 8 percent of the federal budget. It is estimated that about 10,000 baby boomers will go on Medicare per day for the next twenty years. However, about 5000 seniors are dying per day. Each Medicare recipient costs about $10,500, so Medicare costs will expand by $185 billion dollars (today’s dollars) or another 5% of the federal budget. Roughly, the same calculation applies to social security. So Medicare and Social Security will consume approximately 50% of the U.S. federal budget by 2020. In addition, the interest payments are likely to consume around 30% of the U.S. federal budget. This means that 80% of the federal budget will be spoken for. This does not include any additional costs for Obama Care. It is unlikely that the federal budget as a percentage of the economy can grow, since the U.S. had to borrow one third of the federal budget in 2010.
Here are my predictions for the next decade based on this background. I provide an optimistic, most likely, and pessimistic scenarios. Note these scenarios are based on what I believe is most likely to occur, not what I believe is the best that could be done or the worst that could be done to the U.S. economy.
Predictions Common to all Scenarios
Properties rights of all kinds will continue to be weakened. It appears that you can get a PhD. in economics (or even win the Nobel Prize) without understanding even the most basic ideas of property rights and how they affect a free economy. Even so called free market economists forget that Reagan not only cut tax rates, he strengthened property rights. Particularly he strengthened patent rights – for more information click here. He also strengthened property rights by weakening regulations and weakening the power of unions. A number of so-called free market economists do not understand that property rights are based on productive activity. As a result, they have joined in an all attack on property rights for inventions – patents. For more information see Scarcity Does it Prove Intellectual Property is Unjustified.
There does not appear to be any meaningful ground swell against Sarbanes Oxley and the Financial Reform Bill. As a result, entrepreneurial companies will be starved for financial capital. Because it appears very unlikely we will strengthen property rights for inventions or property rights generally or strengthen our capital markets so they work for start-up companies, the most optimist scenario is limited to subpar growth.
The growth of the Internet will result in a continued decline in commercial real estate values under all scenarios. Commodity prices are likely to increase, inflation adjusted, under all circumstance. Growth in China and inflation will drive this increase in commodity prices.
This scenario assumes that the U.S. faces up to its budgetary problems, repeals Obama Care, and rationalizes it tax structure. This scenario assumes that Obama is not elected for a second term. Government spending will grow slightly as a percentage of GDP. Supply Side economists would probably consider this enough to create vigorous economic growth. However, it does nothing to really encourage investment in new technologies. As a result, real inflation adjusted GDP growth over the decade will probably be around 2%. Median household family income after taxes will be stagnant. This will be two decades during which median household income has not grown in the U.S. I believe that will be the first time in the history of the U.S. this has occurred.
The housing market is likely to be stagnant since family incomes will be stagnant. Inflation is likely to run 4-6%, but this will not be enough to cause appreciation in housing prices. In fact, inflation adjusted housing prices will likely decline.
The best economic opportunities will be in government related jobs or businesses. Commodity based business will also prosper. Technology entrepreneurs will be few and far between. Unemployment numbers will hover between 7-9% throughout the whole decade – this will be the new normal. The U.S. will no longer be the largest economy in the world and based on per capita income among large countries the U.S. may fall below the top ten in the world. The U.S. will also be one among many equals in technological and scientific leadership. All social ills will increase slowly including crime, number of welfare dependents, and black market transactions.
Most Likely Scenario
This scenario assumes that the U.S. will not face up to its budgetary problems and Obama Care will not be repealed completely. Under this scenario, the U.S. will go from financial crisis to financial crisis. Each financial crisis will be meet with a short term band-aid solutions. Federal government spending will grow to at least 30% of GDP and total government spending will be 50-60% of GDP. Inflation will grow to 10-14% by the end of the decade. Despite this, housing prices will not keep up with inflation. Median household family income after taxes will decline by 2-7%. Official GDP numbers will show slightly negative growth, but this will over state the actual growth rate.
The best economic opportunities will be in government related jobs or businesses. Commodity based business will also prosper. The financial differences between those who are in the government’s favor and those who are not will be huge. Technology entrepreneurs will be almost nonexistent. The brain drain from the U.S. will be apparent and a cause for anxiety. Unemployment numbers will hover between 9-15% throughout the whole decade. The U.S. will no longer be the largest economy in the world and based on per capita income among large countries the U.S. will fall well below the top ten in the world. The U.S. will also be a declining power in technology and science. All social ills will increase moderately including crime, number of welfare dependents, and black market transactions. The chance of a major war in the world will be moderate.
The U.S. will not face up to its budgetary issues even to get through a crisis. The U.S. will either literally default on its debt or inflation will be over 20% or both. Multiple states will go bankrupt and be bailed out by the federal government. Tax burdens will skyrocket as will the black market. Housing prices will decrease significantly except in extremely exclusively neighborhoods. Social order will collapse. The pretense that the U.S. is a nation of laws or that the Constitution has any meaning will be completely destroyed. There is a possibility (15%) that there will be a military coup. Alternatively or in combination there is a possibility that the U.S. will break up into a number of separate countries. Many parts of the U.S. will decide that it no longer makes sense to support Washington, Wall Street and parts of California that have become use to crony capitalism and government handouts. The brain drain from the U.S. will be well known and huge. This may be the driver for politicians and voters to demand real reform. China and India will dominate the world economy. Unfortunately, neither will likely fill the U.S.’s shoes and become a technological and scientific leader. Singapore will likely be the richest country in the world on a per capita basis by a large margin. They will be the major center of technological and scientific research. The chance of a major war in the world will be probably.
The best reason to be more optimistic is that the U.S. has never had two bad decades in a row. In the late 1930s and late 1970s there was no reason to suppose that the U.S. would right itself economically. We pulled out the 1930s because Roosevelt realized that he had to adopt pro-business policies if the U.S. was to have any chance of winning World War II and so did the voters. In the 70s, there was little hope that the U.S., let alone England, would pull out of the inflationary spiral, increase unionization, increased regulation, increasing government spending and entitlements. However, there was the glimmer of Ronald Reagan and a surge of free market economists such as Milton Friedman, who still understood property rights. Unfortunately, I do not see a Ronald Reagan on the horizon and many of today’s free market economists are overly focused on the detrimental effects of Federal Reserve and high marginal tax rates. Very few seem to understand the importance of strengthening property rights, particularly for inventions or the need to free up our capital markets from regulation. I hope I am wrong and there is a politician who understands property rights, particularly for inventions, and the need to free up our capital markets, while having the strength to stand up to government unions and special interests.
I cannot decide if we are seeing the collapse of Western Civilization under the weight of the welfare state (socialism) or if we are seeing the last hurrah of the welfare state.
 Ron Paul and Newt Gingrich have advocated eliminating SOX.
According to the NYtimes the House Financial Services Committee approved an amendment to Sarbanes Oxley (Sarbox) that would allow some companies to be exempt from this legislation. While the article implies that many companies would not be exempt under this amendment, the amendment only applies to companies worth less than $75 million and asks for a study of whether companies worth less than $250 million should be exempt.
Sarbanes Oxley has severely damaged the technology start-up market and the financial industry in the U.S. Sarbox is very expensive: including enormous direct and indirect costs to our economy and to innovation. It has not met its goals of improving the quality of auditing or preventing fraud. The effects of this law include fewer public companies, fewer companies going public, more companies choosing to go public in foreign markets, absurdly high auditing expenses and a significant decrease in risk capital.
For More information see Sarbanes Oxley – Is the Medicine Worse Than the Disease – 1 and Sarbanes Oxley – Is the Medicine Worse Than the Disease – 2 .
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