I do not remember a time when there was such a complete disagreement on the likely economic future of the United States as there is now. Given the importance that the US still has for Israel, who is right is a matter of great significance.
One school of thought says that the crushing burden of debt is so great and the income gap among classes of the population is so wide that an economic apocalypse as bad as or worse than the Great Depression of the 1930's is inevitable.
The other school of thought says that, on the contrary, although the negative factors are not insignificant, new productive technologies such as 3-D manufacturing and advanced robotization, coupled with the revolutionary change in the availability and cost of fossil energy, will ensure an economic boom of historic proportions, signifying nothing less than a third industrial revolution, with all that implies.
There can be no doubt that both sides of the debate have excellent ammunition to support their forecasts. The debt-to-GDP ratio is indeed the highest it has been since World War II, and it is spread across all sectors: government, business and public. Concentration of wealth in the form of ownership of productive capital is certainly huge and widening. The gap between the top 10% and everyone else, as well as the extremely high percentage of the population dependent in whole or in part on government transfer payments, are truly frightening social phenomena.
There can equally be no doubt that a new industrial revolution is underway which will revolutionize the industrial process, rendering it more rapid, more environmentally friendly and more productive in traditional output per man-hour terms. As for energy, the situation is simply astonishing. Not only is the US already self-sufficient in natural gas for the first time in decades, with prices plummeting, but it also has rapidly increasing oil production, and will soon surpass Saudi Arabia and Russia as the world's largest producer. It is already no longer the world's largest consumer of crude oil, a position now held by China. Again, technology is the key, trumping for the time being at least wrong-headed governmental regulatory policies.
So who is right? I submit that there is a third alternative, more likely in my opinion than either of the other two. What is the major difference between now and the run-up to the Great Depression? In the 1920's the US was a rising power, having single-handedly decided the outcome of World War I; there were many new and startling technologies in such vital sectors as transportation and communications, there was plenty of oil and gas and prices were low. Income disparities were not as great as now, and there was little unemployment in contrast to the current situation. Yet the pyramid of debt which crumbled in 1929, followed by the Smoot-Hawley tariff of 1930 and the banking crisis of 1931, created a panorama of economic and social disaster unparalleled in US and world history.
What is the major difference between then and now? I submit it is that at that time liquidity, not solvency, was in short supply; unlike the present, when the situation is the opposite, with oceans of liquidity sloshing around the economy. Where do we find a parallel in recent history to the present-day in the US? In Japan post-1990's. In other words, I believe that the most likely outcome of the clashing conditions we see today is neither economic/social Armageddon nor an historic period of boom, but a prolonged period of economic stagnation, held in place by continuing injections of liquidity by the Federal Reserve.
Japan has plenty of problems and the world's highest debt-to-GDP ratio by far, but it has not collapsed as an economy or a society. It is simply not going anywhere significant. Can it be that the world's largest economy will go the way what used to be the world's second-largest economy has gone? What would that mean for Israel? Stay tuned.
Norman A. Bailey, Ph.D., is Adjunct Professor of Economic Statecraft at The Institute of World Politics, Washington, DC, and a researcher at the Center for National Security Studies, University of Haifa.
Published by Globes [online], Israel business news - www.globes-online.com - on October 16, 2013
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