The American Disease

So Wonks Anonymous had a major slip last night and spent over an hour watching a video of a Princeton symposium about the current financial crisis. Which video can be found on Paul Krugman's blog although Wonks Anonymous would not advise viewing unless you are a real wonk or have serious co-wonkishness issues. This is the hard stuff.

One of the presenters in the video made an almost tangential remark that set Wonks Anonymous little mind to work. It seems that over the past decades the United States has experienced unprecedented growth of the financial sector. More and more resources have been devoted to packaging and selling loans and other debt instruments.

Now, back when Wonks Anonymous was learning and teaching International Economics, the Dutch Disease was a favorite example in trade and development economics. It seems that with the discovery of North Sea oil the Netherlands came into a rather large windfall, which windfall had rather paradoxical results. Oil made the Dutch rich but it also shrank their manufacturing and other industries. Resources were drawn away from most other industries to oil because they brought higher returns there. Why make Gouda when you can pump black gold?

This would also explain why Kuwait and Saudi Arabia are not industrial powerhouses despite their great wealth.

It seems to Wonks Anonymous that over the past decades - probably starting with the Reagan deficits in the 1980's - the United States discovered that it was sitting on a vast pool of unexploited credit. We could use our credit to make and sell IOUs on the world market. It was cheaper to borrow money and buy goods than to make them. We had no need to educate our own population when we could borrow money and buy PhDs, MDs, and RNs from the rest of the world. Why we didn't even have to staff call centers when so many people in South Asia had such perfect English.

And despite fervid and continuous preaching on the evils of debt, despite several major changes in tax policy that were designed to increase returns on savings, we have continued to borrow. The financial sector, which packages and markets this debt, has expanded while the rest of the economy has languished. Why produce stuff when you can borrow? This is a special variant of the Dutch Disease. I call it The American Disease.

Wonks Anonymous believes that we have drained our last pools of credit in this last crisis. While we think of the bailout we should also consider how we will address this long term problem.


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