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The Real Threats to the Economy of the USA

Sam Vaknin, Ph.D. - 4/26/2005

The outcry about offshoring (outsourcing - the relocation of domestic jobs to more efficient and cheaper suppliers abroad) is politically motivated. Outsourcing affects the vocal, politically active, emblematic, and well-connected hi-tech industry in a year of presidential elections. No wonder it has become a campaign issue.

But outsourcing is far from being a real threat to America's economic well-being and prospects. As technologies mature, outsourcing is both inevitable and welcome. It encourages the optimal allocation of economic resources, frees up capital and labor for more productive uses, and, in the medium to long run, generates more jobs than it eliminates.

The largest economy in the world is faced with other, structural, more daunting dangers, though.

1. Huge costs are imposed on the American economy by the global geopolitical realignment following the Cold War and its manifestations - ubiquitous instability, ethnic and national tensions, and terrorism. Military budgets soar and the private sector is crowded out of the credit markets.

2. The ageing of the population in the United States portends a crisis of mammoth proportions in the pension and social security systems. The shrinking of the productive age group is not fully compensated for by immigration.

3. The decline of American science and technology requires the importation of brainpower from other countries. This process - of net brain absorption - is about to reverse and become net brain drain as American scientists flee restrictions in the free flow of scientific information and religious constraints on research (e.g., on stem cell studies).

4. The rise in religious sentiment, the "esoteric sciences", and sheer superstitions carries an economic price tag. As economic decisions - for instance: the allocation of funding for research and the arts, foreign aid, the workings of the Internet - become less rational the allocation of scarce economic resources is rendered more wasteful.

5. The shift from productive economic activities to speculative and derivative pursuits (i.e., trading in financial instruments) transformed the United States into a "paper economy", both literally and figuratively. Consequently, as it increasingly opens up to international trade, it imports more than it exports (generating unsustainable trade deficits). The resultant excess capacity (slack) prevents rapid and energetic recoveries from slumps and recessions.

6. American fiscal and personal profligacy buried the United States and its denizens under a mountain of debt. America has a monopoly on printing US dollars and these have become its main export. A global shift in the composition of international reserves (e.g., the emergence of the euro as a reserve currency) threatens America's ability to erode its debt through inflation. The increasing ubiquity and intrusiveness of government - both Federal and in the various states - adds to the economy's underlying inefficiency.