The Comeback Read online

  But Americans are not stupid, and when presented with the facts, we can deal with them.

  The fact of the decline is unmistakable. It stems from our choking debt and is exacerbated by government actions making the situation worse. The sub-prime mortgage debacle of 2008 was our clarion call.

  I am as responsible as anyone. I knew about it. I certainly could have done more. I warned about it in our association magazine; I spoke about it when I gave speeches. In a 2007 meeting, I urged a Federal Trade Commissioner to focus on sub-prime mortgages when he summoned me to his office, concerned that Americans did not fully understand the transition to digital television.

  Indeed, in 2007 and 2008, when consumer group and government leaders were concerned about the transition to digital television, I was consistent in raising the issue. I would say—even as head of the world’s largest consumer electronics trade association—that losing television service for a few days is of minor importance compared to the fact that millions of Americans would lose their homes because they did not understand the mortgage documents they had signed.

  In retrospect, I should have shouted louder. After all, what is more important to the innovation industry than the overall health of the U.S. economy? Or, more crassly, we sell fewer new products and services to nations with struggling economies. And years later, our economy is still struggling from the impact of the sub-prime crisis. In retrospect, what issue was more important than the harsh impact of sub-prime mortgages on the U.S. economy?

  I still keep wondering why I have heard not one person in any position of responsibility actually take responsibility. How is it that we faced an easily foreseeable crisis and no one is responsible? What about the executives who headed the mortgage lenders like Countrywide and Washington Mutual? Other than some minor civil fines, they are living nicely thanks to their ill-gotten gains. What about the political leaders who rejected Bush Administration pleas to reform the promiscuous lending entities? Some are still ensconced in Congress and congratulating themselves for passing the 2010 financial “reform” legislation.

  What about the Clinton and Bush Administration regulators who did not do their jobs and review these schemes for fraud and ascertain that mortgage applications were being checked and verified? What of the consumer groups advocating for housing ownership by the poor and greater equality of income? They are still encouraging laws that put lower-class Americans in a precarious financial position.

  What of the bond-rating agencies who packaged the sub-prime mortgages and rated them safe? Author Michael Lewis in The Big Short describes how these agencies relied on borrower credit scores and cleverly included lending to recent immigrants (with no bad credit history and thus high scores) to give high average scores and thus high ratings to sub-prime notes. Yet these agencies and their executives continue to prosper.

  What of the investigative journalists who missed this obvious story?

  Housing mortgages don’t have much to do with innovation. But the story from beginning to end, when it ends, revealed that our government is wildly ill-suited to manage our economy. Our government’s response to the sub-prime mortgage disaster underscores a blinding incompetence that is hard to fathom. The response was but the latest in a multitude of foolish mistakes that have crippled America’s number one brand: innovation. That Chinese Communist was correct. And unless we accept that, we will never return to our once-unconquerable heights.

  My dream is to return to China in ten years and meet with him again. Behind me, I want a strong U.S. economy, building markets and expanding humanity’s technological progress. I want him to envy America, rather than look down his nose at us. I want to return to that Chinese man and extend my thumb, pointing upward.

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  America’s Decline

  A TALE OF TWO CITIES

  Almost every week, I experience a tale of two cities as I travel from Washington, D.C., to Detroit to see my wife and toddler son. For Washington, it is the best of times. Today’s U.S. Department of Labor numbers show that the Washington area’s 6.4 percent unemployment is the lowest of any large area in the nation. Washington area home prices are up 9 percent.1

  The Washington economy is supercharged by the inflow of new federal government spending and the legal and lobbying business generated by the government proposing and issuing new federal laws and regulations. Even the quiet missions of Washington trade associations are growing as the government rushes to legislate and regulate. Americans outside Washington are paying ever more to Washington-based experts to explain massive 2,000-page bills as well as multitudes of proposed rules.

  More than 10,000 lobbyists are formally registered to lobby the federal government. Interest groups, including unions, businesses, and the AARP, reported spending $3.5 billion in 2009 to influence the federal government, and likely even more was spent in 2010.

  American Bar Association statistics reveal that the number of “active, resident” lawyers in Washington, D.C., jumped from 46,689 in 2008 to 48,456 in 2009. This increase is the second highest in the nation, with only New York adding more lawyers. Washington, D.C. now has one lawyer for every twelve D.C. residents. This is more than ten times the rate of the next most-lawyered state, New York, which has one lawyer for every 127 citizens.

  Why the large number and growth in lawyers and lobbyists? The Obama Administration and Congress have been legislating and regulating to a degree unparalleled in our lives. This fuels the Washington metropolitan area economy, making it the nation’s wealthiest area by almost every definition, even as the rest of the national economy struggles. And the Washington boom will continue as the federal government hires thousands of new employees to implement the mandates of the health-care and financial reform bills as well as many little-noticed new bills.

  Forbes.com reports that six of the ten wealthiest counties in the nation surround Washington, D.C. Washington, that most unique of American cities, is ever growing, ever expanding.2 It does not know recessions because it does not produce anything consumers can reject. You must purchase what Washington is selling. You pay for your required purchases with taxes, which feed Washington more than any other city in the country.

  Indeed, it is the best of times for our nation’s capital.

  For Detroit, it is the worst of times and has been for some time. Over the last fifty years, the city has lost more than half its population. Despite an influx of Washington stimulus cash, the 2010 Census shows that Detroit is still bleeding residents, losing over 1,700 people in 2009, second only to Cleveland.3 As they say, people vote with their feet, and the flight from Detroit mirrors a larger national trend, with states like Michigan, New York, and Illinois suffering net population losses over the past ten years. People go where there’s opportunity, and there simply isn’t any in Detroit.

  What a difference a couple of decades make. In my lifetime, albeit when I was young, Detroit represented the epitome of the American Dream. It was a destination city for entrepreneurs, innovators, executives, blue-collar workers, and thousands of poor African Americans fleeing the bigotry of the Jim Crow South. Now, the children of those dream-seekers can’t wait to leave.

  As I leave the Detroit airport to see my family, the anecdotal evidence bears this out. The unprecedented number of “for sale” signs, abandoned buildings, and empty lots tell the story of Detroit’s vast decline. ABC News reported that, in March 2010, more than 33,000 Detroit homes were believed to be vacant.4

  Meanwhile, the economic numbers reveal a city struggling with high unemployment and a flaccid business environment. In the summer of 2010, Detroit’s unemployment rate was over 20 percent, twice as high as the national average. And even before the current economic downturn, Detroit led major metropolitan areas in unemployment trauma. Between 2000 and the first quarter of 2010, Detroit lost over 270,000 jobs, making it the worst out of 363 job markets measured by the U.S. Conference of Mayors.

  Of course, Detroit’s decline is tied to the absolute and relative decline of the Bi
g Three auto manufacturers, which remain the city’s largest employers. Fifty years ago, these distinctly American companies were the Dells, Microsofts, and Apples of the American economy. Although the United States didn’t invent the automobile, this country made it its own—indeed, never in the history of mankind had such an advanced technological achievement been available to so many. The American car in the middle of the twentieth century was what the personal computer would be at the end: one in every home.

  And although the car is very much still with us, Detroit’s day is, as I look out the window, all but over. It survives only by the largesse of that other city I call home: Washington. The relative opulence of Washington compared to the distress of Detroit epitomizes a challenged nation. With apologies to Dickens, this tale of two cities is the story of the expansion of the public sector and the decay of the private sector. It is the story of how the public sector, ever growing, feeds on the wealth generated by the private sector. It is the story of how a once great American industry now must beg, hat in hand, at the table of Washington.

  And it’s a tale I see all over the country, not just on my weekly trips back and forth between Detroit and Washington. Detroit, once the most innovative city in the country, is dying, and America’s innovative spirit is dying with it. In its place are the lawyers and lobbyists of Washington, who spend their work days trying to get the largest share of the Washington handout of taxpayers’ money.

  It’s the story of the decline of America.

  THE FAILURE OF A GENERATION

  My parents’ generation worked hard to give my generation, the so-called Baby Boomers, a better world. They worked hard so we could be educated. They endured depressions and fought wars to give us a better future. They sacrificed so we would have a better life. They died knowing they gave it their all, did the right thing, and succeeded.

  Sadly, my generation will not pass on with the comforting thought that we have done our children well. We are the first American generation that has failed to sacrifice for the next generation. Instead, we have stolen from them. We have lived for today. Every jobs bill, unemployment payments extension, corporate bailout, subsidy of state liabilities, and stimulus package; every increase in public pensions, Medicare, Social Security, and prescription drug and health-care coverage is a new debt we pile on our children. These benefits, which we bestow on ourselves, lift us briefly. But they massively burden our children and their children.

  And with each heralded calamity, we focus on how to spend more money that we don’t have rather than on the opportunity to make tough choices and solve long-term problems. Instead, the crisis is an opportunity for a politician to fund his favorite spending program or for Congress to build another layer of bureaucracy. We can summarize this attitude of ours with the words from President Obama’s first White House Chief of Staff, Rahm Emanuel: “Never let a crisis go to waste.”

  Which is why our children will be the first generation of Americans to inherit a more difficult life. While they will be enriched by technology, they will be poorer by other, more important measures. They will inherit a nation with more debt, less wealth, and greater challenges. More, they may not be equipped to deal with the intense competitiveness of a global economy.

  We are already seeing burdens we put on our children and grandchildren. Spending and pension obligations at the municipal level are forcing cities to cut somewhere, and so we see austerity measures like “Furlough Fridays” for students and teachers, reduced foreign language and music courses, and larger classrooms with fewer instructors. These cuts are a transfer of wealth from the young to the old. We are now cannibalizing our children’s education to pay for our retirement. This is intergenerational theft. We are greedy geezers.

  Our generation is but a link in the chain of generations. But now we are the weakest link. We have blithely assumed that our nation, which has been great, will continue to be great without our making it so. That is the curse of success: We assume prosperity is just something that happens, not something you work for. We had better start working, or history will record us as the generation that destroyed our children’s future.

  Right now, the future looks pretty bleak. As I survey the economic, political, and social elements of America at the moment, I don’t see a society prepared to face a more competitive, more interconnected global future. The United States is drowning in debt, its political leaders are focused on false solutions, and we are failing to prepare our next generation to confront tomorrow’s challenges.

  In short, we are deliberately pushing our nation into a decline. But before we can talk about arresting that decline, we have to properly and honestly assess the severity of our problems. And those problems begin with our economy.

  BEWARE THE GREEKS

  For decades now, the United States, supported by a stable political system and a growing private sector, has been able to avoid economic realities. Policies and habits that would undo a lesser country are standard operating procedure in the United States, precisely because our underlying economic and political foundations have been sound. But the party is ending.

  Although Greece’s output is just over 2 percent of the European Union economy, its financial collapse in the first half of 2010 roiled continental markets and required an international bailout. Imagine what would happen to U.S. markets if California, which is 13 percent of the national economy, experienced a Greek-style implosion.

  A study by a group at Stanford University pegs California’s unfunded pension liabilities at $500 billion. But that only includes California’s own state debt. When you factor in California’s 13 percent stake in the U.S. economy, which is saddled with $13 trillion in debt, the state’s total debt liability is over $2 trillion.

  In many ways, California as a state has bigger problems than Greece as a country. The unemployment rate in California is higher than that of Greece. Much has been made of the ability of Greek government workers to retire at the age of fifty-three. In California, government workers can retire at fifty-five. As defeated gubernatorial candidate Meg Whitman noted during her campaign, the amount California spends on its pension programs has increased by 2,000 percent in the last decade to over $7 billion annually.5 More, while California lost over one million private sector jobs since 2007, California’s public employment has remained flat.6

  In fact, if California were an independent nation, it probably would have suffered Greece’s fate a long time ago. The only thing keeping California—and Michigan, and Illinois, and New York— afloat is the resiliency of the U.S. economy, which is the best long-term bet in the world.

  Or at least it used to be.

  According to White House estimates, our total federal government debt will be $20.3 trillion by 2020.7 But this doesn’t factor in the unfunded liabilities associated with Medicare and Social Security. Also, this burden assumes no further crises, wars, or bailouts of state and local governments over the next ten years—not exactly realistic assumptions. This 2020 debt amount—$20.3 trillion—is if nothing changes at all. And the interest alone on $20.5 trillion, roughly $500 billion per year, would swallow about a third of today’s entire federal budget. The Congressional Budget Office (CBO) says that if we keep on this path, we will raise the federal debt to 90 percent of the nation’s economic output by 2020.

  How Will Our Huge Annual String of Deficits and Growing Total Debt Affect us?

  Well, take your pick. There’s the example of Japan, which suffered in the 1990s from what was known as the “lost decade.” Following a real estate crunch in the early part of the decade, Japan responded with massive stimulus packages to boost economic growth. To offset the rising deficits these spending packages created, Japan had to raise taxes, which destroyed the fragile recovery and ensured that the crisis continued for several more years.

  Or we could follow the scenario of present-day Greece. As our federal deficits continue to grow unchecked, the international community will eventually lose confidence in the U.S. government as a good
investment. Our debt rating will go down, our interest expense will increase, the federal government will impose austerity, and government workers will revolt.

  As quickly as Greece collapsed, the United States could find itself a second-rate economic power. The dollar’s replacement as the world’s reserve currency would be the least of our problems. Rebuilding America’s credit would take precedence over any other domestic priority, which would require taxes at least twice as high as they are now. In short, the private sector would exist to rebuild the public sector—at least, much more than it already does. America’s economic engine would sputter for decades.

  Or more immediately, we will see states and local governments facing a condition equivalent to bankruptcy. These governments survived 2009 and 2010 thanks to receiving one-third of the $787 billion stimulus package, courtesy of the U.S. taxpayer, plus another late 2010 bailout from Congress in the form of Medicaid and unemployment insurance assistance. Predictably this has allowed the worst offenders—California, New York, and Illinois— to delay addressing their structural problems of bloated state payrolls and huge pension obligations and they still look to Uncle Sam. California’s 2011 budget simply assumes an additional $5 billion gift from Congress. The Ponzi scheme can’t continue, and it won’t continue.

  Whether we’re talking about federal or state obligations, those debts must be paid—or, more realistically, the federal and state governments must at least put forth a good-faith effort to control our debts and begin to live within their means. We have seen what happens when those debts are called in: Beware the Greeks.

  DEMOCRATS CAN’T ADD; REPUBLICANS CAN’T SUBTRACT

  But are our political leaders honest (and mature) enough to address our economic and budgetary problems in a forthright and realistic way? Are they prepared to do what my parents’ generation did and accept that sacrifice is required?