Ten years later, the empire is (still) fading

September 15, 2018

Lehman Brothers collapsed 10 years ago this weekend, sending stock markets into a tailspin, instantly becoming both an engine of misery and a symbol of the deepest rut since the Great Depression.

As the economic world dissects the tumult and triumphs since that record $600 billion bankruptcy, we’re asking big questions: Have we learned the lessons of too much risk? Is the four-fold stock market gain a healthy sign? Are we headed for another big bust?

And the biggest of all: What’s the state of the American empire? Happy news, it’s not collapsing or crumbling. The good-old greenback remains the safe-haven currency, as Timothy G. Cashman, senior investment strategist at Wells Fargo in Greenwich and Hartford, points out.

The bad news: The empire is fading, declining slowly. Lehman Brothers is just a small part of that picture.

The evidence is everywhere and not just since 2016, emanating from a president who’s undoing decades of American leadership in the world while imperiling the economy with a tax break that required huge new borrowing exactly as his own handpicked Fed chairman is trying to put on the brakes.

Signs of the decline — nowhere clearer than in Connecticut, the richest and arguably most dysfunctional state — fall into four categories: weak wages for hourly work despite strong overall income gains, almost all at the top; unsustainable debt and liabilities as tax collection can’t keep up; questionable economic competitiveness with flat productivity.

And most squishy, but perhaps most important, battered faith in the leadership of the nation, or here in Connecticut, leadership of the state. That’s a measure of a powerful society’s strength in and of itself but it also spells the direction of power.

“To some extent Connecticut is the canary in the coal mine of what’s going to happen in America,” said UConn economist Fred V. Carstensen, who head the Connecticut Center for Economic Analysis. “There’s no question that we’re building in some really dangerous levels of debt, we’re eroding our ability to deal with future crises and we’re not investing in ourselves.”

President Donald Trump is a symptom of the malaise, we can all agree, as former president Barack Obama said in a speech this month. In fact, Carstensen said, the United States has worked toward a manageable decrease in its share of the global economy for decades, trying to build up other countries in the American model.

But now Trump is botching the plan badly in lots of ways, through isolation, letting China take control of trade, for example, in ways a new president won’t be able to reverse. Worse, Carstensen said, “no country is going to trust us because now we have a horrible reputation….and that’s something that will outlive Trump.”

As the stock markets boom, income rises and unemployment falls, none of this is a clean picture — even in Connecticut, where we’re struggling with negative growth of more than 7 percent since the recession while the rest of the country grows modestly.

Here, the debate is not whether we’re bad off — we are, with somewhere between $40 billion and $60 billion in pension and debt liabilities that aren’t funded and state government shortfalls growing by $500 million a year. The issue is what’s causing the state’s woes. Mismanagement? Demographics as growth flocks to magnet cities? Or is it something deeper that speaks to the direction of a rich nation unable to pay all of its entitlements?

All three play a part. I’m in the “something deeper” camp, writing about the empire’s decline at least since the early years of the post-recession recovery, when national debt was climbing (not as fast as now, under Trump) and more important, incomes for middle class families were falling behind.

This past week’s Census report showing a 1.8 percent gain in buying power in 2017 for the middle of the middle class is better than flat, but it’s less than what we’d see at the peak of an economic cycle in the past. That mythical household in the precise middle of the scale is still behind where it was before the recession, before Lehman Brothers imploded under the weight of bad home mortgage debt.

Worse, even though household income is finally climbing back up — most strongly in the last years of the Obama administration — hourly wages have been even slower to show gains, although there are signs of progress there in the monthly Department of Labor reports.

As I said, this isn’t a clean fade and it’s certainly not a collapse, even in Connecticut. Still, there is something deeper than the long-term cycles happening as a rich empire makes too many promises and its leadership loses too much confidence.

We’re not just talking about promises to the poor and middle class, such as income supports, health care and retirement security. No, the top 1 percent has seen its share of income creep from just over 10 percent of the total to nearly 20 percent since 1970. I call that an entitlement. While it has advantages — these people do create companies and jobs — it’s now at the point of abuse, as it was just before the Great Depression.

Ben Harris, a visiting economics professor at Northwestern University’s Kellogg School of Management, isn’t in the America-is-fading camp. “I don’t think I’d put it that strongly,” he said, “but if 30 years from now we look back and say the U.S. economy had just been in decades and decades of slow growth, we would say that our massive indebtedness would play a huge role.”

The nation’s debt is now at 78 percent of total economic output and is projected to rise to 96 percent by 2028, said Harris, a former chief economist to then-Vice President Joe Biden. The Trump tax reform act of last December amounts to a shift in wealth from workers to business owners and from Americans to foreign business owners, Harris said, because of the structure of tax brackets over time.

Those business owners, will of course create jobs and perhaps pay higher wages, but Harris said, “I think that the debt story will outweigh the foreign investment story.”

Debt could easily grow to exceed 100 percent of gross domestic product, Harris said, putting the United States in mystery territory. “The best case scenario is that our interest rates shoot up.”

And the worst? A calamity made all the worse still by the nation’s failure to let in more immigrants. That’s partly what happened in ancient Rome, along with entitlements gone amok and loss of confidence in leadership. “The Romans were always successful when they integrated a new group, and always facing destruction and ruin when they tried to resist bringing new people in,” podcaster and Rome historian Mike Duncan said in Smithsonian.com last year.

The debate will rage on, with us either as frogs in a boiling pot or deer in a forest, not seeing encroachment. Harris says we have too much going for us in the form of innovation to decline precipitously, while Carstensen shows that public investment in research and education is way down, as the number of Americans able to fill technical jobs lags.

“We’re still the No. 1 economy in the world and we’re still the No. 1 currency,” said Cashman, the Wells Fargo strategist.

And Connecticut is still the richest state — for now.

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