The author of the bestseller The Zero Sum Society now tells us what we must do to remain a world-class economy at a time when other countries have outpaced us in growth, productivity and entrepreneurship....
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Zero-Sum Solution Reviews
Written by a liberal political economist this book explicitly sets out to outline "what Democrats have to do to regain their competitiveness politically." His underlying philosophy is that "Market principles and forces have to be used, but "leaving it to the market" is a recipe for failure. A modern economist would argue that economic policy which relies on neo-classical perfect markets - as is espoused by American Republicans and Australian Liberals - and ignores known causes of market failure and externalities is a recipe for failure.Thurow’s central thesis is that America faces a set of structural problems, including the low long-run trend rate of growth of productivity, whose solutions required that significant economic losses be distributed to politically powerful interest groups. A central tenet is that "nothing is more important than restoring American productivity growth, yet nothing is being done to do so." While this book was written 30 years ago about the 1980s, it is an indictment on how short a distance we’ve come that these same themes, amplified, dominate political debate in America and Australia in the mid 2010s.On the US budget problem his conclusion is as relevant now as it was then: "There are no solutions that lie within the bounds of current political feasibility" which remains the case while "most social welfare spending" is for the middle-class and not the disadvantaged. The baby-boom generation was undertaxed, and borrowed to pay themselves too many benefits. Thurow warned at the time that "the American economy is in a very literal sense running on borrowed money". Americans, then and now, were borrowing from abroad to enjoy a standard of living that cannot be sustained. In the 1980s the US had liquidated seventy years of asset accumulation in just two years when debt reached $94 billion. It has since grown to $18 trillion - 5000 years of asset accumulation at the rate of the 60s and 70s. Thurow also notes the challenges of US foreign debt in 1986 of $100 billion: in 2015 US foreign debt has grown to $6000 billion as part of a total debt of $18,000 billion.Thurow’s view on taxes v expenditure cuts also remains relevant (in both the US and Australia): "economically the United States will have to raise taxes significantly, since it is not possible to eliminate the deficit with budget cuts", but rues, correctly with the benefit of hindsight, that "nothing will be done without the impetus of a crisis".His comments on the consequences of income inequality have become even more relevant as, thirty years later, the top 20% earn 7% points more income while the bottom 60% earn 7% points less . His caution that "there are few examples of democratic societies that have managed to survive while tolerating extreme disparities in income and wealth" should be heeded by more politicians, and voters.He also reiterates what others have argued but what the US is yet to understand: tax deductibility for mortgage payments results in overinvestment in housing at the cost of more productive investment and was at the core of the financial crisis and the low savings rates. Thurow’s conclusion that America needs to twist from a tight monetary and loose fiscal policy to an easy money and tight fiscal policy is accurate: "However right a vigorous Keynesian recovery is in the short run it is not the right long-run solution." This ‘twist’ is the de facto policy being followed now in the US and Australia, but the politicians often ignore Thurow’s axiom that "a perception of equity is central if sacrifices are to be imposed in a democracy". This is something more politicians, in the US and Australia, should heed.The weakest areas of Thurow’s arguments are also the most important: his prescriptions on what needs to change. A number of Thurow’s arguments were weak at the time, which has been proven with hindsight. Thurow commends the Democrats introduction of Social Security as part of Roosevelt’s New Deal for lifting people out of poverty, but ignores that the US system, unlike Australia’s, effectively remains unfunded. In advocating stronger more interventionist government industry policy Thurow concludes that "the people who build the hardware are going to dominate the software" - failing to see the commodisation of IT hardware, and the value that first Microsoft and Apple, then Google and Facebook, have built from software and social networks. Thurow also is trapped in a nationalist view of trade policy, railing against globalisation and seeming to not understand, or at least accept, the benefits of international trade. In his discussion on reigniting productivity growth, Thurow understates the effect of: (a) migration of activity from manufacturing to services (with its adverse impact on average productivity growth); (b) of changes in quality and safety in the goods produced now v previously; or (c) of the adverse impact on productivity of capital investment (with adverse impact on short-term productivity growth). On employment Thurow sounds naïve when arguing that "it is possible to create a full-employment society without business cycles where the distribution of earning is significantly narrower than it is now", and when arguing for corporations to become partnerships with partial employee ownership and bonus systems based on average incomes. This is simply not supported, by Thurow or others, by any empirical evidence, let alone practicable to implement. Government stockpiling of commodities is a flawed strategy. Thurow’s prescriptions on increasing savings rates seem to ignore the role of shadow banking and those on retirement accounts are simply bizarre. These eccentric solutions undermine and distract from the important public and economic policy points that Thurow makes.If you agree with Thurow’s reasoning, then, with the US dollar reaching fresh highs in 2015, investors should recall Thurow’s warning that the dollar will fall and it will be rapid once it begins. Thurow concludes that Americans would "rally around the effort" to build a new economy. Thurow’s optimism was misplaced 30 years ago and contrasts with Krugman’s pessimism today that the US has the capacity to change. There are no signs that in 2015, America is any closer to recognising it has a debt problem, let alone identifying a pathway to a balanced budget or debt repayment.If Thurow’s warning was sobering in the 1980s it should be a clarion call now for Americans: "Eventually lenders quit lending, and when this happens painful changes in lifestyle are forced upon the borrower." "At some point the rest of the world will decide that it has lent America enough…and the lending will stop".For its articulation of the challenges, but not for its prescription of solutions, this book remains as relevant now as it was in the 1980s and is crying out for a publisher to release an updated version for the 2010s.