Ann Elk: Where? Oh, what is my theory? This is it. My theory that belongs to me is as follows. This is how it goes. The next thing I’m going to say is my theory. Ready?

TV Interviewer: Yes.

Ann Elk: … This theory goes as follows and begins now. All brontosauruses are thin at one end; much, much thicker in the middle; and then thin again at the far end.

(From Monty Python’s Flying Circus)

I too have a theory, which is to say it is a theory and it is mine. I hope it’s a bit less silly than Ann Elk’s theory, but in any case let’s try it on. The next thing I’m going to say is actually not my theory, but another theory, which is someone else’s and got me to thinking about my theory.

This other theory is something called Dutch Disease, which is an economic diagnosis of the Netherlands’s loss of competitiveness in goods producing industry following a 1959 discovery of natural gas off its North Sea coast. In the simplest terms, this leads to inflows of investment, which pump up the exchange rate and alters terms of trade in such a way that exports become uncompetitive. In this perverse fashion, a lucky strike in natural resources creates not employment and growth but unemployment and stagnation.

America, my theory states, has a version of that, only the natural resource is money. I want to name the problem “American Disease” but I read in an article by Bryan Caplan (http://bit.ly/tkDRJ) that that’s the name of a syndrome of Americans living beyond their means. Actually the problem I pose is closely related, just as H1N1 influenza is closely related to other strains of the flu. Perhaps I can say “2009 American Disease” to differentiate it from old established strains, or should I call it “California Disease” to reflect the fact that the disease has advanced furthest in the Golden State?

America is a country with real natural resources, of course, but the high costs of extraction and environmental compliance and restrictions on land use places them increasingly out of reach. In the days when the country did produce resources and processed them into manufactured goods which foreigners bought, the U.S. generated a vast amount of wealth, much of which was invested in buildings and infrastructure and so remains visible in the present day as a reminder our peak of economic power.

(Exactly the same is true of Argentina, by the way, which was the wealthiest country in the world 100 years ago and still has the buildings and boulevards to prove it, even though Mr. Juan Peron and the generals set the country on an unusual course from first world to third world status.)

Now, even after the financial crisis, America’s most important industry is finance, broadly defined. The financial industry differs from the auto industry and the chemicals industry in one interesting respect. The auto industry inputs steel and plastic and outputs autos, the chemicals industry inputs primary and intermediate materials and outputs finished chemical products – in other words, they work on raw materials and change them into something else. Most industries do this. But the finance industry has money both as input and output – it changes money’s form but not its nature in its processes. Money is both the input and the output, the resource base and the finished product.

The American finance industry is competitive, one of the nation’s success stories in terms of services exports. Our political class, which increasingly impedes us from taking coal out of our mountains, irrigating our farmlands, and manufacturing products with processes that are not squeaky clean, has long promoted clean, non-polluting financial services, and it has prospered as the industry prospered.

However, I believe that too much money in an economy based on financial services has given us a condition akin to Dutch Disease. It could probably be shown that the maintenance of the U.S. as a financial center has made the American dollar stronger than it would otherwise have been, reducing our competitiveness in global markets. Moreover, the high level of compensation in the financial industry and supporting services has probably driven up wages and benefits throughout the U.S. labor economy, another blow to the competitiveness of any entrepreneur who wants to defy the odds and manufacture a product for our own use.

While the American political class stands in the way of development of (real) natural resources and domestic manufacturing, it does see the residual financial wealth of the nation as a resource that it can cut and drill and strip mine – endlessly, in fact, as it recognizes no restraint on the size of resource, but treats it as infinite. The people entrusted to run the country reckon without the necessary diminution of the resource as taxes, penalties, and compliance costs leave less and less to reinvest, even as the potential returns on investment are inevitably being reduced. Their static models fail to capture the fact that producers will not produce – or innovate, or hire – out of sheer altruism even as the returns on their capital and labor are stolen.

The impoverishment of the United States by the Argentine model is thus well under way.

Oh, and why do I say California has the most advanced case of the “2009 American Disease?” Well, just look at the Golden State. There is oil offshore, but its development is not permitted. Manufacturing is being driven out. And the Central Valley is experiencing 40% unemployment in agriculture in order to mudfish habitat; but the fiscal position continues to deteriorate as California’s political class absolutely will not live within the means of the state’s reduced circumstances.

As California is the United States only more so, California’s political class is America’s in microcosm, with all its pathologies subjected to magnification. It puts me in mind of the passage from Atlas Shrugged:

As they proclaim that the only requirement for running a factory is the ability to turn the cranks of the machines, and blank out the question of who created the factory—so they proclaim that there are no entities, that nothing exists but motion, and blank out the fact that motion presupposes the thing which moves, that without the concept of entity, there can be no such concept as ‘motion.’ As they proclaim their right to consume the unearned, and blank out the question of who’s to produce it—so they proclaim that there is no law of identity, that nothing exists but change, and blank out the fact that change presupposes the concepts of what changes, from what and to what, that, without the law of identity no such concept as ‘change’ is possible. As they rob an industrialist while denying his value, so they seek to seize power over all of existence while denying that existence exists.

Join the forum discussion on this post - (1) Posts