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History and Origins

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With Timothy Monaco, University of Pennsylvania

At the dawn of the twenty-first century, the general prospects of the American economy appear to be quite bright. The U.S. experienced one of the longest peace time expansions ever between 1992 and 2001. The last few years of the decade were particularly good ones characterized by low rates of unemployment and inflation, and high rates of growth in productivity and Gross Domestic Product (GDP).

Despite concerns attendant on the moderate recession of 2001-2002, the improved performance of the U.S. economy during the last few years of the American Century, especially as compared to other industrial societies, led to the proliferation of optimistic pronouncements about its long-term potential. This optimism still dominates discussions of the long term prospects. Much of this optimism is based on the emergence of a so-called “New Economy” which has resulted from the long overdue utilization of high technology products such as computers and the internet by America’s businesses. According to this view, the U.S. economy is finally reaping the benefits of a sustained period of investment in and development of high technology products.

Proponents of the New Economy argue that technology is fundamentally transforming the U.S. economy into a significantly more productive one that will result in the establishment of higher rates of productivity and growth over the long-term. We are skeptical about claims that these new technologies are the long-term panacea to America’s economic performance. We note that many of the “dotcom” firms that were bandied about as a revolutionary development in American business as recently as 1999 collapsed in 2000 along with the Nasdaq index. The firms were not profitable, and investment was chilled by the belated realization of that fact.

We believe that the proponents of the New Economy are exhibiting their own form of irrational exuberance about the impact of new technologies on the American workplace. As Northwestern University economist Robert Gordon has convincingly argued, the New Economy has been falsely compared to the Second Industrial Revolution (1860-1900). In that revolution, clusters of great inventions including the electric light and the electric motor truly transformed the American economy and society, and led to sustained improvements in productivity and economic growth in the U.S.

On the other hand several fundamental changes in American society will limit the extent and duration of its elevated economic performance. The underpinnings of the U.S. political economy were fundamentally altered during the last third of the twentieth century in a way that will make the lower rates of growth and productivity of the period from the mid 1960s to the mid 1990s the standard in the twenty-first century. We argue that two permanent changes are responsible for this lowered performance, and we believe that they will continue to exert a powerful negative influence on its performance in the twenty-first century.

The first negative influence is the depletion of America's cultural capital which reached critical mass in the mid 1960s. Changes in the fabric of American culture and society are made clear by the shift in focus from family and civil society to the individual. The triumph of what the senior author has called "expressive individualism" has been manifested in the high divorce rate, the explosion of children born out-of-wedlock, and the concomitant increase in the number of single parent families which are largely headed by women. The resulting "feminization" of poverty and the destruction of stable family life act as a powerful brake on the development and growth of a productive people as time and energy are shifted to unproductive enterprises. While there has been some improvement in indices of social health, there are few signs that a permanent shift is in the making.

The second major negative influence on performance of the U.S. economy has been the increasing role that the government has assumed beginning with the New Deal policies in the 1930s. This expansion was solidified with the national war effort in the 1940s, and then the vast expansion made possible by the Great Society beginning in the mid 1960s. This has been manifested not only in the growth of federal government spending and taxation, but also in the increasing intrusion of government into virtually every aspect of American life and business. This expansion and intrusion of the Government into the lives and businesses of America, "collectivist liberalism," represents a serious threat to the traditional entrepreneurial spirit that many have identified as separating superior U.S. economic performance from its competitors. It should not be surprising that the growth and intrusion of government has gone hand-in-hand with the collapse of America’s cultural capital.

The reaction to the terrorist attacks on the World Trade Center in America’s financial and cultural capital on September 11, 2001 indicates that the increasing intrusion of the government will continue unabated. This traumatic event has already had a significant impact on the growth of the U.S. government as Washington reacted to it by creating yet another large bureaucracy in the form of the Department of Homeland Security. The threat posed by international terrorists and other recent legislation will interfere with the smooth functioning of business activities in America. The Patriot Act of 2001, for example, will increase the costs associated with academic research and slow the flow of highly trained and educated immigrants who are essential to the nation’s continued preeminence in high technology industries.

We also believe that the lack of fiscal discipline characterized by the persistence of budget deficits since 1960 will likely continue after the brief respite of the last few years of the twentieth century. The inaccuracy of the optimistic projections of economic growth by the Congressional Budget Office (CBO) in the last few years of the twentieth century has been exposed at the beginning of the twenty-first century. The relatively large budget surpluses of the last few years of the Clinton administration have been quickly undone and federal budget deficits once again the order of the day.

One reason for the return of federal budget deficits was the orgy of increased government spending that accompanied the higher tax revenues made possible by the long period of economic expansion in the 1990s. The CBO projections failed to take into account the appetite of politicians to spend the surpluses at an unsustainable rate, and the public expectation that the state will provide for an ever wider range of needs.

The budget surpluses during the Clinton years were also a function of the reduction of defense spending made possible by the end of the Cold War. However, the aftermath of the September 11 attack on the World Trade Center and the subsequent “war on terrorism” has resulted in a conspicuous rise in defense spending that is likely to reverse much of the defense cuts of the Clinton years. Recent American military forays into Afghanistan and Iraq indicate the nation’s willingness to expend significant resources against the new amorphous threat of international terrorism and its state sponsors.

The higher level of government spending during the booming 1990s combined with the increased domestic and defense spending for the war on terrorism will likely return the U.S. government to the category of a major international debtor.

We believe that these developments represent such fundamental changes to the nature of the U.S. socio-economic system that the economic capabilities and performance of the American economy have been permanently lowered. The book, The End of the American Century, will provide a comprehensive analysis of the various issues which are at the center of the debate about the U.S. economy. We are interested in understanding how the U.S. economy has actually performed since World War Two, and what accounts for this performance. While there has been a great deal written about these issues in the existent literature, most of this work has been rather narrow and limited in its approach. Our book seeks to overcome these limitations by using an interdisciplinary approach to provide a comprehensive examination of the economic, political, and cultural aspects of the American economic experience since the Second World War. It is a genuine study of America’s political economy and its only real competitors are some neo-Marxist studies which are of very limited value.

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