The US: A decade after 2001

A star (*) indicates more information is available in the references and notes.

President Obama in his latest State of the Union Address reported to the US Congress that after nine years of war the withdrawal of all US troops from Iraqis completed and in more than two decades Osama bin Laden (OBL) is not around to threaten the US security.

President has in three years resolved major issues related to theUS security except that associated with the Af-Pak area terrorist Taliban and intransigent warlords of Pakistan. President has asked theUS and NATO generals to set up by 2014 a 350,000 strong Afghan army capable of neutralizing threats to its sovereignty from its neighbors. The US is committed to providing necessary military and economic aid to the Afghanistan to defend and sustain itself in any war to ensure that Pakistan based Taliban co-linked to al Qaeda will not be able to threaten the US security.

The number one job for the US is to rebuild its economy after all its security concerns are satisfied. The Bush Administration neglected economy that was run wild by greedy bankers and financial institutions to create the mortgage bubble that busted on September 18, 2008 bringing the global economic crash.

Following are some additional points that he did not mention.

1. The 2001 attacks astounded the nation and he world. By starting an asymmetric war the warlords and al Qaeda linked terrorist exposed the US vulnerabilities.
2. Judging from the successes of Drone attacks in the Af-Pak region, during last decade the US has developed low cost high tech solutions to effectively take war to enemy’s territory and decapitate leadership of terrorist organizations.
3. The US air power, in a short period of weeks in 2001 had destroyed al Qaeda safe heavens in Afghanistan and the terrorists were forced to flee east across the Duran Line.
4. The Iraq war (2002 – 11) was to reassert the US hegemony of the region and secure access to energy supplies for the free world from Iraq.
5. From 2000 to 2006 due to reckless banking and mortgage lending practices theUScreated an economic bubble that no one foresaw will deflate in 2008 precipitating a global economic collapse.
6. The mortgage bubble period coincided with manufacturing job losses due to outsourcing American jobs to emerging nations. In first decade of 21^st century its official unemployment rate rose from about 4% to about 10%. The US lost 14 million jobs because of outsourcing and automation.
7. The real unemployment rate was in excess of 18% as many laid-off workers had exhausted the unemployment wages and were no longer counted by the unemployment bureau. The latest unemployment rates from the Bureau of Labor Statistics for Americans over 25 years old state that unemployment rate for those with less than a high school degree was 13.8%; those with a high school degree and no college, 8.7%; those with some college or associate degree, 7.7%; and those with bachelor’s degree or higher, 4.1%*.
8. The outsourcing of the jobs to emerging nations had eliminated theUSjobs of marginally educated citizens (about 25%) with high school or less education. Apple computers is America’s most valued corporation and all its products are manufactured in emerging nations by sourcing parts from as many as 20 nations. Apple computers annual production and sales is 70 million iPhones, 30 million iPads and 59 million other products and all are manufactured overseas. Apple products are truly, “Made in the World.”
9. Apple computers created 43,000 R&D, sales and marketing jobs in theUSfor products manufactured inChina using components sourced from a global supply chain network. Apple computers created 700,000 jobs to man its global supply chain*.
10. Same business plans to varying degrees are followed by almost all Fortune 500 corporations. Even someHollywood productions are moved to Bollywood to cut costs and exploit low wages of excellent      Bollywood film production crews.
11. It has taken three years for President Obama to reorient policies to get theUSon a road to economic and jobs recovery. The state of theUSeconomy is terrible but it is healing, slowly and surely, partly because theUShas reversed its industrial policies.

Americahas reoriented its manufacturing jobs policies from subsidizing of the outsourcing businesses and now it offers tax and capital to set up manufacturing industries. It is encouraging private sector to help reduce unemployment rates by offering incentives to industries to bring jobs home. In last three years private sector has added 3.7 million jobs, reducing unemployment rate to 8.1% in 4Q 2011. To maintain a healthy economy America needs 30 million more jobs. So it may take a decade or more to generate necessary level of employment by retraining job seekers in the IT and heavily automated manufacturing industry.

Productivity of the US workers is high. A manufacturing plant that used 20,000 semi skilled workers in last century now employs highly skilled 500 workers for operating automatic machines to attain same level of production. The days of high paying jobs for semi-skilled (high school or less education) are over. Ten of 14 million job seekers are semi-skilled unemployable workers and they need advanced education for retraining with help from the US government and the industry.

The two problems at the root of the US troubles are the busting of the mortgage bubble and excessive private debt. Until 2006 home prices soared and there was a lot of over building. The bubble was the main driver of the economy for eight years of the Bush Administration. The bubble deflated starting about six years ago and the construction industry plunged. The teaser rate driven subprime mortgages and housing market collapsed. The high interest rates driven credit markets collapsed as unemployment rates soared to about 10% with an estimated job losses of 14 million. With no jobs and high private debts Americans stopped buying. It put breaks on the booming consumer industries including the service sectors that include retail, hospitality, and travel.

Essentially, the banking and insurance industry managers were driven by greed and they recklessly created poor quality CDS (Credit Default Securities) and CDO (Credit Debt Obligations) bonds and highly leveraged it with public deposits. These bonds were fraudulently rated A to A+ to fool prospective bond investors. These two vital sectors of the US businesses from 2002 – 06 had failed to hedge its bets by providing adequate reserves. Before the bubble deflated the failed businesses in the banking and insurance industries had reduced its reserves to less than 7%; in many cases to 2%. For a healthy hedge levels a minimum of 18 to 20% reserves are needed. The responsible US citizens who had deposited with the banks or invested life time savings and pension funds in the CDS and CDO bonds lost most if not all their investments once the markets crashed.

Finally, the US government had to step in with $700+ billion stimulus package to revive dying automobile industry, save some banks, financial institutions and insurance providers. The government also financed new technology driven businesses for renewable energy (solar and wind).

The depressed economy is responsible for reduced government revenues for war efforts, etc. The US allies like Afghanistan and Pakistan has to recognize that the US will not be able to continue with its military policies of the last decade by renting Pakistan army to maintain its regional hegemony.

Security of Afghanistan is necessary to secure the US from terrorist attacks and hence the US is addressing that issue. Many of the US power bases needed to maintain the regional US hegemony have been shifted to the nations around the Gulf of Arabia across from Pakistan. Drone attacks have effectively decapitated al Qaeda leadership in several nations including Somalia,Yemen, and Pakistan.

Reference and notes:

1. Kishan Bhatia, “Asymmetric War and Financial Bets,” 0115 0117 2012, (2,766 words),  http://www.indiacause.com/blog/2012/01/28/asymmetric-war-and-financial-bets-2/

• The blog discusses impact of the asymmetric wars onPakistan’s economy. It is part one of two part series; this part two discusses impacts of the wars on the American economy.

2. Paul Krugman, http://www.nytimes.com/2012/01/23/opinion/krugman-is-our-economy-healing.html?partner=rssnyt&emc=rss
3. Paul Krugman, “U.S. prosperity depends on synergies, not heroes,” http://kadblog.org/2012/01/28/krugman-propensity-depends-on-synergies-not-heroes/