An Economic Primer: Why Americans Won't Invest in Themselves

Consider these Americans:

Our first case is one of five million Americans unemployed for more than 27 weeks:

Graph of Civilians Unemployed for 27 Weeks and Over

A second American is part owner of a $20 trillion investment fund.

A third American is terrified that her pension fund will go bust (as the Illinois teachers’ fund will some time during the next ten years, among many others).

The $20 trillion fund squirrels away its money in safe, low-yielding assets. It won’t invest in the kind of risky investments that put bricks on top of mortar and hires workers.

Because American #2 at the $20 trillion investment fund won’t take risks, American #1 can’t find a job. And because low-risk investments now pay very little — investment-grade corporate bonds and mortgage-backed securities with federal backing yield barely 3% — pension funds can’t earn enough to meet their obligations to prospective retirees, and American #3 won’t have enough retirement income to live on.

All these Americans could well be the same individual, and probably are members of the same family.

Pension and retirement funds in the United States control $16 trillion in assets. That’s more than double the total assets of the whole U.S. banking system, and more than five times the total assets of hedge funds world-wide. The retirement savings of ordinary Americans dominate the capital markets, not the sort of fat-cats caricatured in the press. Add another $4 trillion in life insurance assets, which mainly reflect the retirement savings of the middle class, and the middle class investment fund now stands at $20 trillion.

Americans won’t take risks on each other. That’s our problem.  A decade ago, at the peak of China’s investment in American securities, I quipped that a rich Chinese won’t lend money to a poor Chinese, unless the poor Chinese moves to America. That’s starting to change. China’s huge trade surplus has shrunk to nearly zero as the Chinese consume more at home. The problem now is that middle-class Americans won’t invest in themselves.


We’re not talking about greedy Wall Street cheating Main Street: The plain fact of the matter is that $20 trillion of middle-class retirement savings refuse to invest in the sweat and ingenuity of the same people who own the savings. Corporations have about $2 trillion of cash on hand, and a lot has been written about the risk-aversion of U.S. companies. But that’s a tenth of the money available to pension funds.

There are two possible explanations.

One is that something has frightened Americans out of risk assets, such that the only thing we have to fear is fear itself, and maybe also Barack Obama and his legion of fiscal inquisitors.

The other is that we’re just not good enough: we’re lazy, under-educated, spoiled, petulant, unable to compete with the lean and hungry Asians.

If the second explanation is correct, it means we’ve already turned into Greece or Spain. I don’t believe that for a moment. We lag in a number of areas, but America still has the best technology, highest productivity, and by far the best research universities in the world. And we have plenty of people willing to work, and work hard.

The other explanation is that something is preventing us from investing in ourselves. Why won’t we use our $20 trillion in retirement savings to build factories and stores and offices and generating stations and oil rigs and mines?

Let me count the ways.

We have the highest corporate tax rate in the world.

We have an administration that sandbagged one of the biggest contributions to energy independence to become available in decades, namely the Keystone project.

We have a regulatory environment that makes it next to impossible to build a nuclear power plant.

We have a health care program that puts the biggest weight of a new entitlement program right on the economy’s weak spot — firms with fifty workers.

We have an administration that can’t get its act together to steer the economy away from a fiscal cliff.

We have an out-of-control budget deficit as far as the spreadsheet can extend to the out-years, which means much higher taxes in the future.

Mitt Romney needs to persuade Americans that he can bring us together, to give us the confidence to take risks on ourselves and our neighbors. Obama appeals to resentment against the 1%. But the solution lies not with the 1%, but with the 99%, who have to trust each other. The politics of resentment spread fear and distrust and cause economic paralysis. Barack Obama has turned us into our own worst enemies.

Romney might also tell the government-union base of the Democratic Party that their pensions and retirement health care will go down the drain as long as economic growth languishes around 1.5%, because there won’t be enough income to pay for them.

Does anyone actually think that the outcome of the election depends on whether voters think Obama or Romney will be tougher on China?