December 11th, 2011
09:30 AM ET

Zakaria: The real burden on the U.S. economy

By Fareed Zakaria, CNN

President Obama gave an important speech in Kansas last week. Whether you agree with all of it or not, he has begun a national conversation about the economy and the role of government. That's what this election should be about. And in presenting his view, Obama shifted the economic conversation from deficits alone to the crucial issue of growth. After all, deficits matter because they could have a harmful effect on growth.

So the question we should all ask is: What would make this economy grow? What has stopped it from growing much over the last few years - indeed over much of the last decade?

One theory heard a lot these days is that the economy is burdened by excessive government regulation, interference and taxes. Cut them, the Republican candidates all say, and the economy will be unleashed.

It's a compelling picture, but the data simply do not support it.

The Organization for Economic Cooperation and Development (OECD) released a study last week measuring tax revenue as a percentage of GDP. Of the 30 countries studied, the United States came in 27th. Taxes are low in historical terms as well - the lowest since the early 1950s.

The Kauffman Foundation, which looks at the level of U.S. entre­pre­neur­ship, found that in 2010, 340 out of every 100,000 Americans started a business each month. That rate hasn’t changed much in the past few years; it is only slightly higher than in 2007, before the recession. Regarding regulations, Bloomberg News has crunched the numbers and found that the Obama administration has not reviewed or issued significantly more rules than its predecessors.

Or look at competitiveness. The World Bank publishes a report that looks at "Doing Business" across the globe. The U.S. ranks 4th in the world. The World Economic Forum does an annual ranking of overall economic competitiveness. The U.S. ranked fifth. In both these rankings, the countries that score higher are tiny places like Singapore and Finland, with populations often at 5% that of the United States.

And these rankings have not slipped much over the last decade. So where has there been change? Where have we slipped?

The answer is pretty clear. Only five years ago, American infrastructure used to be ranked in the top 10 by the World Economic Forum. Now we're 24th. U.S. air infrastructure has gone from 12th in the world to 31st - roads from eighth to 20th.

The drop in human capital is even greater than the drop in physical capital. The United States used to have the world's largest percentage of college graduates. We're now number 14, according to the most recent OECD data, and American students routinely rank toward the bottom of the developed world in international tests.

The situation in science education is more drastic. Even with the increase in college attendance over the past two decades, there were fewer engineering and engineering technologies graduates in 2009 (84,636) than in 1989 (85,002). Research and development spending has risen under Obama, but the basic trend has been downward for two decades. In percentage terms, the federal share of research spending - which funds basic science - is half of what it was in the 1950s.

In other words, the big shift in the United States over the past two decades is not a rise in regulations and taxation but a decline in investment - in physical and human capital. And investment is the crucial locomotive of long-term growth. In our interview, Michael Spence, the Nobel Prize-winning economist, pointed out that the United States got out of the Great Depression because of the spending associated with World War II but also because during the war, the U.S. dramatically reduced its consumption and expanded investments. People spent less; they saved more and bought war bonds. That surge in investment - by people and government - produced a generation of growth after the war.

If we want the next generation of growth, we need a similarly serious strategy of investment.

Read more on this in my column in The Washington Post this week. For more of my thoughts throughout the week, I invite you to follow me on Facebook and Twitter and to visit the Global Public Square every day.

soundoff (343 Responses)
  1. MiketheElectrician

    Investing in our country...what a novel notion. You better no tell the GOP, they will say we are wasting it. If it doesn't go towards invading a country, or keeping money among the elite, they are so against spending.

    December 12, 2011 at 3:05 pm | Reply
  2. dana

    I believe that Mr. Zakaria has taken effects and tried to make them causes for our lack of growth. In the last 20 years we have seen globalization as never before in human history and tremendous productivity gains in US manufacturing – more with less people. The globalization has resulted in outsourcing to and investment in low-cost countries where the population is educated and has a decent work ethic. This investment and the jobs created would have been for Americans if US cost had been in line with foreign manufacturers. While this loss of jobs and investment is negative, the outsourcing to low-cost countries has kept inflation relatively low for the lower technology goods imported to the US. However, we have come to a tipping point where the lack of investment in the US has not created new private sector jobs that can contribute to government revenues so that we can build or repair our infrastructure. I believe we are in a downward spiral and we need to do something about the trade imbalance that would allow companies to reinvest in the US because it is profitable again. Regardless of what the Tea Party or the Occupy movements want, economics always prevails and companies will not knowingly do things that put them out of business. They will do things to preserve themselves even if it looks "greedy" to most people.
    I believe there are several ways bring back jobs including tax incentives for investing in the US (sounds a lot like the Republican mantra), managing the FX rates so that we have a fair trade (not free) and slowly cutting government spending so that our borrowing cost can be reduced so that this can be used to improve infrastructure

    December 12, 2011 at 3:46 pm | Reply
  3. Voltairine

    "In other words, the big shift in the United States over the past two decades is not a rise in regulations and taxation but a decline in investment – in physical and human capital": Good luck trying to convince even one big business or big money person, or any of their ilk, as they have and continue to vehemently argue (often petulantly and abusively) that this isn't the case at all and that the root of all evil is social programs to actually help people and taxing even one penny of their gargantuan mountains of loot. If GOD HIMSELF or perhaps a highly advanced alien race came down and told them directly they still would refuse to accept this because it cuts into their obscene profits and anything that does that is to be resisted to the bitter end, which may be revolution and civil/global war with, at some point before during or after, a global economic collapse that will render all of their money worthless in a righteous act of poetic justice.

    December 12, 2011 at 3:52 pm | Reply
  4. open400

    The United States pulled out of the depression after World War II becuase the rest of the major industrial poweres had been destroyed by the war itself and we still had cheap access to raw materials like oil. Wars are typically bad for the economy- unless the war is short and the victrous country gain strong strategic and econmic advantage. The wars of Vietnam and Iraq have decimated our economy.

    December 12, 2011 at 3:54 pm | Reply
    • Froggy

      Don't forget about the Cold War. The US govt continued to spend huge amounts of money after WWII fighting the USSR. This was a major reason the economy didn't collapse again when the "hot" war ended.

      December 13, 2011 at 12:15 am | Reply
  5. Russel Jeffords

    This author simply isn't very bright, is he?

    let's the peak of the baby boom for college graduates – yep, 1989 or so – 90,000 science/engineering graduates.

    let's 2009, long after the boomers cleared the gates, about 87,000 science/engineering graduates. Hmmmmm. As a fraction of the total pool, Author Sir, we have actually INCREASED the numbers of students graduating in these fields.

    The fact that Affirmative Action and the "everyman," approach to higher education (funded by the taxpayers, of course) makes a 2009 graduate worth about 30% that of a 1989 graduate is another topic entirely....but one that is clearly embraced by Mr. Obama....the penultimate example of an Affirmative Action project if I ever saw one (Michelle is the ultimate example, and Lantraicia and Shamika (or whatever the hell their names are) will be #3 and #4 on the list.


    December 12, 2011 at 4:38 pm | Reply
    • Chris

      Your contempt for our President and his family and your blame of Affirmative Action (or "everyman" approach) devaluing our students is a pinpointed spotlight on your views. You don't need come out and confirm or deny it, you sir, are quite racist to presume that the only students of worth are those who came from white families. And just because I said what you implied does not mean you can somehow flip this interpretation upon me. If you think that you're educated enough to call Mr. Zakaria a buffoon you better live up to the fact that you understand the subtext of your comments. Hope you cut the eye holes on your white sheet well enough that you can read the computer screen through them.

      December 13, 2011 at 12:55 pm | Reply
  6. AutumnskyD

    I don't always agree with Mr Zakaria but he's spot on here. By refusing to invest in ourselves America has lost ground. Education, basic research and infrastructure are our most important assets. I knew we were in trouble the day people cheered over the demise of the Superconducting Super Collider project in Texas. Our Space program now has to buy rides to the space station from the Russians. Basic research and exploration created trillions in wealth yet now we no longer believe in science it seems. We have become selfish, greedy and short sighted to our own determent.

    December 12, 2011 at 4:40 pm | Reply
  7. KC_in_CA

    "the Obama administration has not reviewed or issued significantly more rules than its predecessors"

    So... Does this mean that if I gain an average of just 5 pounds a year that I will never be obese? After all, I didn't gain any more in any one year than any other year.

    Laws and regulations add up. At some point they become burdensome. Have we reached that point? I don't know. But saying that we haven't because the rate they are being created hasn't increased is just stupid. This is either poor journalism or decietful. Possibly both. Either way, shame on any readers who don't look deeper, think for themselves, and ask the basic questions required of a thinking reader – who says so, who ELSE says so.

    December 12, 2011 at 4:48 pm | Reply
    • Chris

      In your example, you're gaining an average 5 pounds a year because you're taking in more calories than you can afford; perhaps more exercise is in order. Don't have the time or money? Make the time or readjust your finances if you're so concerned about the weight gain.

      I work in the environmental consulting industry. Often-times, the most anemic portion of a business organization is their environmental staff; this is a function of those in the corporate structure who will not apportion some of their profits to addressing regulatory needs. I sympathize with the fact that there are some poorly written / poorly executed regulations out there (Boiler MACT and Stationary Engine rules (NESHAP ZZZZ, NSPS IIII/JJJJ)). When I hear businesses say they are burdened with regulations, it's like hearing a whiny high schooler saying they don't have time for homework, but then waste hours on Facebook, Video Games, and everything else other than their homework. Well written regs find ways to place the burden on large businesses / emitters and leave the small businesses with fewer or no regs to have to comply with. The blanket statement that regulations are bad is too simplistic. I want anti-regulation candidates to identify regs they find burdensome and then say what they would do instead.

      December 13, 2011 at 1:05 pm | Reply
  8. Man

    Huge increases in debt, throughout the history of this nation, were tied directly to war. Look at the large jumps in the national debt. All of them match war.

    Chickenhawks got us into this mess.

    December 12, 2011 at 6:19 pm | Reply
  9. Martin

    The other thing that is at a low since the 1950s is American production. We have allowed the vermin that run the corporations to send American production and jobs overseas to what amounts to slave labor factories where people are paid 1 dollar a day or less all in the name of the ultra rich being that much richer.

    What made this country the strongest in the world at the end of WW II was our production base. All we make now are cars and weapons. Consumer items, food, electronics and many other things that used to be made in this country are now made elsewhere. We have become a service economy as opposed to a production economy. No wonder we get our heads handed to us in trade deficits.

    But hey, as long as our CEOs can all have private jets instead of having to fly first class, or get that 5th vacation mansion or 3rd yacht, that's all that matters right ?

    December 12, 2011 at 7:42 pm | Reply
  10. jjs

    Not the economic policies or the government are the problem. The problem is the american people. This nation used to be made of highly courageous, independent, and hardworking people, who left their countries and came here for a better life. Unfortunately, their offspring are a bunch of illiterate, obese, lazy, and ignorant people who destroyed everything their prededessors created.

    December 12, 2011 at 9:55 pm | Reply
    • Froggy

      I take extreme offense to this as I am the descendent of both original English colonists and European immigrants who came here in the early 20th century. I worked very hard to get through school and continue to work hard for my career and community (as do most of my friends). We are financially responsible and socially stable, in our late 20s, and fairly liberal. While there are people who game the system and want something for nothing, one would be hard pressed to say they are the majority. Negative sound bite comments like that do nothing to further a constructive discussion.

      December 13, 2011 at 12:23 am | Reply
  11. Nelba

    Can some corporations be lying when they say they can't hire engineers, etc? Recently Xerox CEO Burns spoke about thousands of "unfillable " engineering type jobs on a Soledad O'Brien CNN show. BUT ... Go to the Xerox job site and you got a DIFFERENT STORY. Search their jobs for "engineer" I got seven - 7 !!! - hits. Xerox has 92, 000 employees so how are seven engineering jobs something that panics the CEO and keeps her up night? The thing most disturbing about the story is that journalists such as Soledad O'Brien do not even bother to do simple fact checking like we have just did.

    December 12, 2011 at 10:13 pm | Reply
    • Nelba

      ... Od course it's "like we have just done."

      December 12, 2011 at 11:02 pm | Reply
  12. Froggy

    I can't speak for engineering, but we are cranking out a huge number of graduates with science degrees – biology, chemistry, physics, etc. Here is the problem. A student finishes graduate school with a degree in biology. Due to the large number of graduates relative to the available jobs the student (if he/she is lucky) becomes a postdoc in a research lab where they work extremely long hours for less pay than a tech with a bachelor's degree in the same lab is making. The postdoc becomes increasingly irritated with the cattiness, lack of professionalism (everyone is afraid someone else will steal their ideas – with good reason), and constant squabbling for the few available research grant dollars. This combined with the long hours, low pay, and poor benefits causes the postdoc to become increasingly dissatisfied and unproductive and eventually they leave the field completely in search of greener pastures. The problem is not the number of students graduating with degrees, it is the dysfunctional system they are expected to work in.

    December 12, 2011 at 11:13 pm | Reply
  13. meanpeoplesuck

    I believe him to be right, but how can Leave it to Beaver work in a Beavis and Buthead world?

    December 13, 2011 at 12:18 am | Reply
  14. Michael

    Fareed, Sorry to say, but this is a huge logical fallacy.
    We are dealing with the fallout of a huge asset bubble. Following 9/11, Greenspan kept interest rates too low for too long. Fannie/Freddie and Wall St invested in building too many houses. This caused too low of unemployment and too many houses to be built. People used their houses like piggy banks as prices went up. Now we pay the price with high unemployment and foreclosures.
    NAFTA gave us a short term boost by having cheaper goods, but in the long term, off-shored too many jobs. With no jobs, now there is no demand for products and services.

    Bush's tax cuts also gave a short term boost to the economy, but now we are paying the price with huge debt and cannot raise interest rates to encourage saving or we will be crippled by the taxes to pay the debt. The tax cuts also gave a huge handout to the wealthy at the expense of lower and middle class. This again decreased demand. With no demand we go into recession. We need to raise taxes on the wealthy to pay the debt and ease the burden on lower/middle class to create more demand. Then raise interest rates to encourage saving.

    As for over-regulation, Fareed, do you run a business? Business starts is not a measure of over-regulation. Try counting the number of employees dedicated to human resources and regulatory and compliance and accounting compared to employees doing productive work. Count how many hours are spent on silly things like getting emissions checked on vehicles.

    As for infrastructure, maybe we could invest in infrastructure if the unions weren't getting such fat pensions.

    Yes, it is true, we are having a hard time finding GOOD engineers. This is partly the irony of the technology becoming more accessible.

    December 13, 2011 at 1:43 am | Reply
  15. Steven

    Why is everyone so d#@# blind to the fact the #1 hit on everyone in this country in the last decade is fuel prices which has caused enormous inflation. I mean come on they have raised these prices sky high from what they use to be ten years ago. Most of us have a far commute we have no choice but to get fuel. Now they are saying the US is exporting gasoline so what the why can't we lower these prices lock it from being speculated on this will fix everything mostly Im telling you if they went back to prices ten years ago I would have a extra $400 a month no lie that would help us a whole lot and I know I'm not the only one.

    December 13, 2011 at 5:39 am | Reply
  16. Name*TheOldGuyPhD

    You said: "One theory heard a lot these days is that the economy is burdened by excessive government regulation, interference and taxes. Cut them, the Republican candidates all say, and the economy will be unleashed.
    It’s a compelling picture, but the data simply do not support it."
    I disagree with your conclusion from the data you present. The Republicans are correct regarding how to get the economy moving again. Our anti-business Government is our #1 current growth problem. However, I do agree with your conclusions on infrastructure & investment. Government should handle infrastructure but major tax reform for both personal & business is necessary to improve investment in the real economy.

    December 13, 2011 at 6:40 am | Reply
    • Chris

      "The Republicans are correct regarding how to get the economy moving again. Our anti-business Government is our #1 current growth problem."

      Based upon YOUR statements, I fail to come to the same conclusion. It's a pretty scathing accusation to call our government anti-business; especially when you account for all the subsidies that they hand-out to already profitable industries. Smart businesses find ways to deal with regulations; sometimes it means shaking up the status-quo. It's safe to assume most of these people that run these businesses are intelligent, correct (that's the Randian perspective)? So then, why aren't they smart enough to figure out how to make due in new regulatory environments that all they can do is throw their hands up and scream like insolent children?

      December 13, 2011 at 1:29 pm | Reply
  17. Tom65

    We were told by the GOP – repeatedly over the last four decades – that if we deregulated and cut corporate taxes, businesses would reinvest the money into capital improvements and worker training. Instead, they claimed the windfall as profits, took larger CEO salaries, and shipped jobs overseas. THIS is what the so-called "job creators" actually did. Excuse me if I don't buy the same lie in a different package.

    December 13, 2011 at 11:46 am | Reply
  18. Barney

    In World War II we sold war bonds to finance the war. What if we gave people who make more than, say $500,000 a year, the option to either pay a bit higher tax rate or to dedicate an equivalent or perhaps slightly higher amont in a special type of bond that would finance the improvement of infrastructure and education? That way, instead of gambling on derivatives they would invest in America.

    December 13, 2011 at 12:13 pm | Reply
    • Chris

      Despite the fact that we did it before, that would be socialism now... ARGHHHH SOCIALISM!!! zOMG!

      December 13, 2011 at 1:09 pm | Reply
  19. alidonfong

    Here is short summary of what Pakistan did for USA.
    1) Choose US over Russia as Ally since the creation of Pakistan.
    2) Pakistan Join CENTO (Alliance again Russia), just to please USA
    3) Pakistan did not took part directly in Arab-Israel wars, again just to please USA
    4) Pakistan lost half of the country (Pakistan was at fault) and did not get any direct military support from USA and at they end they had to raise white flag and accept defeat.
    5) In 1980’s after Russia’s invasion of Afghanistan Pakistan was brainwashed by USA that Russia is going to invade there land, USA provided full military and some what financial support to Pakistan to train Mujahidin’s against Red Army in Afghanistan, at the end Red Army left and its economy collapsed, USSR was also broken into several countries, it is not wrong to say that former soviet Union was defeated by Mujahidin’s and the won the war for USA.
    6) Pakistan is home to millions of Afghan refugees due to ongoing wars in Afghanistan in which USA is directly or in directly involved. Afghan refuges also brought drugs and weapons which resulted in thousand’s of death in Pakistan.
    7) After 9/11 Pakistan shook hands with USA again to eliminate al-Qaida and Taleban from Afghanistan, the outcome of this is 30,000 thousand deaths in Pakistan and loss of 60 billon $.
    "stop the war in or around Pakistan"

    December 13, 2011 at 1:18 pm | Reply
  20. alidonfong

    We can’t win Afghanistan war without winning Pakistan, says Panetta"

    December 13, 2011 at 1:18 pm | Reply
  21. alidonfong

    New Gateway to Central Asia and Europe.

    With a
    population of over 180 million most of whom are well educated, english
    speaking, entrepreneurial, a cultural and social fit with Central
    Asians...Pakistan will now become the new face and gateway to Central Asia and
    Europe. Pakistan will thus span this region and provide the impetus for growth,
    prosperity and unity among these countries. These are new and exciting times
    for Pakistanis who should now look forward to their new leadership role aligned
    with Central Asia and Europe rather than the Subcontinent. We wish them much
    success as they have sacrificed the most during the past 30 + years creating a
    new world order

    December 13, 2011 at 1:19 pm | Reply
  22. johnny

    I have been advocating all along the same answer for USA to rise above it's present pessimisticf doldrums. Michael Spence is practically and realistically brilliant.

    Americans must stop this old and prolonged , health wrecking, unaffordable habit of eating – and spending- more then they need.

    If the current 65% obese, fat, Americans cut down on their consumption – and start saving money wasted on them, USA is on the road to healing its economy and strengthening its financials.

    During the Grea Depression Americans were niec, slim and healthy, but after WWII ended fatness crept into American society again.

    December 14, 2011 at 12:34 am | Reply
  23. jim ward

    The important thing is to invest in profitable things. You can't blow it all on cash for clunkers or aid to some country who hates us. You ought to spend on something with returns.

    December 14, 2011 at 8:04 pm | Reply
  24. Roland

    A general comment that if an organization is mentioned and the results of their study, it would be nice to have a link to an abstract of the organization. Information as to their charter, mission and how they sustain their organization would help in deciding their purpose in conducting the study. I am sure we all can cite studies that make a case.

    December 18, 2011 at 10:39 am | Reply
  25. Oh, Really?

    The real burden on the US economy is the public sector unions and their obscene pensions.

    What do you think is killing Europe?

    It's the pensions.

    December 22, 2011 at 7:19 am | Reply
  26. Joel

    I don't hear people suggesting novel ideas to get us out of the doldrums. The truth is that we are not in a position to use government spending the way it was used in WWII due to the size of the debt, relative to the GDP. However, that doesn't leave us powerless.

    What we need is capital spending in the U.S. to create jobs. The way to get it is to fix the capital gains tax. Six months is not really long term capital gains, nor should people receive tax breaks on foreign capital gains.

    I propose that capital gains be taxed at 18% after one year, 16% after two years, 14% after three years, etc. until reaching zero. Furthermore, the capital gains tax rate should only apply in proportion to the percentage of assets that a company has within the U.S. These moves would have a big effect on where people put their money and how long they hold it there. The stock market would be more stable and companies would be encouraged to build within the U.S.

    It would take a populist movement to get this kind of change.

    December 23, 2011 at 2:33 pm | Reply
  27. ErnestPayne

    Hey Fareed. How is the war in Iraq going? Declared victory yet? You were all eager for the war before it started.

    January 24, 2012 at 6:02 pm | Reply
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    July 25, 2012 at 10:05 am | Reply
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