Recently, Japan and Korea have begun to express deep concerns about the “ability of the United States to address profound problems in its political and economic system.”
This is not just about the “business cycle.” Our key Asian allies are wondering whether we’re even able to see the gathering storm on the horizon, much less respond. Their worry is shared by many of our own national security leaders. In the midst of the great recession, Adm. Mike Mullen, then chairman of the Joint Chiefs of Staff, asked two officers within his personal staff to explore the question of “grand strategy.” They recommended the development of a “national strategy of sustainability.” It’s good advice.
The ability to execute grand strategy is something that sets America apart. Roosevelt, Truman, and Eisenhower all used grand strategies to prevail in the two great strategic contests of the last century. Moreover, it was our economy that did the heavy lifting in each of those undertakings, first harnessing the nation’s industrial might to out-produce and finish off the Axis, then aiming our markets at suburban expansion to outperform and outlast the Soviets while paying for a military alliance to contain them.
We need a new one, but what would a grand strategy of sustainability look like, exactly? First, we need a definition of grand strategy. Here’s mine: A grand strategy combines our economic engine, our governing institutions, and our international engagement to meet the great global challenges of the era.
While the world appears to be getting only more complex over time, there are in actuality just four massive, full-certainty threats at play:
1. Deleveraging: the depression-scale event we’re experiencing, thanks to the burst credit bubble. It’s at least a 10-year process, and we’re not very far along.
2. Global economic inclusion: Roughly 3 billion people will enter the global middle class in the next 20 years. We don’t even have enough resources for the 2.5 billion already here, meaning commodity prices—and strategic behavior—have only begun to rise.
3. Ecosystem depletion: Whether it’s climate change or the destruction of natural capital, we’re rapidly depleting the systems that provide us air, water, and food, while floods, droughts, tornadoes, and hurricanes are getting more extreme.
4. Resilience: Finally, our systems, supply chains, and infrastructure are simply not resilient. Instead of compartmentalizing shocks and risk, our lean, just-in-time “value chains” are magnifying disruptive events and the systems themselves are vulnerable to breakdown, attack, and capture.
These problems frame an existential challenge, creating an age of global instability. Each is by itself epoch-defining, and they are now fully intertwined. None can be solved independently, and business-as-usual will only aggravate and accelerate them, driving what is essentially a slow collapse of the international economic order.
The good news is that as long as we resist being distracted by important but ultimately second-tier problems—like Iranian saber-rattling or health care reform—today’s economic opportunity begins to emerge.
Let’s start at home. If you’re in a deleveraging, after you triage the crash, you need to create or find a massive pool of demand and an equally large pool of credit-worthy borrowers. Where is there a great pool of demand? Right under our noses. In fact, it’s us. There is a great demographic change happening in America. Baby boomers and millennials are changing the definition of the American dream and, in the process, have created a pool of demand for housing nearly three times as large as what existed after World War II. The trick is, it’s not for the homes that builders are building.
Boomers and millennials, the two largest demographic groups in the country, are converging in a time-of-life moment where what they want is smaller homes on smaller lots in walkable, service-rich, transit-oriented communities. Boomers, who have just started turning 65, are empty-nesting and downsizing. But they are going to have to work much later into what they thought would be their retirement, and they fear the fate of their parents, who had their car keys taken away and ended up in the nursing home. Millennials are in the process of getting married and having kids, and according to market surveys, 77 percent simply don’t ever want to go back to the ‘burbs. At the end of the day, traditional subdivisions are isolating and expensive, while millennials are increasingly connected, are more into tech than cars, and are seeing their economic future more like their grandparents’—full of hard work and living on a budget.
Add it all up, and the National Association of Realtors estimates that—today—56 percent of Americans want the attributes of this new American dream in their next housing purchase. Yet only 2 percent of new units being built today fit these attributes. That’s a massive pool of pent-up demand, locked away by federal policy still supporting suburban growth at the expense of all other types of communities. Change the policy—without having to spend a dime—and we’re off to the races with new jobs in construction and infrastructure, plus homes and communities that reflect the way we want to live today. And they happen to be good for the planet, reducing energy, water, and waste by at least one-third.
But there is more. Three billion people around the world coming into the middle class in the next 20 years. When they do (and 200,000 people are literally leaving their villages every day), their incomes go up 300 percent—and so does their resource use. Since we’re already consuming 1.5 planets’ worth of resources, the McKinsey Global Institute is now saying we need a massive resource productivity revolution. That’s especially true in the United States, where we use 50 percent more material per unit of GDP than the top-performing EU countries. That waste could be profit.
America should be the leader of that resource revolution. But we’re hobbled by another 60-year-old policy: taxes. In the early days of World War II, as Washington harnessed the industrial might of the nation for war, we understood two things: First, with 16 million in the service and our factories at full tilt, a universal income tax at full employment would reduce the likelihood of a recession from too much war debt. Second, to ensure our factories had the raw materials to produce the tanks, planes, food, and fuel for the Allies, we needed to subsidize resource extraction.
Like the bias toward suburban growth, this taxing of work and subsidizing resource use is still the law of the land. Eighty percent of federal revenue comes from individual income. Farmers are pumping the equivalent of 18 times the Colorado River's annual flow from the Ogallala Aquifer per year under the Great Plains—for free.* Not to mention the gigatons of carbon we emit freely into the atmosphere. With high unemployment, rising competition over resources, and exhausted ecosystems, this makes no sense.
So if you’re thinking like Ike, what do you do? You flip it. Shift taxes off of wages and onto resources and waste, and the economics magically line up. With a gradual phasing-in of the policy, we can create the certainty that American businesses want and need to be part of the solution. We’d also be putting more money in the pockets of hard-working Americans. With roughly $3.6 trillion in capital sitting on the sidelines of Wall Street, delivering certainty to the markets would have all kinds of returns.
We're unsustainable because there are massive pools of domestic and global economic demand that the U.S. economy and the larger global economy are not designed to exploit. If we leave that unmet human aspiration to slosh around too long, all sorts of nasty consequences will arise, from extreme politics at home to conflict abroad.
It's time for Washington to do what Roosevelt, Truman, and Eisenhower did twice in the last century: reorient the American economy to do our nation's, and the world's, strategic heavy lifting. Refocus America’s purpose on addressing global unsustainability instead of defending the outmoded lifestyle of Ozzie and Harriet, and designing resilience into our new infrastructure and systems amounts to a rounding error on a balanced federal budget.