The Blog

Prosperity in a Crisis

The United States needs to recapitalize banks and enact broader tax cuts.

11:00 PM, Feb 11, 2009 • By RYAN STREETER and WILLIAM INBODEN
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In addition to its historically robust (if not currently weakened) capital markets and entrepreneurship, the United States has flourished because of characteristics such as its citizens' ability to convert knowledge into innovation and social trust into productive activity. To be sure, the nation cannot prosper without healthy capital markets, but if we do not continue to support and invest in the basic drivers of commerce and productive citizens, those capital markets don't mean much. If in the current financial maelstrom Americans abandon the pillars of their success, the future might not be so promising. Unfortunately the stimulus package does not seem designed to reinforce these pillars.

The idea that prosperity is more than money is not merely our theory. It is borne out of the data themselves. The Prosperity Index finds that economic strength and a good quality of life are mutually reinforcing: in general, countries have either both, or neither. When scored along a continuum, only 18 percent of countries are above the worldwide median in one category but not the other. The other 82 percent are either above the median in both categories, or below it in both. This means that nations that protect political and civil rights have strong community life and foster a culture of opportunity are also likely to foster innovation, attract investment, and invest in education. Alternatively, those that do not cultivate economic growth also generally do not enjoy a high quality of life.

The United States outscores the other top 10 countries on personal income by 40 percent, and has few peers in vital areas such as capital investment per worker, citizen engagement, and research and development. The U.S. leads the world, with Japan, in its ability to commercialize innovation through patents, scoring an impressive 38 percent higher than the average of the top ten countries. Only New Zealand has higher scores than the U.S. in its ability to foster opportunity and community through voluntarism and charitable giving. When considered together, these factors propel the U.S. to high scores in both our economic and quality of life rankings.

However, the U.S. has some weaknesses that, if exacerbated during the response to the current financial crisis, might undermine continued American prosperity. When analyzed by 16 commonly accepted measures of economic competitiveness, the U.S. ranks 7th in the world. However, it ranks below average on promoting international trade and investment, suggesting that policies aimed at protectionism and retreat from the global economy (as in earlier versions of the stimulus package) would only make things worse, not better. In addition the U.S. scores second to last among the top ten countries on governance measures such as regulatory quality and the effectiveness of government policy, which means that simplistic attempts by politicians to crudely regulate a fix to our current crisis will only threaten America's standing among the world's most prosperous countries. America also scores only slightly above the global average on the percentage of people who believe it is possible to "get ahead through hard work"--a worrisome finding given the historic role the U.S. has played as the land of opportunity.

What do these findings mean for President Obama and the Democrat-controlled Congress? They suggest that a successful response to the current crisis needs to capitalize on America's underlying strengths and avoid magnifying its weaknesses. Increased trade restrictions, or unmeasured regulatory policies on entities that already operate under substantial layers of regulation, will probably make America less prosperous, not more. Investments in key infrastructure aimed at facilitating American commerce are important, although spending government resources on industries that the government has deemed important will likely yield little and skew the market along the way.

Perhaps even more important than job-creation efforts is the threat of diminished trust among Americans--in each other, in those responsible for large public and private institutions, and in their own ability to get ahead by investing their talent and resources. While the U.S. has strong scores on social capital measures such as reliance on others, religious engagement, and community involvement, it turns in mediocre scores on social trust overall. In other words, Americans trust those with whom they interact on a daily basis, but their level of trust for people they do not personally know is low.