Brazil Is the New America: How Brazil Offers Upward Mobility in a Collapsing World (46 page)

Note that Tainter defines collapse as “a rapid transformation to a lower degree of complexity, typically involving significantly less energy consumption.”
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When “its easier solutions are exhausted, problem-solving moves inexorably to greater complexity, higher costs, and diminishing returns.”
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As highlighted earlier in this book, examples of greater complexity involving higher costs and diminishing returns are almost everywhere you turn in President Obama's America. Nonetheless, it may be useful to revisit some examples, beginning with one that Tainter highlighted in an earlier analysis. He showed that the productivity of the United States healthcare system declined by 60 percent from 1930 to 1982.
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Ironically, the early 1980s was hardly a time of conspicuous stability or positive returns for U.S. healthcare. To the contrary, it appears that the productivity of U.S. healthcare may have declined more rapidly after 1980 than before. Cross-national spending comparisons based on OECD data show U.S. healthcare costs per capita skyrocketing from around $1,200 in 1982 to $7,290 in 2008.

Over the same time, the United States' standing in terms of the health indicators used by the OECD to measure the success of healthcare—including life expectancy, self-reported health status, premature mortality, death due to cancer, infant mortality, and mortality due to medical misadventure, among others—fell to 17th, dead last, among 17 wealthy countries.

The outlays are so large, and the deterioration so significant that the marginal returns from U.S. healthcare spending may actually be negative in some respects. This forewarning of collapse is underscored by a similarly startling suggestion of diminishing or even negative marginal returns from complexity in the other major undertakings of government in the United States.

As reported in a University of Southern California Infographic, “U.S. Education Spending and Performance versus the World,” “the U.S. is the clear leader in total annual spending, but ranks ninth in science performance and tenth in math” in a comparison with 11 other leading economies.
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According to the U.S. Department of Education, annual U.S. spending per school-aged child was $7,743, as compared to $1,683 in Brazil. In this respect, the United States suffers from declining marginal returns compared to Brazil. While Brazil's test results trailed the pack among the 11 leading economies selected by the U.S. Department of Education for comparison, unlike the United States, Brazil was not spending lavishly on education without obtaining commensurate results. The United States spends at least a third more than any other leading economy but the productivity of this spending is evidently meager.

Note, as well, that the U.S. Department of Education conspicuously omitted China from its comparisons. The Chinese spend even less than the Brazilians on education, but top the world in achievement test results.

Furthermore, there is good reason to suppose that the per capita spending reported by the Department of Education grossly understates actual U.S. outlays. Bill Ponath, author of
Verdict for America: Critical Issues Facing Our Nation,
argues that “the United States is spending at least $20,576 per student in elementary and secondary schools.”
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He bases this on the average of spending across all U.S. jurisdictions, ranging from $10,896 per student in Idaho to an astonishing $38,986 per student in the District of Columbia. (Washington, DC schools are notoriously among the worst in the United States, while also being the most expensive.) In addition to state spending, the federal government is laying out $1,917 per pupil toward the total national average of $20,576.

The 2009 Program for International Student Assessment (PISA) reported scores for 65 countries based on the administration of uniform tests in reading, math, and science to 15-year-old students in each country. The results showed that China-Shanghai had the highest overall average score, with China-Hong Kong the second highest, and Finland the third highest.
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Notably, the per capita education outlays in China were $1,326 annually, or just 6.5 percent of the level in the United States.

Given the current technological frontier, it is generally assumed that healthcare and education can only be provided locally. More is the pity, because if Wal-Mart could import Chinese education at anything like its per capita cost in China, it would imply a startling improvement in the marginal returns from complexity (government spending) in the United States.

An even more startling disproportion between costs and returns is evident in United States military spending. As the Ponath analysis of per-pupil educational spending in the United States implies, U.S. authorities and bureaucracies are not always eager to present clear and accurate accounts of their spending. What seems true of education is even more the case with U.S. military spending. Total Department of Defense spending for fiscal year 2010, for example, was reported at $707.5 billion. But, as I explore in a moment, this represented as little as one-half of total defense-related spending.

Outlays related to nuclear weapons, for example, comprised $21.8 billion of the Energy Department budget. Veterans' pensions took another $54.6 billion, under the budget of the Department of Veterans Affairs. Security outlays for the Department of Homeland Security entailed another $46.9 billion. At least one-third of the FBI budget, some $2.7 billion, was devoted to counterterrorism operations. The export of weapons to allies accounted for another $5.6 billion under the International Affairs budget of the State Department. A catchall category, “Other Defense-related Spending,” spread among various agencies was $8.2 billion. Last, but hardly least, interest on debt incurred to fight past wars and finance other military spending totaled from $109.1 billion to as much as $431.5 billion, depending on judgment calls about which debt should be included.
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All told, military spending came to at least $1.030 trillion. If interest payments on all debatable debt were included, the total could be as high as $1.415 trillion, or almost precisely double the widely reported Department of Defense budget of $707.5 billion for FY 2010.

However you slice it, aggregate U.S. outlays for military purposes are staggering. The United States spends more than the next dozen highest spending countries combined, and the United States accounts for approximately half of total national security spending for the entire planet. But unlike the case of healthcare, or education, it is much more difficult to measure the marginal returns from military spending. There is no PISA test to objectively compare national security outcomes between countries.

Nonetheless, educated analysis suggests that there are declining (or even negative) marginal returns for the over $1 trillion the United States lavishes on military spending annually. One dimension of this was suggested by William Nordhaus of, Yale University, in a paper he presented to the American Economic Association. In it, Nordhaus notes:

One way to consider the size of our military expenditures is by comparison with other countries. Other countries face security threats, and they respond by allocating funds to security. Is it plausible that the United States faces a variety and severity of objective security threats that are equal to the rest of the world put together? I would think not. Unlike Israel, no serious country wishes to wipe the U.S. off the face of the earth. Unlike Russia, India, China, and much of Europe, no one has invaded the U.S. since the nineteenth century. We have common borders with two friendly democratic countries with which we have fought no wars for more than a century. Only one country has nuclear weapons that can seriously threaten our existence. . . .

The last five major wars that the United States undertook (Korea, Vietnam, Kuwait, Afghanistan, and Iraq) were ones in which the U.S. attacked countries that had not directly attacked the United States. Four of the five are still unresolved. Whether the U.S. and the community of nations will benefit from the U.S.'s ability to undertake wars of choice will be debated for many years. But this is clearly one of the side effects of having a military establishment that has a capability far beyond its ability to defend the homeland. To the extent that Vietnam and Iraq prove to be miscalculations and strategic blunders, the ability to conduct them is clearly a cost of having a large military budget. . . . If power, secrecy, and money corrupt, then large sums, appropriated and spent in secrecy, for purposes that are unspecified, can, and in current circumstances do, corrupt absolutely.
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The possibility, suggested by Nordhaus, that U.S. military outlays entail negative marginal returns, brings into perspective the success of the Al Qaeda “rope-a-dope” strategy of engaging the United States in conflict. As detailed in the
New York Times,
“Al Qaeda spent roughly half a million dollars to destroy the World Trade Center and cripple the Pentagon. What has been the cost to the United States? In a survey of estimates by the New York Times, the answer is $3.3 trillion or about $7 million for every dollar Al Qaeda spent planning and executing the attacks.”
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The
Times
goes on to state that the total “equals one-fifth of the current national debt.” This underscores the prospect that, with economic growth stalled, growing numbers of Americans will experience highly negative returns from the “complexity” imposed upon them by the U.S. government. The apparently remorseless desire of both major political parties in the United States to increase the costs of government without respect to the marginal returns engendered by their programs brings to mind the parallels we discussed earlier that Tainter drew with the collapse of the Roman Empire.

He also points out that “as a solar-energy-based society which taxed heavily, the empire had little fiscal reserve.”
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(Not incidentally, a major part of the Roman Empire's problem as it slid toward collapse was a significant decline in solar energy inputs as the climate turned colder.) Confronted with crises, Roman emperors responded ruthlessly, putting the state's interest in extracting more resources ahead of any consideration of the hardships imposed on citizens. They debased the currency again and again,

and the level of taxation was made even more oppressive. . . . Inflation devastated the economy. . . . While peasants went hungry or sold their children into slavery, massive fortifications were built, the size of the bureaucracy doubled, provincial administration was made more complex, large subsidies in gold were paid to Germanic tribes, and the new Imperial cities and courts were established. With rising taxes, marginal lands were abandoned and population declined. Peasants could no longer support large families.
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Tainter highlights the key to the future evolution of society: the wealthy in ancient Rome, as well as the poor, fled from the government. At that time, given the structure of the Roman state and its policy of imposing ruinous tax obligations collectively on the residents of towns and cities, the best and perhaps the only avenue of escape was to withdraw to the countryside.

President Obama's policies, also enacted under conditions of declining (and even negative) marginal returns to complexity at a time of declining energy inputs share similarities with those of the authoritarian emperors in the final years of the Roman Empire. As “the menacing specter of state bankruptcy” draws ever nearer, President Obama enthusiastically embraces the old remedies of “reduction in the value of the currency and increased taxation.” To a degree that few Americans yet realize, President Obama has opted for the most severe “financial repression” in American history, seemingly to “squeeze the population to the last drop.” To better appreciate these parallels, see the account of the fall of Rome in
The Cambridge Ancient History
, volume XI.

As I became interested in Brazil over the past few years and sought to learn its ways, I became persuaded that Stefan Zweig's often ridiculed description of Brazil as a land of the future, is true. It is, as Zweig wrote,

extravagantly endowed by nature with space and infinite wells within that space blessed; with beauty in every imaginable power it still has the old task of its beginning to plant people from overpopulated areas in its inexhaustible earth and, combining old with new, to create a new civilization . . . its development is still in its initial stages, and no degree of imagination suffices to conceive of what this country this world will mean to the next generation.
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Generally, immigrants leave poorer countries for richer ones. There is much less migration of individuals from higher-income countries to economies with higher prospects. Note, however, that is exactly the model for the early settlement of the United States, whose founding settlers left England to seek a better life in the “New World.”

One of the legendary investors of the twentieth century was the late Nils Taube, an original backer of my financial newsletter,
Strategic Investment
. Nils achieved “an investment track record that is virtually unmatched in the world of global investing,”
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realizing an annual compound return of more than 15 percent in almost half a century as a fund manager. He was just about the best in the business. Nils repeatedly advised me “to plagiarize, plagiarize, why not use your eyes?”

He was quoting Tom Lehrer, in what Nils took to be one of the more dependable recipes for investment success. He thought the fact that different societies have tended to reach prosperity at different times created a fantastic template for pocketing low-risk profits.

Put simply, he thought you could dependably profit by seeing what worked in the past in the then-leading economies, and doing something similar when other societies pass through similar stages of development.