Brazil Is the New America: How Brazil Offers Upward Mobility in a Collapsing World (3 page)

Table 1.1
shows the GDP numbers chained to 2005 dollars (in millions).

The only reason that the U.S. GDP has not fallen more than it has is that the federal government has raised its annual spending by more than $1.3 trillion since 2004. It almost goes without saying that this surge in government spending, financed out of an empty pocket, cannot continue indefinitely for decades into the future. With the private sector getting skinnier and government getting bigger, another amber light is flashing a caution about future U.S. growth prospects.

Not only is a bigger government a negative for economic growth, but even the overdue effort to trim excess government spending will weigh on growth, as we have seen in Europe. The unwelcome requirement to avoid an insolvency trap with austerity may compound the long-term slowdown in U.S. real growth.

The picture would appear even more grim if you tracked the advance in poverty in the United States, as measured in growing chronic unemployment and food stamp use, much of it due to the impact of surging energy prices on suburbs designed in the 1950s when gasoline cost 30 cents a gallon. One in every seven Americans now participates in the food stamp program. Neither austerity nor Keynesianism will cure what ails us, as the twin pincers of debt-deflation and rising energy costs are destined to impoverish the former middle class.

Decades of remorseless fiscal and monetary profligacy have squandered most of America's inheritance of prosperity. My generation and the older ones that held power failed to heed the prophetic warning delivered more than half a century ago in President Dwight Eisenhower's farewell speech on January 17, 1961:

As we peer into society's future, we—you and I, and our government—must avoid the impulse to live only for today, plundering, for our own ease and convenience, the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage.
7

Unhappily, we did precisely what Eisenhower warned against. We “plundered the precious resources of tomorrow” for “our own ease and convenience.” Now, tomorrow is dawning.

The trailing generations of Americans, who came along too late to enjoy the boom financed by easy money, inherit the diminished prospects and the unpaid debts that will weigh upon economic growth and living standards in the United States during their lifetimes.

Up next, we delve into the American Dream and how it is—and will soon be even more so—alive and well in Brazil.

1
See Carmen M. Reinhart and Kenneth S. Rogoff,
This Time is Different: Eight Centuries of Financial Folly
(Princeton, NJ: Princeton University Press), 2010; Carmen M. Reinhart and Kenneth S. Rogoff, “Growth in a Time of Debt,” January 7, 2010,
www.economics.harvard.edu/files/faculty/51_Growth_in_Time_Debt.pdf
; and Carmen M. Reinhart amd Kenneth S. Rogoff, “Too Much Debt Means the Economy Can't Grow: Reinhart and Rogoff,” Bloomberg, July 14, 2011,
www.bloomberg.com/news/2011-07-14/too-much-debt-means-economy-can-t-grow-commentary-by-reinhart-and-rogoff.html
.

2
Laurence Kotlikoff, “U.S. Is Bankrupt and We Don't Even Know It,” Bloomberg, August 11, 2010,
www.bloomberg.com/news/2010-08-11/u-s-is-bankrupt-and-we-don-t-even-know-commentary-by-laurence-kotlikoff.html
.

3
“Hard to forecast end to U.S. housing crisis: Shiller,” Reuters, February 20, 2009,
www.reuters.com/article/2009/02/20/businesspro-us-usa-economy-shiller-idUSTRE51J5SO20090220
.

4
John Ross, “New deterioration in the US savings rate and its implications,” Key Trends in Globalisation, January 3, 2011,
http://ablog.typepad.com/keytrendsinglobalisation/2011/01/new-deterioration-in-the-us-savings-rate.html
.

5
Ibid.

6
John Ross, “Average economist predictions for US GDP would mean only 0.9% annual average growth over business cycle to end 2011,” Key Trends in the World Economy, January 17, 2011,
http://ablog.typepad.com/key_trends_in_the_world_e/2011/01/average-economist-predictions-for-us-gdp-would-mean-only-09-annual-average-growth-over-business-cycle-to-end-2011.html
.

7
Dwight Eisenhower, “Farewell Address” (1961),
www.ourdocuments.gov/doc.php?flash=true&doc=90&page=transcript
.

Thus in the beginning all the World was America, and more so than that is now; for no such thing as Money was any where known. . . . All the World was for the taking.

—John Locke,
The Second Treatise on Civil Government
(1690)

The controversial thesis of this book is that the relative advantages of two richly endowed countries, Brazil and the United States, will reverse in the twenty-first century. One of the more fundamental developments of our time is the progressive slowdown in growth rates of the leading advanced economies and the increasing dynamism of what were once known as “underdeveloped” countries. While we don't often look at it this way, today's advanced economies are those that were well-suited to prosper in the conditions prevailing during the nineteenth and twentieth centuries.

Even though the United States emerged as the world's foremost economy in the middle of the twentieth century, Brazil's growth rate substantially exceeded that of the United States during most of that century. But the twentieth century was not Brazil's century for at least three reasons:

A key to understanding the economic transformation just described is recognizing that U.S. growth was launched around natural advantages (including incorporation of copious amounts of cheap energy and cheap water transportation) that enabled Americans to grab most of the “low hanging fruit of modern history.”
4
These advantages supported the growth of middle-class incomes as annual energy input per capita shot up from one-twentieth of one horsepower before the Industrial Revolution to more than 131,000 horsepower lately.

The commonplace observation that U.S. prosperity depends upon cheap energy implies a downside. As energy becomes more expensive, U.S. prosperity falters. It is not entirely a coincidence that the peak in American incomes compared to the rest of the world occurred around 1950, when U.S. domination of world oil production peaked. The subsequent slowdown in world energy output per capita has closely correlated with a slowdown in U.S. economic growth. Median family income in the United States more than doubled between 1947 and 1973 but rose by less than one quarter between 1973 and 2004. Economist Robert Gordon has shown that the growth of multifactor productivity in the United States collapsed in the fourth quarter of the twentieth century, just as the growth of energy inputs faltered.
5
The meager income gains that did materialize were mostly wiped away in the ensuing financial crisis. The real median wage in the United States has been stagnant for a quarter of a century, despite a near doubling of GDP per capita.
6

The extraordinary and unrepeatable success the United States enjoyed in achieving superior incomes for most Americans has now become a cause of instability as downward mobility bites.

It is little appreciated that as of 2011, according to Branko Milanovich's
The Haves and the Have-Nots
, “the poorest 5 percent of Americans are among the richest people in the world (richer than nearly 70 percent of other people in the world). The poorest 5 percent of Americans, for example, are richer than the richest 5 percent of Indians.” The “middle class” in the United States is competing with the middle class in India and China. If U.S. middle-class incomes must fall until they match those in India and China, the bottom is a long way down. (As of this writing, an income in rupees that equates to $85 per month qualifies as “middle class” in India.)

Brazil, by contrast, is already more nearly a microcosm of the whole earth: “The bottom 5 percent of Brazilians are among the poorest people in the world but the top 5 percent are among the richest.”
7

Brazilians are accustomed to a yawning wealth gap between the plutocrats and the very poor. Partly, this reflects Brazil's natural endowments, which have always required high capital investment to exploit. There was less low hanging fruit in Brazil. Brazil's early history involved plantation farming that necessarily required extensive farm labor. Unlike the United States, where yeoman farmers could expect to earn an independent livelihood on relatively small plots, Brazil in its early days was dominated by grantees on large plantations secured from the Portuguese crown, initially in a system of “captaincies” over gigantic tracts of land larger than European countries. Later, the dimensions of land holdings by the elite shrank to the merely vast. Still the investment requirements to develop these properties were enormous. As distinguished historian Thomas Skidmore summarized, “the risks were too great and the rewards too uncertain to persuade most of the grantees to make the investments required to be successful.”
8

The tradition of a dominant plutocracy reflects circumstances that have necessitated high capital requirements for economic development in Brazil from its beginnings. More on those later.

As Brazil has developed, wealth disparities have not been narrowed significantly by politically inspired income redistribution within the democratic process. This is at least partly due to the fact that the Brazilian state has heretofore lacked the credit to support debt democracy, the expedient policy that has dominated politics among the world's richest democracies. In debt democracy, the illusion of consensus over subsidies, handouts, and welfare support is achieved by borrowing on the credit of the state. The long indulgence of the world in according AAA credit standing to the debt of OECD governments permitted the spending of vast sums out of an empty pocket. In the United States, the government chronically spends money to disguise declining private incomes. But unfortunately for the United States, the United Kingdom, Japan, Greece, Ireland, Portugal, Italy, Spain, and soon, other countries, the stimulative effect of new debt is waning along with the growth potential of the advanced economies.

If anything, the pressure for income redistribution in Brazil may have lessened as the incomes of the poorest Brazilians rose. While American incomes sink, almost 40 million Brazilians have risen from poverty to middle-class status in the eight years prior to May 2011. Brazil has grown rapidly while its energy inputs soared.

Although U.S. investment in scientific and technical research has yielded new products and profitable companies, it has failed to duplicate the kind of comparative productivity advantage necessary to reproduce the gap in incomes that Americans enjoyed over everyone else half a century ago. Figuratively, no one knows where to find the ladder to enable average Americans to reach the higher fruit.

Whereas the United States enjoyed favorable access to cheap energy from the nineteenth century through the first three-quarters of the twentieth century, Brazil is becoming an energy superpower at a time when oil and other energy-dense fuels are becoming increasingly scarce and expensive. As we will explore, Brazil is better situated to prosper in a world of expensive energy where the cost of BTUs soars as global oil production wanes.

Brazil is also the Saudi Arabia of water in a parched world, where “to produce a single pound of wheat requires half a ton, or nearly 125 gallons of water.”
9
Brazil comprises just 5.7 percent of the world's landmass, but about 20 percent of the world's freshwater flows through the Amazon basin alone. Few other countries can rival Brazil's freshwater resources. Water authority, Steven Solomon, places Brazil foremost among the “super Water Have countries . . . with far more water than their populations can ever use.”
10