Reinventing the Economy of the USA
Posted on August 18th, 2010

By Garvin Karunaratne, Ph.D., Michigan State University International Consultant

Current fiscal and monetary measures, as well as the US President’s Stimulus Package offering $ 862 billion to rejuvenate the ailing corporations, financial institutions etc.,` is unlikely to bring prosperity to the USA economy in the long term. The paradigm that had been hitherto followed- to leave the economy to be handled by the Private Sector-Monetarism, with the State having little or no control has been found to be a non-runner. Laissez-faire and de-regulation have proved to be non developmental. This malaise has had worldwide repercussions.

  The following suggestions are made:

1. Move away from theories of Monetarism- Freemarket Laissez-faire Economics, which have failed to bring about development. Search for a new paradigm for development.

2. Get down to basic concepts of development- production and trade, self reliance, self sufficiency. Cull down globalization to be developmental. Handle development through development planning aimed at increasing productivity and full employment with the aim of having a prosperous country annihilating poverty. Development Planning should commence at the County Level and be tied to the State and Federal levels

3. Concentrate on Microenterprises, especially self employed ventures. 

4. Concentrate on the development of community enterprises, where the industries will be based at County level and managed by community members. Use theories of Community Development and Non-Formal Education to enable people to be partners in development, develop the abilities and capacities of entrepreneurs and community leaders etc. to attend to development tasks.

5 `The Universities should attend to develop the local and national economy in the role of the Land Grant Universities. The Cooperative Extension Service should take on the role of rural and urban planning and coordinating all development efforts by Universities, training institutes and State Departments of Economic Development 

6. Regulate the stockmarket mechanism to function in a developmental manner by channeling funds into production, ensuring that the executives cannot draw unlimited funds through the sale of stock options etc. Regulate and closely monitor all Hedge Funds

 It has to be a multipronged interdisciplinary effort.

 Reinventing the Economy of the USA

By Garvin Karunaratne, Ph.D., Michigan State University

1 Introduction 
 The USA, the richest country in the world has been mired in a recession for the past several years. The aim of this Paper is to explore possible solutions to end the recession.

 In 2010 it was found that 4.3 million Americans are out of work.

The collapse of prestigious multinational companies and financial institutions of repute has become commonplace. The USA’s second largest Bank, the Bank of America found its profits plunge 95% due to the sub prime mortgage debacle.. The demise of Freddie Mac and Fannie Mae, the $ 5 trillion national mortgage companies that are involved in funding over half the US mortgage market. has sounded the death knell of homeownership.  All round the situation is one of bankruptcy, though this word is conveniently avoided when speaking about a country.  States and local Councils have deficits  of nearly $ 100 billion while the Federal has a deficit close to $ 1.4 trillion. The USA economy is in dire straits with people not being certain even of the savings they have deposited in banks. This malaise has spread to the UK and to Europe and around the World.

 President Bush tried to contain the recession with a $ 168 billion tax cut, which does not seems to have had any effect. In the words of President Obama, “They(Republicans) gave tax cuts to millionaires who did not need it,(WallSt.Journal:6/17/2010)  “President Obama has tried to curb the recession with a $ 862 billion stimulus package.

Causes for the Recession

The main cause for the demise of the US Economy lies in the Milton Friedman -Freemarket Laissez-faire Economic Theory that has been followed since the days of President Ronald Regan and Premier Margaret Thatcher which deregulated and offered unreined supremacy to private enterprise. Earlier the concepts followed was Keynesian, with effective regulation.   Fed Chair Volker was dropped by Regan because Volker did not want to de-regulate. Greenspan was a deregulator and the current crisis can be related to the lack of controls. It was hoped that the development of private enterprises would emerge with deregulation, usher prosperity through trickle down economics and act in the national interest. This has now been proved wrong.  In the words of President Obama:

“If you are a Wall Street bank or an insurance company or an oil company you pretty much get to play by your own rules, regardless of the consequences for everybody else”¦.. the irresponsibility of a few folks  on Wall Street can bring our entire economy to its knees.(Wall St.Journal:6/17/2010)

 The USA championed the concept of free enterprise and freedom, following the tenet of Adam Smith, the celebrated economist who argued for free enterprise.

   The US economy has seen production fall with the loss of jobs. The USA has lost as much as 8.5 million jobs  since the recession commenced in 2007. In 2000 the unemployment rate was only 4%. That was in the heart of the boom when every business premise in the Silicon Valley was in production. The unemployment rate increased to 5.1% in 2005 and to 9.3% by 2009. In 2010 the unemployment rate is at 9.5%. Now in the heart of Silicon Valley many business premises are vacant; enterprises have folded up and gone for good. The economy of the USA  must add over 100,000 jobs a month to absorb new entrants.

 An additional cause for the recession is offshore-resourcing, where work that was once done in the USA is being done abroad. Developments in communication technology- e mail, video-conferencing etc. enable easy and cheap communication links to get things done abroad- aimed to benefit from low wages in the Third World. This results in unemployment in the USA. The craze for making profit has been the prime cause.

 A further cause is the highly trained high tech experts being laid off proceeding back to their own country- India and setting up high tech enterprises. This has enabled the outsourcing

 The situation has been aptly summarized in an advertisement by MacNiel Automotive:

“The exporting  of American jobs is a trend  that must be stopped and reversed. When I walk into my local hardware store I typically find 85% of the goods for sale are manufactured 7,000 miles away. Recognizable American brands have been forced by shortsighted management and buyers at large national chains to build factories overseas just to save a lousy $ .50 on a tape measure. To these ruthless buyers it is all about money.”

The US economy’s greatness lies in the application of the state of the art high technology- research and development with innovation and training for entrepreneurs. The USA has held the unrivalled position of leader in high technology. This position is at stake now due to high-tech enterprises retrenching specialists and also due to offshore resourcing. This has to be nipped in the bud if the USA is to continue to be the leader.

  Looking at the structure of imports and exports of the US, one finds a serious deficit. In 2003 the deficit was $ 403 billion. This  increased to $ 666 billion by 2004. By 2006 this deficit increased to $ 764 billion. In 2008 the deficit was $ 695.9, while by 2009, the deficit had reduced to $ 380.7 billion. Perhaps the lower deficit could be attributed to lower imports due to the reduction in consumer spending.

 To finance this shortfall, the USA is compelled to borrow US $ 1 billion daily from foreign borrowers. The total public debt of the USA is a staggering $ 10 trillion. This debt has increased steadily from $ 6.4 tr in 2003 and $ 7.5tr. in 2005. This increasing trend deserves serious attention. Further foreign holdings of US assets has increased from $ 1.2 trillion in 1994 to as much as $ 6.3 trillion by June 2005.  Foreign investors now hold slightly less than 50% of the publicly held and publicly traded U.S. Treasury securities, 25% of corporate bonds, and about 12% of U.S. corporate stocks.These in 2008 amount to a total of 2.5 trillion: (CRS Report to Congress Order Code RL34319 Foreign Ownership of U.S. Financial Assets:Implications of a Withdrawal”:January 14, 2008:James K. Jackson)

 Heavy budget deficits are an unhappy phenomenon.  President Obama’s first year budget deficit was $ 1.4 trillion while his second year  had a deficit of $  1.3 trillion.

The housing market has had to bear the brunt of the downturn in employment. Homeownership was accepted as a virtue from 1918, when the US Government staged a “Own Your Own Home” Campaign.  In the 1940s homeownership was at around 40% and this increased to  65% by the 1960s and reached a peak of 69.4% in the mid 2004. The situation was exacerbated by the sub prime mortgage crisis. This was primarily due to Banks giving loans on a liberal basis to as much as 125% of value.

Looking deeper into the sub-prime mortgage crisis, on my visit to the USA in June 2008 and later in June 2010,  I find that the primary cause for the sub prime mortgage crisis is not the loss of jobs and earnings. The manipulation of interest rates in itself has caused a burden on people who were enticed to take mortgages and other loans when the interest rates were low. In May 2000 the interest rate was 6.5% and this was gradually reduced to 1.0% by June 2003. Next, the rate was gradually increased to 5.25% in June 2006 and thereafter reduced gradually to 0.25%   As the interest rates were increased the loanees found it difficult to pay the mortgages as their incomes did not increase and foreclosures were inevitable. This sub prime crisis is thus directly related to  the indiscriminate manipulation of interest rates. Our financial experts sought at times to spur investment by reducing interest rates and at other times to reduce inflation by increasing interest rates. The experts failed to understand human psychology. They failed to fathom the repercussions that would be caused by the incessant manipulation of interest rates. In the process the sub prime mortgage crisis was an unwanted result.  The gravity of the sub prime mortgage crisis is that most homeowners do not have equity in their homes. In Las Vegas though homeownership is at 59%,  only 17% of homeowners have any equity left. In San Diego though homeownership is at 55% only 35% to 39% of homeowners had equity in their homes.(Wall Street Journal:June17,2010)

 Methods other than manipulating interest rates have to be utilized to spur investment and obviate inflation. In my opinion had the interest rate remained stable and steady the housing price slump could have been caused only by a loss of earnings. The loss of earnings- unemployment is something that could be tackled, but when it is linked to the process of sub prime mortgages and in addition, to the fall in the value of houses and there is an overall lack of confidence and uncertainty in finance caused by the collapse of financial institutes of repute, the total situation defies any easy solution.

 In actuality the collapse of the economy was due to the fact that financial companies of repute tried to make the maximum profit and even resorted to fraudulent means to achieve such ends. Countrywide Financial, was accused “of misleading investors”  and agreed to  a settlement of $ 600 million to settle law suits accusing that it “loosened its lending standards during the housing boom and made loans that entailed greater risks to shareholders.(“Countrywide to pay $ 600 million to settle law suits” in USA Today: Aug 042010)   Goldman Sachs was accused  by the SEC of failing high standards of honesty and professionalism. In detail, Goldman Sachs was accused of having “defrauded investors by misstating and leaving out key facts about a financial product tied to sub prime mortgages as the housing market was about to tank. The SEC alleged that ” one of the World’s largest hedge funds,  Paulson & Co.  paid Goldman to structure a transaction in which Paulson could take  short positions against mortgage securities chosen by Paulson & Co based on the belief that securities would fail.(“SEC Reaches Record Settlement with Golden Sachs” in Daily Finance:July 15, 2010)

 What is important to note is that due to financial settlements these companies that were alleged to have done frauds have got the chance to continue to be in business- in the same capacity along with their staff that had done the misdeeds.  In short the companies and the officials responsible have not been duly punished for the misdeeds. There was firm evidence for the SEC to launch a prosecution and it was wrong to have allowed the errant companies to get off scot free for having done irregularities and frauds. The case should have been heard in full and if the frauds had been proved then the Company should have been held responsible to restore the losses to the investors, the companies should have been liquidated and the errant officers should have been given incarceration. It is only if such strong action is taken that companies can be controlled and expected not to do any frauds in the future.

 Columnist Mick Patterson rightly states: While the citizens of America have  suffered mightily, the culprits have not. Most of those responsible  for this national nightmare are still in the positions they held, while others have left with big payoffs. This too is the unacceptable face of Capitalism”. Patterson refers to the fraud perpetrated by Goldman Sachs and the lending done for mortgages far in excess of values, which created a catastrophy.(” An Unacceptable Face of Capitalism” in The San Diego Union Tribune, June 10, 2010)

 In the current system investors have also fallen a prey to fraudulent activities by hedge funds and people who handle investment for profit making. In December 2008 it was reported that the world’s largest swindle was that of Bernard L Madoff, former Chairman of Nasdaq Stock Market. His Plan- working a pyramid deposit scheme which he financed through luring depositors- where he paid hefty returns by using the money of new depositors and finally made off with $ 50 billion when he realized that no further depositors could be found. The victims were worldwide including banks of repute like HSBC losing $ 1 billion. This exposes the lack of an audit mechanism to ensure that people and institutions that handle people’s money are not swindled. It is important to note that Madoff’s market making firm was commenced in 1960. Madoff also ran a hedge fund.

Poverty in the US is on the increase, with increasing unemployment, loss of people’s earnings due to the recession. Many workers have had to hold on to their jobs by agreeing to cuts in pay and perks. A mass of some 37 million were in poverty in 2004. This was an increase of 1.1 million over the earlier year. The poverty rate increased  between 2007 and 2008. The official  poverty rate  was 13.2%, up from 12.5% in 2007. It also follows that real per capita incomes declined  by 3.1% for the total population between 2007 and 2008.  As much as 46.3  million people were without health insurance coverage in 2008  In 2004 only 45 million people did not have health insurance. This was an increase from 45.7 million in 2007.(US Dept.of Commerce:2004 & Income, Poverty & Health Insurance Coverage in the US 2008″

In my incessant travels to the USA over the past two decades, I have seen poverty on the gradual increase. By 2005 many production companies had closed down and many premises were vacant. However now the situation is far worse. In 2010 I traveled by road from Baltimore to Virginia, to Tennesee, to North Carolina, Georgia, Florida,   Louisiana, Alabama, Missisipi, Texas, New Mexico, Arizona and  California.  In the rural areas the economy has come to a grinding halt. I myself saw bread being doled out to the unemployed in many Malls in rural areas. The situation of Imperial County in California detailed by Columnist   Tamara Audi would be typical of many rural areas. She speaks of an unemployment rate of 28% “Many families are grappling  with eviction notices and unpaid utility bills”¦ The Imperial Valley Food bank now serves about 13,000 people a month- a 40% rise  in demand over  the past two years. “¦. Campesinos Unidos, a   Social services agency in  Brawley. ran out of food  during its regular distribution to local families”¦ “we went to the emergency supplies and ran out of those too” ( Tamara Audi: “Bypassed by the Recovery: After tasting prosperity, California Desert Towns are Back to What they were” in Wall Street Journal, June17,2010)

 The stark truth is that many people are hungry, aptly stated by John Criswell, Executive Director of the San Diego Hunger Coalition: “An estimated 731,742 San Diegans face food insecurity- meaning they do not know  how they will meet their nutritional needs”¦. 1.38 million households in California receive public assistance such as cash aid or food stamps. The vast majority of these households- a million receive food stamps only.”(“ƒ”¹…”The Confusion about food stamps” in San Diego Union Tribune:July30, 2010  It is important to note that Food Stamps enables one to obtain only certain items of food. Generally food found in excess is included. This does not help a family to obtain full nutrition needs.

In fact the New York Times(Dec 02 2007) states “You need not be a Wall Street chieftain to feel the anxiety that has wrapped its arms around the American economy. The stockmarket seems locked in a downward spiral as one bank after another suffers its day of reckoning with bad mortgages. Companies are sharply cutting profit forecasts as the sense takes hold that American consumers are finally too loaded with debt to buy the next flat screen television. The dollar has fallen to inglorious depths. One unpleasant word hovers large: recession“ Economist Nouriel Roubini says that “The evidence is now building that an ugly recession is inevitable.”(Ibid) 

   In January 2008 the President of the USA had announced an Economic Stimulus Package of $145 billion to be spent on tax cuts and it was hoped that a tax cut of $ 300 to 600 to each tax payer will boost consumer spending. In my experience a tax cut of $ 600 is unlikely to create any investment that will lead to any increase in productivity. Consumer spending will only increase imports. It was also found that families tend to save a tax cut to face a rainy day. Currently, the stimulus package of $ 862 billion is unlikely to bring prosperity in the long term unless it is worked on a new paradigm for ensuring development goals. Many attempts are being made today to tackle the problem of sub prime lending, little knowing that the sub prime mortgage crisis is only one of the results of the downturn in the economy and not a cause of the downturn of the economy. Economists should be really addressing the economy itself. What is required is incentives for long term increases in productivity which is the aim of this Research Paper.

 In February 2009 the Obama Administration  enacted a major package:  The American Recovery and Reinvestment Act(ARRA) to arrest the downfall of the economy. It comprised a mixture of assistance to the unemployed, aid to cash strapped State and local Governments and tax cuts. The total amounted to $ 862 billion. President Obama’s Plan is to increase US exports. His aim is to double US exports by  5 years. Cash-strapped foreign countries can no longer be depended upon to import, purely because they do not have funds. This is why the USA has to look for additional methods like the development of local resources and creating the requirements for US consumers in the USA itself. Then the money currently spent on imports will circulate in the USA, creating employment and also alleviating poverty.This is a fundamental recommendation of this Paper.

 The USA Congress  passed a Job Creation Bill in March 2010, that included $ 13 billion of tax incentives to coax companies to increase their cadres.

Bailing out banks with finance will not bring long term results. Stability in bank lending is a necessary pre requisite to enable long term development, but this in itself will not enable full development. 

  It is of interest to note that when the Sub Prime Mortgage Crisis hit the USA in 2008 and Countrywide had to be bailed out by the Bank of America for only $ 4.1 billion, the Chief Executive- the founder Angelo Mozilo got a compensation package of $ 22.1 million in 2008. Though far less than his emolument package of $ 121.5 million in 2007, it is forgotten that his maladministration was the cause for the sub prime mortgage crisis at Countrywide. Freddie Mac’s Chair Richard Syron earned $ 14.5 million in 2007 while Fannie Mae’s Chair earned $ 14.2 million in the same year while the giant companies were near collapse. Instead of bonuses they should have been severely reprimanded. Rewarding chiefs who were responsible for mismanagement does not send the right message to officialdom.

The Private Sector has been accepted as the engine of growth and the task of economic development is left in the hands of the private companies. Research done in the Universities is fed to the private companies. It is true that private companies have been a success in spearheading research and production and the stockmarket mechanism has been successful in providing funds for the companies, but there has been no mechanism to ensure that the companies are not bled to death by the emoluments drawn by the chief executives of the companies by their selling stock options. As stated by Professor Joseph Stiglitz: Corporate scandals dethroned the high priests of American capitalism; the CEOs of some of America’s largest enterprises seem to be enriching themselves at the expense of their shareholders and workers. Excessive layoffs have enriched the corporations’ cash assets, but alongside, unemployment and resultant poverty has been the unwanted result. The CEO of General Motors, Richard Wagoner got a 33% pay hike to $ 2.2 million pay plus perks in 2007 although the Company lost $ 38.7 billion that year. Ford’s CEO Alan Mulally was paid $ 39.1 million for the four months he worked in 2007, when the company ran at a loss of $ 1.1 billion. All this extravaganze while the companies ailed and are begging for funds from the US Treasury does not sound right. There has to be a mechanism by which the company executives cannot milk dry the companies and they have to be rewarded for success and also be held responsible for failure.

 The problem appears to be that there is no comprehensive plan for development. University dons in economics attend mainly to teaching and research. Companies try to work in areas  where they can create profits. We have well paid journalists and newscasters analyzing the news, adding comments, but no one is doing the actual thinking that can end up in  planning for production and attending to the wherewithal that is necessary for production to get going.

 The resultant situation can be aptly summed up in the words of Ben Bernanke, the Federal Chief, the authority on finance:

In all likelihood”¦ a significant amount of time  will be required to restore the nearly 8.5 million jobs that were lost over 2008 and 2009.(“Economy Tiptoeing Forward” in San Diego Union Tribune:June10,2010)

  The Stockmarket ensured that there were ample funds for the various companies that were floated. Allowing investors to make profits through speculative trading was the strategy used to enable corporations to obtain funds for development. However certain weaknesses are evident in the stockmarket mechanism. As investors poured in and bought stock, there was no mechanism afloat that could ensure that the funds available to the company could be used for productive development. Unregulated greed among investors enabled hedge funds to gain millions even as markets collapsed by shorting stocks and shorting had to be stopped at times by the Securities & Exchange Commission in September 2008. Hedge Funds gained a billion pounds in profits from the collapse of Northern Rock in the UK in 2008. The working of the stockmarket needs to have more regulations to ensure that the money created when a share price goes up is invested for further technological advancement and product development. The stockmarket continues to be the chief method of financing development and the expansion of industries and every attempt has to be made to develop this method further. However it is essential that there is regulation to ensure that the stockmarket mechanism is not unduly used by hedge funds to act in any manner to destablize the economy. 

  The current economic crisis in the US has to be understood in the global context..It is my opinion that the East Asian Economic Crisis of 1997 which spread to include the Asian Giants- Malaysia, Thailand, the Phillipines, South Korea, Indonesia and then spread to Russia, Argentina and Brazil has had an adverse effect on the economies of the Developed Countries and the current recession of the US also comes within this context. It is important to note in this connection that other than Malaysia all other countries that were involved in this crisis had to have their economies rejuvenated by the injection of foreign aid, including a rescheduling of their debt- in short the countries were given a further lease of life. Other Asian and African countries also have ailing economies that have to be annually bolstered with aid from the Developed Countries. The slump in the sales of manufactured products comes from the lack of sales and very few countries have funds to buy manufactures. The economies of the Developed Countries depends on their manufactures and unless sales can be found, there will be unemployment-loss of jobs and poverty and deprivation will inevitably creep up. A part of the present cause for the downturn of the US economy lies in the US depending on the rest of the world as a source of income ( through investment, sales, offering services, opening up the rest of the World for US multinationals, etc) and finding such incomes dry up.

 The attempt at prosperity was also to be achieved by encouraging US investors, especially Multinationals to invest overseas- in Emerging Economies and the Third World countries, open up their assets for exploitation and bring riches to the USA. The prosperity in the Clinton years was mainly achieved through this method. A classic case of this strategy  was Clinton’s attempt to coax Sheik Hassina, the Prime Minister of Bangladesh, to change Bangladesh’s long held stance  against the liberalization of gas exports until local need usive s were met and a fifty year reserve was assured.  Clinton had announced $ 97 million in food aid,  $ 84 million in clean energy initiatives and $ 8.6 million to reduce abusive child labor, a “ƒ”¹…”Debt for Nature’ swap and forgave $  6 million in Bangladesh’s external debt but Sheik Hasina stood her ground  stating:’ we would like to lead a life of dignity’. This decision of the Government of Bangladesh disappointed the US and British Companies as well as the World bank.(Garvin Karunaratne:How the IMF Ruined Sri Lanka,”¦, Godages, Colombo:2006)  This illustrates the method used by the USA to open up markets for US and other multinationals and for their shareholders to profit- a strategy that cannot always be relied upon.

 Travelling through most of the  States in the USA in 2004 to 2006 and in 2010(clocking over 40,000 miles in my RV) I have seen many microenterprises established in the homes of people. Actually, small business employment represents nearly 40% of US employment from 1996 to 2006. These are small businesses providing self employment to a single person. Many such small entrepreneurs have told me that their earnings are meagre and insufficient even to meet the cost of paying their health insurance premium. This is a core of interested and patriotic entrepreneurs who are willing to spurt into activity given a chance.

 It is necessary to develop resources within the U.S.A. in a self sustaining manner. The USA is sufficiently large and has a store of undeveloped resources which can help building up a self sustaining economy

 With the inroads of the Friedman Freemarket Laissez-faire Economic Theory during the Regan Presidency, no further attempt was made to bring about prosperity in the long term. This Monetarism Theory was based on a libertarian philosophy which reduced the role of Governments- banned development planning by the State and instead enthroned the private sector through deregulation. Free Trade enabled America to reach prosperity; however there was plenty amidst poverty. However the craze for further profits by key players even resorting to fraudulent practices has seen the collapse of the capitalist system. George Soros warned us of this : 

Markets can work in unexpected ways and become chaotic. I am afraid that the prevailing view which is one of expanding the market mechanism to all domains has the potential of destroying society. Unless we review our concept of markets they will collapse because we are creating global markets without understanding their true nature.(Financial Guardian, UK, Oct 30, 1997)

It appears necessary to search for a solution where there is employment and prosperity for all Americans. It is imperative that corrective measures have to be taken immediately before the USA slumps down further.


What Can be done today? 

As stated by Juan Somavia, the Director General of the International Labor Organizaion:

We need an economic rescue plan for working people and the real economy, with rules and policies that deliver decent work and productive enterprise. We must better link productivity to salaries and growth to employment.(Asian Tribune Oct 23, 2008)

The current global recession cannot be overcome unless there is State intervention both through regulation and also through direct stimulus activity, aimed at increasing productivity causing employment and income generation. This task can only be achieved on a national basis by each sovereign country because it is only planning on a national policy and national budgetary expenditure that can achieve this goal.
High-tech research has to be concentrated on with leading high-tech Universities attending to concentrate on research and guiding high-tech enterprises to success. This effort needs supervision and support by a US Senate Committee on High-Tech Industries, on the lines of the US Senate Committee on Small Business. 

 The thrust on the development of microenterprises has to be strengthened. Microenterprise Development is already being done through many voluntary organizations that avail themselves of funding from the SBA, various Foundations and guidance from certain Universities. This is guided by the Senate Committee on Small Business Development . The current effort of the Small Business Administration to help small entrepreneurs has to be strengthened by the provision of the infrastructure to study local needs and available resources, find methods of developing enterprises at the local County level. 

Microenterprises are units that need not incur high overhead costs and need not have high earnings to provide dividends for non- working investors. The aim of the entrepreneurs should be to work for one’s self- an earned income as opposed to providing an unearned income for non-working people who invest and earn on account of the investment. These microenterprises are short of capital and do not have the capacity to attend to research. The Small Business Administration, working closely with Universities should take on the mantle of providing the infrastructure- research, development and marketing guidance for microenterprises.

 In my travels  in 2010 in a number of States I have seen items made in China being sold all over to tourists. The items ranged from ceramicware- mugs, bowls to textile items like caps, hats, T-shirts etc. What was extremely interesting was that there were a few US manufacturers in textile items and their prices were equal to that of the  Chinese products. All over in the Florida Keys, Orlando, in Mesa Verdi, in the Grand Canyon, at NASA at Cape Canaveral in Florida everywhere mugs of Chinese make were being sold at prices from $ 7.99 to 10.00. In ceramicware it is necessary that the cups & mugs- in which food can be consumed,  have to be fired at high temnperatures( 1200 degrees) for the lead to get burnt,suitable for consuming food. As a Deputy Director of Small Industries my idea of making cups  and mugs  in Sri Lanka was vetoed by  experts on the ground that the kilns in the Small industry Departmental Centres had a firing range only upto 900. degrees.  Today the American people  are not aware whether the cups and mugs they buy have been fired to the required extent for the lead to become non poisionous.  It has been found on investigations at Salt Lake City that  20% of ceramic cookers  were leaching out lead into the food.  The FDA suggests that people  should beware of porcelain mugs  produced in other countries and advised that these should not be used to consume food. 

 When one goes into the retail price of a mug at $ 7.99( the cheapest) it is seen that the retailer has a high mark up and there is an element of profit for the distributor, the importer in addition to the cost of freight. From my own experience in handling ceramic centers in Sri Lanka I can venture to state that if local production centers are arranged all porcelain items like cups, mugs etc could be made locally and sold at tourist shops in the respective areas. Thus the cost of overseas freight, profit levied by the importer and the distributor could be obviated. Thus I am of the opinion that regional pottery centers can produce all the mugs, cups and other porcelain items for sale within the current retail prices. For this to succeed the imports from China should be heavily tariffed. The aim is the creation of employment in the USA.

 Oin textile items too, I found T-shirts  priced at around $ 12.00 to $ 20.00 all made in China and other countries. The quality of the material was also poor. What was very interesting was that there were US manufacturers like  Sportex manufacturing T shirts which were sold at prices equal to the Chinese products. This directly proves my point that these items could be manufactured in the USA. The items would include T shirts, anoracks, caps, hats . It is necessary that the items are produced in garment factories on a regional basis. The machinery should include manufacturing quality fabric and garment factories in the USA established on a regional basis to cut costs of distribution. These industries will make the textiled items, in the locality itself. All imports should have forbidding tariffs.

 This strategy if successful can be extended to all clothing and this in my opinion is the one and only strategy for the USA to get out of the recession and also bring about full employment and thereby alleviate the poverty that is rampant today.  This has to be done by careful development planning.

 May I suggest that the local training institutes- Colleges be involved as follows:

For production of textiles- inputs from the Institutes of Technology in State Universities and Colleges.

For designing ceramicware and designing motifs for T shirts the Departments of Art and Design at Colleges and Universities should play a major role. Currently found designs on both ceramicware and textiles are not attractive. High quality designs will make attractive products.

A group of experts should be  entrusted with investigating further about all above items  identifying the machinery, costing, recruiting the trainees who will also follow necessary courses in art, design, pottery, machining in the case of garment making, establishing small scale factories, costing etc.

This group should comprise an economist, a marketing expert in addition to technically qualified personnel in the industry concerned.

 A Federal Committee- like the US Congress Sub Committee on Small Industries should be entrusted with the task of providing the direction and overseeing the progress.

 I hold first hand experience as an Administrator and a Consultant on Industrial Development and Employment Creation  over three decades and can vouch for the fact that this experiment will be a success.

 I would suggest that  Pilot Projects should be immediately commenced with  hand picked State Universities in the areas concerned. A State University in Florida should be entrusted with the task of providing to the Tourist  requirements in Florida. Further the State University in New Mexico should be charged with the production of items required for sale in shops in Mesa Verdi and the Grand Canyon.  A State University in Virginia should be charged with the manufactuire of items required for shops in the Blue Ridge Mountain and  Smokey Mountain  areas.

 In all these industrial units there should be scope for tourists to see the entrepreneurs at work. This would be an added attraction

 Development of Agricultural Production. I have observed cultivable areas in Florida and such other States with ample water resources where land can be developed for cultivation of varieties that are currently imported.  A group of experts drawn from  Colleges of Agriculture in a State University should be entrusted with identifying the imported items that can be produced in the respective States. Thereafter the land to be developed has to be identified, with investigations done on the availability of water resources- rainfall patterns studied. Further investigations should  be made as to whether deep tube wells are required and cost of drilling, cost of leveling and developing land etc should be looked into. This Group of experts in land development and agriculture should be entrusted with the task of drafting suitable plans for settling trainees. These trainees should be also enlisted in study courses in appropriate subjects at College level.

 The trainee students may be given a grant for the work they are expected to do during the gestation period. There should be estimates made of required assistance to get the land to a cultivable state.

 The State should take action to establish tractor stations on a cooperative basis to enable the trainee entrepreneurs to obtain the tractors on a rental basis.

 To my mind I can state that there is scope to establish Grape plantations and establish Vineries on a massive scale, aimed at making the USA self sufficient in all wine products.  An export trade could also be aimed at. The USA has ample experience in this regard.

 At the Keys in Florida I gathered that this area had a particular variety of Lime- Key Lime based on which a good industry manufacturing juice and fruit preparations was done in the past. Key Lime had a very special tangy taste. Now that Lime is no more and  I am told that there are a few trees scattered in the area today.  Investigations have to be made  and Key Lime plantations have to be re-established in order to develop the area as well as to create production for the people. In other regions too there could be regional varieties that have lost favour and have become almost extinct.  Investigations have to be made and this will enable new crop varieties to be developed.

 It is observed that fruits are found in family gardens in excessive quantities and there is no market for such produce. Thus there is a situation specially in States like Florida and California where oranges  go waste while the Supermarkets in the same areas retail these same items at very high prices.  Cooperative organizations should be developed to enable family producers to harvest their excess produce which will be purchased and retailed by the Cooperatives. This was a Scheme which was very successfully implemented in Sri Lanka by the Department for Development of Agricultural Marketing during the period 1950 to 1977. I worked as an Assistant Commissioner in charge of this Program. The benefits of this Program are two fold- to help the producer by paying them a fair price, keeping a low margin of profit and retailing at a cheap price. The Supermarkets will not find sales when they try to sell oranges at high prices and are forced to bring their prices down. It is suggested that the USA should implement this Scheme as a method of reducing the cost of living-alleviating poverty. (For a full report see Garvin Karunaratne: “The Proven Sri Lankan Solution to the Spiralling Cost of Living” in Lanka Web:March 29,2010)

 Currently State  Governments concentrate on Tourism. Development Planning based on the above lines at County level should be done  in addition to the current emphasis on Tourism. There should be a yeoman attempt at finding the needs of communities, studying the resources available within communities to solve the needs of the communities, find additional resources that are required to achieve such tasks and build up the abilities and capacities of community leaders as they try to attend to their own development. The needs of the communities has to be assessed in the context of State and National needs so that overproduction can be avoided. 

 Communities should be put in charge of the development of their areas. For this to become a reality, emphasis has to be placed  on  building community expertise through the theories of Community Development and Non Formal Education.  Community Development is a US Theory of the Sixties. Though practised in the Third World it was thought that Community Development was not required for the US because the US was prosperous. However today’s economic crisis militates that Community Development and Non Formal Education theories should be re-kindled to bring about development. 

 In the words of Professor Murray Ross, Community Development is the process by which the community identifies its needs and objectives, develop the will to work at the needs and the objectives, finds the resources to deal with these needs and objectives, take action to get them done and in doing so develop cooperative and collaborative attitudes and practices in the community.(Community Development:Theory & Practice, Harper &Row:1967

The development of the communities can only be brought about by building up the abilities and capacities of community leaders. This has to be done through the utilization of non-formal education techniques. Non Formal Education refers to a number of educational processes- community development, discussion, deliberation, self help, leadership development, conscientization, participation, sequences of decision making, etc that function simultaneously and complementarily to cause experiential learning.. The people should play a positive role in the needs assessment, in the plan formulation, in finding resources and in contributing their mite for the program, managing the program with their full responsibility. This entire continuum of action is the educational process leading to the development of the initiatives and responsibility in the people.(Garvin Karunaratne:Non Formal Education:Theory & Practice at Comilla, BARD, Bangladesh:1984) 

Once the premier Universities in the world concentrated on teaching strategies for development. This was aimed at equipping administrators to take charge of the development of the Developing Countries. I was one of the Sri Lankan administrators trained in Community Development at the University of Manchester. While the University of Michigan taught Community Development, MIT(Massachussets Institute of Technology) and Michigan State University in the USA concentrated on Non Formal Education. Thus teaching Community Development and Non Formal Education at university level is a clear necessity today.

My travels in Canada in 2004 amply confirm the necessity for community controlled enterprises to emerge. When I entered Canada, I wanted to see the manufacture of Blue Mountain Pottery, a fine pottery that adorned the shelves of high class shops like Harrods in London. When I found that the factory was to be closed down I made it a point to visit the factory. I was interested as I had established many pottery centers in Sri Lanka and was held responsible for their success. The Blue Mountain products were very elegant and marketable and on my visit to the factory I was told that the decision to close the factory was not that the factory was incurring a loss. The answers I got to my repeated questions enabled me to figure out that the profits created were insufficient to find massive profits for the non-working owners. The decision to close has caused unemployment to 143 workers and closed down a great pottery factory for good, a factory that once turned out exquisite pottery. It was a pottery that could have been developed to provide employment for thousands of Canadians and bring in incomes for Canada. Blue Mountain Pottery had the capacity to be developed like the Lladro Figurines in Spain.

In Edinburgh I found that Edinburgh Crystal, a well established showpiece enterprise, had closed down relegating the experienced and trained workers to the unemployed heap.

Both Blue Mountain Pottery and Edinburgh Crystal were State of the Art well established national ventures that never ran at a loss and their loss is a great national calamity that should never have happened.

 This experience confirms that the strategy of community cooperatives handling production is the alternative strategy that has to be concentrated on for purposes of finding employment and poverty alleviation in the rural areas. The current emphasis of individual enterprises- aimed at persons becoming self employed and developing their enterprises have to be expanded further with the community members taking charge of the development of natural resources found in their own areas. Then we can plan for the development of the rural areas on a firm basis. When individuals develop their enterprises or establish worker cooperatives, with success on their hands they can move from their poor moorings to areas of affluence leaving behind the poverty stricken areas from where they sprang into being. 

 Development under the concept of Free Trade and non interference by the Government today is entirely based on the profit motive. The aims of creating employment for the people and development of local resources too have to be tied into the goals of development. It is then that poverty alleviation can ever take place. The Government has to step in to support small entrepreneurs as the small entrepreneurs do not have the resources to attend to research study and find the finance for development. These aspects have to be attended to by the State though the Small Business Development Unit or through a separate source

The Community Development Corporations deserve to be rejuvenated in every County, to study local resources and attend to the development of microenterprises on a community cooperative basis. The County Councils have to be helped by the leading Universities to equip them with skills to assess their economic situation, plan to develop their resources and to work in such a manner as to develop the abilities and capacities of the community leaders and the people. It is here that community development and other non-formal education processes come to the forefront.

Community Development, Non Formal Education and Community Economic Development should be taught at Universities. Administrators should understand these strategic theories and possess the skills to apply when they attend to development tasks. This is a pre-requisite to make people partners in development. 

 Once the State Universities played a major role in the development of the USA. Then it was the Colleges of Agriculture and Industry that carried the mantle of development under the Land Grant System.  The Cooperative Extension Service does not attempt to attend to Development Planning.  Currently the Universities concentrate on the MBA. The thrust of Business Management Faculties of the various Universities that now train students for the MBA. is not for the creation of employment, not for productive development. Instead their aim is at efficiency, teaching strategies for the creation of profits- how to make things cheaper, how to get workers to work more. In this process the rich become richer. Success is judged in terms of more profits created. Instead the Business Faculties of Universities should take on a national development outlook. The attempt should be for creating national production resulting in poverty alleviation. The Business Administration Faculties of Universities should consider this new point of view.

 The role of the Cooperative Extension Service deserves to be expanded to include development planning in both rural and urban areas, and attending to the task of coordinating the efforts of Universities, training institutions, efforts of State Departments of Economic Development and Community Councils. This should also include guiding the trained to become commercially viable entrepreneurs. Though this is a massive task in itself, this is the only path towards sustainable development.

Development Planning in this context should not be confused with the regimented planning so characteristic of the command economies of communist countries. Instead it is only planning on a definite basis with room for investment by the private sector-both corporate and microenterprises, as well as action on cooperative development, aimed at producing the nation’s requirements, that can achieve full employment, alleviate poverty and create prosperity. It is only action on a definite planned basis that can be expected to lead the USA out of the current economic downturn. 

  To enable this take off in development, educational institutes- the Universities and Colleges have to play a major role. This attempt is akin to the Land Grant Universities that once did bring about the development of America. Today unfortunately the Land Grant Role is limited to Colleges of Agricultural Economics, activities limited to a few projects, leaving the major tasks of production in the hands of private enterprise. In his connection I can recall the role played by Michigan State University in the Comilla Program of Rural Development in Bangladesh, where the task was to find the best method of bringing about development in rural Bangladesh. This was a grand success with the program achieving full employment and doubling the yields of rice in less than a decade. This was a monumental achievement in the annals of development history. 


The current deployment of monetary and fiscal measures to guide and bring about an upturn of the economy has proved to be insufficient to address the multifarious problems that beset the American economy. Monetarism has killed the Third World. The message of the Failure of the East Asian Giants of 1997 was not taken seriously as indicative of the demise of Monetarism and infusing funds from the Developed Economy Bankers was thought to be sufficient a measure. This time in 2008 Monetarism has been exposed in the recession in the USA and today the situation is that many US State Governments are strapped of cash to maintain their services.

 In order to enable development planning to be a success it is necessary that the Government has to provide the necessary infrastructure to enable the training of the self employed in vocational training. In addition the State has to provide the mechanism for the training cum production units to get geared into action. Action has to b e taken to get protection for the production in terms of not getting the production swamped by cheap imports.

At least it has to be understood now that the Friedman Monetarist Experiment has exposed its inherent weaknesses. Friedman’s Monetary Theory enshrined the Law of the Jungle and the Wild Hounds, which concept allowed the rich to become richer and the poor to be consigned to the dustbin. It has to be understood that the Private Sector’s main aim is profit and not service. Regulations have to be devised to ensure that the stockmarket mechanism is not abused and investment is not fraudulently swindled.

It is sad that the Friedman Monetary Theory has had to decimate the US Economy before its fallacy has been really understood. A New Paradigm for Development has to be sought.

A multi-pronged approach through the use of various strategies is required. The development of microenterprises, the rejuvenation of Community Development Corporations as well as the development of the capacities and abilities of local community leaders through Community Cooperatives could form this multipronged strategy.. The aim should be to study the local needs and local resources, finding solutions encourage private entrepreneurs and also work with the local communities to draft plans for microenterprise development as well as for the establishment of community based cooperatives- all aimed at tackling the problems of rural decadence and poverty. This task would fall to the Cooperative Extension Service.

I am certain that this proposal is practical and can be successful within a matter of a few years. I can vouch for this without any reservation because I was involved in a similar program in Bangladesh as the Commonwealth Fund Advisor to the Ministry of Labor and Manpower of the Government of Bangladesh. Presented with the scourge of  millions of unemployed youth, and undeterred by the miserable failure of the ILO attempt to establish a self employment program in Tangail, Bangladesh in 1978-1981, , I designed the Youth Self Employment Program in 1982 and guided Bangladeshi administrators to implement it. This Program was based on guiding the trained youths to develop their own self employment projects and guiding them when they commence self employment activities till they become commercially viable. No subsidies were offered but in addition to the vocational training that was given, the youths were motivated to study local resources and draft a self employment project which they established with intensive guidance in entrepreneurship from the Department of Youth Development. The Training Institutes were also charged with the task of offering a technical extension service. This Program has been developed over the years and since 1997 guides 160,000 a year to become commercially viable entrepreneurs. By December 2005, over a million have been found self employment on a commercially viable basis without any subsidies. It is easily the largest program of self-employment creation today, a program that has stood the test of time.

I have also worked as the chief executive of many large commercial ventures in Sri Lanka as a senior member of the Sri Lanka Administrative Service where I was held severely responsible to ensure success.

Both the Comilla Program as well as the Youth Self Employment Program of Bangladesh are the contributions of excellence in American academia- the Michigan State University and this alone proves that Universities can  play a cardinal role in enabling development.

 The current situation of the USA merits the scathing comment by Andrew J Bracevich:

American today must reckon with  a contradiction of growing proportions. Promising prosperity and peace the Washington Rules are  propelling the US toward insolvency and perpetual war. Over the horizon a shipwreck of epic proportions awaits.  To acknowledge the danger we face is to make learning and perhaps even a course change “”…”possible.  To willfully ignore the danger is to become complacent in the destruction of what most Americans hold dear.(From: Washington Rules: America’s Path to Permanent War: Metropolitan:2010)

It is my opinion that we can avoid this disaster and this Paper details the new paradigm that will unfold prosperity.

It is my fervent hope that the  new paradigm detailed for the  development of the Superpower America and the suggestions made may please be looked into by various authorities- the new US Administration, the Universities and the Foundations. I wish to be associated with any new initiatives and do hold the first hand experience and qualifications  to  assure that success can be achieved.

 Garvin Karunaratne, Ph.D(Michigan State University)

Center for Global Poverty Alleviation, 2, Broadlands Avenue, London SW16 1NA, The UK  Phone 208 677 2664: ed mail August 17, 2010:

One Response to “Reinventing the Economy of the USA”

  1. Kamal Says:

    It is a very interesting article
    Good advice
    From the third world
    Would they listen?
    No, No, No
    It is too simple, and clear and obvious
    What is your profit margin?

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