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12 September 2017 Financial Analysts Journal Book Review

Seeds of Destruction: Why the Path to Economic Ruin Runs through Washington, and How to Reclaim American Prosperity (a review)

  1. Jerry H. Tempelman, CFA
An analysis of what currently ails the U.S. economy, Seeds of Destruction offers a set of centrist, nonpartisan public policy proposals that its authors believe would go a long way toward restoring the prosperity that the United States enjoyed during the second half of the 20th century.

Seeds of Destruction is an analysis of what currently ails the U.S. economy. More importantly, it is also a set of public policy proposals that its authors believe would go a long way toward restoring the prosperity that the United States enjoyed during the second half of the 20th century.

The book is worthwhile for two principal reasons. First, it makes a persuasive case that the United States’ current economic problems are more structural than cyclical in nature. Second, in political terms, the authors’ proposals are relatively centrist, which may make them more feasible to implement than the more drastic reform ideas offered by the political left and right. The book’s centrist approach reflects, in part, the contrasting political leanings of its authors. Glenn Hubbard is the dean of Columbia Business School and was previously chairman of the Council of Economic Advisers under Republican President George W. Bush. Peter Navarro is a business professor at the University of California, Irvine and a former Democratic candidate for the U.S. Congress.

The central theme of Seeds of Destruction is that since 2000, the rate of U.S. economic growth has been significantly lower than before and that this decline is costly in terms of living standards and employment opportunities. The authors argue that the lower growth rate is not a cyclical phenomenon but is a result of structural macroeconomic imbalances. Too much consumption is financed by credit and is not supported by incomes. Saving is insufficient to fund needed increases in capital investment. Growing entitlement programs will cause government spending to take up an ever-larger share of the economy. And chronic trade deficits—stemming, in large part, from the United States’ proverbial addiction to foreign oil and from mercantilist trade practices by China—also serve to hold growth below its full potential.

In discussing the recent global financial crisis, Hubbard and Navarro offer fairly standard mainstream explanations: a monetary policy that was too accommodative for too long after the 2001 recession, home buyers who took out mortgages that were too large relative to their incomes, lenders who issued those mortgages partly because they could repackage and sell off their credit exposure, and the use of inadequate quantitative models to price the risk of such opaque financial instruments as collateralized debt obligations. The book’s main contribution, however, is that it offers a longer-term perspective that extends beyond the crisis.

Although the authors have few kind words for the economic policies of the Obama administration, their alternative prescriptions are only slightly right of center. With respect to Social Security reform, for example, many Republicans favor a solution that includes personal accounts. The authors are at odds over such an approach, with only one (presumably Hubbard) in favor. Instead, they jointly recommend adjusting the retirement age to account for the increase in life spans since Social Security’s creation in the 1930s and tying the annual increase in benefit payments to inflation rather than wage growth. These two adjustments alone, the authors argue, would nearly suffice to make Social Security solvent well into the future.

Not all readers will agree with the authors’ underlying theoretical framework. For instance, structural shifts in the broader economy may mean that past growth rates are no longer attainable. People tend to save more of their income during their high-earning middle years and spend more of it during their low-earning retirement years. Therefore, all else being equal, an aging population will produce a lower aggregate saving rate and, in turn, a structurally lower growth rate.

In the political arena, not all the authors’ policy ideas are likely to find a warm reception. For example, Hubbard and Navarro propose that when the price of oil drops below a certain level, the government should charge a levy to keep the price high, thereby providing an incentive for the development of alternative energy sources. Although this idea may go nowhere fast in Congress, the authors are to be commended for its novelty.

On the whole, however, many readers will probably find Hubbard and Navarro’s proposals a sensible compromise for solving the United States’ current economic woes. Seeds of Destruction is a welcome addition to the ongoing debate in an increasingly partisan political environment.



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