Book Review by Jerry Tempelman, Financial Analysts Journal

Seeds of Destruction" is an analysis of what is currently ailing the U.S. economy. More importantly, it is also a set of public policy proposals that its authors believe would go a long way towards 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 our current economic problems are more structural than cyclical in nature. Second, the authors’ proposals are politically relatively centrist, which may make them more feasible to implement than some of the more drastic reform ideas offered by the political left and right.

The book’s centrist approach reflects in part the mixed political leanings of its authors, Glenn Hubbard – dean and professor of the Graduate School of Business at Columbia University and previously chairman of the Council of Economic Advisers to President George W. Bush – and Peter Navarro, business professor at the University of California-Irvine and a former Democratic candidate for U.S. Congress.

The book’s central theme is that our rate of economic growth since 2000 has been significantly less than it was previously, 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 due to structural macroeconomic imbalances. Too much consumption is financed by credit but not supported by incomes. Saving is insufficient to help fund needed increases in capital investment. Growing entitlement programs mean that government spending will be taking up an ever-larger share of our economy. And chronic trade deficits, stemming in large part from our proverbial addiction to foreign oil and from mercantilist trade practices by China, also serve to hold our actual growth rate beyond its full potential.

The authors discuss, of course, the global financial crisis, for which they offer fairly standard mainstream explanations, such as 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 in part because they could repackage and sell off their credit exposure, and inadequate quantitative models used to price the risk of opaque financial instruments such as collateralized debt obligations. But the book’s main contribution is that it offers a longer-term perspective that extends beyond the crisis.

The authors have few kind words for the economic policies of the current Democratic administration. But the proposals they make are only slightly right of center. When it comes to Social Security reform, for example, many Republicans favor a solution that includes personal accounts. The authors are at odds on such a solution, with only one of them (presumably Hubbard) in favor. So together they recommend instead that the retirement age be adjusted to account for the increase in life spans since Social Security was established in the 1930s, and that the annual increase in benefit payments be adjusted to match the rate of inflation rather than the rate of wage growth. These two adjustments alone, the authors argue, should be sufficient to make Social Security nearly solvent again.

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

Not all ideas offered by the authors may find a warm reception in the political arena. For example, they propose that when the price of oil drops below a certain level, the government charge a levy in order to keep the price high, thus providing an incentive for the exploration of alternative energy sources. This idea may go politically nowhere fast, but the authors are to be commended for its novelty.

Overall, though, many readers are likely to find the solutions proposed by Hubbard and Navarro to be a sensible compromise for solving our current economic woes. Their book is a welcome addition to the ongoing debate in an increasingly partisan political environment.

By Jerry Tempelman, CFA, Financial Analysts Journal