3 Reasons to Be Worried About America's Economic Future

Warren Buffett is bullish on America. He made that perfectly clear when he wrote "Buy American. I Am" during the depths of the financial crisis. And he reaffirmed that belief in America's promising future earlier this year in a profile by Time titled "The Optimist."

His argument is pretty compelling, too, for long-term investors. He notes that the Dow Jones Industrial Average (DJINDICES: ^DJI  ) rose from 66 to 11,497 in the 20th century, despite four wars, a Great Depression, and several recessions. That observation is further strengthened by the fact that the Dow is up 65% since he wrote his "Buy American" piece five years ago.

Back in January, Buffett said he's "100% sure that people in this country will be doing more business 10 years from now than they are today." He argues that basic demographics favor the U.S. when compared to other rich countries.

Despite that solid case for America's future, I think there are some troubling long-term trends that could impede economic growth in the coming years. Given that Buffett himself invited someone to lay out the bear case for Berkshire Hathaway (NYSE: BRK-B  ) at this year's annual meeting, I thought it might be helpful for investors to consider the bear case for America. Here are three trends to be concerned about.

1. Rising Economic Inequality
After considering all of the recent Census data, The Economist reported that, "The most unequal country in the rich world is thus becoming even more so." Currently, the share of overall income held by the richest 1% in the United States is close to the highest level in a century. Meanwhile, the middle class saw its share of the nation's income decline considerably since 1970. And lower-income households are becoming an increasing share of the population.

At a recent talk at Georgetown University, Buffett noted that inequality is getting "wider" and that 24 million or so Americans live on $22,000 per year. He added, "I don't want to try to live on $22,000 with a couple of kids."

Leaving aside the notion of fairness, it's important to consider what inequality might mean for the economy. Throughout much of American history, our relatively high wages resulted in a healthy demand for goods and services, which in turn helped grow the overall economy. If the middle class and poor continue to see their incomes decline, will decreased consumption result in lower economic growth in the future?

2. Climate Change
Last month, the United Nations released its latest assessment of climate science. You can read a summary of the report here.

One of the co-chairs of the committee introduced the report by saying, "Continued emissions of greenhouse gases will cause further warming and changes in all components of the climate system. Limiting climate change will require substantial and sustained reductions of greenhouse gas emissions." [Bolding in the original.]

Earlier this year, The Washington Post identified another interesting fact about climate change. Since 1991, "roughly 97 percent of all published scientific papers that take a position on the question agree that humans are warming the planet." And yet many Americans seem to believe that the scientific community is divided on the cause of global warming.

It seems to be a topic that is beyond our society's ability to address. First of all, it's a complex topic that is playing out over an extremely long time frame. Secondly, it's hard to put a price tag on the worst-case scenario facing our economy if we do nothing. Finally, our short-term-oriented political system isn't very good at addressing long-term problems.

Looked at this way, it's not surprising that the issue of climate change wasn't seriously addressed during the presidential campaign last year. But here's the thing. If the scientists are right and we need to do something meaningful soon, it's very unlikely that our government would be able to agree on what must be done. At the very least, that's a major risk factor facing our economy in the future.

3. We're falling behind the rest of the world in key skills.
Ever since 1776, old guys like me have been ranting about how the younger generation in America doesn't know anything. This time it's true, however.

A new study by the Organization for Economic Cooperation and Development, as reported by The Atlantic, found that the "United States performed worse than nearly every other country in the group of developed nations" when it came to math, reading, and technology-driven problem solving.

When broken out by age group, American young adults fared poorly compared with the other countries. But before I get too judgmental about the younger generation, I should note that American 45 to 54 year olds performed just average. That's probably not something to celebrate. Responding to the report, our education secretary said that "our education system hasn't done enough to help Americans compete" in the global economy.

This is bad news, and our economy will likely suffer the side effects of this for quite a long time. Unsurprisingly, America had lots of high-performers and lots of low-performers, which further illustrates the increasing economic inequality in this country. You can read the entire study here.

The decline and fall of America?
It's not easy to feel optimistic about America's economic future, after considering the long-term trends discussed above. And yet, those trends are only one part of the story.

America remains a leader in technology and innovation, and it continues to attract some of the brightest minds from around the world. Our companies also continue to be the most profitable, with 132 of Fortune's most profitable corporations in the world coming from the United States. ExxonMobil (NYSE: XOM  ) , with $45 billion in profit, and Apple (NASDAQ: AAPL  ) , with $42 billion in profit, came in Nos. 1 and 2 respectively on the global list for 2012.

We've had much darker times in our history than today, and investors were rewarded for buying equities during those periods. For example, I was born a month after the Cuban Missile Crisis – a considerably more perilous time than nowadays. I wish I'd been buying stocks back then as a 1 month old.

So maybe Buffett is right after all: "Bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price."

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  • Report this Comment On October 13, 2013, at 8:40 AM, rdmcdonald48 wrote:

    3 REAL Reasons to worry about the U.S. and its economic future:

    1. Barack Obama - A man who has no concept of the scope of the debt of this nation, and who believes he alone can spend our way out of it.

    2. Harry Reid - another Democrat who does not care about how his decisions affect real people. Who has no interest in negotiating the legislation that comes to the Senate from the House.

    3. John Boehner - Combined with the 2 above, completes the trio in the complete failure of real leadership in the politics of America.

    These 3 have put politics and their own political agendas ahead of the interests of the American people and each has contributed to the debt that will economically paralyze generations to come.

  • Report this Comment On October 13, 2013, at 10:29 AM, Jeffkory wrote:

    Three reasons to worry about the economic future- Republicans- republicans- republicans They shut down the gov't- Not OB They put people out of work and put our economy at risk- Don't the embarrassing negative crybabies ever want power again?

  • Report this Comment On October 13, 2013, at 10:31 AM, CommonSense2016 wrote:

    Republicans control the House of Representatives. That gives them the right to grant or withhold money. The House of Representatives voted all the money required to keep all government activities going except for Obamacare. Constitution of the United States says spending bills must originate in the House of Representatives. That means Congressmen have a right to decide whether or not they want to spend money on a particular government activity and they say include this. Even though Obamacare is the law and the Supreme Court has said it is Constitutional the House of Representatives by responsibility and right have the decision to fund or not what the Senate asks for. So they gave a CLEAN bill to the President that he has asked for but they have chosen not to include Obamacare which is a CLEAN bill. Obama asked for and got what he asked for, CLEAN bill, but he wants more which is not required by the House of Representatives by the Constitution of the United States. That is a check and balance of the United States. Obama is lying about being held hostage, he is actually holding America hostage because like a two year old not getting what he wants he is crying and lying to America that it is the Republicans fault when actually he is to blame.

    I got the technical information from Thomas Sowell a senior fellow at the Hoover Institution, Stanford University.

  • Report this Comment On October 13, 2013, at 10:35 AM, Jeffkory wrote:

    The negative Repubs keep complaining about spending- What about the bill they passed to SPEND 633 BILLION on defense during the fiscal cliff jan 2013 that the branches of military said they don't need? Hey Pubs-THATS HUGE WASTEFUL SPENDING. Typical of that party.

  • Report this Comment On October 13, 2013, at 10:37 AM, drakeiverson wrote:

    How does this sound: FLAT 10% TAX for EVERYBODY--including the churches! And NO MORE "free healthcare for life" for Congress.

  • Report this Comment On October 13, 2013, at 11:57 AM, whyknotu wrote:

    The Quote of the Decade:

    "The fact that we are here today to debate raising America's debt limit is a sign of leadership failure.

    It is a sign that the US Government cannot pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government's reckless fiscal policies.

    Increasing America's debt weakens us domestically and internationally. Leadership means that, 'the buck stops here.' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren.

    America has a debt problem and a failure of leadership. Americans deserve better."

    ~ Senator Barack H. Obama, March 2006

  • Report this Comment On October 13, 2013, at 12:29 PM, DaSky wrote:

    Uhh, socialism destroys all nations it infests?

  • Report this Comment On October 14, 2013, at 5:58 PM, kinosternon wrote:

    Climate change?! You gotta be kidding. There is nothing anybody can do that will make a difference. The climate changes and it has been doing that for millions of years. Thirty-five years ago the world's leading climate experts feared global-cooling. For the past 15-20 years they have feared global warming. In 5-10 years they will probably fear global temperature stasis. The US has wasted trillions of dollars thinking they can fix it and all we have to show for it is a pile of inane actions by congress.

  • Report this Comment On October 14, 2013, at 5:59 PM, kinosternon wrote:

    One more comment... The most abundant greenhouse gas is water vapor. Will congress pass a law limiting ocean water evaporation?

  • Report this Comment On October 14, 2013, at 6:18 PM, rashworth wrote:

    It is hard to imagine a more negative outlook for American business. Global warming is bad for business. My science friends find this apocalyptic to the point of the 1970's population bomb.

    As to the problems they are overshadowed by the power of millions in the everyday market. The only way to thwart that uncontrollable force is to seize the markets by the power of government in the hands of autocrats. The use of force can even try to squeeze millions of common people. Rich and poor is a natural outcome of each project that attempts to make money. The riches of one and the poverty of another is no predeterminate of the future. Each I individual new generation can make or loose a million. Keep your own vision and don't b forget buyer be ware of another vision being sold.

  • Report this Comment On October 14, 2013, at 7:23 PM, gkirkmf wrote:

    Excellent article. Too bad that a bunch of political minded uninformed folks don't get it. Take climate change for instance. You have folks who haven't taken a science course since the 8th grade spouting off as though they were PHDs. Try this thought. You buy automobile insurance... why??? It costs you a lot of money but you spend it anyway. BECAUSE THE COST OF NOT DOING IT COULD BANKRUPT YOU OR RUIN YOUR LIFE!! Hold that thought... now let's think about climate change... we can spend some of our capital on reducing carbon emissions... It may cost us 5% of our income.. a big deal.... but consider what will happen if the worst case scenario comes true.. the earth may become uninhabitable for several hundred thousand years.... Are you willing to gamble your children's future by not buying a bit of "insurance" now.... Thanks for holding that thought!

  • Report this Comment On October 14, 2013, at 7:54 PM, cmalek wrote:

    To control global warming we need to reduce the amount of hot air coming from the politicians, pundits and prognosticators.

  • Report this Comment On October 15, 2013, at 12:04 AM, stevews99 wrote:

    John: I commend your effort but there are some serious flaws (I completely concur with rmmcdonald48!). Since #1 and #2 come directly from the B. Obama "how to transform the greatest economic powerhouse the world has seen into a banana republic" I can only assume you are yet another Motley Fool progressive or you have been spending some quality time with Morgan Housel. I completely agree with #3 but I would be shocked if you realized the reason we are so "stupid" is because a significant portion of the multi-trillion dollars spent on education over the last 20 years has gone to unionized administrators instead of the class room. Once this country recognizes the need for competent leadership (at every level) we will regain our economic leadership. Please enlighten me how this excellent financial service, of which I have been a proud member since it's inception, can espouse a socialist philosophy which has failed time and again. Be well...

  • Report this Comment On October 15, 2013, at 1:01 AM, Mickum wrote:

    Another article by the Lefties at the Fool. I really should consider canceling my subscriptions.

    Climate "Change" (we don't use "global warming" anymore because it's not true) -- it is absolutely arrogant to think that we mere humans could actually affect the climate of the world! Not true - study the data. As to the astounding figure of 97%, remember that climatologists (if it's 97% of them v. 97% of "scientists") are in the business of global warming and let's not forget climategate -- which proves that some "scientists" are really politicians (i.e., capable of suppressing the truth) rather than true scientists.

    The real concern for America's economic future is the huge growth in an inefficient (i.e., non-profit generating) government economic player, a declining birth rate and a declining morality (including work-ethic). What made America great and powerful were the opposite. It's that simple.

  • Report this Comment On October 15, 2013, at 8:08 AM, HanSoLow wrote:

    The US has stopped increasing CO2 emmisions. They are at 1990s levels thanks to the emergence of Natural Gas. Government gets these types of things so wrong. Gas was scarce, but technology and innovation vastly expanded NG reserves. Gas became cheap and a better more viable energy source. The free market reduced CO2 emmisions with out the help of the Government.

  • Report this Comment On October 15, 2013, at 9:23 AM, TMFBane wrote:

    Thanks for all of your comments, everyone! I really appreciate all of you taking the time to offer up your thoughts.

    I just wanted to respond to those of you who feel that this is somehow too political. On one level, I understand why you feel that way. Fundamentally, economics is about trade-offs, so it’s a fairly “political” discipline. Choosing to do one thing often means you’re not doing the other thing. Clearly, those types of decisions involve politics, for better or worse.

    Now, I realize some of you see these issues from a right vs. left or liberal vs. conservative perspective, but I honestly don’t see them that way. These problems have the potential to harm our economy, and have evolved over decades. Both parties bear responsibility for the way things are, and neither party is doing anything meaningful to address these problems.

    Take education, for example. As I father of two school-age children, I can tell you that our poor educational performance isn’t a right/left thing. American kids are last in math, but first in “confidence” in their math abilities. This is not a good thing. Both republican and democratic parents are equally worried about the issue.

    Anyway, I know there are more challenges facing our economy, but I mentioned these three since they’re big issues that aren’t being adequately addressed, in my opinion.

    Foolishly,

    John Reeves

  • Report this Comment On October 15, 2013, at 12:29 PM, redfrckle wrote:

    John, I think your article was well thought out and informative.

    Not everything has to become a political free-for-all; facts are facts and opinions are opinions. Sadly, some people don't know the difference. For example, it's a fact that there is climate change; there are varying opinions on who is responsible and what should be done about it.

    It's my opinion that divisive attacks from "conservatives" against "liberals" and vice versa do nothing to advance the welfare of our nation. If we all profess to be patriots, then perhaps we should stop fighting each other and start building together.

    The most important lesson I gained from your article is that a challenging economy is the best time to buy in order to build a more secure future. One needn't agree or disagree about the examples given in order to benefit from that wise conclusion. I thank you.

  • Report this Comment On October 16, 2013, at 2:10 PM, todamo13 wrote:

    I'm not sure I'd consider Exxon Mobil being mega-profitable as a reason for optimism, considering point 2.

  • Report this Comment On October 18, 2013, at 2:24 PM, masterN17 wrote:

    How this thoughtful commentary turned into a political sideshow is beyond me. Thanks for the insightful article.

  • Report this Comment On October 18, 2013, at 6:14 PM, 092326 wrote:

    Of equal importance is the break-down of the family.Too many young women without education or jobs skills having babies, too many minority children dropping out of school with little education and no job skills.

  • Report this Comment On October 19, 2013, at 10:28 AM, twonine wrote:

    All of you are playing right into THEIR game. Uncertainty is one of the components that drive the markets along with media propaganda. Definitely Politics a key component. KEEP DOING WHAT YOU DO. "IT WORKS"! {MARKET=POLITIC}

  • Report this Comment On October 19, 2013, at 12:37 PM, boogerface02211 wrote:

    The rich are getting richer and the incomes of the middle and lower classes have stagnated since around 1980. That is not great, but it is not the same as saying that middle and lower class incomes are declining.

  • Report this Comment On October 19, 2013, at 3:10 PM, OregonPam wrote:

    Several people in this comment thread have railed about the inclusion of climate change as an issue, and suggested it's just a "lefty" or otherwise politically motivated issue. I think that's because it's hard to imagine what the real impact is going to be.

    It is true that the climate has changed in the past. 12,000 years ago there were glaciers covering a large portion of North America and Europe. So yes, the climate does change.

    There are significant differences between then and now. Primarily, we're now an urban, industrialized world rather than bands of nomadic hunters and gatherers. There are many reasons this matters to American financial stability. Here are three of the biggies:

    1 - The predicted impact of climate change is more severe weather events. We're already seeing this. This wreaks havoc on urban infrastructure such as roads, bridges, the electric grid, sewer systems etc. Governments are already struggling to pay for needed maintenance. But maintenance isn't all that's required. We need more robust infrastructure than we've ever installed before to take the impacts, and keep our country running.

    So far the average American hasn't felt these impacts. FEMA has absorbed all the impacts. But the GAO (Gov't Accountability Office) recently released a report declaring this to be one of the largest outstanding, unaccounted for liabilities potentially facing the American government.

    It would be great if we could think proactively and replace aging infrastructure with robust infrastructure that's able to take the impact. More likely we'll wait until a region gets wiped out, then possibly replace the infrastructure. This will expose us to an ongoing series of economic drags showing up in random places and ways.

    Bottom Line: There is a major American expense coming that we're not prepared for. How to make money on this: invest in disaster recovery & infrastructure companies.

    2 - Changes in Agricultural productivity in the American heartland. Our federal government provides crop insurance to the farmers in America's heartland at enormously subsidized rates. If their crops fail, they probably won't lose the farm, and they'll try again next year. It's important to national security to be able to feed ourselves, so this is a good idea. But as long term and short term weather patterns shift, we'll see more crop failures over larger swaths of the country. Eventually we'll figure out what grows where under the new patterns. But that will takes years of experiments, and weather patterns will likely continue to shift long after the generation reading this passes on. During the interim (our whole lives) it's reasonable to expect a higher rate of failure than we've seen to date under the stable weather system of the past. A higher rate of failure means higher draws on crop insurance, means more expenses to the federal government.

    3 - International Political Instability: Extreme Weather and shifts in the agricultural productivity will create more political instability around the world. If large countries become unable to feed themselves reliably we'll see uprisings and riots making business very hard to conduct there. Who cares? Anyone who needs resources such as rare earth minerals from obscure places like Afghanistan (just an example). Political instability creates a drag on the American economy by requiring increased military spending to "keep peace" so that trade can continue.

    So at the same time that we'll be needing to spend more at home on infrastructure & crop insurance we'll be needing to spend more abroad to keep trade flowing.

    These effects are already beginning, but it will be at least a decade, in my opinion, before they really start to affect our budget.

    Putting your head in the sand regarding climate change is just ignoring one of the major impacts to the future American economy.

    Right now we have a choice: We could take a leadership role in trying to stabilize the climate, and increase our certainty about the future of the American economy. Or, we could just let things go as they do, and adapt when it becomes critical. (Or we could do a little of both)

    Personally I think just waiting to adapt is like taking out debt in your kids names. It's the kids in grade school right now who will bear the real burden of paying for the infrastructure, the crop insurance, and the international political instability. I'd rather leave them an inheritance I can be proud of.

  • Report this Comment On October 20, 2013, at 12:51 AM, ChrisBern wrote:

    First, Buffett has turned into a government shill, and at this point most of his rhetoric is self-serving with regards to his investment portfolio and/or his political persuasions.

    But more importantly, how does the author come up with such a weak list of weaknesses? Inequality and climate change...really? How about the fact we had a 30+ year debt binge in both the public and private sector that won't keep feeding the economy the way it has been for decades? The author's 3rd reason is valid, too.

  • Report this Comment On October 20, 2013, at 7:03 PM, bluemoon51 wrote:

    The alarmists (including the author) really need to do more homework and not all on global warming/climate change activist websites. More severe weather is not happening (IPCC and NASA admit this if you read the full reports). Agricultural productivity has increased considerably over the past 20 years, partly due to increased CO2 levels. Middle East radical religious movements and sub-movements can hardly be "scientifically" blamed on heat and drought. Sorry, item 2 is not a valid concern unless we worry about the overreaction and added costs of being "carbon neutral."

  • Report this Comment On November 22, 2013, at 12:26 PM, dmiles2 wrote:

    John, at least half of the increase in the Dow has come from the devaluation of the dollar. Just since you were born, the dollar has declined by a factor of about ten or more.

    Re: education

    You should read The Underground History of American Education by John Taylor Gatto.

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