The Strengths and Weaknesses of the U.S. Economy

 

If the U.S. is going to be able to solve its serious economic and fiscal problems, there needs to be a realistic understanding of what they are. My last post, “Is the U.S. Economy Really in Good Shape?” discusses a recent Op Ed in the Wall Street Journal by Martin Feldstein.  Mr. Feldstein makes the case that it is in pretty good shape right now even though there are big problems on the horizon. Unfortunately, such an assessment is likely to lead to complacency and inaction towards our long term problems.
Capture0Let’s look at the overall situation.

Our Economic Strengths:

  • The world’s largest economy, twice as large as our nearest competitor, China. The 2.2% GDP growth since the Great Recession ended in June 2009 is not especially robust but it’s among the best in the developed world.
  • World leadership. The U.S. dominates international finance, technology, higher education and popular culture. Everybody else wants to emulate us and to have what we have.
  • The U.S. Dollar dominates world currency because of its strength and stability. This protects the value of the dollar relative to other currencies.

Our Economic Weaknesses:

  • Massive Debt. The public debt (on which we pay interest) now stands at 74% of GDP, the largest since right after the end of WWII. As our currently low interest rates inevitably continue to rise, interest payments on the debt will skyrocket creating a huge burden on future generations.
  • Demographic Challenges. Payouts for Social Security, Medicare and Medicaid are continuing to grow rapidly, thereby putting upward pressure on annual deficits as well as accumulated debt.
  • Slow Growth Environment. The economist Robert Gordon makes a persuasive case that the explosive economic growth which the U.S. enjoyed from 1870 – 1970 will be very difficult, perhaps even impossible, to duplicate in the future.

 

The big picture is that we are going to have to work hard to achieve the degree of economic growth which will be needed to propel American society forward in the future as it has in the past.

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Does the U.S. Care About Europe?

 

“After Paris, Islamic State’s rise and Syria’s agony are shaking a weakened Europe – and the broader international system,” writes the Brookings Institution’s Robert Kagan in yesterday’s Wall Street Journal. “Can the U.S. summon the will to respond?”
Capture“What the U.S. now does or doesn’t do in Syria will affect the future stability of Europe, the strength of trans-Atlantic relations and therefore the well-being of the liberal world order. … Just as in the 1990s, when Europeans could address the crisis in the Balkans only with the U.S. playing the dominant military role, so again America will have to take the lead, provide the troops, supply the bulk of the air power and pull together those willing and able to join the effort.”
Such an effort would require:

  • Establishing a safe zone in Syria to avoid having more refugees flood Europe and provide a place to return for those who have already fled. This would require not only U.S. airpower but also ground forces numbering up to 30,000.
  • An additional 10,000 – 20,000 troops to uproot Islamic state from its havens in Syria and Iraq.
  • An internationally negotiated transition in Syria ushering Mr. Assad from power and establishing a new provisional government to hold nationwide elections.

As Mr. Kagan reminds us the U.S. has taken lots of police actions in the last 70 years since the end of WWII:  Korea, Vietnam, Panama, Kuwait, the Balkans, Afghanistan and Iraq being the big ones.  “Not today.  Americans remain paralyzed by Iraq, Republicans almost as much as Democrats, and Mr. Obama is both the political beneficiary and the living symbol of this paralysis.  He may be the first president since the end of WWII who simply doesn’t care what happens to Europe.”
Mr. Kagan concludes, “Perhaps there are Europeans today wishing that the U.S. will not compound its error of commission in Iraq by making an equally unfortunate error of omission in Syria.  They can certainly hope.”

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America and the World: the Need for Leadership

 

As we are just getting started on what so far is a confusing presidential election campaign, it would be easy to forget how incredibly lucky we are in America.  Our country is very strong and we are isolated from many of the world’s problems.  The terrorist attacks in Paris over the weekend are a grim reminder of this fact.  But we still have responsibility for much of what is happening around the world.
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  • George W. Bush’s biggest failing is not the Iraq War, draining Medicare funds with a new drug benefit or ramping up deficits with tax cuts that lose revenue. His biggest failing is not foreseeing the financial crisis and at least mitigating it if not heading it off entirely. His financial advisors (Greenspan, Bernanke, Geithner, Paulson) were asleep at the switch. As the Economist makes clear in its latest issue, “First America, then Europe. Now the debt crisis has reached the emerging markets.”
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  • Barack Obama’s biggest failing is not the stagnant economy or massive debt buildup which occurred on his watch, although he could have eased their burden with smarter policies. His biggest failing is his unwillingness to assert sufficient power in the Middle East to head off the chaos we observe today. The enormous European refugee crisis with all of its attendant horrors is largely the result of his inadequate intervention in Iraq, Libya and Syria.

The main concerns of this website are the internal fiscal and economic problems faced by the U.S.  We have to figure out amongst ourselves how to address these very serious issues.  But, like it or not, what we do affects the whole world.  If we fail to meet our responsibilities, the whole world, including us, will suffer with the consequences.

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Globalization Is a Messy Process

 

Globalization is having a dramatic effect on income distribution around the world as I discussed in a previous post. Middle incomes in the developed world are stagnating while at the same time they are growing rapidly throughout much of the rest of the world.
At the same time as western world economies are stagnating, turmoil and instability are breaking out elsewhere, especially in eastern Europe, the Middle East and northern Africa.  Fortunately the U.S. and its allies are stepping in with military force to help maintain local order in many parts of the world where it is breaking down.
In short, at the same time, whether connected or not, the postwar geopolitical system is breaking down and the economic stability of the Great Moderation has given way to the Great Recession and its aftermath of macroeconomic volatility.
An interesting article by Chrystia Freeland in the latest issue of The Atlantic, “Globalization Bites Back” addresses both of these issues together.  She says “I believe that capitalist democracy has proved itself to be the only compelling, universalist vision of how to live the good life.  But the stable world order many of us assumed this thesis foretold has not come to pass.”
CaptureAs the above chart shows, one very positive result of this messy process is likely to occur.  The middle class worldwide is predicted to grow from 1.8 billion in 2009 to 4.9 billion in 2030.  All of this enormous growth in the size of the middle class will occur outside of North America and Europe.
The implications for the continued prosperity and world leadership of the U.S. are clear.  We need to get our own economy back on track, growing at a faster rate.  We also need to get our fiscal house in order so that the dollar will continue to be the international currency of choice.
Our dominant role in world affairs is beneficial to all but it is by no means assured without much effort on our part.