The U.S. Economy and Its Future Transformation

The economic crisis that broke out in 2007 has now implicated the physical economy, triggering the worst global recession since the Great Depression in the 1930’s. The U.S. economic growth in the last quarter of 2008 was -6.2 percent, the worst in 26 years, and it had also affected the developed economies of places like Europe and Japan. While the Obama administration’s economic bailout package has started up the currency printing machines, the federal government has also thus far run up a debt of over $10 trillion, which is equivalent to $38,000 per capita, due to massive borrowing.

Criticisms of the American institutions by newspaper commentaries can often be seen during the economic crisis, some of which include criticisms on Americans’ excessive spending, the government’s unrestrained borrowing, as well as comments saying that the U.S. dollar will inflate and depreciate due to excessive distribution. Some critics have even described the dollar as a “black hole for global capitals.” Though this description is not without some truth, it is still worth further examination.

American consumerism had once brought about benefits

If we were to look at the greatest economy, the U.S. economy’s performance has been the best in the world since the second World War. The Anglo-Saxon model that the U.S. introduced had been more efficient than any other kind of model. For instance, unemployment rate in the U.S. could usually stay within four percent to six percent during the 90’s, whereas in the Euro-zone during the same period it was seven percent and above, and its actual economic growth was also lower than that of the U.S.

For a long time, the American consumers have been the main impetus behind the world economic growth. The reason Europe and Japan were able to recover rapidly after World War II was, besides receiving aid from the U.S., that the U.S. opened up its market to these countries.

The Four Asian Dragons subsequently modeled themselves after this developmental model and developed an economy that was oriented toward exporting to or servicing developed countries, and they became developed economies. China’s economy has also relied mainly on export in the last 30 years since its reform and has only started turning its attention to its domestic needs recently.

Some of the main reasons that the Axis started the war all those years ago were, among others, raw materials and markets. The issue was resolved when the U.S. opened its economy to the world. Large-scale conventional wars have since disappeared, and there emerged the U.S.-led post-war Pax Americana which has lasted till this day.

In other words, nearly 60 years of American consumerism has helped countless people out of poverty and has aided an autocratic country’s opening up and reform. The U.S., however, was not simply benefiting others exclusively. Former Federal Reserve chairman Alan Greenspan mentioned in his book that when a market becomes dominant, Communist control would be weakened. Such an evolution of peace has undoubtedly been very successful.

China ultimately became a responsible superpower as a result of developing its market economy and weakening its autocracy, and that had certainly suited U.S. interests. Moreover, the U.S. could easily procure a large amount of low-priced products through trading with China.

China’s profit is greater than its loss

However, it was not the case that the American elites did not realize that opening up its market meant the loss of a concentrated labor force, such as the manufacturing industry. For instance, if we factor in all the benefits, the lowest wage in the U.S. presently is still more than 10 times above that in China. Multinational corporations, in their pursuit for profit, would definitely shift their production to countries that required lower production capital. The hi-tech and service sectors that the U.S. relies on, however, are not enough to make up for the loss of wealth created by the loss of the manufacturing sector, thus resulting in a structural trade deficit.

At the same time, the U.S. did consider protectionism. While protectionism could indeed solve the problem mentioned above, the world’s wealth has also shrunken greatly because it went against David Ricardo’s comparative advantage theory. And so, there could be nothing left of the fruits of the post-war peace and prosperity.

The external demand economies have also abetted the said situation by buying the U.S. treasury bonds in large amounts and driving down their own currencies’ exchange rates. Many countries, especially China, have been braving the dangers of trade wars and throwing money into the black hole for capitals. This is like a strange situation where the shop owner wants to sell his products off cheaply, yet the customer demands a raise in the price.

The reason for this is that there is much more benefit than loss for China under this institution. The shifting of the world’s production to China has driven down the unemployment rates and has brought about the upgrading of corporate technology and management. More importantly, it sped up the urbanization of the population, expanded productivity, and increased the wealth of the society. This is also a prerequisite for political democratization.

The U.S. government tried to resolve the economic crisis through spending as it has always done. Its first package was worth up to $787 billion. According to the laws of economy, this would surely trigger a serious inflation and the depreciation of the currency and will greatly damage the world economy.

The U.S. dollar, however, has so far risen 19 percent compared to the previous year. One of the main reasons was that, since last August, China has sped up buying U.S. treasury bonds, buying them at an average of $20 billion every month. In the whole of 2008, the U.S. treasury bonds that China had bought had increased by 46 percent, reaching a historical new height.

When we consider the fact that partial indebtedness would surely cause the U.S. to leave the inflation to fluctuate, such a move was no different from an exchanging of gifts, a mutual economic aid to the U.S … The U.S. and China are actually economic allies in fact, but not in name.

Of course, the Anglo-Saxon model that was introduced by the U.S. is not flawless. Market economy theories like that of Adam Smith’s, as well as the “Invisible Hand,” were not sufficient to regulate the financial institutions. The cause of this crisis was also brought about by inadequacy in monitoring financial institutions. That said, we would still have to give our affirmation to the superiority of the overall market economy institution.

Though the concept of American consumers driving the global economy is getting old and becoming unsustainable, it has been in force successfully for the past 60 years and had solved the poverty problem for many countries. The more developed economies in East Asia and the 1.3 billion population in China have especially benefited much from it. Perhaps critics should not be passing unfair judgment during a crisis while benefiting from the U.S. economy at the same time.