U.S. Has Already Lost Half Decade of Growth

Although the world’s largest economy “could begin to pull out of its malaise,” the unjustified removals from office and the weakness of the banking system do not help, warned Simon Johnson, former chief economist at the International Monetary Fund.

The United States, the world’s largest economy, accounting for about 25 percent of global output, has already lost a half decade of growth, and even though the U.S. “could begin to pull out of its malaise,” the unjustified removals from office and the weakness of the banking system, an analyst warns, do not help.

Simon Johnson, who served as chief economist at the IMF in 2007 and 2008, now a professor at the Massachusetts Institute of Technology, and a senior fellow at the Peterson Institute for International Economics, also states that “it is hard to see how the European Union will show anything other than low growth for the next several years, placing another quarter of the world’s economy in the doldrums.”

“The prospects for global growth in the short term greatly depend on whether China can avoid following in the footsteps of the U.S. and Europe,” writes Johnson, in an article published by Bloomberg News.

The former IMF economist says that, if you compare nominal gross domestic product per capita for the second quarter of 2006 with the number for the second quarter of 2011, the U.S. has had about 8 percent growth. Yet inflation during the same period has been a bit higher.

Johnson emphasizes that the U.S. is still home to a great deal of innovation and big companies are making plenty of money, while “the equity-financed part of the private sector has strong prospects.” Likewise, “new technology-based ventures continue to attract top talent from around the world.”

However, the economist warns “[s]till, it isn’t helpful that our politicians insist on pounding down consumer confidence through rhetoric and confrontation, and by doing nothing to prevent job cuts by state and local governments.”

“Those cuts make little sense. The U.S. is the world’s best credit risk and there is wide agreement that strengthening education is the path to long-term productivity growth, yet teachers are being laid off around the country,” Johnson warned.

He also said that “there is no good news from the U.S. banking system,” as the Obama administration made the decision “to allow big banks to recapitalize as the economy recovered, while also permitting dividends to increase and high bonus payouts to resume.”

But “[a]s the recovery stalls, this strategy looks increasingly dubious because the banks’ equity capital levels are now probably too low to buffer the shock of another down leg,” Johnson writes.

According to the economist, U.S. households are “at the epicenter of the crisis,” as consumption accounts for slightly more than 70 percent of final spending. But “[m]any Americans ran down their savings and borrowed heavily in the years before 2008. In any case, some lasting increase in the household savings rate is to be expected.”

Similar thinking probably applies to the small-business sector as “[t]he death of credit” in October 2008 has made everyone want to be more careful. “There is a legitimate reluctance to spend and to hire, and it’s hard to imagine a politically feasible fiscal stimulus that would make a difference,” Johnson concludes.