Don’t Give the United States Up for Dead

As the world wobbles toward recession once again, there is a bad feeling in the air. The implosion of the Greek economy places the future of the euro in doubt and threatens the European banking sector. There are indications of fatigue in many of the emerging markets after three years of rapid growth. The U.S. economy is also faltering as the various stages of fiscal stimulus and monetary expansion come to an end.

For all of these reasons, a feeling of sadness can be felt in much of North America. The boasting of a decade ago has vanished. Ten years ago, most Americans made fun of the supposed Chinese boom. Today it is believed the Asian giant will take first place. Nevertheless, it is far too early to give the U.S. economy up for lost. The best of the U.S. reveals itself when doubt reigns and the worst when the country brims with bravado. It was the urgent need to keep up with the Russians after the launch of Sputnik in 1957 that drove the American space program to success.

The sense of humility brought on by defeat in Vietnam inspired the modernization of the Armed Forces, and U.S. de-industrialization during the 1970s produced the entrepreneurial spirit that drove the technological revolution of the ‘90s. On the other hand, the arrogance of the turn of the millennium provoked the military and financial reverses that currently overwhelm the country. However, the U.S. economy is in the middle of a great transformation that will leave it in an enviable position compared to its competitors, although this transformation is far from being finished.

China in Perspective

Despite exaltation over the miraculous Chinese economy and how it will eclipse that of the U.S., the labor productivity of China is equivalent to only 12 percent of that of the U.S. American workers, especially in the south where they are not unionized, are hyper-competitive. In the last decade, U.S. productivity grew at an annual rate of 6 percent, compared with a growth of industrial production of 3 percent, helping to explain the persistent level of unemployment. Many of these excess workers shifted to the construction industry, but the collapse of the housing market made it difficult for all of them to find work.

The collapse of housing prices caused other problems. Many found the value of their home to be in the red, leaving them unable to move. This reduced something of the labor mobility so characteristic of the United States. However, the U.S. economy is in the middle of a catharsis. Exports are growing, thanks to the devaluation of the dollar. The real value of the greenback has fallen at least 30 percent since the year 2000, and the private sector needs between 24 and 36 months to react to the changes in the exchange rate.

Many sectors, such as heavy equipment, transport and agriculture, are announcing double-digit profits. The proof is in front of us, as rail cargo traffic rose by an annualized rate of 7.8 percent in the first half of the year. A few moments’ observation in the Donner Pass, crossing the Sierra Nevada, confirms the immense volume of rail traffic, and the transport sector is struggling in the face of a serious lack of drivers.

Transport volume rose by 3 percent in June, and the American Trucking Association calculates a lack of some 100,000 drivers. Transport firms have found themselves obligated to raise salaries and benefits to attract workers, and newspapers, radio stations, and television channels are full of publicity to attract drivers. The expansion of the Panama Canal will only make things worse. A flood of cargo vessels will invade the major ports of the East Coast of the U.S. and will convert them into important points in a logistics network covering the entire Atlantic basin. This is why it’s premature to give up on the U.S. economy.

This doesn’t mean the U.S. won’t face difficulties. The de-leveraging of the housing bubble is still in process and will be for many years to come. The recession forced many businesses to multiply their productivity, leaving many workers on the margins. The U.S. will have to enact structural changes that are not even on the table yet. The high cost of lawsuits is a huge drag on American companies.

Finally, the U.S. has to reform its fiscal system. Federal revenues will climb to 14.4 percent of GDP in 2011, compared to an average of 18 percent in the postwar world. Meanwhile, government spending will exceed 23 percent of GDP. Tax cuts only work if there is an equal reduction of spending, but the opposite has happened in the U.S. It is to be hoped that this problem is being worked on, which will help to re-establish faith in the economy.

But this doesn’t mean lights out for the U.S. economy. It’s still the engine of the world economy, and it will remain at the vanguard for a long time to come.