Is the US economy still sick?

Last Fall, I was the only person (to my knowledge) who forecast that the US economy would revive.   

My hopes were fulfilled by the results of the last quarter of 2011. 

However, the most recent figures (last Friday) show that the economy grew at only 2.2 percent in the first quarter of this year, down from 3 percent the previous quarter.   

Of course, 2.2% is not bad compared to MINUS 8.9% which the US economy hit in the middle of 2008, or the 0.4% it hit in the middle of 2011.

That is why some people doubt that the economy is still sick. Consensus expectations for the first quarter of this year were 3% or higher, those were based on the common approach of “take the figures that suit you most and project them forward”.  Those consensus forecasts were disappointed.  I did not make any forecasts in terms of figures for this quarter, because my sights are set a little more long term.

So, long term, will the economy continue to be sick?

First, let us recall where we are since the current crisis started in 2007:  US taxpayer money and government policies have been mostly focused on rescuing the largest banks and financial institutions, as well as the poorest of US citizens.  But the creation of a competitive US economy has been paid practically no attention.The assumption seems to have been that if the biggest disasters were averted, and the poorest helped, then the economy would revive, provided consumers could be helped to spend.  And the government’s stimulus policies since the crisis have been designed primarily to encourage Americans to spend (though there have been a few investments – e.g. in infrastructure – most of these will be found, on examination, to have been wasteful or less than optimal from the perspective of encouraging sustainable growth).  

Consumers have indeed done their best - and better than they should sensibly have done:  the savings rate was nearly zero immediately before the financial crisis, but hit nearly 6% at the end of 2008, then declined to 4.5% in 2010 and to 3.9% in 2011 (that was against a savings rate of more than 8% from the 1960s through the mid-1980s). 

Second, let us revisit why I had foreseen the rise of the US economy in the Fall of last year? Primarily because of the decline of BRIC and other emerging markets in view of risk aversion, and the return of capital to the US.  That is a long term trend which will continue, in spite of short-term dips and reversals, unless something fundamentally new comes up - and all the substantial surprises that I can foresee are only likely to make the move of capital to the US stronger.

So why is the US still languishing?  The US is still languishing because of the actions of the US government as well as of rich US citizens.

What actions of the US government?  Simply put, the US government has launched no substantial policy designed to revive growth in the US. What kinds of policies could the US have put in place (and what can it still put in place)?  John Mumford, in his book, BROKE, published last year, suggested a very credible plan for creating 10 million jobs by selective policy support for small and medium sized businesses, which are the only engine that can drive US growth. Instead, the government has continued to focus on large companies, because they are the ones with a strong lobby in the US, while small and medium sized companies, which seem to have no real lobby at all, continue to languish. President Obama would be well advised to focus on re-igniting the growth of small and medium sized businesses, as they are the only engine which can make him re-electable.

And what has been the contribution of American citizens to preventing the growth of the US economy?  Well, in view of self-interested propaganda regarding the decline of the dollar (and even the collapse of the dollar), while foreigners have continued to buy into the US because they have feared a collapse in their own countries even more, Americans have continued to seek safety and tax efficiency by putting their capital into special purpose vehicles abroad, particularly but not exclusively in the Caribbean. Now that faith in God and loyalty to nation have been replaced by the worship of money, gone are the days when an appeal to American patriotism could encourage rich Americans to bring capital back home. Now incentives and legislation must force or encourage them to do so. Since any force, to be effective, would be draconian (and probably counter-productive), it is tax policies and incentives that must be provided for Americans to keep American capital in America. 

Such a move is complicated by the perception that the US will not be able to produce as high a growth rate as other countries.  And there is some validity to the perception, because China and India, for example, at present, produce growth rates three to four times as high as the US - fair compensation to the risk of a sudden political, fiscal or monetary debacle, particularly in "black box" (non-transparent) countries, such as China..   

However, that differential in growth rates will continue to bedevil the US as long as the US government continues to tilt the scales against the US by subscribing to free trade treaties which provide foreign manufacturers with unfair advantages.

For example, it is clear that few factories are going to be built in the US as long as it is cheaper to build such factories in China.  Equally clearly, it is going to be cheaper to build factories in such countreis as long as its salaries don't rise too fast while these countreis pay hardly any attention to environmental and human considerations.  

To understand the competitive advantage of countries such as India and China, American and European investors focus attention on how hard people work in such countries, but ignore why people work so hard, whether in poor countries or among the poor in the US itself.  Because it is not the hard-working Chinese who provide the competitive edge to China, it is China’s flouting of minimum standards of environmental care, as well as of health and safety standards, that enables it to do so.

All that the US has to do to regain the advantage for its small and middle sized companies is to revoke the “most favored nation” status for Chinese and other manufactures till such countries provides minimum standards of human and environmental responsibility.  

Any move to do so will provoke, specifically, a furious Chinese response, and threats of withdrawal of Chinese money from the US.  That is, however, a cost worth paying for the revival of the US economy.  

What will prevent such a move from being merely a new kind protectionism, is if that is the start of a journey towards a new globalisation.  

The existing kind of globalisation focuses on mere growth, while leaving it to chance or a few individuals to address the human and environmental challenges of our time.  The new globalisation must focus more and more creativity and energy on addressing competitively the challenges of our time: genuinely sustainable growth - growth that is environmentally responsible and tackles real needs such as illiteracy, disease, poverty, suffering and lack of freedom around the world.

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