The Unbound Economy
America’s Perpetual Christmas
Kenneth Rogoff
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Has the United States transcended the laws of economics? As the New Year begins, the US continues to race ahead of its rich-country counterparts. The gargantuan US trade deficit? No problem. In 2005, it widened further, and the dollar only strengthened. Low investment and a deteriorating primary education system? Not to worry. The super-flexible US economy keeps managing to produce more with less.
Nor are there any signs of America’s economic hegemony starting to fold under the weight of maintaining its unilateral military dominance. Instead of feeling the pinch of wartime privations, like in any ordinary country, American consumers are binging as if it were Christmas all year round.
There are those who truly believe in the idea that America is exceptional. Those true believers argue that America’s consumers can long pursue their spendthrift ways because their country’s economy is better than everyone else’s. The US labor market is more flexible than Europe’s, enabling it to react more nimbly to the ever shifting sands of globalization. And, unlike most countries, especially in Latin America and Asia, the US system ruthlessly prunes weak corporate leadership.
Moreover, the true believers cite America’s better-funded and hyper-competitive university system, which sucks in a disproportionate share of the world’s top students and researchers. Many ultimately choose to immigrate to America permanently, and it is relatively easy for them to do so, thanks to a society that still welcomes outsiders with open arms (even if things have become more difficult since 2001). On top of all this, the US military, rather than being a burden, feeds the country’s technological superiority by subsidizing basic research.
By contrast, skeptics hold that the US economy already contains the seeds of its own socio-economic decline. They point to worsening income inequality, as images beamed worldwide from post-hurricane New Orleans illustrated all too clearly. Poor children do not have reasonable access to health care. Nor are the non-poor faring particularly well, as wage growth has remained virtually flat for a very long time, even as corporate profits are booming.
Indeed, this disconnect may explain why polls do not give President Bush the credit for economic management that his strong record would seem to merit. Nor does it help Americans’ mood that they spend far more of their lives working than do citizens in Europe or, these days, even Japan. All of these factors place deep stresses on the social fabric which, so the skeptics argue, will ultimately play out in the political arena.
Interestingly, both sides cite America’s gaping trade deficit – believe it or not, the US is soaking up two-thirds of global excess saving – to support their arguments. The true believers view the deficits as evidence that the world recognizes how special the US is and wants to buy in. Skeptics see an empire living on borrowed money and borrowed time.
So which is it? In my view, those who think that America is about to collapse are likely to be disappointed. Nevertheless, I suspect that the age of American exceptionalism is near an end, and soon per capita income in Europe and Japan will approach that of the US, rather than falling farther behind. Though the next few years are likely to underscore some of the weaknesses that the skeptics highlight, the end will come mainly because other countries will find creative ways to mimic the most effective US institutions, albeit within their own legal, political, and social frameworks.
We would do well to recall how, at the beginning of the 1990’s, book after book was still being written urging US and European corporations to imitate Japan or face certain doom. The last 15 years have of course revealed deep flaws in Japan’s financial system. But another major factor contributing to Japan’s decline was that firms elsewhere began adopting Japanese methods, such as just-in-time supply chains. Surely, imitation will someday impinge on superior US growth performance as well.
Perhaps the biggest weakness in the true believers’ argument is the trade deficit. For the moment, America’s ability to borrow vast sums at low interest rates acts like a huge dose of steroids on the economy. It artificially props up consumption growth and allows the government to defer hard choices between taxes and military expenditures. At some point, the party is going to end.
The unwinding of the US economy might even begin in 2006, particularly if Japan continues to grow out of its doldrums, the US housing market softens dramatically, and Europe’s economic recovery accelerates. Individually, these are each highly plausible scenarios, and collectively they would hit the US trade deficit like a perfect storm.
Perhaps the end will come in a different way, but it is difficult to imagine the age of US exceptionalism lasting indefinitely. Can the end come abruptly in 2006? This is not the most likely scenario, but it is not unthinkable.
Kenneth Rogoff, a former chief economist of the IMF, is Professor of Economics at Harvard University.
Copyright: Project Syndicate, 2006.
www.project-syndicate.org
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