What's Wrong with the U.S. Economy

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The U.S. is in need of new policies and new institutional reforms that aim to redefine the role of the U.S. economy in today's increasingly globalized and interdependent world. The rise of China and India as economic hubs will undoubtedly alter the world's economic balance. Today more than ever, comparative advantage is key to defining a nation's global competitiveness and the overall global competitiveness of the U.S. is not exactly on the rise. In fact, it is slowly leveling off and may indeed decline if new forward-thinking policies and reforms are not put into place.

Worsening budget and trade deficits along with the declining interest in U.S. equities by private investors do not give anyone, including Alan Greenspan, warm and fuzzy feelings. Many thought that a depreciated dollar would give a boost to U.S. exports, thus, improving the U.S. trade deficit. Well, that did not happen. The culprit many say is that the U.S. economy is growing at a faster rate than that of Europe for instance. That may very well be, but the problem remains that the U.S. Balance of Payments (BOP) situation today is unlike anything seen in the past. Why, you may ask. It is because today more than ever, the U.S. trade deficit is increasingly being financed by foreign central banks (official capital inflows) rather than private investors (private capital inflows). This situation did not exist in the 1980s when the Reagan republicans claimed that deficits don't matter. The point here is that the current situation is creating some very difficult problems for the long-term sustainability of the U.S. economy. Not that it is on the verge of crumbling - that would be a loony idea. But rather that decisions made today in the realm of economic and public policy are critical to the long-term position of the U.S. economy in the world.

I expect that the Federal Reserve will continue to incrementally hike up interest rates and that the U.S., EU, Japan, and China eventually initiate a coordinated intervention in order to stop the dollar from continuing to bleed. The Chinese, however, will not float their currency because it would be silly to expect them to do that at this point. The best thing the U.S. can hope for is that they agree to initially appreciate (revalue) their currency. Although they eventually will have to float their currency, the Chinese will not take that big of a risk now while in the midst of a huge economic expansion.

On the other hand, I expect the U.S. administration and Congress to spend some time thinking about future U.S. competitiveness and pass forward-looking legislation in the areas of job creation & training, education, and immigration. Fear-mongering and silly protectionist speech is counterproductive and will only lead to a worsening of the problem. Public policy makers should open their eyes to the realities of the global economy and adjust to how the wind now blows. They need to plant the seeds of future economic prosperity through practical means such as bringing millions of illegal immigrants out of the shadows and into the formal economy, reform the education system so that it produces a comparatively competitive workforce in next-generation technology, properly fund R&D, and continue to expand free trade.

See Also:

• The Link Between Immigration Reform and Social Security Reform


• When Greed Defeats Human Decency