September 3, 2011
by Irwin Stelzer
There is gloom and then there is doom. We Americans have plenty of reason for the former as we say goodbye to summer on this holiday weekend on which I am told the last gin and tonic of the season is consumed by those so inclined. Confidence in the economy is plunging at the fastest rate since the collapse of Lehman Brothers; the national debt is rising as spending in this period of supposed austerity easily tops last year’s; a recent blip notwithstanding, house prices are somewhere between stagnant and falling; foreclosures are up and home sales are down despite historically low interest rates; share prices fluctuate wildly; a vast majority feels America is on the wrong track; and economists are scrambling to lower their growth forecasts, and not by a little bit. The final shard in the broken dream of a prosperous America is the jobs market: for the first time since February 1945 the economy did not create a single net new job in August. Preliminary job creation figures for the past two months were revised down by 58,000. Average hourly earnings fell, the unemployment rate is stuck at 9.1%, and 25 million Americans, 16.2% of the work force, are looking for full time work. Gloom enough to satisfy the most pessimistic of us.
But doom is quite another matter from gloom. That’s what Federal Reserve Board chairman Ben Bernanke was hinting at when he told his central bank colleagues from around the world, “The growth fundamentals of the United States do not appear to have been permanently altered by the shocks of the past four years. It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals.” Translation: if we get our policies right, there is no reason America can’t recapture the optimism and energy that we once called “the American dream”.
Or, as Sharmin Mossavar-Rahmani, a highly respected analyst and head of investment strategy in Goldman Sachs’ private wealth management group puts it, “The current crisis has not dealt a fatal blow to the US as the preeminent economic and global power.”
The American economy still produces more goods and services than the next three largest economies (Japan, China and Germany) combined. And is likely to hold that position as successive Japanese governments wrestle with decades of stagnation, China attempts to cope with the problems created by its centralized economic management and currency manipulation, and Germany wallows in a eurozone financial crisis that seems to worsen by the day. America’s per capita GDP exceeds that of emerging rivals such as China and India, by more than ten and almost fifty times, countries that declinists say will soon overtake us economically and in other ways.
Then there is the good demographic picture. The American population is expanding “in the midst of a global demographic slowdown,” according to Joel Kotkin, distinguished presidential fellow at Chapman University. In a developed country such as the US, he notes after analyzing reams of data, a growing population “offers the hope of expanding markets, new workers and entrepreneurial innovation” -- new hands and brains to produce things, rather than merely the mouths to feed that so worried Thomas Malthus.
Better still for America’s long-run prospects in a globalized economy, by 2050 about one-in-three citizens of most developed countries in both Europe and East Asia will be older than 65, compared with only one-in-five Americans. Yes, our baby boomers will soon want the joints and organs needed to keep their golf games up to par. But in relative terms, concludes Kotkin, America “will maintain a youthful, dynamic demographic”.
Some measure -- albeit an imperfect one -- of the benefits of that “youthful, dynamic demographic” can be seen by counting the US patents issued to inventors, by country of origin. Between 1997 and 2010, the number of patents issued to American-based inventors exceeded by far all other patents issued to all other countries in the world combined. Americans received 2.3 million patents, with Germany in second place with 286,000. Inventors in Britain and Taiwan were the only other countries to receive more than 100,000 patents.
Which doesn’t begin to capture the edge America’s entrepreneurial culture and rule of law gives it in the long run. Tales of Silicon Valley are legendary: foreigners from British prime minister David Cameron to Russian president Dmitry Medvedev travel there to see how they might duplicate American dynamism. It is a special feature of the United States that its entrepreneurs, many immigrants, boast that a person hasn’t taken enough risks if he has not gone bankrupt at least once by the age of 35.
This dynamic feature of the US economy is no passing thing, even if the current state of the economy has small start-ups reluctant to expand until uncertainties about health care costs, regulations and future tax levels are dispelled. Alexander Groh, Heinrich Liechtenstein and Karsten Lieser of the business school of the University of Navarra in Spain have done a massive study of conditions in eighty countries in order to construct “The Global Venture Capital and Private Equity Attractiveness Index.” The criteria used to develop the rankings are corporate governance, depth of capital markets, economic activity, taxation, the human and social environment, and entrepreneurial culture. The United States ranks number one in attractiveness to venture capitalists and private equity deal makers.
America also comes out top of the heap in a study of over 10,000 firms in 20 countries. A team from the Harvard Business School, the London School of Economics, Stanford, and McKinsey & Co. found that when it comes to overall management, American firms outperform all others. That doesn’t mean that other countries don’t have well-managed firms: they do. But overall our tough levels of competition, use of human capital and flexible labor markets rank us number one.
And what of the BRICs (Brazil, Russia, India and China), the group with the snappy acronym touted by some as a wave of the future that will swamp America? It seems that inadequate protection of investors’ rights, high levels of perceived corruption, and low levels of innovation “remain investment obstacles in BRIC”, according to the Navarra research team.
Add America’s blessing of abundant natural resources, waiting to be used once obstacles to their development are removed, and periodic cleansing bursts of voter populism, and America’s future looks far brighter than the current gloom suggests. But not in the near term. The Office of Management and Budget and the President’s economic team now think the unemployment rate will remain stuck at 9% for the rest of this year and into 2012.
President Obama will offer his plan to get the economy moving again when he addresses a joint session of congress next Thursday -- a speech Americans are so interested to hear that it is scheduled by the White House to be delivered an hour earlier than usual so as not to conflict with the opening of the football season. This, in deference to our well-developed sense of priorities.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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