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America s economy is once again reinventing itself
Jul 14th 2012 | from the print edition
ALMOST the only thing on which Barack Obama and Mitt Romney, his Republican
challenger, agree is that the economy is in a bad way. Unemployment is stuck
above 8% and growth probably slipped below an annualised 2% in the first half
of this year. Ahead lie the threats of a euro break-up, a slowdown in China and
the fiscal cliff , a withering year-end combination of tax increases and
spending cuts. Mr Obama and Mr Romney disagree only on what would make things
worse: re-electing a left-wing president who has regulated to death a private
sector he neither likes nor understands; or swapping him for a rapacious
private-equity man bent on enriching the very people who caused the mess.
America s economy is certainly in a tender state. But the pessimism of the
presidential slanging-match misses something vital. Led by its inventive
private sector, the economy is remaking itself (see article). Old weaknesses
are being remedied and new strengths discovered, with an agility that has much
to teach stagnant Europe and dirigiste Asia.
Balance your imbalances
America s sluggishness stems above all from pre-crisis excesses and the
misshapen economy they created. Until 2008 growth relied too heavily on
consumer spending and house-buying, both of them financed by foreign savings
channelled through an undercapitalised financial system. Household debt,
already nearly 100% of income in 2000, reached 133% in 2007. Recoveries from
debt-driven busts always take years, as households and banks repair their
balance-sheets.
Nonetheless, in the past three years that repair has proceeded fast. America s
houses are now among the world s most undervalued: 19% below fair value,
according to our house-price index. And because the Treasury and other
regulators, unlike their euro-zone counterparts, chose to confront the rot in
their financial system quickly, American banks have had to write off debts and
raise equity faster than their peers. (Citigroup alone has flushed through some
$143 billion of loan losses; no euro-zone bank has set aside more than $30
billion.) American capital ratios are among the world s highest. And consumers
have cut back, too: debts are now 114% of income.
New strengths have also been found. One is a more dynamic export sector. The
weaker dollar helps explain why the trade deficit has shrunk from 6% of GDP in
2006 to about 4% today. But other, more permanent, shifts especially the growth
of a consuming class in emerging markets augur well. On the campaign trail,
both parties attack China as a currency-fiddling, rule-breaking supplier of
cheap imports (see Lexington). But a richer China has become the third-largest
market for America s exports, up 53% since 2007.
And American exporters are changing. Some of the products Boeing jets,
Microsoft software and Hollywood films are familiar. But there is a boom, too,
in high-value services (architecture, engineering and finance) and a growing
app economy , nurtured by Facebook, Apple and Google, which employs more than
300,000 people; its games, virtual merchandise and so on sell effortlessly
across borders. Constrained by weakness at home and in Europe, even small
companies are seeking a toehold in emerging markets. American manufacturers are
recapturing some markets once lost to imports, and pioneering new processes
such as 3D printing.
Meanwhile, what was once an Achilles heel is becoming a competitive advantage.
America has paid dearly for its addiction to imported oil. Whenever West Texas
Intermediate climbs above $100 per barrel (as it did in 2008, last year and
again this year), growth suffers. But high prices have had an effect,
restraining demand and stimulating supply. Net imports of oil this year are on
track to be the lowest since 1995, and America should eventually become a net
exporter of gas.
Many countries have shale gas, but, as it did with the internet revolution,
America leads in exploiting it (see our special report this week). Federal
money helped finance development of the fracking technology that makes shale
gas accessible, just as it paid for the internet s precursors. However its use
was commercialised by a Texas wildcatter called George Mitchell, the sort of
risk-taker America has in abundance. In Europe shale gas has been locked in by
green rules and limited property rights. In America shale has already lowered
consumers energy bills and, by displacing coal, carbon emissions. In future,
it will give a spur to the domestic manufacture of anything needing large
amounts of energy.
America s work-out is not finished. Even when the results are more visible, it
will leave many problems unsolved. Because the companies leading the process
are so productive, they pay high wages but do not employ many people. They may
thus do little to reduce unemployment, while aggravating inequality. Yet this
is still a more balanced and sustainable basis for growth than what America had
before and a far better platform for prosperity than unreformed, elderly
Europe.
Of cliffs, and other perils
What should the next president do to generate muscle in this new economy?
First, do no harm. Not driving the economy over the fiscal cliff would be a
start: instead, settle on a credible long-term deficit plan that includes both
tax rises and cuts to entitlement programmes. There are other madnesses
brewing. Some Democrats want to restrict exports of natural gas to hold down
the price for domestic consumers a brilliant strategy to discourage domestic
investment and production. A braver Mr Obama would expedite approval of gas
exports. For his part, Mr Romney should back off his promise to brand China a
currency manipulator, an invitation to a trade war.
Second, the next president should fix America s ramshackle public services.
Even the most productive start-ups cannot help an economy held back by
dilapidated roads, the world s most expensive health system, underachieving
union-dominated schools and a Byzantine immigration system that deprives
companies of the world s best talent. Focus on those things, Mr Obama and Mr
Romney, and you will be surprised what America s private sector can do for
itself.
from the print edition | Leaders