For the past
several months, I have sensed a shift in the wind of elite opinion on
the future of the U.S. economy and on the broader issue of American influence
and hegemony.
It has long
been the conventional wisdom that the U.S. economy is the world's most
resilient and innovative and that it will always bounce back to maintain the
American standard of living as the world's highest along with American global
power as the world's greatest. The challenge of Japan in the 1980s was thought
to have been turned aside in the 1990s by a combination of the collapse of
Japan's great asset bubble and the dot.com revolution emanating from , where
else, the United States. By the same token, the collapse of what was eventually
revealed to have been the dot.com bubble, was understood to have been overcome
by the dynamic U.S. real estate and services economy led by the rapidly
expanding and sophisticated banks of, where else, Wall Street.
The tone of
commentary and analysis tended to be optimistic if not triumphalist. The
American Enterprise Institute established its Project for the Next American
Century. Even Fareed Zakaria's best
selling book The Post American World argued that globalization would have the
world continuing to imitate the American model and that the United States would
long maintain its hegemonic role.
In
particular, those like the author Pat Choate, The Atlantic Washington editor
James Fallows, Harvard Professor Dani Rodrik, and others who called for more
attention to America's competitiveness and for some forms of industrial policy
were dismissed and banished to nether darkness.
Now,
however, Zakaria has just written a quite pessimistic Time magazine article on
America's future and his The Post American World 2.0 is going into the book
stores calling for new programs that sound a lot like an industrial policy. The
Wall Street Journal, long reliably triumphalist, ran a special report in its
June 2 edition entitled Get Ready: Here Comes the Yuan, David Pilling wrote
also on June 2 in the usually optimistic-about-America Financial Times that
"U.S. regional [in Asia] influence will surely wane", in the same edition
FT Washington correspondent Robin Harding cited research by ITG
Investment Research economist Steven Blitz showing that at an accelerating rate
since the 1970s fewer and fewer Americans expect their incomes to be higher in
six months (Blitz says the decline is "inextricably linked to the rising U.S.
trade deficit."), and in yesterday's Financial Times economics editor Alan
Beattie noted America's declining influence as an established fact. So the
heralds of our society appear to be embracing what has been the common view of
America's trajectory for the past quarter century.
But the
biggest straws in the wind were Monday's Financial Times op-ed by Larry
Summers and yesterday's Washington Post column by Steve Pearlstein. Let me take
them in reverse order. Pearlstein noted that our statistical data gathering and
analysis have not kept up with the evolution of global supply chains,
outsourcing, labor arbitrage, and other key elements of globalization. As a
result, we have been overestimating our GDP and productivity growth and
underestimating the depth of the recent economic crisis and the extent of our
economic decline. This is an argument that has been made by former BusinessWeek
Chief Economist Michael Mandel and also by me in my recent book The Betrayal of
American Prosperity. So it's nice to see it getting picked up by Steve as well.
Summers,
ever the quintessential macroeconomist, argued cogently and forcefully that the
big problem facing the U.S. economy today is not debt but lack of sufficient
demand to achieve something approaching full utilization of resources. To create
enough demand we must have confidence, says Summers, and that will require not
only continued fiscal stimulus and easy monetary policy but also other policy
measures as well. Now it's not surprising that Summers would call for continued
stimulus and easy money. That's what you'd expect from him. It's the other
policy measures that are intriguing.
First because he is being forced to turn to
them. On the one hand, it's true that insufficient demand is presently dragging
the U.S. economy down. But the problem is that consumption as a percent of GDP
in the United States is already far above the rate or any other major country.
It is generally agreed by economists including Summers that a global
rebalancing has to take place in which the U.S. saving, investment, and
production rates rise as a percent of GDP while consumption falls. So just
creating more consumer demand in the U.S. economy does not really solve the
problem. There has to be more demand, but it must be demand for products and
services made in America. Thus Summers talks about the government promoting
sales of U.S. products abroad, enforcing
trade agreements, changing visa requirements to promote tourism and exports of
U.S. education and health services, relaxation of regulatory burdens, and expansion
of infrastructure investment.
If that
sounds pretty close to something like an economic strategy based on various
industrial policies that "pick winners and losers", it is. These are the kinds
of measures that have always been of little interest to and even, in some
instances, actively opposed by Summers and his macroeconomist colleagues. That they are
getting attention now is a big harbinger of the future.
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