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DEBATING THE FUTURE OF THE U.S. ECONOMY
BY ALLEN SINAI & PHILIP MERRILL
www.the-american-interest.com
VOLUME I, NUMBER 2 (WINTER 2005)
It is widely conceded and often remarked that
in this still young 21st century both the relative
and the absolute power of the United States are,
by any historical standard, simply remarkable. Some
draw comparisons to 19th-century Britain, when its
fleet ruled the oceans and the sun never set on
its possessions. Others draw parallels to Rome.
America's overt power is most readily appreciated
in the military sphere. Even if it cannot seem to
wholly master the arts of counterinsurgency, no
one doubts that the U.S. military can project massive
power anywhere on earth, as no other state can.
But the roots of that capacity lie ultimately in
America's wealth, and it is here that questions,
anxious or expectant depending on who is doing the
asking, have arisen about the likely longevity of
U.S. global power.
Has there ever been a power as great as the United
States that has been a debtor as opposed to a creditor
nation? There is no parallel with Britain or Rome
here. Indeed, America's trade and budget deficits
have raised doubts about the stability of America's
fundamental economic condition, as has the erosion
of the U.S. manufacturing base in the face of foreign
challenge. The possible end of the special global
reserve currency status of the dollar in the face
of the euro, and perhaps a new continent-spanning
Asian currency, only magnifies the implications
of these trends. Most recently, evidence of the
rapid opening up of the international economy's
services sector has raised fears that outsourcing
will impoverish whole new areas of the U.S. economy,
forcing the ruthless logic of globalization back
upon the society that pioneered and promoted globalization
itself.
Is American unipolarity bound to be short-lived
on account of economic vulnerability? The American
Interest asked Allen Sinai and Philip Merrill a
series of questions about the U.S. economy in relation
to America's global power and role.
-THE EDITORS
HOW IMPORTANT IS THE SIZE
AND NATURE OF THE U.S. ECONOMY IN DEFINING POWER
IN TODAY'S WORLD?
ALLEN SINAI: The size, nature and economic strength
of the U.S. economy are extremely important in defining
global power relations — political and otherwise.
Indeed, throughout history economics has been front-and-center
in determining how the fortunes of nations have
risen and fallen. It is hard to separate economic
strength from military strength in defining power
relations. A country's military dominance over others,
or expansion of its regional hegemony, has often
contributed to economic power, which, in turn, has
reinforced political and military power.
The size of the U.S. economy, its growth rate, its
economic performance and its attractiveness as a
place to invest, work and live are therefore essential
ingredients for the United States to remain the
global leader among nations. And, as throughout
history, that leadership position is essential for
maintaining U.S. economic strength. What is different
about today's world is that the setting of contemporary
global economics and politics is such that no country
is an island. Interdependence with other countries
— with economics as a main driving force of
that interdependence — is more of a reality
than ever before.
PHILIP MERRILL: It's the key. The main threat we
face today is the prospect of having to deal with
weapons of mass destruction in the hands of mostly
non-state crazies in what used to be called the
Third World. But the central fact of the 21st century
is the enormous size of the U.S. economy compared
with everyone else's. Contrast this with the dominant
political fact of the 20th century, which was the
growth of huge military forces in the hands of totalitarian
states that were willing to use them. It is as though
we have lived on two different planets.
It's hard to exaggerate the relative size and dynamism
of the U.S. economy. In 2004, the U.S. gross domestic
product (GDP) stood at $11.7 trillion, up $700 billion
from 2003. Now consider certain points of comparison.
The next largest economy to ours is Japan's —
at $4.7 trillion. Germany and France are $2.7 trillion
and $2 trillion respectively — but all three
of these economies are stagnant and more likely
to shrink than to grow over the next decade.
Shrinkage is also the likely fate of the economy
of our Cold War adversary, Russia. Despite the surge
in oil prices in recent years, which has nearly
doubled the size of the Russian economy, Russia's
GDP is smaller than $600 billion. That is about
5 percent of U.S. GDP. In round figures, Russia
is about the economic equivalent of Holland. And
as Russia's population declines, as all projections
predict, and its leaders continue to re-centralize
power in the state, its economy will likely decline
as well.
Other large economies are growing, however. China's
GDP is about $1.6 trillion, India's about $700 billion.
Brazil's GDP is about the same. Of course, purchasing
power parity comparisons would increase significantly
the relative size of these emerging economies, but
even so, the broad-brush picture remains the same.
The gaps are huge by any measure and will take a
very long time — and very large investments
in infrastructure — to overcome.
For example, the Export-Import Bank of the United
States recently approved a preliminary $5 billion
commitment for Westinghouse and Bechtel to build
two large nuclear power plants in China, each one
larger than Maryland's Calvert Cliffs nuclear power
station. China plans to build two of these plants
each year for the next 30 years. If those plans
become a reality, which is likely whether we build
them or the French do, nuclear power will increase
from its current 1.7 percent of the Chinese national
power requirement to about 4 percent. That's a huge
investment for a less than dramatic impact.
The fact is that the United States is driving the
world economy more definitively than at any time
since the 1960s. This is not just because of its
size, but because of its innovative capacities in
science and technology — the driving force
behind modern economic growth — and its innovative
means of management and marketing. American wealth,
and the manner of its creation, is defining our
age.
IS THE U.S. ECONOMY LIKELY
TO KEEP GROWING, OR WILL VARIOUS FACTORS WORK AGAINST
THAT PROSPECT?
ALLEN SINAI: On average, the U.S. economy is likely
to grow relatively strongly over the next few decades,
as always with ebbs and flows from the business
cycle. There is no reason to expect anything less
than 3 percent-or-so growth per year, which approximates
historical trends. Indeed, we may expect somewhat
better performance depending on the pace of productivity
growth.
As population growth and thus labor force growth
slows, the potential for the U.S. economy to grow
will also slow in comparison with the last decade
or two. But 3 percent annual growth in real GDP
is still relatively strong, especially when compared
with the growth rates of other major industrialized
countries in the G-8.
Of course, there will be periods of slower-than-average
growth, in part because the business cycle is now
probably a 4-to-7 year recovery-expansion-boom-peak-recession
pattern, instead of the 3-year-or-so short-run business
fluctuations of the past.
The mechanisms of the business cycle and the internal
workings of a market-oriented capitalist system
will inevitably produce fluctuations within a basic
long-run growth trend. But long-run growth of the
U.S. economy has outstripped all other developed
countries' long-run performance.
For a long time now the United States has averaged
about 3 percent growth a year despite all kinds
of global and domestic perturbations. We have experienced
wars, competitive challenges from emerging global
economies, such as Japan in the 1980s and now China,
and outsized oil price shocks. We have also endured
myriad changes in political and economic orders
worldwide — the birth of the World Trade Organization
and the end of the Cold War, to mention just two.
And through it all — leaving aside the recessions
and inflation of the 1970s and 1980s, the mechanics
of which are now understood and likely to be averted
— the U.S. economy grew.
The resiliency of the U.S. economy, the ingenuity
of the American people, and the flexibility of policymakers
in responding to external and internal shocks are,
I believe, advantageous cultural characteristics
of the American system that will not go away anytime
soon.
PHILIP MERRILL: To answer that question, it's a
good idea to look backwards. No one disputes that
the U.S. economy today is simply enormous. But not
everyone predicted that it would be. Estimates have
almost always been wrong, and they've almost always
been wrong by being far too low.
The historic average annual growth rate for the
United States over more than 200 years has been
about 3 percent. The 30-year bond rate is currently
5 percent. Reasonable people have set the assumption
for a pension plan to be actuarially valid at 7.7
percent, and rarely is that assumption disappointed.
The average annual growth rate of the U.S. stock
market for more than a century has been 11 percent.
If we conservatively assume the 3 percent historic
growth rate of the economy, and add 2 percent for
inflation, ceteris paribus, in 30 years we will
have a $50 trillion economy.
That's a lot of money, but this is a conclusion
that should not surprise anyone familiar with the
basic data of U.S. economic history. In 1962, the
U.S. GDP, in today's dollars, was about $580 billion.
In just 40 years, we have created more than $100
trillion in new net worth. Now that's really a lot
of money — a lot of real wealth. This is a
level of wealth creation without historic parallel.
The Spanish control of Latin America, the Dutch
trade with the East Indies, and the British Raj
in India all look like marginal investments by comparison.
There is no 20-year period in U.S. history —
not 1850-70, not 1919-39, not 1940-60 — from
which we did not emerge as a far stronger country
economically. In the past 40 years, however, we
have seen the results of growth that has worked
essentially like compound interest. No, we have
not repealed the business cycle. But the hills and
valleys have been leveled in ways that reduce the
lows and emphasize more regular growth. Our growth
has had elements of exponential expansion for a
long time, but it took until recent decades for
the slope of the curve to really head upwards. This
has produced a kind of tectonic shift in the world's
economic geology, a shift that has been recognized
more clearly by observers in other countries than
by Americans, probably because distance affords
them a better perspective from which to appreciate
the trend.
These historical data suggest that the United States
continues to show an amazing capacity for productivity
growth and economic reinvention. We have an entrepreneurial
spirit. And we benefit from a degree of mobility
in labor, management and capital that no other economy
can match. Most likely, then, the best is yet to
come for the U.S. economy. Within the normal business
cycle — including savings, surplus and deficit
projections — I believe that the United States
will continue to experience explosive growth during
the 21st century, just as it has over the past two
centuries.
EVEN IF THE U.S. ECONOMY DOES
WELL IN THE FUTURE, WON'T THE GROWTH OF OTHER COUNTRIES
DIMINISH THE RELATIVE CLOUT OF U.S. ECONOMIC POWER?
IN OUR AGE, WHAT ARE THE POLITICAL IMPLICATIONS
OF THAT DIMINISHED ECONOMIC CLOUT?
ALLEN SINAI: As other countries in the global economy
grow, it is inevitable that the relative clout of
U.S. economic power will diminish. Assuming there
are no major global wars or unexpected conflicts,
a wholesale shift in economic power is unlikely.
Instead, a more closely integrated global economy
will emerge with certain regions driving global
growth forward.
The U.S. share of global GDP will have to diminish,
if only because other countries with low shares
now — particularly those in Asia but perhaps
also some in Europe and other regions — will
grow at a much faster rate than the global average
(for reasons related to development and entry into
the global economic system). Less unilateral U.S.
dominance of the global economy must inevitably
result in less U.S. dominance in global politics,
and thus more collaborative partnership arrangements.
And yet one can still say that none of this is likely
to diminish U.S. economic clout, and hence U.S.
political influence, in any dramatic way.
PHILIP MERRILL: It's possible that America's relative
economic power will diminish, but it's a fundamental
mistake to see international economic competition
as a zero-sum situation. No one would assert that
the United States today would be better off if Germany,
Japan and other major economies in Europe and Asia
were as weak today as they were at the end of World
War II. Likewise, the United States won't be better
off if China and India are poor. On the contrary,
we'll all be better off if they're doing well economically,
and that's mainly because of trade.
Most Americans do not understand how important exports
have become to the U.S. economy. Exports have risen
from $42 billion in 1963 to $1.2 trillion a year
today. One way or another, one U.S. job in ten is
export-dependent. And with 19 out of every 20 people
in the world living outside the United States, that's
where our growing markets lie.
That is why the debate about outsourcing is often
skewed and leads to misunderstanding. Of course,
there is pain in an American losing a job, especially
if it's your job. There is a natural desire to blame
someone — and government policy is an obvious
target.
But if we have outsourced 600,000 to 700,000 U.S.
jobs in recent years, we have also insourced at
least 6 or 7 million. The German company Siemens
employs more than 70,000 people in the United States.
Japanese and German automakers employ thousands
upon thousands more. So do other French, Dutch and
British firms, and the list goes on.
When a job is created in the United States, regardless
of where the capital comes from or where the corporate
management sits, it's seen as normal. No one gives
the U.S. government credit for helping to attract
that investment. But government policy gets blamed
for outsourced jobs, particularly when a manufacturing
job loss can be traced directly to a foreign producer.
Nevertheless, Americans have the most to lose in
a trade war — 13 million jobs, or about 10
percent of the U.S. workforce. U.S. trade policy
must reflect the maintenance of these export-related
jobs as well as other jobs, or it would be a very
foolish policy indeed.
WHICH COUNTRIES ARE MOST LIKELY
TO BE AMERICA'S ECONOMIC COMPETITORS IN THE YEARS
AHEAD?
ALLEN SINAI: China and India, so long as they manage
their economies and foreign policies well, will
without a doubt supplant some portion of the U.S.
share in the global economy — and thereby
gain considerable political influence. History is
clear on this — with economic power comes
political power and influence, if only because countries'
allegiances change depending on where business is
best.
This can readily be seen in Asia, where the power
lineup has changed immensely because of China's
strong, dynamic growth. China's influence on business
and finance in Asia and, eventually, in the whole
of the global economy is clearly going to grow.
China is now Japan's number one trading partner.
Japan, previously leery and cautious in dealings
with China, now regards China as a "friend."
South Korea also counts China as its largest trading
partner. The economic opportunities in China and
the huge Chinese market are attracting a tremendous
amount of foreign direct investment. Firms and financial
institutions of every sort and from nearly every
country are seeking entry into China, establishing
production plants and regional corporate headquarters
there. This represents a huge migration away from
Tokyo and Singapore as the economic and financial
centers of Asia.
PHILIP MERRILL: Europe will continue to be a major
player, especially if its integration policies continue,
and Japan too. But the most dynamic competitors
will probably be China and India.
China, which has been concentrating its efforts
on expanding its economy, is a country that understands
the connection between free market systems and economic
growth. Compared, for example, with Russia, the
Chinese have been quite successful.
China had a $175 billion trade surplus with the
United States last year and has Wal-Mart as its
distribution agent — with $18 billion in annual
sales to that one company alone. In rapid succession
during the last two years, China surpassed first
Japan, then Mexico, to become the second-largest
source of U.S. imports after Canada. China has also
become the fourth-largest purchaser of U.S. exports.
While it is making fast progress in developing its
economy, China nonetheless has a long way to go,
including major internal political barriers yet
to be overcome.
India also has made striking economic progress in
recent years. Its real GDP has grown by an average
of 6 percent per year during the last 15 years,
and its high-tech industries are flourishing. But
India starts from a very low baseline and still
lags far behind China, which has become almost twice
as rich on a per capita basis.
With some modification of the "permit raj"
system in India, but still far from sufficient infrastructure,
India has a remarkable new sense of self-confidence.
Indian businessmen find they have a favorable export
ratio with China, even in sectors like auto parts,
and they revel in their achievements. Every time
a story about U.S. outsourcing to India appears
in the American press — which is nearly every
day — India's extensive and varied popular
press runs large headlines highlighting India's
successes. Indian business leaders lately sound
a little like King Kong, pounding their chests and
crying out, "Hey, we can compete with the Americans,
too!" This is something new.
Unlike China, India is a stable, democratic country,
though one very different from the United States.
With its democratic institutions and English-speaking
educational system, India could very well overtake
China in a few decades. But whether or not it does,
both India and China will continue to lag far behind
the United States in all relevant economic categories.
Neither will displace us, and the gaps between our
wealth may even grow.
WHAT HAPPENS IF CHINA DETERMINES
TO TRANSLATE ITS GROWING WEALTH INTO MILITARY POWER?
IS THAT AN ARGUMENT FOR CURTAILING U.S. TRADE WITH
CHINA NOW, AS SOME ARGUE?
ALLEN SINAI: How China uses its increased economic
power and influence in the global political arena
is one of the crucial unanswered questions of the
future. There is no doubt that China's growing economic
might makes it a powerful global force. China's
ascendancy will not resemble that of Japan in the
1980s, if only for reasons of sheer scale. Nor can
the United States expect China to make the mistakes
that Japan has made to undermine its political standing
and wealth.
The motives of countries on the rise are never entirely
clear. History is filled with examples of pathologically
ambitious leaders and countries. But although history
tells us to be cautious, we cannot relate to China
based on the empire-seekers of the past. We must
begin with the assumption that China will be rational
in its economic and political relationships, seeking
for its citizens improved security and a rising
standard of living.
Certainly then, until China proves that expectation
wrong, our approach toward it should not be characterized
by threats. The curtailing of U.S.-China trade through
protectionism would essentially be just that, and
this is exactly the wrong approach to take with
a country that is just entering the global system.
China's current motivations seem to be mostly economic
ones and not, as has been the case so many times
in history, dominance over other countries driven
by some irrational view of how the world system
should line up.
PHILIP MERRILL: It would not be unnatural for China
to invest more in its military. Nor would it be
surprising for many to see that effort as directed
ultimately at the United States. But China's military
spending so far is very small compared to ours.
In some years our supplemental spending exceeds
the entire Chinese military budget. Objectively
speaking, our military continues to grow stronger
and more advanced each year compared with China's.
That does not mean there are no conditions under
which China would challenge the United States, nor
does it mean China will be deterred from attacking
or intimidating other countries. But there is good
reason to keep all this in perspective.
More important, our trade deficit with China is
"cheap" if it helps China evolve into
a market-oriented society rather than a military
adversary of the old-fashioned imperialist-mercantilist
sort, which would really raise our own military
costs. But that old-fashioned imperial path is not
likely for China. Visitors to China in recent years,
myself included, are invariably struck by the market
orientation of Chinese government ministers and
staff. They are all members of the Communist Party,
true, but so are most bank and company presidents
there. They all sound like members of the National
Association of Manufacturers, talking in terms of
profits, market share and return on capital.
If there is nothing particularly communist about
China's contemporary political elite, there is still
plenty that is authoritarian. Their legitimacy is
based not on any ideology, but on a self-assessed
ability to deliver jobs and basic services. For
them, it's like the old college song, "We're
Here Because We're Here." Of course, whether
their market orientation will eventually curb their
military enthusiasm or vice versa remains to be
seen. I am cautiously optimistic.
HOW DANGEROUS ARE THE TWIN
DEFICITS WE ARE CURRENTLY RUNNING?
ALLEN SINAI: The so-called twin deficits —
trade, or current account, and budget — represent
a dangerous and threatening imbalance in the U.S.
economy.
Trade deficits represent a country's purchasing
more goods and services abroad than it sells abroad.
Budget deficits represent the amount by which federal
government outlays exceed tax receipts. The debt
and potential debt service associated with financing
both deficits could exert a huge drag on the performance
of the U.S. economy and ultimately Americans' standard
of living.
At present, with the trade deficit at a record high
relative to GDP, the federal budget deficit also
high (but not at record levels) and low interest
rates, the twin deficits do not present an imminent
problem. A strongly growing economy can finance
such deficits and pay the service on the debt. And
if the underlying economy is strong and inflation
low, there is little reason to fear a wholesale
dumping of holdings of U.S. debt and stocks or a
run on the dollar.
If, however, the deficits were to continue rising
in absolute terms and as a percentage of GDP, and
if debt and debt service rise relative to the size
of the U.S. economy, then the credit worthiness
of the United States, the safety and stability of
the dollar, and the future of U.S. economic activity
could be called into question.
In such a situation, foreign investors and lenders
might well curtail the new money flows we need to
finance ongoing deficits and might even, under stress,
sell some of their outstanding U.S. holdings. Financial
markets would react negatively as a result: The
dollar would fall, interest rates would rise, and
the stock market would decline. All of this would
in time negatively affect the growth of the U.S.
economy, forcing a reduction in consumer spending
and an increase in saving, with the result being
a lower standard of living for the American people.
Currently, the out-year prospects for the trade
and budget deficits are daunting. Between 2007 and
2012, the deficits are expected to rise sizably
and to generate increased debt relative to GDP.
Whether inflation and interest rates are much higher
will be key determinants of how burdensome these
deficits will be. But there is a significant risk
that, during this period or perhaps before, financial
markets and the economy might suffer.
Preemptive planning must be taken to deal with these
out-year deficits and their potential consequences.
Controlling the growth of federal spending (both
defense and non-defense), rationalizing central
government institutions to increase productivity
and cost-effectiveness, and instituting a tax system
that provides the most economic growth per dollar
of tax revenue are important objectives.
Unfortunately, societies such as the United States
do not typically react to problems before the sky
actually falls. Given this historical fact of life,
twin deficits represent a distinct danger on the
road ahead.
PHILIP MERRILL: Insofar as deficits say something
about Americans' spending habits — notably
a lack of providence, as it used to be called —
it's nothing to sniff at. But I think the economic
problem, more narrowly construed, is vastly exaggerated.
So long as the U.S. economy is growing faster than
either our trade or budget deficit, they are not
critical problems. Currently, U.S. annual growth
is greater than the $600 billion trade deficit or
the $400 billion budget deficit. So I do not worry
overly much about this. Nor should anyone else.
Ask yourself this question: If the value of your
home increased over time at a rate greater than
the interest rate on your mortgage, would you worry
about that? Or would you celebrate? Of course you
wouldn't worry, and that's more or less our situation
with the ratio between the growth of our economy
and our deficits.
I don't worry either about politically motivated
attempts to wreck the U.S. economy by suddenly moving
huge amounts of invested dollars out of the United
States. There is simply no other economy in the
world large enough and reliable enough to house
all that investment.
Of course, if U.S. growth were to substantially
slip, and the twin deficits substantially expand,
that would be another matter. We are not powerless
before such possibilities, however, and we can and
must do what needs to be done to maintain a sensible
balance.
WHAT ABOUT THE VALUE OF THE
DOLLAR? IS THAT SOMETHING WE SHOULD WORRY ABOUT?
ALLEN SINAI: The value of the U.S. dollar normally
does not play an important role in the behavior
of the U.S. economy, but a dollar that kept falling
could increase exports at the cost of higher inflation
and higher interest rates. A gradually fluctuating
dollar, however, and one that declines or increases
irregularly but still essentially gradually, should
not impact U.S. economic performance very much.
Lately the dollar has been doing well, contrary
to the views of many who thought that large and
rising trade and budget deficits would bring it
crashing down. The "crash" view never
had much credence, though if the deficit trends
continue they could eventually contribute to a much
lower dollar.
In that case, Americans would be poorer internationally,
with higher inflation at home and higher costs for
goods and services purchased abroad. But the odds
are that most people will have enough advance warning
to factor such a risk into the kinds of decisions
that depend on the U.S. currency.
More important for the dollar are other factors:
how the U.S. economy grows, relative interest rates
between the United States and its major trading
partners, the solidity of the U.S. political system
versus those of other trading partners, and the
attractiveness of the United States as a place to
lend and invest.
So long as U.S. growth and low inflation continue
apace, however, the dollar and its behavior should
not be of any particular concern.
PHILIP MERRILL: No. The decline of the dollar makes
it increasingly difficult for Europeans to export.
Since it is difficult for them to break out of their
"social contract" and to compete for foreign
markets, the result is to make U.S. exports more
competitive. The problem of European exports is
not our problem. It's a problem for Europeans, and
I'm not inclined — and neither is President
Bush — to solve this particular problem at
our expense.
WHAT ABOUT THE LOW SAVINGS
RATE OF AMERICANS? DOESN'T THAT AFFECT BOTH OUR
DEFICITS AND THE VALUE OF THE DOLLAR?
ALLEN SINAI: The low personal savings rate of U.S.
households is a puzzle of the U.S. economy.
It is part of a set of imbalances, including strong
spending and borrowing by households, pervasive
now for many years. Ultimately, the U.S. government,
and particularly households, will have to save more,
correcting the imbalances reflected by low savings
and high trade and budget deficits. Hopefully, this
will come about through appropriate macroeconomic
and structural policies and voluntary modifications
of behavior, rather than through the painful marketplace
adjustments of a long period of weak economic growth
or recession.
It should be pointed out that the low personal savings
rate of households is somewhat overstated. Its calculation
reflects simply the subtraction of consumption and
interest payments from income. Not all funds are
counted as income, however, and consumption can
rise because of increased wealth, for example, or
because of capital gains realizations from price
appreciation on property or stocks.
In the latter case, the gains essentially provide
funds equivalent to income but are not fully counted
as disposable income. The increased expenditures
that come from capital gains realizations get subtracted
from income, which results in a distorted, low savings
picture that is not really reflective of the financial
position of households.
Taking account of savings from equity in real estate,
stocks and retirement funds gives a better picture
of the savings rate for American households. When
this is done, the low U.S. savings rate represented
in the National Income and Product Account personal
savings rate calculation appears much greater and
the problem of chronically low savings for households
is not nearly so troublesome.
PHILIP MERRILL: The savings rate of Americans is
only low if we accept the professional economists'
definition of what constitutes savings. I don't.
For example, the equity that people put into their
homes is not considered savings in standard professional
economic statistics. But in America, which is very
much an ownership society in which most people's
main savings is the equity on their home, this is
a misleading omission. So is the inability to account
adequately for the value of intellectual capital.
Americans do save, but not mainly by stashing cash
in a bank. I don't worry about our savings rate
any more than I lose sleep about deficits or the
dollar.
IF YOU WERE TO RANK AMERICA'S
ECONOMIC VULNERABILITIES, THOSE MOST LIKELY TO AFFECT
THE WORLD OVER THE NEXT FEW DECADES, WHAT WOULD
THAT RANKING LOOK LIKE?
ALLEN SINAI: The picture of America going forward
is bright. Its history and ability to flexibly respond
to challenges of all sorts suggest optimism is appropriate
for the future. There is something about the American
people, institutions, leaders, way of life and mixed
capitalist economic system that has made America
a major, if not the principal, force in economics
and global politics for decades.
Certainly there are economic vulnerabilities and
risks. First among them are the imbalances on the
federal budget and current account, which require
borrowing and investment from outside the United
States on an ongoing basis. So long as inflation
and interest rates are low, debt accumulation not
too high and the pace of GDP growth outstrips that
of the debt and debt service, the deficits are sustainable
and American economic vulnerability minimal. But
because these conditions may not always hold, these
imbalances must be considered as the greatest longer-term
risk to the U.S. economy.
A second risk, more near-term, is the ever-present
danger of inflation, which puts a premium on the
ability of the Federal Reserve to maintain price
stability and sustainable growth. Historically,
the U.S. economy has inherently generated higher
and higher inflation, routinely requiring restrictive
monetary policy to keep it at controllable levels.
This persistent characteristic of the U.S. economy
is a continuing danger amid other present concerns.
A third concern has to do with geopolitics —
specifically, the destabilizing effects of terrorism.
While the U.S. economy has absorbed and recovered
from the shock of September 11, no economy or system
is invulnerable to repetitive, vastly destructive
acts of terrorism. Certainly, the economic growth
of the United States and other global economies
is slower today than would otherwise be the case
because of these risks.
Finally, the uncertainty surrounding the ascent
of China has to be listed as the fourth vulnerability.
One must accommodate shifting economic and political
power structures, shifts that have occurred throughout
history with the rise and fall of nations. We need
a coherent international policy that encompasses
China's increasing economic and political clout,
recognizes its economic and competitive challenge,
and establishes the institutions and relationships
that will be necessary to cope with the dominance
of Asia by one country. However, while the global
power lineup may be shifting, U.S. leadership will
be a reality for a long time to come.
PHILIP MERRILL: We have a few problems, to be sure.
One minor and immediate problem, and one serious
and long-term problem, come readily to mind.
The minor problem is the current real estate/housing
bubble, and the general effects of that bubble throughout
our economy. Herb Stein once said that "anything
that can't sustain itself, won't." Of course
he was right. There is likely to be a 30 percent
collapse in U.S. housing prices in the near future,
but from a peak that will only be recognized in
hindsight.
The way to cool the housing bubble would be for
interest rates to gradually rise from their current,
historic lows to 6, 7 or 8 percent. By mildly raising
U.S. interest rates and stimulating U.S. exports,
the decline of the dollar could help us have a softer
landing rather than a precipitous collapse.
The serious problem concerns education. Despite
our enormous strengths, the one thing that gives
me pause is our failure to invest adequately in
education and prepare our young people for technically
demanding jobs. While American higher education
is still second to none, state university budgets
are being cut by Democrats and Republicans alike.
This is a mistake. And, as every concerned parent
knows, America lacks effective math and science
education at the secondary level, as well. Parenthetically,
the national evisceration of a core curriculum is
no help either.
With our huge economy increasingly dominated by
knowledge-based industries, ensuring the best education
for our children is the smartest long-range investment
we can make — and it's the one likely to produce
the highest returns. This is the way to compete
with 300 million people each in China and India
— people who speak or are about to speak English,
are scientifically educated, and are very hard-working.
Finally and more generally, it is worth noting that
we may face a problem of understanding the new economic
reality. The sheer size of the U.S. economy and
the rise of a globally networked economy have changed
the way investors and their advisors look at the
world. As a result, the United States can only do
well when other countries do well, and vice versa.
We are inextricably linked together in ways and
to an extent we have never been linked before.
So we don't have to worry about being displaced.
Just as there is no other military power that can
overwhelm us, there is no other economic power that
can overtake us. But we do need to think more conceptually
about how to use our wealth, our economic resources
and our communications skills, and perhaps do some
unconventional thinking to advance and support our
national interests — which are almost entirely
consonant with the interests of other nations.
This presents a kind of paradox. The more influence
we have economically in such an interlinked world,
the more cooperation we require diplomatically.
We need the support of foreign intelligence services
and other agencies in counterterrorism, just as
the jobs created by our exports to other countries
and their exports here are mutually dependent. Our
wealth isn't in question. Our judgment about how
to manage that wealth may be.
ALLEN SINAI is chief global economist and president
of Decision Economics, Inc.
PHILIP MERRILL served as president and chairman
of the Export-Import Bank of the United States from
November 2002 to July 2005, and has held senior
positions in both the Defense and State Departments.
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Sources: Thousands of Turkish troops enter Iraq
ANKARA, Turkey (AP) -- Several thousand Turkish troops crossed into northern Iraq early Wednesday to chase Kurdish guerrillas who operate from bases there, Turkish security officials said.... |
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Could an al-Qaeda Attack Trigger War With Iran?
Following revelations of a George W. Bush administration policy to hold Iran responsible for any al-Qaeda attack on the U.S. that could be portrayed as planned on Iranian soil... |
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U.S. doubles air attacks in Iraq
BAGHDAD - Four years into the war that opened with "shock and awe," U.S. warplanes have again stepped up attacks in Iraq , dropping bombs at more than twice the rate of a year ago. ... |
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NPR interviews Dahr Jamail on State of Iraq Hospitals
The five minute interview with Michelle Norris is a good one. However, if the NPR show were true to its title, "All Things Considered"... |
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Bipartisan panel urges agencies to order civilians to Iraq
With the situation in Iraq "grave and deteriorating," the United States must begin the process of shifting troops out of the country, members of a bipartisan panel said Wednesday... |
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Sunnis Reject
Early Iraq Election Results, Calling for Inquiry
BAGHDAD,
Iraq, Dec. 20 - Sunni Arab leaders angrily rejected early election
results on Tuesday, saying the vote had been fixed in... |
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Dispelling
Myths About Iraq
The
bruising debate over U.S. Iraq policy often seems to stray far from
the reality on the ground inside Iraq. Although Iraq’s progress
... |
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Iraqis Glad
2005 Over, Dim Hopes for 2006
*BAGHDAD,
Dec 20 (IPS) - Despite the parliamentary elections last week
and temporary ease in violence ... |
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Religious Groups
Take Early Lead in Iraqi Ballots
BAGHDAD,
Iraq, Dec. 19 - Early voting results announced by Iraqi electoral
officials on Monday, with nearly two-thirds of the ballots ... |
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David Brooks:
Taking a long view of the Iraq conflict
WASHINGTON
Over the past few years, the Iraq war has morphed from a war of liberation
against Saddam Hussein into a civil conflict between Sunnis and Shiites
... |
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Yosfiya: The
21st Century Nazis Are Here
Weary
of the overall failure of the US media to accurately report on the
realities of the war in Iraq for the Iraqi people and US soldiers,
Dahr Jamail went to Iraq to report on the war himself... |
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U.S. Is Said
to Pay to Plant Articles in Iraq Papers
WASHINGTON,
Nov. 30 - Titled "The Sands Are Blowing Toward a Democratic Iraq,"
an article written this week for publication in the Iraqi press was
scornful of outsiders' pessimism about the country's future... |
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N. Korea warns of nuclear war if attacked
North Korea will respond to a pre-emptive U.S. military attack with an "annihilating strike and a nuclear war," the state-run media said Monday, heightening its antagonistic rhetoric.... |
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Israel says no negotiations on soldier
Palestinian militants holding an Israeli soldier gave Israel less than 24 hours Monday to start releasing 1,500 Palestinian prisoners ... |
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In the Shadow
of Sharon
IT
is too early to assess Ariel Sharon's legacy. To be sure, he will
be remembered as one of Israel's great field commanders, the wily,
bulldozing general ... |
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The New Red,
White and Blue
As
we enter 2006, we find ourselves in trouble, at home and abroad. We
are in trouble because we are led by defeatists - wimps, actually... |
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Life After
Ariel Sharon
When
Prime Minister Ariel Sharon announced two months ago that he was leaving
the right-wing Likud Party, which he had embodied for three decades... |
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Administration
Cites War Vote in Spying Case
WASHINGTON,
Dec. 19 - President Bush and two of his most senior aides argued Monday
that the highly ... |
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Austrian presidency
will not press for EU constitution
EUOBSERVER
/ BRUSSELS - Austrian foreign minister Ursula Plassnik has indicated
that her country's incoming six-month EU... |
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DEFINING THE
AMERICAN INTEREST
The
American Interest (AI) is a new and independent voice devoted to the
broad theme of "America in the world." Our agenda is threefold.
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THE AMAZING
BUBBLE-MAN
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US DEPARTMENT
OF STATE RELEASED A PRESS STATEMENT ABOUT U.S.-IZRAEL STRATEGIC DIALOGUE
On
November 28, 2005, the United States and Israel conducted a strategic
dialogue led by Under Secretary for Political Affairs Nicholas Burns
and Minister of Jerusalem... |
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An Offering
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Thirty-two
months after U.S. forces invaded Iraq, President Bush's advisers concluded
that his message of "stay the course" has been translated by a weary
American public as "stay forever." And so yesterday the president
tried to reassure the nation... |
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9/11 Commissioners
Fault Administration
WASHINGTON
-- Reviewing action on recommendations it made last year, the Sept.
11 commission on Monday criticized the Bush administration for not
adopting standards for treatment of captured terror suspects... |
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US
refuses to rule out use of torture
THE
White House has refused to rule out the use of torture in an effort
to prevent a major terrorist attack, arguing the war on terror could
present a "difficult dilemma" and the US administration
was duty-bound to protect the American people... |
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American
Majority Says Bush Misled on Iraq
(Angus
Reid Global Scan) – Many adults in the United States are questioning
their president’s motives to launch the coalition effort, according
to a poll by Hart/McInturff released by the Wall Street Journal... |
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EU opens door to hidden TV adverts
EUOBSERVER / BRUSSELS – More frequent commercial breaks as well as product placements, ... |
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EU states under fire for red tape on foreign workers
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There is too much hyperbole over the EU consitutional treaty
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Brussels asks Helsinki to push for stronger EU in criminal matters
The European Commission has renewed calls to boost EU powers in criminal matters as well as increase the role of ... |
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MEPs shelve prickly anti-fraud debate, again
The European Parliament has for the third time postponed a plenary debate on ... |
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Frattini calls for national search into CIA flights and prisons
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EU praises Bush for wanting 'end' to Guantanamo
The EU has welcomed US president George W. Bush's statements on ending the Guantanamo ... |
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This WEEK in the European Union
EUOBSERVER / WEEKLY AGENDA (2-9 July) This week will be the first in office for the Finnish EU presidency. ... |
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EU troops kill
wife of Bosnian war crimes suspect
The
wife of Bosnian Serb war crimes suspect Dragomir Abazovic was shot
to death in a gun battle as EU troops stormed the couple's house ... |
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Bird flu kills
third child in Turkey
Avian
influenza has cost the life of a third child in Eastern Turkey, raising
fears that the deadly strain of the so-called bird flu virus could
spread ... |
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EU draws up
Adriatic gas plan after Russia-Ukraine fiasco
The
EU might build a new gas pipeline on the Adriatic Sea coast in order... |
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Slovak-Vatican
abortion deal criticised by EU experts
Slovakia
has been challenged by EU legal experts over an agreement with the
Vatican... |
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Commissioner
proposes constitution cherry-picking
French
commissioner Jacques Barrot has proposed that single elements of the
EU constitution be taken out in a bid to save the charter... |
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Blair takes
hits on EU budget deal
British
prime minister Tony Blair, defending the deal on EU’s budget
in front of the House of Commons... |
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Italian bank
chief resigns
Italian
Central Bank governor Antonio Fazio resigned yesterday after the Italian
government had announced... |
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WTO fallout
expected
Polish
experts say the WTO deal could harm EU exporters of milk, sugar, beef
and grain leading to oversupply... |
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Austria to
revive constitution chat
Austria
plans to revive the EU constitution debate and plough ahead with Turkey
accession talks under its incoming... |
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EU threatens
to cut Palestine funds if Hamas wins
The
EU's exterior relations chief Javier Solana will stop EU funding for
Palestine if Hamas wins the Palestinian elections saying... |
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Ukraine snubbed
in Russia gas row
Ukraine
prime minister Yuri Yekhanourov flew to Moscow for gas price talks
but came back with nothing as Russia... |
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Serbian grip
on Kosovo weakening
Less
and less people in Serbia and on an international level support the
idea of a Serbian Kosovo, Le Figaro writes... |
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New Baltic
gas pipeline scheme
Finland
and Estonia are talking about building a gas pipeline linking... |
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Germany to
cooperate with Italy
German
chancellor Angela Merkel on Monday visited Italian prime minister
Silvio Berlusconi amid promises... |
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Turkey pressed
to stop blocking EU-NATO meetings
EUOBSERVER
/ BRUSSELS - Turkey has come under increased pressure to stop blocking
strategic meetings between the EU and NATO... |
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Slovaks
voting on design of euro coins
EUOBSERVER
/ BRUSSELS - Slovak citizens are voting on the country's future eurocoin
designs, with a possibility... |
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Bosnian
leaders in Brussels for US-led constitution talks
Bosnian
political leaders are meeting in Brussels to discuss a reform of their
country’s constitution, on the basis of a draft... |
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Polish
government deepens eurosceptic ties
The
new Polish government secured parliamentary backing on Thursday (10
November) but some fear mounting tension with Brussels in store... |
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Estonian
foreign minister denied entry visa to Russia
Russia
has refused to give the Estonian foreign minister an entry visa, sparking
a diplomatic row with Tallinn... |
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Ex-commissioner
Edith Cresson may lose EU pension
EUOBSERVER
/ BRUSSELS - The European Commission has called for the suspension
of EU pension rights for former French prime minister... |
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Letters
to commissioners to go public in EU transparency drive
EUOBSERVER
/ BRUSSELS - The European Commission has adopted today (9 November)
a controversial "transparency initiative."... |
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