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By Marc Erikson
"It's
the economy, stupid!", the 1992 Clinton-Gore election
slogan dreamed up by James Carville, may well be the
most memorable of all times. George Bush Sr didn't get
it ... and no second term. Now John Kerry, the
Democrats' likely US presidential candidate in 2004, is
going for a repeat against Bush Jr by harping on the
unemployment issue. It'll almost certainly prove a
miscalculation. Below, I detail why.
The US
dollar fell by 20 percent against the euro and 10
percent against the yen last year. Since George W Bush
became president, the United States has lost well over 2
million manufacturing jobs. New jobs are slow in being
created. The 2003 current account deficit totaled US$580
billion (5 percent of gross domestic product, or GDP);
the 2004 budget deficit will be about $500 billion - the
vaunted "twin deficit". The US savings rate is near
zero. So has the US economy once again become the basket
case it was under Jimmy Carter before Federal Reserve
chairman Paul Volcker and president Ronald Reagan
rescued it and restored it to renewed vigor in the
1980s?
The short answer is, not by a long shot.
At an average 6 percent GDP growth rate in the second
half of 2003, the US economy grew at a rate 30 (!) times
the eurozone's. Without such fast US growth, which
Europeans can only dream about (most likely forever) and
which drew in huge exports from the eurozone and Asia,
eurozone growth would have been negative, much-admired
Chinese growth zero, and recently picking up Japanese
growth 1.3 percent instead of the reported 2.7 percent.
A few simple calculations prove the point: The
eurozone's 2003 trade surplus with the US was $75
billion or 0.85 percent of GDP, more than double the
eurozone's 0.4 percent GDP growth. China's trade surplus
with the US was $124 billion or 10.4 percent of GDP -
slightly higher than GDP growth. Japan's trade surplus
with the US was $66 billion or 1.4 percent of GDP -
about half of GDP growth.
Three factors, in the
main, have allowed the US economy to bounce back quickly
from the recession caused by the bursting of the
Internet bubble and to reduce unemployment - albeit at a
slower rate than hoped for by the Bush administration -
from 6.2 percent in July 2003 to 5.6 percent this
January. In nearly equal order of significance, they
are: deep and flexible capital markets, a flexible labor
market featuring the world's best-educated labor force,
and a regulatory regime and tax structures highly
conducive to entrepreneurial initiative.
Starting in early 2000, stock markets sharply
reversed three years of irrational exuberance and
harshly punished dot-coms with sky-high valuations and
zero earnings as well as information-technology (IT)
stocks across the board. But sound capital was preserved
as it flowed into bond markets and fueled a sustained
rally there. Enterprises of all kinds and sizes, not
just Internet start-ups and IT suppliers, shed
substantial numbers of jobs as aggregate demand
contracted. But except for manufacturing workers, whose
jobs went overseas for cost reasons, large numbers of
laid-off workers were reabsorbed by or started their own
new businesses after relatively short periods on the
unemployment rolls. High labor mobility and education
levels saw to that. Already in 2001, new business
formation rebounded from 377,000 in the last year of the
Bill Clinton administration to 504,000. In 2002, 713,000
new businesses were created. Enactment of the Bush tax
cuts ("for the rich", as the Democrats charge) led to
the formation of the highest number ever (some 900,000)
of new businesses in 2003 - precisely the effect the
architect of the tax-cut strategy, former chief economic
adviser to the president Glenn Hubbard, had intended and
forecast.
In early 2004, the reduction in
manufacturing jobs is - at long last - coming to an end
as well, as the economy is picking up steam on the back
of increased capital spending. The numbers aren't
marvelous; only the decline has been arrested. And
indeed, US manufacturing-sector employment has been on a
secular decline for decades. The Organization of
Economic Cooperation and Development (OECD) forecasts
that by 2020, only 2-3 percent of the US workforce will
be employed in the manufacturing sector, well down from
the present 8-9 percent. Jobs that have migrated to
lower-labor-cost China or Mexico will not come back to
Michigan, Ohio, or the Carolinas. The present respite
will be temporary, though - of course - it comes just in
time to improve George W Bush's re-election chances.
What makes me most confident that the US economy
has entered a sustainable expansion phase is the
extraordinary increase in productivity experienced in
this recovery. Productivity, labor and capital are the
three factors that define an economy's growth potential.
Capital and labor have generally been in ample supply in
the US economy at reasonable cost. But profits and
reinvestment, which delimit growth, rise with
productivity. The much-maligned information-technology
revolution and a labor force well prepared to make the
most of the new-fangled tools at its disposal have
boosted productivity to levels never seen before over an
extended period. Between 1995 and 2001, annual US
productivity growth averaged 2.7 percent. From 2001 to
date, it has jumped to an astonishing 5.6 percent.
Some might argue that such productivity growth
in the main is due to the reluctance of companies to
hire added labor as output grows. I'd be most surprised,
however, if the opposite weren't the true "culprit":
that IT-induced production efficiencies permitted
companies to adopt their go-slow stance toward new
hiring. Stellar productivity growth, in my view, is due
to rapid technological innovation, prompted and aided by
globalization-induced competition. In this ruthless
game, the fastest, best-educated innovator, imbued with
pronounced and creative entrepreneurial drive, wins and
reaps the greatest profit. On all counts, US companies
excel and enjoy the added benefit of not being hampered
by an aversive regulatory regime. Small surprise then
that the US economy bests the rest.
Current
account deficits? Budget deficits? Low savings? One
nation's current account deficit is another's capital
account surplus. As things stand, Asian exporters and
public and private investors are demonstrably prepared
and eager to invest their surpluses where they find the
best markets and best risk rewards - the United States.
Capital inflows to the US well exceed, and increasingly
so, the trade and current account deficits.
The
budget deficit, like any debt, is more easily financed
and built down in a fast-growing economy. The
Congressional Budget Office (CBO) estimates that this
year's deficit will come in at $477 billion. Were GDP to
grow by 5 percent to $11.815 trillion in 2004, the
deficit would be about 4 percent of GDP, roughly in line
with the deficits of the major eurozone economies. The
CBO also estimates that the deficit will be nearly cut
in half in three years' time to $242 billion. With
continuing moderate economic growth, the deficit will be
below 2 percent of GDP by 2007 - another number
Europeans can only dream about.
Last, low
savings: Americans don't save much, but they invest.
Fifty percent of households own stock; as of the fourth
quarter of 2003, 68.6 percent of US families were
homeowners. In a growing economy, such assets grow in
value and usually grow a whole lot faster than money in
savings accounts. It's riskier to own such assets rather
than cash under the mattress, but risk-taking is
precisely what's made the US economy the dynamic one it
is.
(Copyright 2004 Asia Times Online Co, Ltd.
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