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The U.S. economy – top of the heap for a while yet

For a while now, I have reading about how the mighty U.S. economy, heavily in debt, with big budget deficits and a large current account black hole, is headed for the rocks. The dollar is on the skids, inflationary pressures are rising, the Fed has been putting up interest rates, the coming Social Security crunch… you know the drill. And some of these worries are to my mind justified, which explains why, with all the plan’s faults, I broadly applaud the efforts of President Bush to overhaul the state pensions system.

Is the situation really as grim as some of the jeremiads claim, however? This suitably wonkish article in the prestigious Foreign Affairs journal argues that things are not nearly as worrying as some might make out and that if anyone has cause for worry, it is Europe with its shrinking birth rates.

The article concudes with this paragraph, and it seems to hit the mark, in my view:

Only one development could upset this optimistic prognosis: an end to the technological dynamism, openness to trade, and flexibility that have powered the U.S. economy. The biggest threat to U.S. hegemony, accordingly, stems not from the sentiments of foreign investors, but from protectionism and isolationism at home


18 comments to The U.S. economy – top of the heap for a while yet

  • Pete(Detroit)

    With respect to the “pyramid scam” that is the US Social Security system, yes, it’s that bad. Fewer people (lower bitrth rates) are putting into the system to support more ‘pensioners’ (longer life expectancy).
    Add to that the utter sillyness of not ‘means testing’ the recipients. Some years ago (back wehn the stock market was hot) one older gent of my aquaintance miss-estimated his tax liability by $50,000. Note – not that he owed taxes ON an ‘extra’ $50k, but he actually oweed an ‘extra’ $50k in taxes.
    Significantly more than I made that year.
    and I’m paying into HIS social security WHY, exactly?
    Makes as much sense as the ‘senior perscription drug’ plan that will have me buying Bill Gates’ Viagra(tm) in a few years (assuming, of course, that he uses it…)

  • Sandy P

    Via Bros. Judd, OJ’s comment is at the end:

    Argentina is expected to complete the largest debt restructuring in history today, hoping to end the long saga of financial excess, collapse and default that has made the country’s name synonymous with fiscal irresponsibility.

    Today is the deadline for President Nestor Kirchner’s take-it-or-leave-it offer to worldwide investors who own the nearly $103 billion in bonds and interest that Argentina defaulted on three years ago: Accept payment in a new series of bonds that will, on average, pay back investors one-third the value. Most are expected to take it, but some have already filed lawsuits. […]

    Despite the seemingly bad terms of Kirchner’s offer, financial observers say about 75% of the bondholders are expected to accept. Officials at the International Monetary Fund and other agencies have said that would probably end Argentina’s status as a financial pariah.

    The debt restructuring will allow the nation to regain access to world financial markets.

    Yet folk still can’t grasp that we have the ChiComs over a barrel.

  • ernest young

    If Pete thinks that the US Social security system is a scam, he should look at the UK system, for an even better example, if any scheme truly deserved the name ‘Ponzi’ it is this one.

    I can well remember the much respected Aneurin (Nye) Bevin, making a speech on the introduction of the National Insurance Act 1948, saying, with regard to the Pension provisions, that “each would contribute the same, and each would receive the same.” (Does that sound vaguely familiar?).

    He went on to say that the Old Age Pension would be based on 80% of the average ‘blue collar’ wage, – that the basic UK pension is now at a meagre 18% of the average ‘blue collar’ wage, says much about politicians, and the value of their ‘word’.

    Against all advice, the Atlee government implemented the scheme whereby ‘today’s contributions were used to pay today’s pensions’. The scheme never had a chance to be self-sufficient, and is, even today, fatally flawed, for this very reason.

    Today, the whole pensions aspect of the National Insurance Act, only survives because of the input of the ‘private’ pensions industry. Without a private and personal pension plan, today’s retirees would be reduced to impoverishment in very short order.

    When the N.I Act was first implemented it was illegal and well nigh impossible for an individual to provide for his own retirement. Large corporate bodies and institutions were later allowed to provide schemes for their employees, it was only very much later that individuals were permitted to contribute on their own behalf, and then only to the extent of 7% of their net annual salary, – hardly likely to yield a fortune on retirement!

    If the US Democrats would only look past their dogmatic dislike of all things Republican, they may well see that any Social Security scheme is far too important to be left to the politicos and bureaucrats alone, and that it is only the private sector that can provide any real growth in the value of pension and savings funds.

    The Legislature should stick to overseeing the industry to prevent the inevitable crookery, but of course they wont, their idea of ‘supervision’ being to demand a piece of the action.

    Better still, provision of a pension should be entirely the responsibility of the retiree….

  • Richard Easbey

    Good Lord, Ernest! You’re saying I should be responsible for my OWN retirement?

    That’s just crazy talk.

  • toolkien

    Bush’s privatization plan is hardly true privatization. The accounts are still Federally mandated types and will certainly have to meet as many, if not more, requirements than ‘private’ group retirement plans. Just how compliance is to be monitored I don’t know. But by no means are they free from state polarization.

    And regular income taxes will necessarily have to increase, or spending cuts (and with a 2.57 trillion dollar budget request he ain’t hittin’ the mark) will have to be made because the ‘subsidy’ of surplus FICA will surely be diverted into the private accounts, the money will be in the market instead of cash-flowing current government expenditures. Either the expenditures decline, regular taxes go up, or more borrowing from China takes place.

    Make no mistake, a drastic overhaul is necessary, the implementation over a period of time to diminish shock, but Bush’s plan is simply another placebo to the ignorant right. Call something private, and act like it’s supposed to be a reduction in government, and they step in line. Until spending is cut, and the government gets out of the business of being the insurer of last resort, and the promiser of all things, everything else is smoke and mirrors.

    And Europe is worse off from what I hear.

  • ernest young


    I know it sounds ridiculous, that us ordinary folk might have the wit to spend our own money..outrageous!:-)

    If we didn’t have our hands tied behind our backs, how would they, (the Enemy), ever be able to pick our pockets so effectively?

  • Susan

    US 2004 fourth-quarter economic figures out today; economy grew at nearly 4 percent, beating expectations; exports were up by 2.4 percent, shrinking the trade deficit. About four percent growth forecasted for the first half of 2005 too.

    Much gnashing of teeth over at al-Beeb for having to report these “sad” facts, I’m sure.

  • Susan

    After all the EU is the coming economic superpower according to Jeremy Rifkin:



    “All of this is not to suggest that European companies have suddenly leaped ahead of their American competitors. Economic growth is anaemic, unemployment is high, and EU member states have been slow at integrating their internal market. But, the US would be ill-advised to ignore the long-term economic potential of Europe. Over the next 20 years, the EU member states will establish a seamless transportation, communications and power grid, and create a single set of protocols and policies for governing commerce and trade. Moreover, English will become the lingua franca for conducting business on the continent. If the EU can engage in commerce and trade across its member states with the same ease as we do across the continental US, it may well become the dominant economic power. ”

    We are so shaking in our boots!

  • The American exports may have risen by 2.4 percent, but why does it have to include such products as Jeremy Rifkin? Europe already has enough of its own crazies.

    In cases like this I wouldnt protest against protectionism.

  • Susan


    oh no, we couldn’t possibly deprive you of Mr. Rifkin’s august services. It would be so. . .so cruel.


  • With regard to Rifkin’s comments posted by Susan. I particularly like this line: “… and create a single set of protocols and policies for governing commerce and trade.” He says that like its a good thing. Yes a single set of policies (emenating from Brussels no doubt) governing commerce and trade. Does this guy have any idea that one thing the U.S. does NOT have is a SINGLE set of policies governing commerce. First you have the disjointed regulations put down by Washington that treats different industries with vastly different levels of intervention (like the difference between software companies and agriculture or car insurance) . Then there are wide variety of commerce, labor and tax rules in the 50 states. So, if what the U.S. is doing is largely right, one thing I’m most definately not worried about (and any European SHOULD be worried about) is that single set of protocols and policies that GOVERN commerce and trade.

    And that’s not to say that rules and regulations shouldn’t be simplified in the States, but its to point out that federalist diversity does lead to some improvements (usually by some government seeing businesses fleeing their jurisitictions in favor of less regulated areas).

  • With regards to the Foreign Affairs article, while I certainly like its optimistic tone (I’m an American in case there was any doubt) I actually think its a bunch of mercantilist tripe.

    All these big thinking economists continually miss the most important point in these types of analysis. The problem they always miss is that “trade deficits” matter not in the grand scheme. All these numbers represent individual transactions each made with individual financial requirements in mind. And more over, this supposedly monolithic group known as “foreign investors” are actually people whose central goal is to make money.

    I have never understood the importance of current account balances and trade deficits. What the hell does it matter the difference in imports and exports? Particularly in nominal terms. Nominal terms largely dependent on exchange rates?

    What does my purchase of Mazda matter when compared to a Japanese person’s desire to own a Dell computer? I’m happy because I got a good car at a good price. Ditto the Japanese. No one “lost” because I bought the more expensive item. Trade after all is mutually beneficial.

    If both imports and exports are growing, regardless of the relative nominal difference, then the economy is doing well, because that means consumers are spending money.

    And the dangers to the currency of the deficits are self correcting. If the dollar tanks, guess what? Since price dictates demand, above almost everything else, U.S. goods will be in higher demand. So demand for dollars to buy those cheap goods will also be in demand. And the increaseed demand will increase the value of the dollar.

    And people keep buying dollars and U.S. securities becauses of their value. Again, they want to make money. They aren’t going to dump those assets just to hurt the U.S. economy, because they’d hurt themselves.

    Anyway, its a good article, but it is still stuck in the mercantilist pass where comparisons of trade values somehow means someone is “winning” while someone else is “losing.” This isn’t a game that requires a score. The trends need to be positive. The comparitive figures that calculate some imaginary “deficit” that only exists on paper are really rather useless.

    All I know is that the article said that the U.S. NIIP peaked in 1980 and has been going downhill ever since. Well, that coincided with the amazing expansion of the U.S. economy. And I’d wager that Japan and Germany have “favorable” NIIP numbers. Then where is the economic benefit? All I know is that the U.S. economy sucked in 1980, nice looking NIIP be damned.

    Lastly, the note that “savings” doesn’t include pretty much anything individual U.S. citizens put their actual savings in is obviously a stat whose day has came and went. Besides that, U.S. savings always have a higher actual value than foreign counterparts. U.S. securities allow for a better bang for the buck, so one needs to save less to get equal value. Oh, and this might have something to do with why foreign investors keep putting their money here. They want to make money, the color of the flag matters very little, well, as long as the color is green.

    And the very last point on why savings are overrated. To my knowledge, no economy has ever saved its way out of a recession. Spending only does that.

  • ernest young

    And the very last point on why savings are overrated. To my knowledge, no economy has ever saved its way out of a recession. Spending only does that.

    Now that paragraph raises an interesting point. – If saving is considered to be right for individuals, being considered prudent to save for old-age, rainy-days, etc. in other words – ‘a good thing’, but is considered bad news for the national economy, where the balance can only be achieved by the ‘government’ encouraging us all to ‘spend, spend, spend’, like drunken Lottery winners.

    Just what conclusions should we draw from this, and just how can we be expected to reconcile these two seperate, and diverging lines of thought?

    I can think of one or two solutions, but given the government’s power and tendency to legislate retrospectively, I doubt that either would be considered strictly legal for long…

  • Sylvain Galineau

    Yes, it has been fashionable in some circles to gush about Europe’s brilliant prospects, and how the U.S. is understandably “scared” of it, backed up by supposedly solid statistical facts such as the EU’s higher population number. Hmmm…yeah. Except if population had anything to do with it, the Chinese and Indian empires would be ruling the world. And the numbers are hardly trending in Europe’s favor, when compared to the U.S. or, for that matter, everywhere else in the world.

    The long-term fundamentals for Europe are exceedingly weak. Shrinking, aging-population. While US population is increasing and getting younger.

    Never mind immigration figures. How many Americans emigrating to Europe as opposed to the other way round ?

    Sure, the US economy could see a hard downswing in the near term. But its acceptance of such volatility is also a source of strength. By stubbornly laying layer after layer of statist concrete over its economic ecosystem in the name of “stability”, “social justice” and other tired, meaningless newspeak, Europe has condemned itself to a dull and mediocre future.

    Which will make the roller coaster over here all the more appealing to many. It can sure be scary on the way down, but there is no going down at hair-raising speeds without climbing up at dizzying heights first.

  • Stehpinkeln

    All the numbers so dear to economists are just numbers. They have no meaning in and of themselves. Their sole purpose is in establishing comparisons to themselves. They are attempts to make the ‘unseen hand’ visible. Nothing more, nothing less.
    People that think the numbers have some sort of meaning are confusing the tools with the job.
    Number are the warp and waft of mathamatics, which is the language used to describe the physical world.
    Economics is not about numbers, but people.
    People think (most of them at least. Every now and then one pops up that proves the old saw that an ass with a load of books is still an ass).
    So ignoring the set of selected numbers that are supposed to describe the social interaction of the citizens of a nation./ state (economic indicators), lets look at some different numbers.
    Europe has a declining birthrate. I submit that is because the citizens have lost faith in the common dream that is Europe. Governments need people to govern. So the government solution to the declining birthrate is to import more people. It will eventually reach a point where there are more imports than homegrown citizens.
    That means the real question is ‘what is europe’?
    The answer to that is more important then the number of widgets manufactured and exported vs the number of gadgets imported.

  • Stehpinkeln

    It takes more then an economy to be a super power. It also takes a distinct and favorable cultural idenity and Military power. No matter what europe does economicaly, they still have a problem culturally. Who is the number one selling pop star in europe? Michael Jackson? Britney Spears? Calogero? Passi? How many young boys in Africa want to ‘be like claude’?
    Europe is to far behind to even bring the Military portion of superpower status into play. They will never catch up. Not even sure they can decrease the rate at which they are losing ground.
    So the EU can forget about being a competitor to the USA. And for those of you that are going, ‘just economicaly, dummy’, may I point out that depending on a ‘competitor’ for protection is basicly insane.
    If the USA gets tired of competing, all we neeed to do is stop protecting.
    Rapine, pillage and plunder may be out of fashion, but they are not extinct.

  • Susan

    I especially liked this part of Rifkin’s article:

    All of this is not to suggest that European companies have suddenly leaped ahead of their American competitors. Economic growth is anaemic, unemployment is high, and EU member states have been slow at integrating their internal market.

    In other words:

    Mrs. Lincoln’s glamorous night out at Ford’s Theatre was not perfect; there was that unfortunate moment when her husband was assassinated.

  • Sylvain Galineau

    In my more optimistic moments, I note the flat-tax wave in Eastern Europe. Should that infect Old Europe, things could turn out very differently.

    Fat chance, you’ll say. Well, next week or next year, for sure. But in a decade ? When the new little neighbors catch up with us at breakneck speed and get all the foreign direct investment, when the young people of France and Germany find jobs in Slovakia they can’t get at home ?

    Who knows. In the meantime, I’ll be in frigid tax-free NH.