Turning the Super Tanker of the American Economy Around

by: EJ on 07/23/2009

The Economist is publishing a series on rebalancing global growth highlighting the world's four biggest economies, starting this week with the United States. I found the article an interesting window into an economist's world view. How difficult it has become to persist in the belief that perpetual growth is the only option for our economic future. The mental contortions required to keep the faith are quite something. You can read the whole article here.

The Economist has produced a to-do list of changes required to stabilize the global economy. What will it take? "The solution is well known: consumers in China and other emerging economies, and in thrifty rich countries like Germany, must become bigger engines of demand, while the former bubble economies, such as America, must continue the shift towards saving and exports."

Specifically they recommend that the great American manufactures like General Electric return to manufacturing rather than finance as the main source of their profits. "In the lead up to the present financial crisis, half of GE's profits came from its finance arm, GE Capital, which among other things had a lucrative business issuing mortgages and credit cards to American consumers. For decades, the growth of the American economy has been led by consumer spending. Thanks to rising asset prices and ever easier access to credit, Americans went on a seemingly unstoppable spending binge, fueling the global economy as they bought ever bigger houses and filled them with ever more stuff. Consumer spending and residential investment rose from 67% of GDP in 1980 to 75% in 2007"

However, the article goes on to state how the situation is changing. "The destruction of more than $13 trillion of consumer wealth and the implosion of the shadow banking system, a once plentiful source of credit, has triggered a shift to thrift, which in turn has plunged the economy into its deepest recession in decades. Americans now save more than 5% of their after-tax income, still well below the post-war average but hugely up from only a year ago."

This sounds like good news but how can an economy based on consumer spending survive the sudden downturn? "As Larry Summers, Mr Obama's chief economic adviser, said on July 17th: "The rebuilt American economy must be more export-oriented and less consumption-oriented." The Economist likens this to a supertanker that, "Even in calm waters, changes direction very slowly. It is now being forced to do so in a gale."

I am quite interested to find out just why countries like China with such well developed manufacturing infrastructure or India with its service industries will embrace the new exports that the United States will be producing in the future. Will it be perhaps because the America dollar will be devalued and the work force underpaid in order to produce cheap exports? Perhaps the example of what is happening as GE moves back to a manufacturing focus will enlighten us. "GE's union at its plant in Louisville had to agree to a wage freeze until 2011 and to let new employees start for just $13 an hour."

The Economist article concludes, "Like GE's workers, Americans will find the new, export-driven model of growth much less comfortable than the old one."

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