Thursday, June 16, 2011

New wind blowing: American decline becomes the new conventional wisdom

Posted By Clyde Prestowitz 

 

FOREIGN POLICY

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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