Economics: The US: bad news waiting in the wings
Sunday 03 November 1996
But let's look forward, not back. What will the next four years look like? What are the pitfalls for the second term? Will the mood at the turn of the millennium be very different from the euphoria now?
There are two broad ways of looking into the medium-term future. One is to focus on the broad macroeconomic outlook, at the big numbers, and try to see how these might develop. The other is to hunt for surprises, things we can only glimpse now but which might become much more important in the near future. Let's try both.
Some of the big numbers for the main economies, taken from IMF forecasts for this year, are set out in the graphs. Most are pretty positive for the US: growth is second only to Japan, which in any case has experienced the longest recession of all; unemployment is second lowest after Japan, where the unemployment figures understate actual unemployment; the fiscal deficit (surprise, surprise) is under better control than anywhere else; and inflation, though towards the top end of the range, is low by historical standards.
So the picture seems fine. But one year's figures are only a snapshot of what is happening at a moment in time. Switch to the movie and the message is somewhat different. The US is coming towards the end of a long period of above-trend growth. By the conventional measures of capacity utilisation and unemployment, the economy is close to the limits of output. So it would be natural either for growth to slow naturally, or to have growth brought to a halt by rising inflation and hence rising interest rates. The fiscal deficit, while low by comparison with the rest of the pack, is harder to finance than that of other countries, as a result of low US savings. So the US remains a substantial capital importer. And inflation, while OK, could be threatened by external shocks such as a rise in raw material prices.
So the moving picture, while not of itself alarming (and at least as attractive as the prospects facing other Group of Seven economies), is not quite as rosy as the snapshot would suggest. Put bluntly, the next four years will see the end of the American boom, as the economy adjusts to slower growth. If it ends quietly, shifting back to trend growth without slithering into recession, then all is well. But somewhere, out there in the future, lurks the next world recession. The chances are that since the US was first out of the last one, it will be first into the next.
Now try the hunt for surprises. There are a whole set of surprises bound up in the present level of Wall Street - maybe not so much surprises since there is already widespread concern about US share prices. Some sort of adjustment is going to take place. There is even talk of a fall in prices being triggered by the election itself, if the Democrats take over Congress and that leads to higher federal borrowing and a sharp rise in bond yields. There are worries that many Americans are using their accounts with mutual funds as bank accounts, unaware that the value of their capital is dependent on a continued solid performance by shares. But it is equally possible to argue that the real economy is robust enough to withstand a sharp set-back to share prices without plunging into recession.
There is a second set of surprises that do not stem from the US but from the other G7 nations. The continental European economy may have a very rough four years. The preoccupation with the preparation for a single currency, the very rapid tightening of fiscal policies, the disruption in the markets whether the project goes ahead or not, the tensions between the "ins" and the "would-be ins" - all this will hobble the continental economy. Whatever view one takes of the wisdom of the project, in the short term there are costs. Europe will not be a locomotive for the world economy over the next four years; but continued slow growth, plus political unrest, may make the US look rather good in relative terms.
There are a third set of surprises concerning East Asia and in particular mainland China. The East Asian time zone is the least stable of the three main economic areas; it is also the fastest-growing and has become something of a locomotive for the world economy. But imbalances between different parts of the region are very large and China itself will next year start a key test of its ability to extend its market system with the takeover of Hong Kong. The US has a large and increasing trade deficit with China. Question: will it allow this to continue to grow, or will we see the early stages of an attempt to curb China's access to world markets?
It is silly to pretend to be able to predict with any certainty how the Chinese economy will fare over the next four years, aside from making the general point that there is enormous momentum behind present growth. But expect bumps and expect those bumps to be felt in the US, China's largest trading partner.
Put those three sets of potential surprises (plus any others you care to add) with the prospect of US having to adjust back to its long-term growth trend, and it is difficult to reach the conclusion that the next four years will not appear as successful as the last. Most of the good news is obvious, out there on centre stage, dancing in front of the voters. Most of the bad news is in the wings, waiting to make its move.
And of course not all Americans have shared in the prosperity of the last four years. The best thing that can be said about the sharp rise in inequality that has been taking place is that the greatest shift may be over. It is hard to see that the US economy actually needs greater inequality from an economic point of view. The costs of such inequality, on the other hand, are all too evident. Our understanding of just why this process should have taken place is still incomplete - though it clearly has something to do with a change in demand for skills.
From a British perspective, where differentials are still less than the US, Canada and France, but higher than Germany or Japan, perhaps the most interesting thing to look for in the next four years will be signs that this widening of differentials in the US has plateaued. I suspect that there will be even greater concern in the US about these differentials than there is now and that will be the dominant theme in the States through to the millennium.
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