Satyajit Das: Reports of US decline are greatly exaggerated – it’s still on top

Das Capital: While well below potential, the growth rate is above that of most developed countries

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The Independent Online

There are fundamental economic, financial, political, military and social reasons to doubt that America’s central role in the world is ending.

In a 2011 article, Michael Beckley, a former research fellow in the International Security Program at Harvard’s Kennedy School’s Belfer Centre, looked at economic, technological and military indicators and concluded that far from declining in relative terms, America was wealthier, more innovative and more militarily powerful compared to China than it was in 1991.

The US economy remains by some distance the world’s largest. Its gross domestic product, at $15-16 trillion, is about 25 per cent of the global economy and almost twice that of the second place China.

 

Americans, on a per capita basis, remain relatively wealthy. GDP per head is around $50,000. This is among the highest in the world especially when low population (Luxembourg, San Marino or Singapore) or commodity-rich (Middle East oil producers) nations are excluded. In comparison, China’s GDP per capita is about $5,000 to $6,000.

American households have substantial net worth in excess of $70trn, although this is down from a peak of over $80trn before the financial crisis.

While the global financial crisis has damaged America’s economic power, its position remains superior to many other countries. This reflects a variety of factors.

The United States was among the first nations to be affected. Financial market traders believe that “if you are going to panic, panic first”. America benefited from first-mover advantages during the crisis.

Its problems, which emerged in 2006/2007, related primarily to $1 trillion of sub-standard mortgages (about 10 per cent of the total American mortgage market). While there were flow-on effects, the scale was smaller than, say, the current sovereign debt problem in Europe.

American policymakers, unlike their counterparts, moved aggressively to recapitalise financial institutions to reduce the risk of contagion. Large government budget deficits and specific industry programmes (for the motor car industry) helped prop up demand, reducing the effects of the financial problems on the real economy.

While the appropriateness of specific measures is debated, the policy helped ensure that problems were minimised.

The US economy is now growing, albeit modestly. While well below trend and theoretical potential, the growth rate is above that in most  developed countries. Jobs are being created slowly, although unemployment and under employment remains at unacceptably high levels. Housing prices, having fallen by about 35 per cent on average, have stabilised.

Even America’s debt statistics are better, on a comparative basis. Total debt (government, corporate and household) has fallen to about 330 per cent of GDP from its peak of 359 per cent in 2008. Public debt levels have risen sharply, in part because of the crisis. But households and corporations are gradually reducing their level of borrowings. While still high in absolute and historical terms, the debt levels compare favourably to other developed countries.

Government net debt at about 84 per cent of GDP is higher than Germany (58 per cent) but well below that of weaker European nations. Household gross debt (86 per cent of GDP) is higher than many countries.  But US household net debt (gross household net debt adjusted for financial assets and liabilities) is negative 235 per cent of GDP, that is financial assets are greater than liabilities. This is better than most nations and only less than Japan amongst developed countries. Corporate net debt (83 per cent of GDP) is in the middle of the range of comparable economies.

Financial institution debt (88 per cent of GDP) is lower than all developed countries except Canada. Banks have decreased leverage, having been forced to aggressively deleverage by selling off assets and raising capital. Banks also have only modest exposure to sovereign debt (8 per cent of GDP) compared to banks in Europe (13-35 per cent) or Japan (83 per cent).

America is also less vulnerable to external shocks than comparable economies. US gross external liabilities (161 per cent of GDP) are lower than most developed countries. US net external liabilities (amount owed to foreigners adjusted for a country’s international investment position) are a manageable 26 per cent of GDP. It ranks behind Belgium (negative 65 per cent), Japan (negative 57 per cent), Germany (negative 38 per cent), UK (8 per cent), Canada (12 per cent), France (16 per cent) and Italy (24 per cent).

America has emerged as the “cleanest of the dirty shirts” of the developed economies.

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