Analysis : Why is the US Economy in Such Bad Shape?

By Arif Samad

Five years after the worst reces­sion in recent US his­tory, the US Com­merce Depart­ment reported that GDPgrowth in the first quar­ter of 2014 con­tracted by nearly 3% . While unsea­sonal win­tery weather has been blamed for the poor results, the fail­ure of the US econ­omy to sus­tain a health recov­ery 5 years after the finan­cial cri­sis exposes fun­da­men­tal flaws in the world’s largest econ­omy. It fur­ther proves the growth that has been achieved has been stim­u­lus dri­ven and since the Fed­eral Reserve began taper­ing Quan­ti­ta­tive Eas­ing (QE) the brakes have been slammed on growth. This under­scores that the flaws in the US econ­omy are struc­tural – tran­scend the busi­ness cycle – and are related to 4 key factors.

Firstly, the US national debt cur­rently exceeds $17 tril­lion,  about the same as the total value of goods and ser­vices pro­duced (GDP) in Amer­ica in a year. Add to this per­sonal and busi­ness debt and the US debt moun­tain stands at around 280% of US GDP, accord­ing to McK­in­sey & Com­pany 2012. This scale of debt can­not be cleared by a spurt of infla­tion or dur­ing the upside of the busi­ness cycle. The debt acts as a mill­stone hold­ing back invest­ment in the pro­duc­tive capac­ity of the econ­omy which is crit­i­cal for a sus­tained eco­nomic recov­ery. Ser­vic­ing the debt is a bur­den on con­sumers who cut back spend­ing and busi­ness who cur­tail invest­ment. Both have a neg­a­tive long term drag on the econ­omy. Finally, the woes of US Gov­ern­ment bor­row­ing could hardly have been missed in recent months with national gov­ern­ment shut down before Con­gress raised the debt ceil­ing yet again. The colos­sal over­all debt bur­den means the nation is only a cri­sis away from bankruptcy.

Sec­ondly, America’s decline in man­u­fac­tur­ing is deep­en­ing the eco­nomic prob­lems it will face. US man­u­fac­tur­ing as mea­sured by the num­ber of jobs has declined by a third since 1998. This has had severe impacts on sec­tors and regions such as car man­u­fac­tur­ing in Detroit at state level. At the national level the struc­tural decline in US man­u­fac­tur­ing has meant more trade imports and less exports. Con­stant trade deficits since the 1980s for an econ­omy the size of the US have huge impli­ca­tions for the bal­ance of pay­ments from mount­ing future com­mit­ments on US Trea­suries. At the same time, per­sis­tent net trade deficits are a con­stant drag on GDP growth. This eco­nomic dis­as­ter is com­pounded by the fact that US’s biggest trade deficit is with China a poten­tial future foe which is also the largest for­eign holder of US Treasuries.

Thirdly, America’s con­sump­tion dri­ven growth is unsus­tain­able. Con­sump­tion dom­i­nates US GDP account­ing for over 60% . This is no coin­ci­dence since eco­nomic growth has per­sis­tently been skewed towards spend­ing. US con­sumer led growth has been fuelled by debt (hence the huge size of US per­sonal debt) and has con­sis­tently caused asset bub­bles whether in finan­cial mar­kets or prop­erty assets that have been fol­lowed by reg­u­lar reces­sions. The prob­lem with con­sumer led growth is that it is ulti­mately unsus­tain­able because when peo­ples’ abil­ity to bor­row runs out or the cost of bor­row­ing is raised then growth comes to an abrupt halt. Con­sumer led growth is a sign of a fun­da­men­tally weak econ­omy where eco­nomic growth is not broad-based and there­fore fails to regen­er­ate and stim­u­late all sec­tors of an economy.

Fourthly, in spite of being the largest econ­omy in the world, in the US there were 46.5 mil­lion peo­ple liv­ing in poverty or 15% of the US pop­u­la­tion in 2012. Accord­ing to the US Cen­sus Bureau the US poverty rate has risen by 2.5 points since 2007, the year before the finan­cial cri­sis and sub­se­quent reces­sion. The poverty rate among the young in the US was about 20%. Poverty stunts the devel­op­ment of the young, increases the sus­cep­ti­bil­ity of the old to ill­ness and impedes pro­duc­tive poten­tial. Devel­op­ment, progress and advance­ment are fatally com­pro­mised. Hope and aspi­ra­tion that come from con­tin­u­ous bet­ter­ment in soci­ety are dashed so the future looks as bleak as the present. Thus today’s poverty per­pet­u­ates tomorrow’s.

The con­trac­tion in US growth in the first quar­ter of 2014 will be dis­missed as a blip. How­ever, as dis­cussed there are struc­tural flaws in the US econ­omy that adversely affect its long run growth tra­jec­tory. The flaws tran­scend reg­u­lar fluc­tu­a­tions in the busi­ness cycle and relate to how the US econ­omy is struc­tured and func­tions which there­fore requires a root and branch reassess­ment of the economy’s work­ings. This dis­cus­sion has not even broached the area of the US’s strat­egy posi­tion in the global econ­omy and trade with the rel­a­tive rise of China, Indian and the other coun­tries in the BRICS although undoubt­edly the US’s struc­tural flaws are crit­i­cally impor­tant in its abil­ity to meet the eco­nomic chal­lenge of these new emerg­ing indus­trial nations. Unless the US is able reduce debt lev­els, increase indus­trial com­pet­i­tive­ness, move to a model of broad-based eco­nomic growth and sig­nif­i­cantly reduce poverty lev­els, while eco­nomic growth may return, it will not be sus­tain­able. More­over the eco­nomic rise of com­pet­ing nations rel­a­tive to the US will con­tinue appear­ing to sug­gest an accel­er­a­tion in the long term eco­nomic decline of the US.