October 24, 2004
US: looming economic crisis?
In the US the Bush/Kerry camps bitterly battle it out in the last weeks of the American presidential elections.
Meanwhile, there has been a quiet unease and concern within Australia over the implications of the twin US trade and budget deficits.
I want to link this economic discourse to a liberalism of fear as underneath this discourse lies fear of the effects of crisis on Australians.
Some in the US split the twin budget and current account deficits. A lot of the unease in the US is directed at the widening current account that causes increases in unemployment for less skilled workers. A key question that is asked is: 'is a chronic and widening current account deficit sustainable, or will the dollar crash, perhaps taking the economy with it?'
Some split the twins. Others see the main solution to the current account deficit to lie in increasing savings in the US. Others talk in terms of a revaluation of Asian currencies.
John Quiggin says that in relation to the US trade deficit:
"It's not clear that global capital markets can call forth enough savings to finance deficits on this scale, at least not without an increase in interest rates. Any significant increase in interest rates would create huge problems for debtor countries like Australia and the US."
Quiggin does not think that a smooth, market-driven adjustment to a sustainable trading position is unlikely. In a followup post he goes on to argue why this is so:
"...if the current account deficit is to be stabilised at a sustainable level, the balance of trade on goods and services must return to surplus in the next decade or so. In this post, I'm going to ruIe out a soft option and argue that, while a smooth market-driven adjustment is not inconceivable, it's unlikely.The soft option is the idea that central banks will keep on buying US dollars indefinitely in order to keep the world trading system indefinitely, and that the US can therefore consume as much as it wants, subject only to the capacity of the Treasury to keep printing dollars. This option is not a goer for both economic and geopolitical reasons."
The imbalance in the currrent account deficit can be reduced in a number of ways:a (further) devaluation of the US dollar; reductions in US wages relative to those overseas; increases in US relative to foreign productivity (the relevant concept here is multifactor productivity, taking account of both capital and labour inputs); and reductions in US consumption relative to foreign consumption. He adds that to get back to balance or surplus in a decade, and without a crisis, no one of these would be sufficient.
The possibility of increases in US relative to foreign productivity is addressed here. Segal states that:
"The United States' global primacy depends in large part on its ability to develop new technologies and industries faster than anyone else. For the last five decades, U.S. scientific innovation and technological entrepreneurship have ensured the country's economic prosperity and military power. It was Americans who invented and commercialized the semiconductor, the personal computer, and the Internet; other countries merely followed the U.S. lead."
Segal then argues that this assumption is being undermined:
"Today, however, this technological edge-so long taken for granted-may be slipping, and the most serious challenge is coming from Asia.....Although the United States' technical dominance remains solid, the globalization of research and development is exerting considerable pressures on the American system. Indeed, as the United States is learning, globalization cuts both ways: it is both a potent catalyst of U.S. technological innovation and a significant threat to it. The United States will never be able to prevent rivals from developing new technologies; it can remain dominant only by continuing to innovate faster than everyone else. But this won't be easy; to keep its privileged position in the world, the United States must get better at fostering technological entrepreneurship at home."
I heard very little about the failure of U.S. trade and industrial policies to nurture and sustain U.S. international competitiveness in the 3 presidential debates.
Our fear is that Australia is going to come off badly with higher interest rates, highly mortgaged households and its own current account deficit. That fear was exploited by the Howard Government to get itself it re-elected, by saying that the horrors would come about through the economic policies of the ALP.
So a liberalism of fear has some bite.
Posted by Gary Sauer-Thompson at October 24, 2004 05:08 PM | TrackBack