The US economy needs to learn some Chinese
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World economic news this week has been largely dominated by the slowdown in the US economy and its knock on effects. The new US GDP figures showed the US economy slowing to an annualised 2.4 percent growth in the 2nd quarter of 2010 – down from 3.7 percent in the 1st quarter of 2010 and 5.0 percent in the last quarter of 2009. In contrast China's GDP grew by 10.3 percent in the latest quarter.
At present growth rates of the US economy will not regain its previous peak level of GDP, achieved at the end of 2007, until the last quarter of 2010. Over the same three year period China's economy will have grown by around 25 percent.
The US economy is being dragged down by the collapse of private investment that occurred during the financial crisis. Measured in constant 2005 prices, US private fixed investment in the 2nd quarter was down by $412 billion compared to the end of 2007 – overwhelming the recovery seen in other sectors of the US economy, and resulting in US GDP being $147 billion below its 4th quarter 2007 level.
The slow recovery and depressed investment in the US economy is leading to some soul-searching among clearer thinking US economists. As the present large Federal budget deficits are clearly not leading to rapid growth, there is discussion of a new wave of "quantitative easing" – purchase of US debt by the Federal Reserve, to attempt to drive down interest rates, increase liquidity, and further stimulate the economy. However quantitative easing was already pursued in 2008-2009 and didn't do the trick then so there is reason to doubt it will do so this time round.
Some US-focussed economists who take a longer-term view are therefore advocating more radical solutions. One is Richard Duncan, author of the bestselling The Dollar Crisis. His follow up, The Corruption of Capitalism, carries a notably coherent analysis of the present reasons for the slow US recovery.
He accurately points out that the US private sector – both consumers and companies – are so weighed down by indebted balance sheets that neither will be able to engage in large scale spending in the next period – i.e. there will be a shortage of private sector effective demand. Therefore, at present, a private sector driven rapid recovery of the US economy is not possible.
Logically, if rather radically, Duncan argues that as in present conditions the private sector cannot lead the US economy to a rapid recovery, the state must do so. He points out that, due to weakness of private demand, the US government simply has no option but to continue to run large budget deficits for the foreseeable future. Therefore, instead of being used simply to maintain consumer demand, as at present, the budget deficit should be used to increase investment in order to revive the US economy. Duncan argues:
"Trillion dollar annual deficits for the next decade may keep the United States from collapsing into a severe depression.... But they would do nothing to restore the economy's long-term viability... The trade deficit would still be massive... There is a much more attractive alternative future, in which the United States remains the world's dominant superpower with a revitalised, self-staining economy. That alternative requires a national industrial-restructuring programme in which the government would invest in 21st Century technologies with the goal of establishing an unassailable American lead in the industries of the future. That goal could be achieved at the cost of $3 trillion over 10 years."
Such a programme for reversing the US investment decline is intellectually coherent. But unfortunately it is impossible to deliver in practice, given the structure of the US economy.
Large scale government intervention in investment would alter the balance between the state and private sectors in the US, increasing the weight of the former. This would require a sharp shift in the structure of the US economy and would also be strongly resisted on ideological grounds.
For this reason while the Obama administration has been able to use the budget deficit to maintain both private and government consumption it has not had any significant effect on US investment. The $41 billion increase in US state investment between the 4th quarter of 2007 and the 2nd quarter of 2010, in current price terms, offset only 8.5 percent of the $485 billion decline in private investment which took place in the same period.
This makes clear why China has come through the international financial crisis far more successfully than the U.S. China's stimulus programme intervened to directly boost investment, raising urban fixed asset investment by over 25 percent, and thereby ensuring that no decline took place of the type seen in the U.S. On the contrary, the period following the start of the international financial crisis saw a sharp increase in fixed investment within China in the areas of the economy that are vital for its increased productivity – such as high speed transport and other infrastructure, together with technological upgrading of industry. China was able to achieve this because its economy has a combination of a large state sector, which could be used to launch the stimulus programme, together with a private one – a "two-legged" approach instead of the "one legged" US structure. Unsurprisingly in these conditions the two-legged Chinese economy is outrunning the one legged US.
The programme called for by Richard Duncan and others for the US – "a national industrial-restructuring programme in which the government would invest in 21st Century technologies" – is impossible for the U.S. to execute because of the lop-sided structure of its economy. However it is rather close to what China is currently executing.
It would be helpful for the US economy if it learnt a little Chinese.
The author is a columnist with China.org.cn. For more information please visit: http://www.china.org.cn/opinion/node_7080931.htm
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