America Is Not Doomed
On this July Fourth weekend, it’s worth taking a step back. There’s a great deal of dyspepsia about the state of America, much of it inspired by the political dysfunction in Washington and the rising inequality and challenge to social mobility throughout the economy. My colleague Lloyd Green wrote last week of “The Sprawling, Dimming Age of Obama.” And the small industry of writers, pundits, historians, and economists who specialize in the genre of American decline continues to turn out new product. In June, for example, we excerpted Niall Ferguson’s The Great Degeneration.
And yet, as the rest of the world goes to hell, politically and economically, the U.S. is standing tall economically—at least on a relative basis. China is slowing down rapidly. Countries tethered to China’s erstwhile insatiable demand for natural resources, like Australia, are downshifting. Brazil is struggling, an immature market with immature political systems. Europe is mired in a seemingly never-ending cycle of austerity and sovereign debt crises. The Middle East? Forget about it. As the BRICs seem to be broken, analysts are now looking to sub-Saharan Africa for growth. Yet throughout it all, the U.S. economy continues to chug along.
This expansion, little predicted, often denied, constantly in doubt, has now entered its fifth year. The National Bureau of Economic Research, which dates business cycles, says the current expansion began in July 2009 and has now entered its 49th month. It is now the fifth longest of the 33 expansions NBER has measured since the 1850s. Economic growth is not fast enough for anyone’s liking, but that’s what you get when you deleverage in a post-financial-crisis period and government austerity becomes part of the problem. In the last three years, government employment has fallen by nearly a million.
Yes, lots of problems remain. But the economic declinists are willfully turning a blind eye to some pretty important and fundamental shifts in the U.S. over the last several years. We live in an age of long business cycles, and there’s every reason to believe the current expansion can’t run for another several years. Simply put, the shape of the U.S. economy has changed in the last four years, in some subtle ways and in some obvious ones. My colleagues who focus only on the downside, or only on the financial sector and the dysfunctional political sector, have missed some very important developments—beyond the stunning recovery of the U.S. financial markets.
The U.S. may not have regained its swagger, but economic self-confidence is returning. And there’s a good reason for it. With four years of growth under our belt, Americans in the aggregate are doing better financially than they were in 2008 and 2009. Everyone is doing a much better job keeping up with financial obligations. Credit-card delinquencies are down to levels not seen since the 1990s, and personal bankruptcy filings are off 14 percent in the past year alone. Today payments are behind on about 7 percent of all U.S. mortgages, down from 10 percent in early 2010. Even as they reduce their debt pile by hundreds of billions of dollars each quarter, American consumers are hitting the malls—retail sales set a new record every month, and car sales, the biggest retail sector, are shifting into a higher gear.
Our economic life is very procyclical. When consumers fail in large numbers, companies fail as well, triggering layoffs and more suffering. That’s what happened in 2008 and 2009. But now procyclicality is working in the other direction. When consumers do better, companies and financial firms do better. Success begets success, and the lack of failure begets lack of failure. So business bankruptcies are off 20 percent in the past year, while bank failures have dwindled—just 16 in the first half of 2013, mostly small banks, down from 39 in the first half of 2012.
Persistently rising demand and the gradual subsiding of fear are leading to fewer people getting laid off—unemployment claims are trending steadily downward, and the number of people on unemployment is off 22 percent from a year ago. There were 3.8 million job openings in the U.S. at the end of April, and each month a small percentage of them get filled. In June the private sector added 200,000 positions, bringing the total of new private-sector jobs to 7.2 million since February 2010. American companies have never had higher profits or more cash on hand. How many other large, developed economies can boast a similar set of data?
Along with the financial sector, housing has been the biggest source of misery for the U.S. economy in recent years. But as I’ve been noting for the past year, housing is now becoming a source of strength. Home prices are still a long way from their bubble-era peak. But with prices, construction, and sales activity rising, the housing sector is now steadily contributing to economic growth and employment. And because a house is the most valuable asset most Americans own, rising home values boost our collective sense of financial self-worth.
Then there’s energy. The U.S. will never be as parsimonious with energy as a Scandinavian country. But there has been a subtle, important revolution in the last several years. Thanks to the technological developments that allow drillers to liberate petroleum from shale oil, the U.S. has boosted annual oil production by 26 percent since 2008, with production now at levels not seen since 1994. The amount of renewable energy deployed in the U.S. doubled in President Obama’s first term, and each day dozens of megawatts of new carbon-free electric-power-generation capacity—especially solar—are flipped on. Thanks to higher standards, engineering advances, and the persistently high price of gasoline, America’s auto fleet is steadily becoming greener.
Procyclicality is also helping to chip away at some of the scary numbers that declinists hold up as red flags: the budget deficit and the trade deficit. The federal budget deficit spikes in slack economic times, as tax revenues dry up and the need for stimulus and benefits rises. That’s what happened in the 2008–10 period, and it’s how we ended up with a $1.4 trillion deficit in fiscal 2009. But as we’ve noted, the process works in the other direction. Today we’ve got more people working, at higher wages and paying higher taxes, thanks to the expiration of the payroll tax holiday and tax increases on high-income earners. Improvements in housing and the financial sector are helping to propel big repayments from the bailed-out mortgages giants Fannie Mae and Freddie Mac—$66 billion in June alone. Spending is lower, thanks to the sequester, the winding down of our twin wars in the Middle East, and less spending on unemployment benefits. The upshot: the Congressional Budget Office projects that the budget deficit for the current fiscal year will come in at a $642 billion, a decline of more than 40 percent from last year. And since the economy is growing, the annual deficit as a percentage of GDP is shrinking. Thanks to surpluses notched in April and June, we have gone through a period in which the amount of publicly available traded debt is falling. That hasn’t happened in ages.
Budget deficits put the nation in peril, because it means we have to borrow—often from foreigners—to fund our operations. There was a second potentially fatal deficit that would require us to borrow from foreigners as well: the trade deficit. The U.S. has long imported much more than it exported, especially oil from OPEC countries and goods from China. But here, too, there has been progress. Exports have been booming since 2009. When the monthly trade data come out, I always note that the U.S. doesn’t make anything the world wants—except the $187 billion of goods and services we export each month. America is in fact very competitive with the rest of the world in a range of areas, and rising global wealth means people around the world can buy more of what we have to offer. Exports were a record $2.2 trillion in 2013 and are likely to set another record. And in large measure because we are producing more oil domestically, our imports are rising at a lower pace than in the post. The upshot is that the trade deficit, $702 billion in 2008, is shrinking—in real terms and as a percentage of the economy. Last year the trade deficit was $534 billion, down by nearly a quarter from 2008. Through the first months of 2013, it has shrunk another 11 percent.
Yes, there are significant issues. Washington doesn’t work, largely because the Republican Party can’t, or won’t, participate in governance. The Federal Reserve will unwind its support of the economy at some point in the future. And above all, there’s a crisis in employment and wages. Faced with a great deal of slack, weak unions, and a corporate culture that prioritizes dividends and stock buybacks and CEO pay over wages, companies are under very little pressure to pay people more. And so they don’t.
Government assistance, the impulse toward regeneration, and a rapidly growing global economy have brought the U.S. a great distance in the past four years. But if the economy is going to enjoy another 48 months of growth, the private sector will have to do its part. The next form of stimulus—the only remaining form of stimulus—will have to come from companies. We don’t need America’s bosses to do anything radical like double the wages of their employees, as Henry Ford did nearly a century ago. They just have to rechannel a portion of the cash earmarked for dividends, stock buybacks, and executive compensation into paychecks.