Honeyman: How can America revive its economy?

Monday, August 29, 2011

THE PROBLEM

For the past 125 years the US has been the major economic power, generating approximately 25% of the world’s GDP. In the past year or so, there has been a reduction in America’s economic dominance.

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In principle, we do not mind. It is good that Asia is growing at a faster rate than the US and Europe. Over the next decade, Asia’s middle classes, including the Philippines, will double. This will create an enormous consumer market, accounting for 40% of all global consumer spending.
This creates a great opportunity for all countries, especially those who excel at exports. For example, 60% of China’s income now comes from exports, but America ’s export share is only 25%. America has lost its global competitive edge.

In the past, America’s growth through higher consumption was assured. Since World War II, the suburban phenomenon guaranteed that the American economy would grow. People borrowed a lot but, in general, they were able to repay. Dormitory towns, starting with Levittown , New York in 1947, sprouted throughout the US and people enjoyed a lifestyle that was the envy of the world.

There were blips, of course. The oil crisis of 1973 generated high inflation and, for a while, the economy was stagnant. This ‘stagflation’ caused Jimmy Carter to be only a one-term president (1977-1981).

Overall, however, Americans did well. Although they had high borrowings, their incomes were able to service the loans. People had positive equity – in other words, the value of what they owned was greater than what they owed.

This time it is different. Higher consumption now is impossible due to high personal borrowing and negative equity. [The house that Mrs. Ligot bought in Buena Park, California for $499,500 in 2007 was worth only $132,500 in 2010. We may not empathize with Mrs. Ligot’s troubles but there are many Filipino-Americans who took on massive mortgages in 2007 to buy equivalent properties and who now find themselves to be technically bankrupt].

As things stand, America ’s economic problems are not short-term. We are not seeing an increase in private sector investment as businesses cannot find opportunities when the home market is stagnant.

Similarly, public sector expenditure is truncated as America finds that, as a country, it is reaching the limit of its indebtedness. [In the Philippines , the Freedom from Debt Coalition is concerned about our indebtedness, but the amount is approximately 65% of GDP. Correspondingly, the US is 95% of GDP and Italy is 120%. Believe it or not, our financial management over the past few years has been prudent, compared to the US and much of Europe, especially Portugal , Italy , Ireland , Greece , Spain ].

A further serious problem which adversely impacts the American economy is the age distribution of the nation. There was a ‘baby boom’ after the end of World War II (1945) and the ‘boomers’ are now reading retirement age. The American pension scheme is under tremendous pressure.

The pension entitlements of American citizens are huge and, unlike other countries, including the Philippines and the UK , which have a fund which hopefully can service pension obligations, the US pays its pensioners out of a current account which has to be increased substantially each year. Hence the ‘graying’ of America, whereby its population consists of an increasing proportion of retirees, is also a challenge to the economy.

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What can be done?

America needs to combine with other countries, possibly the G20, to develop a plan which enables the world economy to grow. A necessary component of this growth is an increase in world trade.

But what, specifically, should America do? It should understand why it became the world’s economic powerhouse in the late nineteenth century. The reason: people.

First generation Americans, often fleeing from difficult circumstances in their original homelands, found an environment in which their stamina, tenacity and entrepreneurial spirit were rewarded. The first generation may have been mainly poor, but they could see that their children and grand children were to have much better lives.

The answer, therefore, is people. America should loosen its girdle about immigration. Its system has broken down anyway. Apparently, there are 12 million illegal immigrants living a precarious existence in the US. Their presence should be legitimized, despite valid concerns about this group being "queue jumpers". America is still a global magnet for talent. It should be made possible for America to open its doors wider so more of those who have the ability are able to study in American universities.

America still has a strong lead in ideas, high-tech and many brand-name products. It needs to be able to draw talent from all over the world to exploit this lead and to enable American businesses to increase their exports.

Obama spoke in these terms in 2008, before he was elected. But not since. The mayor of New York, Michael Bloomberg, has also supported the idea of attracting more global talent.

America should do it now.

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Why should we care?

The media speaks frequently about OFW remittances. This conjures up the image of Filipinos working in Taiwanese factories, Hong Kong homes, Saudi Arabian petrochemical complexes and on the high seas. But the reality is that almost 50% ($9b out of $18b) of our remittances come from America and Canada.

In late 2008, I wrote in these pages that our remittances would slow down. Since remittances are an important component of our economy, a slowdown in remittances means a slowing of our rate of growth. My 2008 prediction was somewhat premature, but it does seem to be happening now and will continue into 2012 and thereafter.

America's economic woes become our problem too.