America remains the world’s economic powerhouse in several crucial respects: it still has some of the best companies in cutting-edge fields, not least the likes of Apple and Google. Its overall GDP remains immense and is larger than ever, having more than caught up after the crisis. It retains many of the best universities and hosts top scientific and entrepreneurial ventures. Its military strength remains unrivalled. It retains the world’s dominant reserve currency, the greenback, which allows it to live beyond its means. Perhaps most important of all, the US still has more appeal than any other on earth to potential immigrants, from poor countries as well as wealthy ones.
But the US also suffers from many major weaknesses. Spending commitments keep on growing, especially on entitlement programmes; on current trends, bankruptcy is inevitable at some point this century. This may sound melodramatic but it isn’t. The US has yet to decide whether it wants to retain its small-state, low tax model – or whether it wants to turn itself into a social-democratic European-style state. The current compromise – bigger and bigger government together with still-low taxes as a share of GDP doesn’t add up. It is not clear whether the US really made that choice yesterday.
Another issue is that productivity growth has slowed too much, which means that long-term GDP prospects are uninspiring. Lombard Street Research puts potential growth at 2-2.25 per cent, driven by output per worker growth rising at little over 1 per cent a year, with the labour force growing by the same amount.
This brings us to other problems: the labour market remains in a terrible state, with many workers having quit the jobs market and employment still 3.1 per cent lower than it was in late 2007. At the same time, median incomes are under huge pressure and back to levels last seen in the 1980s on some measures. Another issue is that monetary policy, like in many other developed nations, remains unsustainably expansionary and hyper-active.
Last but not least, the US faces a dramatic crunch in just a few weeks that this morning’s election results may not actually resolve. On current laws, fiscal policy is set to tighten by around 5 per cent of GDP in early 2013, a very large amount to happen all at once. The political classes will have just a few weeks in which to hammer out a better way forward. Lombard Street, for one, expects around half of the fiscal cliff to occur regardless of who wins the election, a tightening of 2-2.5 per cent of GDP.
In some respects at least, the US economy still retains some if its famous flexibility. Bad decisions are reversed faster than they are in other countries. Take home ownership: the rate has fallen to just 65.3 per cent, the lowest level since 1995. While this shows the extent of the pain that America has gone through, it also confirms that the liquidation process from the malinvestment caused by the bubble has been proceeding apace. But for everybody’s sake, what we now need is growth and ambition, not retrenchment, and for America to regain its mojo. It cannot come a moment too soon.
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