America can help fix the world by fixing itselfby Jay Pelosky
FIVE years into the global financial crisis, the US and global economies remain mired in a weak-growth, low-inflation, high-unemployment environment. Debt busts such as 2008-09 are hard to exit from, and recoveries are long and painful. However, three complicating factors make the current environment even more challenging.
First, economic growth models lie broken across developed and emerging economies alike, with the United States deleveraging from its debt-fuelled consumption excesses, the European Union locked in a fiscal and currency straitjacket and China (and emerging economies more broadly) transitioning from export-led to domestic-demand-led growth. Second, globalisation is in retreat as financial institutions retrench. And third, debt levels remain highly elevated in the developed economies, leading policymakers to rely almost exclusively on monetary policy to buffer the necessary deleveraging process.
The current policy mix of easy money and tight fiscal conditions, however, produces the worst of both worlds: stagnant global growth and increased risk of financial asset bubbles alongside rising prospects for beggar-thy-neighbour tendencies (already somewhat evident in global currency markets).
The result of the debt bust and additional complicating factors is that there is no single economic growth engine akin to the US economy in the late 1990s (post-Asian crisis) or the Chinese economy (post 2008-09) to pull the world economy out of its malaise. We are stuck in a low-demand, low-growth world.
Given such an environment, US policymakers face two main challenges: first, how to put the US economy on a robust and sustained growth path of 3 per cent to 4 per cent per year and second, how to stabilise the globalisation process. The answer to the first challenge lies in the transition to an investment- and production-led economic growth strategy that leverages US access to excess global capital to rebuild America. The answer to the second lies in a US international economic strategy that contributes to global demand and deepens integration with our trade partners in the Americas. Such solutions would provide both global leadership and a model for the EU and Asia to adopt.
The good news is that the United States is best placed to provide this global leadership, given what I call the Rebirth of Middle America. This rebirth is led by three main trends: an energy boom that provides energy at costs roughly a quarter of what they are in Europe and Asia; a manufacturing revival led by competitive labour costs and advanced manufacturing techniques that are turning the multinational manufacturing model on its head; and an agricultural boom that positions the American heartland to be the breadbasket for the world’s emerging consumers.
The bad news is that there are several limiting factors to this story. First is a lack of public- and private-sector investment that may limit the opportunities; second is the high-unemployment, low-income growth that threaten its sustainability and implies a possible return to debt-fuelled consumption; and third is the potential for weak external demand and a strong dollar to blunt the export and manufacturing revival.
Notwithstanding this last concern, the Obama administration, frustrated by congressional resistance to pro-growth fiscal policy, appears to have switched to a trade focus in the hopes of improving US ability to tap external demand. While strategically sound in its desire to protect free trade and fight against beggar-thy-neighbour policies, the focus on the EU and the Pacific appears mistimed and possibly misguided.
In the case of the EU, it seems reasonable to ask why the United States would want to link up with the region least likely to grow over the next 5 to 10 years, one that seems bereft of any growth strategy. In addition, by engaging in free-trade talks with the EU, the United States may allow Europe to abdicate on its internal growth needs. In the case of Asia, the Trans Pacific Partnership seems like a China containment strategy masquerading as a trade policy. China will be the centre of Asia’s consumer zone; the strategic imperative is to ensure that the United States can sell into it. The TPP as configured does not seem to meet that objective.
What to do? The United States should leverage its competitive advantage (access to global capital) to fix that which is broken (US infrastructure) in a way that provides good-paying jobs, fulfils the promise of the Rebirth of Middle America and extends economic cohesion further south into Latin America, the real area of trade opportunity.
The case for infrastructure investment is well known and is underscored by last week’s bridge collapse in Seattle. What is less well appreciated is private capital’s growing interest in funding such projects. US infrastructure quality ranks 25th globally; the impediment to the estimated $1 trillion fix has been the fear that public-sector financing, which is anathema to many in Congress, is required. However, the collapse in public and private interest rates since 2009 has meant that large pools of domestic and foreign capital — pension funds, endowments and sovereign wealth funds — are now in search of investment opportunities that provide annual returns of 5 per cent to 6 per cent over long periods of time, which is just what infrastructure can provide. The private-sector fear is lack of projects, not lack of funding. And offshore interest represents a tremendous geostrategic opportunity for the United States to source capital abroad to rebuild America.
The result of adopting this American growth strategy will be a more robust US economy and an America that contributes to global demand, reduces beggar-thy-neighbour risk and provides a model and an incentive for Europe and Asia to pursue their own internal demand deepening efforts. In turn, this helps set the stage for a more balanced global economy, what I call Tri-Polar 2020, in which each major region — the Americas, Europe and Asia — is self-financing, self-producing and self-consuming.
Reuters, May 29. Jay Pelosky is principal of J2Z Advisory, LLC, which consults with institutional investors on global asset allocation and investment strategy. This essay is excerpted from Building A Bridge To A Tri-Polar World Economy: An American Growth Strategy, published by the New America Foundation.
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FIVE years into the global financial crisis, the US and global economies remain mired in a weak-growth, low-inflation, high-unemployment environment. Debt busts such as 2008-09 are hard to exit from, and recoveries are long and painful. However, three complicating factors make the current... Full story