Wilson Briefs

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 July 2015

How to Secure a Competitive U.S. Economy

by Meg LundsagerGlobal economic dependence on U.S. consumer spending is unlikely to dwindle, despite significant national and international efforts outside the United States to support demand and improve economic flexibility. Because that dependence increases U.S. trade deficits and threatens U.S. competitiveness, the United States should take measures to open foreign markets, assert U.S. leadership, and promote domestic confidence and growth.

SUMMARY

International reliance on the U.S. consumer economy

Economic crises worldwide lead many countries with both large and small economies to rely on exporting their products to the American consumer to generate growing demand that their own consumers and investors cannot provide.

 

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Europe needs more internally generated demand, especially from Germany. This would help other European countries as they undertake needed reforms. Monetary policy is already providing stimulus. Fiscal policy theoretically could be used, but as European countries prioritize reducing national debt they are unlikely to cut taxes or increase spending. So unless European Central Bank policies generate stronger confidence in Germany, the Germans and other Europeans will continue to rely on exports for growth. China’s current financial market gyrations are clearly challenging the ability of its leaders to prevent significant market downturns, which could quickly translate into dampened domestic investment and consumption. This may push China once again to intervene in foreign exchange markets to depreciate the yuan and encourage more exports. And Japan, even if it vanquishes deflation, will not be a source of global growth as its population continues to shrink and structural reforms take years to transform labor markets and encourage more domestic consumption. The European crisis centered on Greece epitomizes the global macroeconomic outlook. Weak growth, with bouts of volatility in financial markets, makes consumers and investors more cautious. Even with the boost from lower oil prices, much of Asia and Latin America share Europe’s challenge of building more diversified internal markets that will contribute to global demand, instead of depending on global demand for strong growth.

A pressing need

Effective government action is needed worldwide. The European Central Bank and Bank of Japan are both taking unprecedented steps to provide monetary stimulus to keep inflation positive and support businesses’ and consumers’ willingness to spend. In the short run, this will help prevent backsliding into recession.In the long run, however, these economies need more resilience and flexibility to generate conditions that encourage consumption and investment. The International Monetary Fund (IMF) has outlined broad ranging reforms that could revitalize Europe and Japan, such as raising retirement ages to global norms and reforming product and labor markets so that firms can expand and contract more easily as economic conditions change. These measures are needed to expand labor forces, which will generate growth, raise incomes, and help reduce national debts. They will nonetheless bring pain to those who have enjoyed generous national systems.

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Fiscal policy theoretically could be used, but as European countries prioritize reducing national debt they are unlikely to cut taxes or increase spending.

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Several countries in eastern and central Europe, such as Poland, have taken such steps and seen positive results, including increased foreign investment that creates jobs and imports knowledge and technology. But other countries inside the Eurozone have shouldered little real economic reform while taking advantage of reduced government borrowing costs, resulting in higher debts and deficits. Greece is the obvious outlier, but others have also lagged in enhancing their economic flexibility.

 Where does this leave the United States?

Global overreliance on U.S. consumers generates larger U.S. trade deficits and reduces U.S. growth. The U.S. economy is much more flexible, resilient, and innovative than Europe’s or Japan’s. Despite these traits, U.S. businesses currently hesitate to invest and U.S. consumers, the backbone of the U.S. economy, are prudently saving more of their incomes than before the 2008 economic crisis. The United States needs to be mindful of global developments that can undermine U.S. competitiveness. The U.S. dollar has appreciated some 20 percent against the euro over the past twelve months, and the effects became visible when U.S. exports declined in May 2015 (http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf). The IMF warns that further dollar appreciation is a “prominent risk” to the U.S. economic outlook (http://www.imf.org/external/pubs/ft/scr/2015/cr15168.pdf). The United States cannot solve Europe’s or Asia’s problems for them, but it can take steps to secure a competitive American economy, which will help improve the global outlook. Timely US actions are required: • To provide competitive financing for U.S. exports, Congress should reauthorize the Export-Import Bank. Other countries’ exporters benefit from government facilitated financing; this step would provide equivalent support for U.S. companies.• U.S. negotiators should conclude negotiations on the Trans Pacific Partnership (TPP) and continue the Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations. TPP includes some of Asia’s younger, faster-growing populations with rapidly developing economies, generating more demand for American-made goods and services. Finalizing TPP would also spark more interest in other countries to join, such as Philippines, Indonesia, and India. TTIP, which addresses the large if stagnant European market for U.S. producers and services providers, will keep the United States from losing ground and help U.S. firms to benefit from Europe’s eventual recovery.

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The U.S. economy is much more flexible, resilient, and innovative than Europe’s or Japan’s.

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