There is Still No Alternative to the United States as the Economic Hegemon

Last month I blogged about how, because of the debt ceiling showdown, "the next decade of global political economy will provide an excellent natural experiment to see whether there will be any form of economic balancing against the United States."  Of course, for this to actually happen, pools of capital need one of two things.  One option is to find a large market that can absorb capital, provide security of investment, and offer a rate of return superior to the United States.  Another option is to willingly take a hit in profit-making opportunities to teach the United States a point.  And while there might be some sovereign wealth funds willing to do the latter, it’s really the former that matters. 

So how are other large markets doing?  James Kanter reports on the latest from the European Union in the New York Times: 

A fragile recovery across the European Union is not expected to bear fruit until next year. And unemployment is likely to remain high in countries like Greece and Spain, and even rise in France, the Union’s head of economic policy warned Tuesday….

And some analysts warned that the forecasts might even be too optimistic in parts, saying that investors and business were likely to remain jittery about growth in many countries and that Europe could even face a sustained period of deflation — an affliction in which economic demand is so weak that prices actually decline, potentially making government debt reduction all the harder….

[European Union’s commissioner for economics and monetary affairs Olli] Rehn said economic output for all of 2013 among the 17 countries that use the euro currency was expected shrink by 0.4 percent, but would grow by 1.1 percent next year. He also said that the 28 countries of the European Union would have an average of zero growth this year, but were expected to grow by 1.4 percent in 2014.

The forecasts also show rising joblessness in France now estimated at 11 percent and projected to rise next year to 11.2 percent….

Even so, Mr. Rehn said he was “counting on these countries to undertake serious and effective economic reforms to boost competitiveness, growth and employment,” having already given them both an extra two years to meet deficit targets. 

Oh. Well, that’s likely still the aftereffects of the Great Recession and the profligate spending policies of the Southern Mediterranean states. Surely, once these economies all starts acting more like Germany– say, what’s this Ambrose Evans-Pritchard story in the Daily Telegraph saying?

The European Commission has warned Germany it could face disciplinary action for running excess trade surpluses at the expense of EU partners, joining the US Treasury in criticising Berlin for doing too little to help lift Europe out of its slump.

“We will discuss this question next week,” said EU economics chief Olli Rehn after releasing the commission’s Autumn report. The text said Germany’s current account surplus will remain far above tolerable levels into the middle of the decade.

Mr Rehn said Berlin had been told by EU leaders at a summit in June that Germany has a duty to help boost demand and “create sustained conditions” for German wage rises. This would help rebalance the EMU system and lift pressure off the crisis states in the South.

The report said Germany’s surplus will narrow slightly from 7pc of GDP this year to 6.6pc in 2014 and 6.4pc in 2015, but this still breaches the EU’s new “macro-imbalances” rules….

Lars Christensen from Danske Bank said the EU authorities are repeating mistakes made in Japan in the early 1990s when deflation became lodged in the system. “Several eurozone countries are already in outright deflation, and that is making it even harder to deal with banking problems and the debt trajectory. There is no growth in the money supply, so this is going to get worse, not better.

"This is just like Japan. The central bank thought money was easy when in fact it was much too tight. But effects could be much worse in Europe because unemployment is so much higher."

Huh.  So, as blinkered as U.S. economic policymaking has been, it turns out that European economic policymaking has been…. even worse. 

Well, there’s always China, right?  I mean, that economy has weathered the Great Recession very well, and its citizens are so much more hard-working and industrious than spoiled American twentysometh– say, what’s this Keith Bradhser story in the New York Times saying about China’s twentysomethings? 

China has relied for the past three decades on unrelenting, even manic, construction of ever more factories, bridges, roads and apartment towers. But that is producing chronic overcapacity together with an acute shortage of blue-collar labor….

Actual changes in economic policy have been slow despite vows of reform. A big impediment to creating a consumer economy are the low incomes of a generation of China’s young people, the country’s would-be consumers.

Born in an era of ever-rising prosperity and mostly only children because of the government’s “one child” policy, young people across China consistently say in interviews that they tend not to share their parents’ compulsion for saving for retirement and children’s educations. Even so, they seldom have the incomes to consume on the scale of the young Americans and Europeans whom they admire and envy.

Mr. Zheng spends almost as much on new clothes each month as he does on food or rent, he says. But as is common for a generation facing high jobless rates — 25 percent or more for recent college graduates — he relies on family and savings to pay for his lifestyle while looking for the right job. That puts a limit on his overall spending. “I want a job for which I was trained, or else my education will be wasted. I don’t want to work in a factory,” he said.

Complicating matters is that many young people are avoiding lower-end service jobs as well as factory jobs. The high school graduation rate in China is rapidly approaching three-quarters of young people, similar to the United States. The number of university graduates in China has nearly quintupled since 2000.

Cultural norms frequently discourage high school and college graduates from accepting jobs in factories or even restaurants.

What’s interesting about that story is that if one could very easily transpose it to the United States — except that China is not nearly as wealthy a country as the U.S.

My point here is not to say that the U.S. economy is doing swimmingly.  Far from it.  And from a welfare perspective, everyone has a stake in seeing the European and Chinese economies performing much more robustly.  If they grow more quickly, the rest of the global economy — including the United States — benefits. 

The thing is, when talking about global political economy, some relative comparisons are necessary.  And compared to the markets that could potentially assume the mantle of leadership, even a United States hampered by bouts of political gridlock looks pretty damn good.  I seriously doubt that you’re going to see large pools of capita
l exiting the United States anytime soon. 

Am I missing anything?