Has the United States Lost its Edge?
The dollar is up, competitiveness is down, and the world’s most powerful economy doesn’t look as hot for investors as it once used to.
Is the United States becoming a less attractive destination for direct investment, or is the rest of the world just catching up? In this year’s edition of the Baseline Profitability Index (BPI), the nation dropped from 26th to 50th place, one of the biggest downward slides among more than 100 countries. What happened?
The short answer is a bit of both. Prospects for growth dimmed somewhat, according to the International Monetary Fund, as the economy repeatedly failed to meet forecasters’ expectations. The security situation also eroded a tiny bit, with lower ratings for political stability and the rule of law from the World Bank. Protection of property rights as judged by the Heritage Foundation declined a tad, but perceptions of corruption measured by Transparency International also decreased by a smidgen. And finally, the semblance of capital controls — restraints on moving funds into and out of the country — strengthened just slightly.
All of these effects were marginal, however. More notable were the improvements among other countries, particularly the ailing economies of Europe. But the most important effect may have been the increase in the value of the dollar, which made investments elsewhere look like a better deal. As other currencies catch up to the dollar in real terms, profits earned abroad will be worth more back here at home.
The trade-weighted value of the dollar, as measured by the Federal Reserve, has jumped by more than 10 percent since the last edition of the BPI was published in May 2014. It’s a good time for Americans to seek value and returns abroad, which means, by comparison, that it’s a bad time to look locally. Of course, this won’t necessarily deter the portfolio investors who have snapped up American stocks and bonds as supposedly safe assets, and who will ride the climb in prices until its eventual crash. After all, they’re the ones who drove up the dollar in the first place, despite the oceans of cash injected into the money supply by the Federal Reserve.
Indeed, it’s time to ask whether the American economy has had it too easy for too long. Bear with me here. For many Americans, life has been far from easy since the global financial crisis. The Fed’s lavish support for growth and employment — in the absence of an effective fiscal policy from Congress — has probably saved the economy from some permanent damage. But what if it has also made the economy flabby?
It wouldn’t be entirely the Fed’s fault. Drumming up capital here is a snap, relative to fundraising in other countries, in part because money continues to pour in from around the world, as well as from the Fed and the Treasury’s printing presses. Though some banks have been shy of lending since the global financial crisis, equity investments of the kind assessed in the BPI have never been more fashionable.
Consider, then, that the dotcom boom — whose seeds came in the form of venture capital and other forms of equity — took root while short-term rates like the one-month London Interbank Offered Rate (LIBOR) and long-term rates like the 10-year Treasury note’s yield were both around 6 percent. Undoubtedly, part of those rates corresponded to higher returns net of inflation, thanks to the surge in productivity that occurred at the same time. But credit has never been as easy to obtain as it is now, even for investments offering what once would have been considered paltry returns.
In an economy settling into a slower growth pattern, lower returns at the macro level may be par for the course. Yet companies at the cutting edge will always offer investors a shot at bigger profits, regardless of how the rest of the economy is performing — as long as they’re facing sufficient pressure to succeed.
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That may be what’s missing. Recall that the labor market was also much tighter during the dotcom boom, with a lower rate of unemployment and a higher rate of participation in the workforce. Companies had to go head to head for people as well as for financing, especially if they didn’t yet have “dotcom” appended to their names. Outside the tech sector, the competition was at its fiercest.
Today, after another two decades of globalization, companies face more international competition for both capital and customers. But the corporate crucible in the United States may not be as hot as it once was. A fad for private equity, with silly money being thrown at iffy investments, just makes matters worse. So how can we stoke the flames once more?
The simple answer is by engendering a bit more competition for resources and setting a higher bar for investment. Raising interest rates, starting with the Federal Reserve’s short-term ones, might make investors think twice about risky assets with expected returns in the single digits. And more federal programs to employ people — yes, I said it — would force the private sector to compete for labor, as well as offsetting the effects of the Fed’s contractionary policy.
I know all this may be anathema to many students of economics. In most textbooks, competition between the public and private sectors for money and resources is cast in an unambiguously negative light. Yet this may not be a textbook situation. The United States may just have lost its competitive edge.
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