Saturday, November 13, 2010

US Competitivenss and the Global Economy

This article illustrates several of the major problems in the global economy and in our domestic economy. President Obama got a cool reception at the G20 meeting which dealt with the important issue of global trade imbalances as well as the role of government in fostering economic growth.

Nations with trade surpluses, such as Germany, China and emerging market countries, expressed concern over the Fed's decision to purchase $600 billion of long-term US treasuries. They believe that efforts to maintain low interest rates in the US will cause investors to seek higher returns by increasing the flow of dollars to surplus nations with higher interest rates and faster growth rates. They worry that this could fuel inflation in their economies and cause their currencies to appreciate relative to the dollar. This could also make their exports more expensive and increase the prices of commodities which are traded in dollars. In short, they believe that the US is worried more about its domestic economy than it is about the global economy

China took the position that the US was not taking its responsibility as the issuer of the world's major reserve currency seriously. Of course, the US has been after China, which pegs its currency to the dollar, to let market forces work to increase the value of is currency to the dollar.
This is a familiar issue that has been with us for some time.

Germany's response was deeper and more telling. It has a trade surplus with the US (as well as with other nations) and it has been able to export its way to economic growth. It suggested that the US should make products that the rest of the world wants to buy instead of trying to devalue the dollar to make US products less expensive in world markets. This raises questions about structural issues in the US economy. Manufacturing wages in Germany are higher than those in the US yet Germany has been able to run a trade surplus while the US has run huge trade deficits. Germany exports manufactured products, which create jobs, while the US has lost its competitiveness in many areas in which it was able to create surpluses. For example, up until 2002 the US ran a trade surplus in many high technology areas. The surplus turned into a $17 billion deficit in 2002 and the deficit increased to $53.6 billion in 2007. This is a trend that should worry us. We may not be able to restore our trade balance by selling financial products or agricultural products to the rest of the world. Besides, these are high productivity sectors which do not create jobs.

There was also a lack of consensus about the role of government to stimulate economic growth. Germany was opposed to government actions that would increase deficits and debt. This may make sense for Germany which is a leading exporter. The UK took a similar stance but for different reasons. Its newly elected conservative government is intent upon using spending cuts to restore fiscal balance. Conservatives in the US would like to take a similar approach by cutting spending, and strangely enough by cutting taxes which will deepen our deficit.

The global financial crisis has exposed major weaknesses in the global economy and in the US. Our domestic economy was fueled by debt instead of by growth in income. Average wages in the US have been relatively flat for 30 years. Growth in consumer spending has depended upon rising debt levels which has been exposed by the bursting of the real estate bubble and a weakening of the banking system. Unfortunately, Obama does not have the full support for taking the necessary actions in his own party and the Republicans will continue their policy of placing the destruction of the Obama presidency above that of restoring the US economy. Things could get worse before they get better.

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