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Why The United States Is Condemned To A Decade Of Slow Growth

Fri, Nov 6 2009, 09:10 GMT
by Economic and Strategy Team

National Bank of Canada

Americans are in a foul mood these days. Stagnating living standards, 10% unemployment, the mortgage meltdown, crippling debts and two unpopular wars are fuelling anger and resentment towards politicians, Wall Street and immigrants. Intuitively, Americans know that, contrary to what some economists are telling them, the good times may not be back anytime soon. Here’s why:

1. Short-term gain for long-term pain:

The post-World War II CEOS with short life spans and ejector seats, who succeeded the family entrepreneurs, have been enticed to favour quarterly profits at the expense of investing for long term growth. Tax-cutting politicians obsessed with the next election and entrapped by a myriad of lobbies have favoured district-pleasing shovel-ready projects at the expense of sustainable and balanced social and economic development, systematically undermining the pillars of American society. The culture of instant gratification appears to have overwhelmed many other aspects of economic life.

2. A massive debt burden:

Short-termism generated unprecedented debt levels, which now constitute formidable obstacles to the economic recovery. The Bush years were an era of artificial prosperity where all but 1% of the growth resulted from the debt binge. Whether the U.S. chooses to(slowly) grow itself out of its predicament or more likely inflates itself out of it, the process will be costly and messy.

3. The innovation deficit:

Contrary to the conventional wisdom, the last decade has been a period of weak innovation (Business Week, June 3, 2009), and the U.S. lead in sciences is eroding rapidly. According to the International Technology and Innovation Foundation (February 2009), the oncedominant U.S. now ranks 6th among 40 countries and regions based on 16 indicators of innovation and competitiveness. The key biotech and pharmaceutical sector has only had one profitable year between 1998 and 2007. The U.S. Government and the private sector have until recently underinvested in transformational energy research. President Obama has openly acknowledged that the U.S. is lagging China in the research and deployment of clean energy technology.

4. The deterioration of the educational system

According to a study of OECD countries (December 2008), fifteen-year olds in the U.S. rank in 21st place in sciences and in 25th place in math, behind countries such as Poland, Belgium and Hungary. While they are still dominant, universities have become unaffordable for many students, and the best and brightest foreign students are less likely than in the past to stay in the U.S. after graduation.

5. A decaying social system and an inadequate safety net:

Laid-off workers have less money for shorter periods of time than anywhere else in the developed world. Social indicators, including poverty levels, crime, a large prisoner population, drug abuse, and mental health issues have surged in the last decade.

6. An underperforming healthcare system:

Despite the highest health expenditures per capita, the U.S ranks 20th in life expectancy, and has the third highest infant mortality rate among OECD nations. The upcoming healthcare legislation will presumably cover some of the 45 million Americans who are uninsured, but will do little to bring down spiralling costs, in no small part because of the $250 million spent so far by the lobby groups.

7. An obsolete and dysfunctional political system:

The Constitution and its checks and balances fostered an environment where individual freedoms and free enterprise were able to thrive, and allowed the U.S. to enjoy a period of unparalleled prosperity in the 20th century. Because of the dominance of money in the election process, and the corresponding influence of special interests, the legislative process has now become largely paralysed and warped. A decade ago, the automobile lobby, with some help from the oil industry, successfully planted the seeds of its selfdestruction, by defeating fuel efficiency standards and emission controls in Congress. Today President Obama, despite his personal popularity and strong majorities in both Houses, is being forced to make unproductive compromises on energy independence, support for R&D and education, healthcare, and so on. China and other countries are in the process of vacuuming up the world’s resources at an astonishing pace. Can an economic system based solely on the short-term profits of private corporations compete with powerful state players with 30-year time horizons? Clearly not.

8. Unwinnable and costly wars of choice:

No sustainable geopolitical advantage will emerge from either the war in Iraq or Afghanistan. There are no credible prospects for ridding the world of terrorist safe havens. Iraq is moving closer to Iran, and Iran is moving closer to China, and so is their oil and gas. Bombing Iran would reinforce these trends and require further U.S. long-term intervention.

9. A backlash against immigration:

Beck, Dobbs, Limbaugh and others have manipulated justifiable security and economic concerns to whip up many Americans into a frenzy about immigrants and foreigners. For a country whose greatness and prosperity has been built on its ability to attract and assimilate newcomers into the American dream, this represents a dangerous step backwards.

10. Free trade under fire:

No nation has been such a staunch supporter of free trade than the U.S. Under the guise of “fair trade”, and unconvincing security and environmental considerations, protectionism is creeping unto an increasing number of corporate and political agendas, with China squarely in the bull’s-eye. A weakened Democratic Party going into the 2010 mid-term elections could provide fertile ground for a risky spurt in protectionism.

A quick return to “normality” is not in the cards. While nothing is inevitable, the U.S. has put itself in a particularly difficult position to confront the challenges of a multipolar world.

Investment Conclusion:

Due to the myriad of political, social and economic problems facing the U.S., companies that are dependent on a robust U.S. recovery, especially in the consumer sector, will underperform those whose profitability is based on the performance of the faster growing regions of the developing world.

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Published on  Fri, Nov 6 2009, 09:13 GMT