Forecasts of America's fall off fiscal cliff all too familiar
ECONOMICS:AS WE obsess about budgetary matters, our cousins on the other side of the Atlantic are no less preoccupied with fiscal affairs. America’s news shows and newspapers endlessly discuss the economics and the politics of their budgetary impasse. If politicians fail to reach a deal on the federal government’s budget in the coming weeks, they will plunge over a “fiscal cliff” on New Year’s Day.
The mechanics of the budget mean that very large spending cuts and tax increases would kick in automatically and immediately. The US economy would get a very large dose of austerity, something it has avoided to date.
Predictably, economists differ on how big an effect going over the cliff would have on growth, but most believe that the impact would range from significantly negative to disastrous.
All this comes as the economy is struggling to recover from a property crash and financial crisis, the effects of which began to be felt as long ago as 2006. The subsequent recession was by far the worst since the Great Depression.
The size of the employment shock illustrates this well. By the time the labour market hit bottom in early 2010, more than eight million jobs had disappeared in net terms, a contraction of almost 6 per cent. Nothing approaching this has been experienced in the US since the 1930s and healing that kind of damage takes a long time – the latest figures show that 143 million Americans are in employment, still almost three million fewer than five years ago.
The polarisation of politics that keeps the US on the edge of the fiscal cliff and the hammering its economy has taken over the past half-decade have caused many to ponder whether America’s best days are behind it. Some longer-term trends, such as declining social mobility and stagnation of median incomes, are no more encouraging. Put all of this in the context of the relentless rise of China, and the case that America’s days as the planet’s sole superpower are numbered looks strong.
Decline as recurring motif
But the declinists are jumping the gun, as they have frequently in the past. Almost from the time the US became the world-leading power in the middle of the last century, its imminent decline has been heralded. In the 1950s and early 1960s, many believed communism would bury its capitalist model. In the 1970s Vietnam, Watergate, race riots and deep social divisions rent the country. In the 1980s, Japan was doing everything right and America was falling behind.
There is a lot wrong with America, but it is no beaten docket and those who have bet against it over the centuries have always lost. There are many reasons to believe they will lose again.
Among the most enduring strengths of the US is its companies, something of no little import for the Irish economy given the role corporate America plays in generating employment, exports, tax revenues and more besides.
The rise of Asia and the phenomenon of globalisation have often masked the fact that the US remains the most innovative place in the world. In most rising industries, its companies are at the cutting edge. US firms dominate the top global 100 list of spenders on research and development and more patents are filed each year in the US than in any other country.
But it is not only in high tech that the US is doing well. Take manufacturing, which many people believe has been a victim of deindustrialisation.
American statisticians have been measuring industrial output since 1919. Apart from recessionary blips, it has never stopped rising and Americans make more widgets today than they ever have (even if it takes far fewer of them because productivity gains have been so great).
The energy revolution, which is generating a boom in that sector, is also helping to cut input costs for manufacturers. Among other things, this has boosted competitiveness and helped goods exports increase by more than 50 per cent since 2005.
If US politicians are becoming increasingly parochial, its companies are not. Again, corporate American remains by far the world’s largest source of foreign direct investment. The US has many problems and weaknesses, almost all of which will be compounded if it goes over the fiscal cliff in January. But Americans usually end up doing the right thing. My money is on Washington seeing sense in the coming weeks and avoiding the fiscal cliff.