Understanding American economic resurgence

It must be confusing for people to look at the US after the economic troubles of 2008 and still see it standing. But not just standing, growing.

When the US went through its toxic debts and a horrific burst of its gigantic real estate bubble it seemed to portend Americans were staring down the barrel of financial collapse and a drift into the rubbish bin of history.

Prediction after prediction gleefully proclaims we were living in the final days of the US Empire. The logical conclusion for many was that this decline was a good thing.

Certainly, the behaviour of the US over the past half century might have shades of imperialism. And it is true that thousands of people around the world might be in a better position if it weren’t for American blunders and stumbling statecraft.

Then again, an equal amount of people (if not more) would be in measurably worse situations if those same adventures had not taken place.

The lesson for strategists and ideologues must be that the law of unintended consequences can very often colour how an otherwise sound policy or political action is received when it actually plays out.

Empire by any other means
Because the US has been the world’s centrepiece economy for decades, it facilitated a great deal of what would eventually be called globalisation. And globalisation can look suspiciously like imperialism.

Despite how it looks, it is still not clear the Americans ever set out to gain this “empire” as a conscious strategic goal. The reality of developing trade ties with countries demands countries build ties with their neighbours until suddenly the world is interconnected.

On top of this, the Americans emerged from the Cold War with a military capacity and fiscal agility strong enough to protect the whole world’s trade routes by itself. Now, the US Navy controls the world’s oceans where 90% of everything is moved from place to place around the world.

This is an unmitigated good and an unintended consequence of trade, which goes largely unnoticed by the media. Yet this particular unintended consequence turned out well for everybody.

Americans aren’t used to being in essential control over so much of the world’s dynamics and have had more than a little trouble over the past few decades in coping and dealing with that power. In a very real sense, they don’t know what to do with the power they’ve fallen into.

That power took them on a whirlwind of poorly conceived military adventures, costing enormous amounts of treasure and human lives, which are only just closing under the governance of President Barack Obama.

They very nearly took the US down the path of economic destruction predicted by doomsayers. But the country remains strong and it is curious to ask the question why.

Answering is not as simple but there are a number of factors the Americans enjoy which other economies don’t: their renowned business agility, strong intellectual property laws, a market-driven economy, great legal protection, and a high degree of technological innovation.

Using these attributes the United States has emerged from the global financial crisis in a very strong position compared to other market economies.

Perhaps they are slightly weaker than when they entered the downturn but, with the surprising assistance of the new fracking energy boom, the Americans could leap forward into a new lease of economic life.

Adolescent America
Yet those attributes don’t fully explain the imminent return of US economic vitality.

Probably one of the better illustrations to better understand some American political actions is considering the country in the analogy of a human lifetime.

From birth to death, humans go through mental transformations many times. But so do countries which have turned into pseudo-empires.

America’s interaction with the world over the past half century has been remarkably adolescent. Their decision making process can be the irrational, knee-jerk, short-term blundering interspersed with clear thinking so reminiscent of an unreasonable teenager.

But just like a teenager with a good upbringing and sound historical pedigree, America is lucky to have thousands of years of liberalism and economic innovative thinking behind it.

The “killer apps” of Western civilisation outlined by British historian Niall Ferguson save the United States from slipping into pitfalls and give the country a playbook through which it can succeed.

In other words, a big part of what separates the United States from, say, the Chinese, is the underlying strength of this inherited tradition of US capitalism.

Take for example how differently these two countries look at their business models, especially around employment and efficiency.

China’s development is still astounding, even if the country probably won’t return to double digit GDP growth figures in the near future. But the Chinese leadership still emphasise maintaining high employment rates in an effort to avoid the potential tumble into widespread unrest from a jobless majority, which could threaten the Communist Party’s rule.

To do this, Beijing constantly needs to prop up inefficient businesses in favour of more efficient versions rather than let them fail, as they probably should in a natural business environment.

Thankfully, China’s pockets are deep enough to keep this up for the time-being, but the sheer volume of bad loans in the Chinese banking structure threatens to send shockwaves throughout the rest of the world when - not if – the system implodes.

Analysts and fund managers will continue to talk about China overtaking the United States, with all the trappings of domination attending such rhetoric. But others are beginning to notice the limits of the Chinese growth model and how a slowdown in China might be more systemic than cyclical.

Tables turning
Where China will struggle to keep its economy growing if it can’t reform its business model, the Americans are quite happy to let inefficient industries collapse if they can’t compete.

The nature of risk in the United States is a winner-take-all game with very high stakes. This breeds a learned mindset of flexibility and agility in the face of a relentlessly changing global market.

Without wanting to trumpet the Americans too much (they do not hold a monopoly on good economic or political practice), the US today has better legal protections, stronger intellectual property laws, and a bristling degree of innovation greater than found in many countries.

Whereas, although China’s leadership clearly desire reform, the slow pace of actually moving in that direction might prove too little, too late.

If Beijing actually needs to stop the money flow into inefficient companies soon, the consequences would be much worse today than perhaps if those reforms were introduced gradually over the years. To a great extent, we’ll never know.

While China still has far cheaper labour rates the United States, by 2020, according to Boston Consulting Group, exports and jobs “reshored” from China back to America could create between 2.5 million and 5 million US factory and service jobs associated with the manufacturing sector.

So the tables are slowly turning between the United States and China.  

America is coming back on to the scene in a big way. But then again, the United States never really went anywhere. Those jobs are returning to America for many reasons which include China’s slowdown, but also because of the fertile way the US treats its businesses.

And sitting restlessly in the margins is a multitude of emerging economies waiting for their opportunity to grab low-end manufacturing jobs from an expensive China to boost their own growth.

Yet the most interesting country ready to experience a return of industry dynamism is the United States. It remains to be seen what its return will do to the prices of goods around the world.

Nathan Smith has studied international relations and conflict at Massey University. He blogs at INTEL and Analysis