The Great American Economy

Each year in spring, American families spread out impulse buys and other paraphernalia on their front lawn in a ritual known as the garage sale. Neighbours peruse each other’s wares and usually buy as much as they sell. The goods so acquired are stored in the garage which, in the US, is not a place to park the family car(s) but a depository of stuff bought on a whim or during a momentary lapse of reason. The garage is also the place where the fruits of big box stores end up. Without it, Walmart and Home Depot could never have prospered.

Of late, American consumers have been on a shopping spree of note, splurging some or all of the cash received from the federal government during the Corona Pandemic when Washington sent out more than 476 million cheques to help individuals and families cope with the emergency. According to the Government Accountability Office, direct payments disbursed in three stimulus rounds totalled $931 billion (£740 billion).

Once on a roll, the American consumer is hard to stop. Whilst the federal handouts were being spent, wages received a six-percent boost in real (inflation-adjusted) terms. After that windfall has gone, there is always some plastic to flash. Rich in interest-bearing assets, the cash flow of US households is only now beginning to incorporate the effects of higher interest rates which adds even more spending power.

Of Tides and Boats

Analysts at Goldman Sachs, an investment bank, expect real incomes to grow by another three percent next year. The caveat is that the bottom quintile can expect to receive only half as much. In the US, a rising tide does not lift all boats equally.

The addiction of consumers to shopping and spending – discarding bad vibes and ignoring warning signs – is the biggest driver of the US economy and the principal source of its remarkable resilience.

Even with Hollywood paralysed as some 11,000 writers on strike were joined by about 160,000 actors, and as trucking firm Yellow Corp went bust with the loss of over 30,000 jobs, the employment numbers hold up. The Bureau of Labor Statistics reported an increase in the non-farm payroll of 187,000 in August. Month-on-month, unemployment advanced to 3.8 percent (from 3.4%) as more people pulled back from the post-pandemic Great Resignation and rejoined the labour force.

In the US, things are looking up – not that they were recently looking down. In July, Federal Reserve Chairperson Jerome Powell predicted an economic slowdown towards year’s end but is no longer forecasting a recession. He also noted that headline inflation is coming down significantly and with a momentum that is likely to reach the target level of two percent, possibly without the need for further rate hikes.

Vibecession

The negative economic vibes of 2022 – promptly dubbed a ‘vibecession’ – have dissipated as fuel prices, a catalyst of public sentiment, receded slightly and bank failures faded from memory. There never was much reason for pessimism. Contrary to what politicians proclaim, the US economy is far from broken and has no peers. It is great as-is.

Whilst China ascended at breakneck speed, the US held its own. The country’s share of global GDP has remained steady at 25 percent since the early 1990s. The US also accounts for 58 percent of the G7’s GDP (40% in 1990), illustrating just how far ahead it has pulled.

The awesome power of the US economy is grounded in an almost unparalleled work ethic: Americans not only work more hours on average than their European and Japanese counterparts, they are also more productive. Last year, US corporations spent an estimated $200 billion (£159 billion) on research and development. They own about a fifth of all patents filed globally – more than Japan and Germany combined.

Size matters too, as does ease of doing business. An outsized domestic pool of moneyed consumers coupled to deep and liquid capital markets begets an economy that roars incessantly. A flexible workforce that responds quickly and efficiently to shifting patterns in demand, and a non-punitive bankruptcy law that facilitates the unwinding or restructuring of failing businesses, add a touch of pizzazz mostly missing elsewhere.

Down and Out in America

Whilst state and federal expenditure on welfare (including Medicaid), as a share of GDP, has increased from an historic average of about four percent to seven percent last year, a growing number of Americans fall through the cracks of an almost Kafkaesque patchwork of more than eighty social security programmes.

Since 2017, homelessness has been on the rise (+6%) according to data from the Department of Housing and Urban Development with around 550,000 people living on the street of whom 22 percent are categorised as chronically homeless. The capital district (DC) and California have the highest rate of unsheltered people.

However, efforts to reduce homelessness, particularly amongst veterans, have been remarkably successful. Between 2010 and 2020, the size of this subgroup has been cut in half to about 55,000. During the pandemic, a moratorium on evictions and emergency rental assistance helped keep vulnerable families housed.

Other social issues confronting US society include gun violence and the enduring opioid crisis. In 2022, overdoses claimed almost 109,000 fatalities as new, cheaper, and more potent drugs such as fentanyl flooded the market.

The latest and deadliest drug to infiltrate the streets is tranq – fentanyl surreptitiously laced with xylazine (an animal tranquilliser) for added bulk – which causes deep wounds to appear in users that, in turn, often lead to amputation. Tranq is immune to Narcan, a drug employed by first-responders to block or reverse the effect of opioids on neural receptors.

Bigger Is Better

Big government is making a bipartisan comeback. Expenditures are up across the board from welfare and healthcare to business support and defence. In a nod to the return of fiscal activism, the federal deficit swelled considerably and now hovers around the eight-percent-mark.

The revival of state interventionism is an outflow of the Corona Pandemic when governments realised that markets alone were not equipped, nor designed, to handle a global emergency. Finance ministers who weeks earlier had preached austerity and fiscal discipline suddenly adopted an unnatural falsetto whilst delivering a likewise odd-sounding whatever-it-takes discourse.

In the US, the self-proclaimed fiscal hawks of the Republican Party did not need much prodding to push then-President Donald Trump into signing a series of comprehensive relief packages totalling roughly $5 trillion (£4 trillion) – the largest-ever flood of federal cash released into the economy and equivalent to almost a quarter of the country’s GDP.

The quick and determined bipartisan response to the Corona Pandemic is almost universally credited with enabling a speedy economic recovery post-crisis. Without it, a downturn similar in scope to the Great Depression could well have materialised. As it happened, the pandemic recession was the shortest on record, lasting only three months.

This laid to rest the phrase made infamous by the Great Communicator Ronald Reagan regarding ‘the nine most terrifying words in the English language’. Now only too many Americans were quite happy to hear those words: “I’m from the government and I’m here to help.”

The realisation that government could come to the rescue of a distressed society – an epiphany for many Americans brought up with the notion that nothing good ever comes out of Washington – reverberated into the Biden Administration with the $740 billion (£592 billion) Inflation Reduction Act which could yet balloon into the trillions due to several uncapped programmes aimed at fighting climate change.

Kabuki Theatre

Government largesse is concentrated on the environment and national defence with a minor in the addressing of social inequities. The periodic tug of war between Democrats and Republicans over the federal budget has become akin to a kabuki show and no longer carries any practical implications as both parties show little if any fiscal restraint and are eager to expand the state – albeit in different directions.

US tax historian Joseph Thorndike dryly observed that the current mood of the nation is not that dissimilar from the one that sparked Franklin Roosevelt’s New Deal or Lyndon Johnson’s Great Society.

For now, few worry about debt and deficits apart from a small coterie of die-hard fiscal puritans. How to pay for the heightened expenditure is not really part of any mainstream agenda. Given the robust performance of the US economy, it is not unreasonable to suppose that future GDP growth will outpace spending levels as it indeed has done in the past.

Moreover, the US is a rather special case inasmuch as its government is the sole issuer of the world’s reserve currency which, by necessity, implies sustaining a large current account deficit. In 1959, Belgium-born Yale professor Robert Griffin pointed this out during a session of the US Congress’ Joint Economic Committee. He concluded that the dollar could only survive as global reserve currency if its issuer is willing to run ever-growing deficits.

Exorbitant Privilege

The Griffin Dilemma surmises an inherent conflict of interest between domestic and international monetary policy objectives for a country whose national currency is used globally. Such a country must be willing to supply the world with its currency – by, for example, running a trade deficit – which inevitably leads to a skewed current account.

Called an “exorbitant privilege” by an envious Charles de Gaulle during a rant in 1965, the dollar’s status as reserve currency bestows a great many benefits on the US. Foremost amongst them, seigniorage (literally: the lord’s right to mint legal tender) or the gain of tangible resources that occurs when a country’s currency is acquired and held abroad. A much used derivative of the original is monetary seigniorage where sovereign-issued bonds are exchanged for freshly-printed tender, allowing the issuer to borrow without the need for repayment.

Domestic economic policy also benefits from the ability to finance deficits, service debts, and settle trades in one’s own currency – one of the many reasons for the emergence of the euro. Conversely and perhaps also perversely, the (mainly) German and Dutch insistence on running large current account surpluses as an outward sign of both fiscal rectitude and health, precludes the euro from becoming an alternative global reserve currency.

Additionally, the euro suffers from a built-in antigrowth bias that the dollar lacks. The eurozone’s provisions for, and restrictions on, monetary and fiscal policy compound other structural weaknesses such as an ageing population, rigid labour market, and strict regulation not always friendly to business.

The mantra repeated almost ad nauseam by US investment guru Warren Buffett – Never Bet Against America – remains true as ever: “In its brief existence […] there has been no incubator for unleashing human potential like America.” This sage conclusion holds a lesson to challengers: Underestimate US economic resilience and might at your peril.

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