Six Reasons the U.S. Will DominateA. Gary Shilling
Aug. 28 (Bloomberg) -- Beyond the bright prospects for the return to rapid U.S. economic growth and the resulting decline in federal debt as a percentage of gross domestic product, the U.S. will enjoy six major long-term advantages over its competitors.
Demographics: The current immigration debate in Washington isn’t about whether to throw out undocumented immigrants, but about how to give them legal status and a path to citizenship, and attract highly educated and skilled newcomers. Only a few other countries such as Canada and Australia are as open as the U.S.
Immigrants tend to be younger than the U.S. average and have higher birth rates, especially Hispanics. The fertility rate of 2.06 is close to the 2.1 births per child-bearing woman needed to sustain the population in the long run. In contrast, the fertility rates in all European countries and even Canada and Australia are below the replacement level. Japan’s rate, the lowest at 1.39, is compounded by the total lack of immigration. China’s fertility rate is just 1.55 because of the one child-per-couple policy, which the government is reconsidering.
Most immigrants have jobs, either those requiring high skills and education or those at low levels that natives shun. They’re generally not old enough to draw Social Security and Medicare benefits, but they contribute payroll taxes that help provide benefits for retiring baby boomers.
Because of aging populations in all major countries, immigrants are needed to keep the 15-to-64 working-age population from falling faster as a percentage of the total. By 2040, the U.S. ratio, 60.3 percent, is projected to be the highest of any developed country. China’s ratio is falling rapidly, from 72.4 percent in 2010, to an estimated 63.1 percent in 2040, due to its one-child policy. New labor force entrants age 15-24 are declining in number.
More Workers: As I pointed out in July, even if the 2 million people who left the labor force in the last two decades for nondemographic reasons such as a recession never re-enter because their skills are rusty or they prefer disability benefits and food stamps, we should experience robust real GDP annual growth of about 3.5 percent once deleveraging is completed. With 2.5 percent growth in productivity a year, employment would need to rise 1 percent annually. That’s about 1.44 million more workers a year.
The Bureau of Labor Statistics estimates that the working-age population will rise about 2.2 million a year. With the current participation rate of 63.3 percent, that would produce 1.4 million new job-seekers, about the same as new labor demand, assuming these new entrants’ skills match those that are needed. And a declining unemployment rate would add more to the number of employed.
Entrepreneurial Spirit: Another big advantage for the U.S. is the nation’s entrepreneurial spirit, which was observed by Alexis de Tocqueville in the 1830s and is still going strong. Despite perceptions of an erosion of economic vigor, the U.S. still seems way ahead of whatever country is in second place.
The advantage starts with the education system, which has many faults but also encourages free inquiry and challenges to accepted doctrine.
Foreigners attending U.S. colleges and universities are often shocked when they are encouraged to question professors. Japan discourages individuality. “The nail that sticks up must be hammered down,” is a common expression. Chinese education involves rote learning with little emphasis on student inquiry. It is hard to see how China will grow after the labor force is fully employed and has fully adapted to Western technology.
Furthermore, China’s economy remains heavily tied to bureaucratic, inefficient state-owned enterprises that produce about a quarter of GDP and employ about the same share of the labor force. The direct government subsidies to about 90 percent of the companies listed on China’s stock exchanges, most of them state-owned enterprises, increased 23 percent last year, to $13.8 billion.
Labor Flexibility: In the U.S., labor unions are becoming a thing of the past, especially in the private sector, and increasingly, among state and local employees. Partly as a result, U.S. wages are flexible on the down side. Surveys show that of the people out of work for six months who find new jobs, a third work for less money than previously.
Working for less is almost unheard of in Europe and lifetime employment is the rule in Japan. As China strives to shift from an export-led to a domestically driven economy, it is increasing minimum wages about 25 percent a year to provide more consumer spending power. But higher wages erode China’s global competitiveness and production is shifting to cheaper locales such as Vietnam, Bangladesh and Pakistan.
The auto industry is a case in point. After the recession drove General Motors Co. and Chrysler Group LLC into bankruptcy, U.S. automakers introduced $14 an hour wages for new employees, half the rate of veterans. In 2011, the average pay of U.S. autoworkers including benefits was $38 an hour, compared with $66 in Germany and $37 in Japan. U.S. pay has increased $3 an hour since 2007, $12 in Japan and $14 in Germany. As a result, vehicles from U.S. auto plants are beginning to be shipped abroad in numbers.
Declining Need For Foreign Financing: The current-account deficit measures the extent that U.S. investment exceeds the combined saving of consumers, business and government. With consumer saving low and large federal deficits, the current-account deficit has been sizable, about $400 billion at annual rates. This deficit is financed by increases in foreigners’ holdings of assets such as stocks, Treasuries and real estate, as they recycle dollars back to dollar-denominated investments.
I don’t share the fears that the Chinese or others will dump their huge holdings of Treasuries and other dollar-denominated securities. If they started selling, the value of their remaining Treasuries would collapse and a global recession would follow as interest rates skyrocketed. China and other export-led economies would be the big losers in the resulting buyers’ market.
But accidents can happen, so the U.S.’s global status will improve if the trade and current-account deficits shrink. That’s likely to happen if my forecast of a rise in the household saving rate to more than 10 percent unfolds. Americans have little choice but to save more. They no longer trust their stock portfolios to substitute for saving out of current income to educate their kids and finance early retirement. The collapse in house prices after heavy cash-out refinancing of mortgages and home equity loans has removed much of the equity they earlier used to finance oversize spending. The postwar babies have been notoriously poor savers and desperately need to keep working and save much more for their old age.
Effects on Imports: As the saving rate rises, spending will grow more slowly, the reverse of what occurred when the saving rate slid from 12 percent in the early 1980s to 1 percent now. That drove consumer spending growth that was about a half-percentage point a year faster than after-tax income, fueling the domestic economy. It also helped export-driven economies in Asia and elsewhere. For every 1 percent increase in U.S. consumer spending, U.S. imports rise 2.8 percent on average.
A rising consumer saving rate will hold back the growth in spending on everything, including imports. This will curtail the exports of economies such as China, whose leaders are working to shift to domestic-driven growth. In any event, the resulting shrinking of the U.S. trade and current-account deficits will put fewer dollars in foreign hands that will be recycled into U.S. investments. And fewer will be needed as more dollars saved by American consumers end up financing the federal deficits.
Strong Dollar: A rising currency is another long-run advantage for the U.S. in the global arena, reflecting economic, political and financial strength, as well as the dollar’s continuing status as the world’s primary reserve and trading currency.
Since ancient times, a dominant global currency has had six characteristics. The dollar will probably be the leader in at least five of the six for many years.
1. Rapid growth in the economy and GDP per capita, promoted by robust productivity growth. In the last decade, the U.S. has excelled in productivity gains among developed areas. The emphasis on entrepreneurial activity and superiority in new technologies suggest this lead will persist.
2. A large economy, probably the world’s biggest. With rapid productivity growth and relatively open immigration, the U.S. will probably continue in this role.
3. Deep and broad financial markets. Money flows where the action is, especially today when it can be transferred anywhere in a split second. Attracting those funds requires not only a powerful and large economy but also deep and broad markets in which to invest. Today, the U.S. Treasury market dwarfs all others in size and, in the eyes of investors, in safety.
4. Free and open financial markets and economy. Foreign investors are willing to hold a country’s currency if they are certain they can invest it in financial or tangible assets in that country with few restrictions --- and withdraw it. The U.S. is essentially open, which is necessary if the Chinese and Japanese are to continue to recycle their current-account surpluses with the U.S. by buying Treasuries and other U.S. investments. Free and open markets persist in the U.S., but Europe has been affected by sovereign debt crisis. China will probably continue to exert tight control over its financial markets and currency, which is anathema to creating an international trading and reserve currency.
5. Lack of substitutes. A primary global currency has no close competitors. Today, the rigidly controlled Chinese economy and financial markets eliminate the yuan as a rival to the dollar for the foreseeable future. Export-dependent and inward-looking Japan doesn’t want the yen to be a primary global currency. And the euro-area financial crisis and recession eliminate the euro for at least a number of years.
6. Credibility of the currency. Money is fleet-footed, congenitally cautious and runs from uncertainty. The credibility of the dollar has been strained by its overall decline since 1985, but remains substantial. On balance, the credibility factor is the only one of my six criteria for a primary international trading and reserve currency where the dollar is at all questionable in the years ahead. Due to the U.S.’s superior prospective productivity growth, huge economic size, and deep and broad as well as open and free markets, the dollar should remain the unchallenged winner. And the credibility issue will probably continue to be noncrucial because there will probably be no global alternative for many years to come.
Energy Independence: The U.S. is on track to achieve self-sufficiency in energy. To the dismay of peak oil devotees, horizontal drilling and hydraulic-fracturing technology have unlocked oceans of natural gas and petroleum. Combined with the oil sands in Canada and other nonconventional sources of energy -- along with improved fuel efficiency in automobiles and other conservation measures -- the U.S. could be relatively free from foreign oil dependence by 2020.
Cheap natural gas is a competitive advantage for U.S. producers, especially of petrochemicals and nitrogen fertilizers.
Surging U.S. oil and gas production has created a global energy supply cushion that allows the U.S. to deal with Iran and other trouble spots without causing debilitating surges in oil prices.
(Gary Shilling is a Bloomberg View columnist and president of A. Gary Shilling & Co. He is the author of “The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation.” This is the last in a three-part series. Read Part 1 and Part 2.)
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