'Angst' Shouldn't Even Begin to Describe the US' Current Economic Sentiment (Part 2 of 2)

This past week, an article written for The Economist, entitled Angst in the United States: What’s wrong with America’s economy?, suggested that Americans are being far too pessimistic, and that there’s reason to believe in a “rosier outlook for America’s economy.” On most of the points addressed in the article, I’d beg to differ. The following is part two of two-part explanation as to why.

Continued from part one

The Actual Entrepreneur’s Dilemma

Either way, let’s decide to ignore that matter and move on. The writer aptly points out that “corporate taxation is a mess and deters domestic investment,” but then offers no solution related to competitiveness on where to instead focus improvement efforts.

Instead, the writer launches into a discussion of public finances, which does make sense as the US’ central economic concern, but in no way debunks the relevance of competitiveness. To say that “when China innovates Americans benefit,” is to oversimplify the way both economies work.

For example, a common refrain in China is “C2C,” meaning “Copy to China.” Many Chinese entrepreneurs have made great careers in finding ideas elsewhere, usually a tech-oriented, US-based idea – preferentially those blocked by the Great Firewall such as Facebook or Twitter – code it up to be displayed in Chinese and appreciated by a Chinese audience, and reap the benefits of having a billion-plus potential first-time users.

Right now, competitiveness in China, especially entrepreneurship, is a game that is rigged – at least domestically – in its favor, and often at the expense of US innovation.

If the US is able to renew its fading preeminence in entrepreneurship the country will benefit specifically in terms of competitiveness. In addition to the brain drain of academics and entrepreneurs discussed earlier, too much of the nation’s wealth has been transferred from intrepid small business owners to other, less productive sectors, over the past quarter century.

Entrepreneurs try new things and either fail quickly, or end up providing goods demanded by the economy, create “more than half of all new jobs”, and contribute real growth through actual production. This is as opposed to less entrepreneurial sectors, including certain global corporations, primarily in financial services, and the public sector.

The Wall Street and government power centers have collected their share of the nation’s wealth through what are normal and legal mechanisms, such as lobbying and legislation, that, beneficial or not, are part of the US business environment. However, the same process that has added to their less-productive increases in wealth has also eroded the level playing field which entrepreneurs require in order to take risks.

Tax, legal, regulatory, and healthcare burdens have diminished the entrepreneurial will to start new businesses in the US, especially as opposed to starting businesses in emerging economies. As wrong-headed as some laws can be in emerging economies, many are not. Add to that fact that a stunning array are rarely enforced, and it stands to reason that countries like China have become breeding grounds for new ventures in what is still virtually untapped and verdant economic soil.

The Labor Market Quagmire

The other “underlying problem” the writer directly addresses is the labor market, which is undoubtedly one of the nation’s most serious ills. While the reasons for unemployment the writer brings up are accurate, they do not provide a complete picture.

In fact, the least promising solution to joblessness is exactly the writer’s route of choice, that “America needs to get its macro-medicine right, in particular by committing itself to medium-term fiscal and monetary stability without excessive short-term tightening.”

Essentially, that perspective is a vote in favor of the same kind of quantitative easing programs that have rocketed the equity markets higher at the expense of a consistently weakening US dollar.

Unfortunately, it’s exactly that same “macro-medicine” that is causing food price increases, and demanding an increasing share of the family budget from both the government-supported unemployed and the stagnant-salaried working poor.

This decrementing standard of living is hitting low-income workers and fixed-income retirees especially hard. To continue present monetary “macro-medicine” in light of its deleterious side effects is hardly a quick-fix solution for the US that credibly lends itself to being summed up in a sentence.

Finally Addressing the Real Issue: US Debt and Deficit

From the outset, the article has a confusing structure. The writer indicates that “three failings stand out,” and then appears to only describe two, at least in terms of subtitles: competitiveness and jobless growth. We’ll take a leap of faith, and guess that the third is intended to be US public finances. The writer describes the matter as “high” on the “the country’s real to-do list” and worth “sorting out,” and so deems it at least somewhat in need of discussion.

To squeeze the US’ crushing debt in as a side topic seems to undermine the needed confrontation of what is the single most important challenge facing the US. Why is that so? To begin, the writer doesn’t mention that according to the International Monetary Fund, US government debt is on pace to overtake GDP by 2012, which is next year.

Nor does the writer mention the fact that Standard & Poor’s recently downgraded the credit rating outlook for US government debt to negative for the first time ever since it began rating US debt about 70 years ago.

Of course, the outlook downgrade came after China-based Dagong Global Credit Rating Co. already downgraded the US’ actual sovereign credit rating to AA, also with a negative outlook. Certainly, Dagong Global does not provide a Nationally Recognized Statistical Rating Organization (NRSRO)-accepted opinion, but it’s already a very public one, and it was likely the catalyst that lit a fire under S&P to finally admit something is amiss with regard to US fiscal health.

Lastly, unlike many other nations, the US ratio of debt to GDP is calculated to exclude state and local government debt, a discrepancy some analysts estimate would tack another $1 trillion onto the national debt. If that figure is in the right ballpark, it would mean that the US is already in Greece-like territory when it comes to nearing default. Put simply, the scale of the debt and deficit problem is far beyond what the writer chooses to seriously consider.

The US economy is not in the midst of just one more quirky moment in the story of a comeback kid. The US economy is in a life and death struggle – it’s a nation that in the medium term is teetering on the brink of default – and it could potentially drag the world’s reserve currency, the US dollar, down alongside with it.

The situation is not necessarily hopeless, and there’s much that could still be done to restore the US economy. However, to blithely suggest that as of now a “rosier outlook” for the US is possible, or that the nation may already be on “the brink of a revival,” is simply counterproductive.

Today, there is cause for far more than angst in the United States.


Rocky Vega,
The Daily Reckoning