Originally Published 2011-05-16 00:00:00 Published on May 16, 2011
US consumer spending and consumer confidence have to pick up, but this can happen only if people have jobs and regular incomes, and the private sector which runs 80 per cent of the US economy starts hiring more people. Also the manufacturing growth will have to pick up and the dependence on Chinese goods needs to be reduced.
US failure to create enough jobs a major worry
With the elimination of Osama bin Laden, President Obama's rating has gone up by 11 points to 57 per cent. But his rating as a solver of America's economic problems has fallen to 34 per cent - down by 3 points. What are the main problems on the economic front that the US is facing?

With the GDP growing at 1.8 per cent in the first quarter of 2011, down from 3.5 per cent in the last quarter, and the $14 trillion federal debt which is not showing any signs of abatement, what is going to be the state of the economy in the next one year? To many top analysts, the main problem with the US is that it is not able to create more jobs, and whatever jobs have been created are not as much as expected. Unemployment is running high at 9 per cent of the labour force, which is a big number as compared to India. To revive the economy, interest rates have been kept low and recently the Federal Reserve's Governor Ben Bernanke announced that there won't be any changes in the interest rates which gave assurance to industry, and stock prices went up because people were going to be encouraged to invest in shares. The Fed has managed to keep interest rates near zero.

The Obama administration has tried its best to revive the economy and went for Quantitative Easing (QE) in which the Federal Reserve bought about $1 trillion in long-term treasury bonds in 2009. Thus, a huge amount of freshly printed dollars were released in the US economy to increase consumer spending and to revive bank lending to small and medium businesses which had been reduced since the financial crisis began. The Federal Reserve bought government bonds worth $600 billion again in 2010 and now QE2 is going to be over soon. From such a heavy injection of dollars, quite a substantial amount went to the emerging market economies to look for higher returns and resulted in heavy FII inflows into those countries. Even India got its share which helped in stoking inflation. The RBI and many other countries' (especially China) central banks have been intervening in the currency markets not to let their currency's value rise against the dollar or else it would hurt their exports.

Thus, the value of the dollar has been fluctuating and when it recently fell against major currencies, the price of gold and silver rose rapidly because people became shaky about holding dollars as a reserve asset. The cheaper dollar, however, is going to boost US exports and the US trade deficit, which has been ballooning, should come down. After Osama, the dollar has risen and oil prices have fallen, and silver and gold prices have also taken a hit. There are several other problems in the American economy like the double dip in the real estate market. Recently after recovering, the real estate market in the US is facing a low point and house prices are falling. Unless the mortgage loans are renegotiated, many Americans may lose their homes like in 2008.

The fiscal deficit is too high at 10 per cent of the GDP and according to conservative economists who are advising the US government, the fiscal deficit problem is the main problem. The reasons behind the huge fiscal deficit are tax cuts during the Bush administration and the Iraq and Afghan wars which have drained the US government of $1.1 trillion. But Nobel Laureate Paul Krugman does not agree that controlling the fiscal deficit is all that urgent and thinks that the main problem is unemployment and for which the government will have to spend on education, skill training, etc, so that jobless youth become employable. To earn more revenue the government will have to raise taxes, but increasing taxes is heavily opposed by the Republicans.

So, where is the money going to come from for Mr Obama's ambitious medicare programme and military spending? Quite clearly the government is broke and the revival of the economy is lukewarm, if not slow.

One of the reasons for the slow growth of jobs is the slowdown of the service sector. Manufacturing growth has also slowed down. Unless these important sectors grow faster there cannot be absorption of the unemployed into the economy.

The US has borrowed heavily from the world in the past because everyone wanted to hold dollar assets. China alone holds $3 trillion worth of dollar assets. If only it tries to unload them in the market, then the value of the dollar will sink. The debt accumulation of the US is alarming because along with the sovereign debt crisis in the EU with the latest candidate for a bailout package being Portugal, there is fear that there could be another financial crisis following a major default by Greece that would usher in another recession. If there are inflationary fears and the interest rates have to be raised, then the US can sink under the heavy interest burden. Yet people around the world have for long believed in the US being the number one nation in technology, productivity growth, innovative ideas and resilience to economic calamities. The US could and probably will revive if it could solve the problem of unemployment and control the lurking inflation and maintain a low interest rate regime. It has to remain in the cutting edge in technology and recently President Obama said that he did not want IT innovations to come only out of India and China, but the fact remains that the US education system remains moulded in the past. The US once had the highest proportion of young adults with post-secondary degrees in the world. Today its rank is 12th. People have been getting hurt with high oil prices and food prices, specially the poor. The US now imports 60 per cent of its oil needs and is affected when international oil prices go up. The US has the third worst poverty rate among the OECD group of developed countries.

US manufacturing growth will have to pick up and its dependence on Chinese goods will have to be reduced to correct its balance of payment deficit. The manufacturing sector in the US has shrunk from contributing 28 per cent to the output in 1959 to 11.5 per cent in 2008. Consumer spending and consumer confidence have to pick up but can happen if people have jobs and regular incomes, and the private sector which runs 80 per cent of the US economy starts hiring more people. Moreover, the confidence to spend will be shaken if there is a terrorist attack in the US - which 69 per cent of Americans fear will take place within a few months of Bin Laden's death.

(The writer is a Senior Fellow at Observer Researve Foundation)

Courtesy: The Tribune
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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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