Peter Coy January 29, 2015
The global elites who congregate each year in Davos, Switzerland, are hardly representative of humanity, but you can still learn a lot at the annual conclave about who’s up and who’s down in the world. One of the biggest take-aways of the 2015 meeting was this: America is back. The world’s movers, shakers, and opinion shapers have stopped resenting and ridiculing the U.S. for its leading role in the financial crisis of 2008-09. “When you look around the globe, it’s just very hard to find a lot of big, bright lights on the economic horizon” except for the “amazing” U.S., says Michael Sabia, chief executive officer of the Caisse de Dépôt et Placement du Québec. He’s recently put his $173 billion pension fund’s money where his mouth is, buying a Manhattan skyscraper and participating in the purchase of Phoenix-based PetSmart. The Chinese have changed their tune a bit, too. Instead of restating the desire for what Beijing’s leadership calls “a new type of great power relationship,” Premier Li Keqiang told an audience in Davos, “China has no intention to compete with other countries for supremacy.”
For Americans who’ve grown accustomed to laments about the country’s decline, the turnaround can be disorienting. After a slow and uninspiring recovery from the depths of the recession, it’s still difficult to embrace the idea that the U.S. economy is booming again—which is one reason President Obama devoted much of his State of the Union address to extolling it. “Since 2010,” Obama said, “America has put more people back to work than Europe, Japan, and all advanced economies combined.”
The U.S. economy has generated jobs at a pace of a quarter million per month over the past year. The unemployment rate—5.6 percent, the lowest since 2008—is low enough that the Federal Reserve has stopped buying bonds and is making noises about lifting short-term rates this year, even as the European Central Bank has finally gotten around to a bond-buying program of its own. (On Jan. 28 the Fed reiterated its promise to be patient about raising rates.) With tax revenue rising, the federal budget deficit has shrunk by two-thirds. Against the foundering euro, the dollar has surpassed an 11-year high.
Of the 10 most valuable companies in the world, eight are based in the U.S. The shale oil revolution, which was born and remains centered in the U.S., has broken the back of the Organization of the Petroleum Exporting Countries, halving the world price of crude since last summer. And the U.S. remains a cultural powerhouse. “You walk down the street in Davos, and they’re playing Unbroken and Boyhood,” notes Vaclav Smil, a Czech-born professor emeritus at the University of Manitoba. China may be growing faster, but it lacks the magnetism of the U.S., he adds. “The U.S. is still the indispensable country. Who wants a green card to go to China?”
Does all this mean the U.S. is really, truly back? Yes and no. The recent performance is impressive when compared against much of the rest of the world. But this isn’t the Olympics, and the global economy isn’t a zero-sum game in which a win for one country is necessarily a loss for another. If the U.S. hopes to sustain its growth, let alone improve on it, then the world’s other economies need to grow, too, so they can buy more of what America makes. Meanwhile, the U.S. itself still has serious long-term challenges. The technology and globalization that are enriching some Americans are impoverishing others. It’s not enough to do better than the rest; the U.S. needs to find a way to create shared prosperity by equipping all Americans to thrive. If it manages to do that—no easy task—it can once again become an engine of growth that will benefit the world.
The secrets of America’s success to date are flexibility and the willingness to experiment and learn from mistakes. Allowing a debt-fueled housing bubble to inflate was a huge mistake for which Democrats and Republicans alike share responsibility. When it popped, the U.S. suffered its deepest downturn since the 1930s. Creditors panicked, and lending froze. In the last quarter of 2008 the gross domestic product shrank at a breathtaking annual rate of 8.2 percent.
But the oft-maligned U.S. government got the big things mostly right. President Bush’s Treasury secretary, Henry Paulson, engineered a takeover of housing finance giants Fannie Mae and Freddie Mac, which kept some credit flowing to home buyers. Paulson also got Congress to authorize $700 billion for the Troubled Asset Relief Program, arm-twisted banks to accept injections of capital to strengthen their lending power and arranged the politically unpopular rescue of American International Group, the world’s largest insurer at the time, whose failure would have shocked the financial world even more than the Lehman Brothers collapse.
President Obama and his Treasury secretary, Timothy Geithner, took even more dramatic actions as the crisis deepened in 2009—getting Congress to pass a $787 billion stimulus package and saving General Motors and Chrysler from being dismembered in bankruptcy court. The Federal Reserve under Chairman Ben Bernanke devised financing programs on the fly, stepping in as the conduit between investors and savers when the financial system went catatonic.
America’s lesson for the rest of the world is that serious economic problems “never get resolved without a real and meaningful discontinuity” in policy, according to Lawrence Summers, Obama’s first National Economic Council director. Crisis resolution fails, Summers said in Davos, “where it’s a grinding, consensual, one more step along the road. Here I’m talking about Europe.”
That’s not to say that all of America’s economic ills have been cured. That 5.6 percent unemployment rate in December? Nice, but the supply of labor is tightening mostly because so many people have stopped looking for work. The share of the population in the labor force fell by three percentage points during and after the financial crisis and hasn’t rebounded since. Bond yields—i.e., interest rates—are falling again. A decline in the price of money signals a lack of demand for loans, which in turn indicates a loss of confidence by business and investors in future growth. The yield on 10-year Treasury bonds, which briefly got to 3 percent a year ago, is back down to 1.8 percent, close to historic lows.
Stock prices have little headroom left, says Scott Minerd, global chief investment officer at Guggenheim Partners. And the strong dollar will make American goods and services less competitive. “Despite healthy balance sheets, corporations are hesitant to invest in equipment, structures, or full-time, high-wage employees,” Sterne Agee Chief Economist Lindsey Piegza wrote in a client note on Jan. 27, pointing to a drop in December orders for durable goods.
Although a cyclical recovery remains under way, some economists fear the long-term trend is negative. According to data gathered by Northwestern University economist Robert Gordon, the “total factor” productivity of the U.S. economy grew around 2 percent a year from 1920 through 1970 but only 0.7 percent a year from 1970 through 2014. Total factor productivity is what creates prosperity—it’s the extra output that the economy produces even without additional labor or capital. If Gordon’s calculations are right, it’s been doubling at a rate of every 90 years since the start of the 1970s vs. every 35 years in the earlier era. “I’ve been feeling gloomy about the long-term U.S. outlook for several years now,” Edmund Phelps, a Nobel prize-winning economist from Columbia University, said during a break in the action in Davos. “Lately I see that some voices have joined mine.”
The rich aren’t feeling the pain because they’ve managed to capture a bigger share of a pie that’s not growing. The pain is felt in the middle and the bottom, where wages are stagnating and living standards have eroded. In December the median annual U.S. household income, at $54,417, was 4.4 percent lower than the inflation-adjusted figure for January 2000, according to Sentier Research. That’s not progress. It’s regress. “Anemic growth is nothing to brag about,” Darrell Issa, the Republican congressman from California, said in a Davos interview.
The U.S. is merely winning the Least Ugly Contest, says Adam Posen, president of the Peterson Institute for International Economics. The results of Greece’s elections are the latest sign that Europe’s long slump is pushing its political system to the breaking point. The Germans are generous only with advice, namely: Tighten your belts, and loosen your labor markets. Greece needs real assistance from Europe’s stronger economies but isn’t getting it. As Summers points out, if New Jersey used the dollar but wasn’t in a fiscal union with the other 49 states—meaning no inflows of federal aid in hard times—it would be in the same predicament as Greece. “What we would get is a New Jersey that would get into recessions and not get out of them,” he says.
Japan, the first nation to get stuck in a slump more than two decades ago, has managed to generate a little bit of long-sought inflation lately, but not the growth to go with it. GDP shrank 1.3 percent in the past year, and Japanese Prime Minister Shinzo Abe’s “third arrow” of reform seems to have gotten lost in the bureaucratic underbrush. Canada, South Korea, India, and Britain are expanding at a decent clip, but Brazil’s economy shrank 0.2 percent. On Jan. 26, Standard & Poor’s cut the Russian government’s credit rating to junk status. China’s leaders, meanwhile, are striving for reform and entrepreneurship, but the authoritarian government could squelch innovation.
The main catalyst for long-term prosperity, at home and abroad, has to be economic growth generated by new ideas. Northwestern’s Gordon argues that the Internet and related digital technologies aren’t nearly as fruitful as the inventions of past generations such as the telephone, electrification, and the jet engine—and that’s why productivity growth and prosperity have lagged. His judgment may be premature. Nanotechnology, genomics, quantum computing, and artificial intelligence have enormous unexploited potential, as does the expansion of the Internet. “The power of the Net becomes exponentially greater the more devices you connect to it”—and the number of devices being connected is exploding, says Chuck Robbins, senior vice president for worldwide field operations at Cisco Systems.
Which leads us back to the special role of the U.S. in the global economy. Despite its undeniable problems, the U.S. excels at invention and reinvention. Some of it comes from basic science, and some comes from the machinery of development and commercialization of which Silicon Valley is the world’s exemplar. The bow-tie-wearing president of Estonia, Toomas Hendrik Ilves, told a story in Davos about a young Estonian inventor he invited to tea in the summer of 2011 who told him he was moving to the U.S. in two weeks to make his fortune. His name is Hardi Meybaum, and he co-founded a computer-aided-design company called GrabCAD. Last fall the now-Boston-based company was sold for $100 million. Said Ilves: “That never would have happened in Europe.”
Vishal Sikka is the CEO of Infosys, the outsourcing giant that’s based in Bangalore, India. Yet Sikka calls Palo Alto, Calif., home. “The U.S. is always at the forefront of embracing new ways of doing things,” he says. “For example, Microsoft just announced HoloLens [goggles that project 3D holograms]. Most likely you’ll see earlier adoption of that in the U.S.” Sikka says many countries, including his native India, have people who excel at problem-solving. “The difference is that innovation is as much about finding problems as it is about solving problems.” Americans have a “dissatisfaction with the way things are” that Sikka says makes them good at finding problems to apply themselves to. “Every time I land in SFO,” says Sikka, “it’s beautiful.”
As much as the U.S. needs the rest of the world to be prosperous, the rest of the world needs the U.S. to push the technological frontier outward for the good of all. It’s far from the only country working at the leading edge, but as the world’s largest economy, it still sets the pace. Is America really back? Let’s hope so—but not forget how much is still left to do.
—With Matthew Campbell
(Corrects seventh and eighth paragraphs to attribute capital injections in banks to Paulson rather than Geithner.)