Beyond the bright prospects for the return to rapid economic growth and the resulting decline in federal debt as a percentage of gross domestic product, the US 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 attract highly educated and skilled newcomers. Only a few other countries such as Canada and Australia are as open as the US.

Because of ageing 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 US ratio, 60.3 per cent, is projected to be the highest of any developed country. China’s ratio is falling rapidly, from 72.4 per cent in 2010, to an estimated 63.1 per cent in 2040, due to its one-child policy. New labour force entrants aged 15-24 are declining in number.

More workers

Even if the 2 million people who left the labour force in the last two decades for non-demographic reasons such as recession never re-enter, we should experience robust real GDP annual growth of about 3.5 per cent once de-leveraging is completed. With 2.5 per cent growth in productivity a year, employment would need to rise 1 per cent annually. That’s about 1.44 million more workers a year.

The Bureau of Labour Statistics estimates that the working-age population will rise about 2.2 million a year. With the current participation rate of 63.3 per cent, that would produce 1.4 million new job-seekers, about the same as new labour 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 US is the nation’s entrepreneurial spirit, which was observed by Alexis de Tocqueville in the 1830s and is still going strong.

The advantage starts with the education system, which has many faults but also encourages free inquiry. Foreigners attending US colleges and universities are often shocked when they are encouraged to question. 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 labour force is fully employed and has adapted to western technology.

Labour flexibility

In the US, labour unions are becoming a thing of the past, especially in the private sector, and increasingly, among state and local employees. Partly as a result, US wages are flexible on the downside. Surveys show that of the people out of work for six months who find new jobs, a third work for less money than previously.

After the recession drove General Motors Co. and Chrysler Group LLC into bankruptcy, US automakers introduced $14 an hour wages for new employees, half the rate of veterans. In 2011, the average pay of US autoworkers including benefits was $38 an hour, compared with $66 in Germany and $37 in Japan. US pay has increased $3 an hour since 2007, $12 in Japan and $14 in Germany. As a result, vehicles from US auto plants are beginning to be shipped abroad in numbers.

Foreign Financing

The current account deficit measures the extent that US 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, 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.

As the saving rate rises, spending will grow more slowly, the reverse of what occurred when the saving rate slid from 12 per cent in the early 1980s to 1 per cent now. It helped export-driven economies in Asia and elsewhere. For every 1 per cent increase in US consumer spending, US imports rise 2.8 per cent 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.

Strong dollar

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 due to:

Rapid growth in the economy and GDP per capita; a large economy, probably the world’s biggest; deep and broad financial markets; free and open financial markets and economy; lack of substitutes; and credibility of the currency. The US 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 non-conventional sources of energy — along with improved fuel efficiency in automobiles and other conservation measures — the US could be relatively free from foreign oil dependence by 2020.

Bloomberg

The US seems way ahead of whatever country is in second place; the advantage starts with the education system.

Published on September 1, 2013