An employee works on solar panels at the QCells solar energy manufacturing plant in Dalton, Georgia, on March 2. The US industrial base has suffered from decades of decline and underinvestment, putting the country’s future economic stability at risk. Photo: Reuters
Opinion
Macroscope
by David Brown
Macroscope
by David Brown
Reversing decades of US industrial decline needs domestic investment, more effective fiscal policies
Laissez-faire policies are hampering US growth, and the government needs to lead from the front with better incentives for investment-driven rather than consumer-led growth
Without it, the US economy will continue to stagnate and be increasingly reliant on imports to bridge its domestic demand gap
The United States needs to mend its ways and get back to basics on growth. There are suggestions that a US recession could be on the way, a self-fulfilling prophecy if the Federal Reserve has its way and comes down even harder on inflation with higher-than-expected interest rate increases in the next few months.
US stock markets are already on edge after last week’s collapse of Silicon Valley Bank. Consumer confidence remains fragile and inflation-busting interest rate rises could be the last straw. The problem is that the US economy is too lopsided and geared towards the consumer. A new model for recovery is needed, based on stronger investment in capital-intensive, productivity-driven growth.
US President Joe Biden has kicked off the process hoping for a green, investment-led revival, and not a minute too soon. His US$370 billion Inflation Reduction Act package of protectionism, state aid and subsidies is designed to galvanise US business in the fight against climate change, but more government commitment will be needed to spark a wider supply-side renaissance for US industry. More business investment is needed to improve the nation’s economic health and growth potential.
The US is taking in too much of the world’s savings simply to plug its yawning trade and budget deficits. These savings would be better employed building up the nation’s productive capacity for stronger and sustainable, non-inflationary growth longer term.
Laissez-faire policies are leaving US growth coming up short, and the government needs to lead from the front with better incentives for investment-driven rather than consumer-led growth. Without it, the economy will continue to stagnate and be increasingly reliant on imports to bridge its domestic demand gap.
07:32
BIS chief Carstens: High interest rates to stay even if a US recession might be 'avoided' in 2023
BIS chief Carstens: High interest rates to stay even if a US recession might be 'avoided' in 2023
The US economy stands at a policy watershed. The Fed is heavily conflicted on interest rates, torn between the need for tougher monetary policy to fight inflation or possibly having to cut rates again to deal with possible contagion effects from the collapse of Silicon Valley Bank, the country’s 16th-largest bank.
Recent sabre-rattling over interest rates is hardly helping financial stability, business intentions or consumer confidence. The Silicon Valley Bank crisis could be another Lehman Brothers moment, triggering new contagion in global markets, something the Fed would be wise to avoid.
Risking a recession with punitive rate rises to flatten inflation is not an option when consumer confidence is still relatively low in the wake of the Covid-19 crisis and when financial uncertainty is taking root again.
On the other hand, using lower interest rates to ease borrowing costs and encourage consumer confidence is not good news for the economy in the long run with consumer demand accounting for around 70 per cent of US gross domestic product. The trouble is that so much demand leaks abroad in the shape of higher imports, a bigger trade deficit and extra debt.
This is where more effective fiscal policies can plug the gaps. Using appropriate tax breaks and incentives to encourage private-sector investment, more resources can be redirected into the areas of the economy which have suffered for decades under the impact of the strong dollar, globalisation and industrial decay.
Where US manufacturing has migrated overseas to lower-cost centres of production, typically in Asia, there is a clear case for greater government intervention where market forces have failed to redress the problem of long-term US economic decline.
Biden’s ambitious Inflation Reduction Act aims to put things right, but a much wider-ranging “New Deal” of economic regeneration of the nation’s ailing infrastructure is needed, too. That is going to cost more money and implies higher taxes to avoid increasing the budget deficit or overloading the government’s colossal debt pile any further.
This will require careful fine-tuning of US fiscal policy, with more progressive taxes directed at the billionaires and super-rich who have thrived from the post-2008 monetary super-stimulus and all the liquidity it has generated for wealth creation in the past 15 years. Windfall taxes must be levied on companies that have seen profits surge through the pandemic and energy crises.
The US government has started to turn back the clock on industrial decline, but there is a long way to go. Business investment needs to get back above a target level of at least 20 per of GDP, last seen around the 2000 dotcom boom, from the current level of around 17.8 per cent. It is not impossible, and it would be a vital first step towards securing a more prosperous, sustainable future for the US economy.
David Brown is the chief executive of New View Economics
