Most of the worry about the world economy is being directed towards Europe, and the Eurozone in particular. I am amongst a very small group of optimists on that front - but it is easy to see why people are worried. In fact it is only through a prolonged period of crisis that Europe will find an enduring solution. But meanwhile, should we be worried about the US too?
What prompted this thought was this article in Vanity Fair by the eminent economist Joseph Stiglitz (thanks to Marisha Ray for drawing my attention to this on Facebook). It's subject is inequality, and why it is corroding the US economy, and why the elite (the top 1%) should worry. Judging by the FB comments, some readers saw this critique as applying to government thinking right across western world - the view that austerity economics is driven by an idealogical view of the role of government. But I took it as a very specific critique to the US.
Professor Stiglitz does not spend much time justifying the statement that inequality in the US is high and increasing. The problem is that almost all the benefits of growth are accruing to the top 1% of the population - and bypassing those on middle incomes. In other words the problem is not an underclass that is disappearing from sight - but a substantial majority of the population being left behind, with the creation of a fabulously rich elite. There are many ways of looking at the statistics on this, but for me one of the most important is the historically high level in national income that is taken up by business profits - the benefit of which goes overwhelmingly to the elite. This may or may not be outrageous in its own right, but Professor Stiglitz points out a number of practical problems that arise from this:
- The very rich spend less of their income on consumption and save the rest. The more wealth that concentrates in their hands, the more consumption overall will fall as a proportion of the economy. Unless there are enough constructive channels for their savings then unemployment will result - unless alternative demand comes from somewhere. That alternative might be an investment boom (as with high tech in the late 1990s) or with big government deficits, propping up the economy now.
- The rich elite use their power to protect vested interests and direct their energies to what economists call "rent-seeking": activities that enrich the individuals themselves but not the economy as a whole. Under his analysis the finance industry is largely based on rent-seeking. As energies are diverted from genuine economic growth, the economy overall weakens. What is good for the profits of existing businesses is often not good for the whole economy - which needs new businesses to come forward.
- The majority who are seeing their incomes stagnate, and find it more and more difficult to join the elite, get resentful, breaking down the trust that underlies all successful economies.
But there is a political puzzle at the centre of this. Why is the Republican Party both veering to the right and retaining substantial popularity? Surely the welling up of resentment against the elite should translate into overwhelming political pressure for a more egalitarian system? I think the American suspicion of government is to blame. I don't think that the majority of American people are particularly happy with the way their living standards are being held back. But, incredible as it may sound to European ears, many of them think it is "socialist" government policies that are to blame. Shrink the government, cut taxes and the 99% will start to catch up with the 1%. Of course, huge funds from the elite are available to support this view in the media - through political campaigning and biased news coverage, such as Fox News. It hardly helps that a lot Americans seem to think they can have their cake and eat it: huge expenditure on entitlement programmes (especially Medicare) without the need for increased taxes.
If Professor Stiglitz is right then the US would be suffering from long term low economic growth, as the various toxic effects of its skewed income and wealth distribution gradually overwhelm the highly dynamic core economy. And indeed, measured per capita (i.e. taking into account population growth), the U.S managed annual growth of only about 1.4% in the first decade of this century (compared to the UK 1.7%, or Germany (1.9%) - though France only managed under 1% - figures from Wikipedia).
Still lacklustre growth won't cause a crash. Italy has made an art of surviving such a challenge. But the proximate cause of a crisis is clear enough - the government's budget deficit of 7.6%, and the lack of any political consensus in how to handle it. There are three ways in which this could cause a problem. The first is if the US government should hit the Spanish problem of being unable to borrow because of a loss of market confidence. This looks implausible. Investors have too few choices where to put their surplus funds. The second is expenditure cuts sucking demand out of the US economy, causing a prolonged recession. This could happen if the Republicans take control in this year's elections. The third is political gridlock causing government funding to seize up, and causing technical default. This looks all too possible if the Republicans control either or both houses of Congress, as looks probable. Even if Mitt Romney should gain control of the presidency (and he's doing well on fundraising), he may well run into trouble with Congress as he desperately tries to find practical answers to the deficit problem.
And what if the US survives the budget crunch in 2013? If growth continues to be lacklustre, and the top 1% continue to hog the benefits, surely US public anger will turn on the elite, as it did briefly in the last days of President Bush? I share the European view that a smaller government, reduced regulation and lower taxes will make the problem worse, not better. That will be a sight to watch from a safe distance.