|
It
is hard to be optimistic about the US at present.
With the help of crucial government support in the
crisis, the US financial sector (or at least parts
of it) has bounced back, while the US’s real economy
struggles with high unemployment, discouraged labour
force dropouts, and damaged balance sheets.
So
it is no surprise that the US public and the US
Congress are angry. The focus of that anger has been
the massive and unwise financial sector bonuses. As
a result, regulatory reforms have thus far consisted
of, firstly, a threat to the Federal Reserve’s
autonomy, and, secondly, a tax on bonuses.
The first idea is a bad one. The latter may be
politically mandatory and marginally beneficial in
fiscal terms. Its effects on risk taking are
debatable. But the much needed structural reforms to
limit leverage and contain the risks that the
financial system periodically imposes on the real
economy – and the public purse – have only belatedly
gotten off the to-do list, and the prospects of
enacting them are difficult to estimate.
In
fairness, the new rule proposed by former US Federal
Reserve Chairman Paul Volcker to separate financial
intermediation from proprietary trading is not a bad
idea. Combined with elevated capital requirements
for banks, it would reduce the chance of another
simultaneous failure of all credit channels. But it
is not sufficient. Hedge funds can also destabilise
the system, as the collapse of Long Term Capital
Management in 1998 demonstrated. So they also need
clear, albeit different, limits on leverage.
Healthcare reform has deeply divided the US public
and US politicians alike. Whatever the merits and
shortcomings of variaous proposals, these divisions
suppressed the bipartisan aspects of the political
process and emphasised its zero sum dimension. That,
in turn, has put in jeopardy other reforms.
One might expect that after a dangerous crisis
rooted in growing structural imbalances and an
unsustainable growth pattern on the demand side,
there would be serious, ongoing debates over what is
needed to restore long-term growth and productive
job creation in the context of a rapidly evolving
global economy. But there is not, which is both
puzzling and worrisome.
This is not to say that the US economy has lost its
dynamism, far from it. But in the long-term,
sustaining it will require farsighted public
policies and investments in hard and soft
infrastructure to support the private sector’s high
capacity for innovation.
There are those who disagree and believe that an
economy’s dynamism is found almost entirely in the
private sector, while the task of government is
mainly to stay out of the way. Still others accept
that government could in principal do something
useful, but believe that it normally does not, and
that the risks outweigh the benefits.
A
policy agenda in the US that is overloaded,
overwhelmingly domestically focused, and partially
paralysed will mean a lack of attention to global
issues that require cooperation and compromise,
including the international dimensions of financial
reform. Absent coordination, there is also a risk
that monetary policies designed to promote growth
(or at least not impede it) will lead to a return of
financial sector distortions and imbalances. The
rebalancing and restoration of global demand in the
medium term is discussed within the G-20, but has
not really gotten underway.
From the perspectives of both policy and investment,
the short and medium term is once again risky. Many
countries, including developing ones, will adopt
defensive postures, some of which, such as making
better use of the domestic market as a driver of
growth, will have broadly positive impacts, even if
growth prospects are somewhat diminished in the
aggregate.
More importantly, the crisis highlighted the risks
associated with high dependence on foreign capital.
That, combined with slow progress on financial
sector reform, makes it likely that risk aversion
will prevail, which could slow, if not reverse,
financial globalisation, and probably lead to slower
growth in many countries.
Restarting the Doha round of trade negotiations with
a more manageable agenda – and one focused on the
poorer and more vulnerable developing countries –
would be a good way to revive progress on trade.
But, in an environment of slow growth and high
unemployment, sentiment in the advanced countries
regarding efforts to liberalise trade is distinctly
negative.
The restoration of growth and balance in the US
economy is crucially important, not only for its
effect on global growth, but also as a foundation
for tackling a broad array of international problems
and challenges. Right now, it looks as though
creating that foundation is on hold.
Outside the advanced countries, there is a view that
the world will return to pre-crisis conditions, with
a stable US that functions as a borrower, lender,
and consumer of last resort. What this perspective
ignores is that pre-crisis growth in the US and the
global economy was based in part on an unsustainable
configuration.
Returning to that model is neither likely nor wise.
While a relatively high and sustainable growth
pattern can be achieved, it will take time. And it
will occur (if it does) in a global economy with
fundamentally different structural and regulatory
characteristics. Waiting around for the advanced
countries to right their ships so that we can all go
back to the old normal is neither good policy nor a
good bet.
What is needed is coordinated restructuring and
policy setting. That is hard to do when the US, the
largest fiscally unified economy, is focused
elsewhere. |
