U.S. Economy—Muscular or Obese?

Shoppers walk down the Third Street Promenade's outdoor shopping mall in Santa Monica, California, on August 17, 2012. According to reports, consumer spending has increased and consumer confidence has risen to the highest level in three months. (Kevork Djansezian/Getty Images)

As dark clouds gather over Europe and growth in the BRIC’s slow, the world once again looks to the old steady engine of growth—the U.S. Some analysts are even finding new sources of strength for the U.S. economy to rebound and presumably save the world. While the U.S. certainly possesses tools to revitalize its economy in the long run, it faces serious challenges in the short term. The U.S. may not be ready to save the day at this point in history.

With election negativity emphasizing current weakness in the U.S. economy, contrarians are arguing for an optimistic view of U.S. reinvention and renewal. Sure, unemployment is high and GDP growth sluggish; wage growth low, pension and medical costs threatening public budgets; and China is surging past the U.S. in terms of total output.

There is no serious discussion of how to proceed on necessary, painful, efficient, fair tax increases and spending cuts.

But there are many positives: Shale gas and oil promise energy security. Food production, droughts aside, is strong in a world that demands more. Educational institutions that attract students from all over the world combine with venture capital in an open society that creates the likes of Google, Apple, Microsoft and Facebook as well as Boeing, Caterpillar, IBM and GE. A combination of a weak dollar, rising Chinese wages and tame wage growth in the U.S. has led to a manufacturing revival.

U.S. banks have written off more bad loans than their EU counterparts and bulked up on capital. Demographics favor the U.S.—a combination of birthrates at replacement level and migration mean that the work force, and thus total output, will help cover elderly benefits. In contrast, labor forces will shrink in the EU, Japan, Russia and China. In short, it is argued, the U.S. economic outlook is good.

In any discussion like this, it’s useful to assess short- to medium-term issues as well as longer term problems and opportunities. For example, it’s true that the labor force will grow in the U.S., though at a slower rate than in the recent past. However, college and high-school completion rates are not rising and may even fall a bit. In addition, high youth unemployment and poor “starter” jobs often lead to long- term impediments to lifetime earnings.

If the U.S. remains stuck several years with high youth and total unemployment rates, the quality and skills of the labor force will suffer. Potential workers may abandon the labor force, perhaps retiring earlier and taking low social-security payments.

Inequality

Another concern is high inequality. The top tenth of the population has nearly half of all income and 90 percent of financial wealth. These are near all-time highs. Tax policy has been set so that the share of income paid in taxes overall and especially for the wealthy is near post–World War II lows. Indeed, the very wealthy sometimes pay a lower tax rate than middle-class workers due to a tax code that assesses capital gains and dividends at a lower rate than earnings, though on average the wealthy pay more.

This inequality is reflected in lower generational income mobility in the U.S. than in Canada or the UK: A person born into the bottom fifth of households sorted by income is likely to stay there, or perhaps bumping up to the next fifth. Likewise, a child lucky to be born in the top fifth is likely to stay there or fall only to the next highest fifth. Such stickiness means that many bright people can’t develop their talents. Both they and the entire economy suffer.