America's economy

Hope at last

The world’s biggest economy has begun a much-needed transition. Barack Obama could do more to help

GREAT storms and floods have a way of altering landscapes. Once the waters recede, some of the changes are obvious: uprooted trees, damaged property, wrecked roads. Later come further changes, as people seek to avoid a repeat, erecting new flood walls or rebuilding elsewhere.

As in the physical world, so in the economic one. The financial deluge that broke over America has passed and the recession it caused, the worst since the 1930s, is ebbing. This year the American economy is expected to grow by around 3%, after shrinking by 2.4% in 2009. Rainbow-spotters hope that employment is at last beginning to grow again. And the economy emerging from recession is not the same as the one that went in. There is obvious damage: high unemployment, millions of foreclosed homes and a huge hole in the public finances. Less obviously, a “rebalancing” is under way: from consumption, housing and debt to exports, investment and saving. As our special report this week argues, this is enormously promising for America and the world; but it is far from assured. A lot depends on politicians—and not just the ones in Washington.

America has relied for decades on its consumers’ willingness to spend, borne up by borrowing and the false comfort of bubbles in asset prices. Now Americans are saving more and borrowing less because the collapse in home prices has eviscerated their wealth. Bankers and regulators who once celebrated the democratisation of credit now ration it. Businesses from General Electric to Citigroup that prospered from the consumption culture are rethinking—and often shrinking—their loan books. Property developers are building smaller, simpler houses. The country’s geography is changing. Recession has slowed the rush to sun and sprawl. People are moving out of Florida and into North Dakota. Foreclosures and costlier commutes have laid low the distant suburbs, or exurbs.

Dearer, scarcer credit is not the only reason. Energy, though not as frighteningly expensive as in 2008, is also no longer cheap. Americans are choosing cars over light trucks, utilities are being told to use more renewable fuel, and domestic deposits of oil and gas locked deep beneath the sea or in dense rock are suddenly profitable to extract. If these trends continue (admittedly, a big if), America could import barely half as much oil in 2025 as seemed likely just five years ago.

United States of exports

With consumers forced to live within their means, American firms will have to sell more to the rest of the world. That may seem a tall order, but with a competitive dollar and favourable growth in other countries, exports in which America already excels, such as high-value manufacturing and services, should do well. The result will be a more balanced American economy and, by extension, a healthier global economy.

Or so it should be. But the smoothness of this transition cannot be taken for granted. Policy decisions both inside and outside America will determine whether this rebalancing is painful or easy. Put crudely, if Americans save more and spend less while other big countries do the opposite, the world economy will prosper. If Americans become thriftier while foreigners fail to spend more, it will stagnate.

The world’s surplus economies have been propelled by American consumers’ appetite for everything from cars and electronics to furniture and clothing. If the United States is going to save and export more, countries in emerging Asia will have to rely more on their own shoppers and on each other. That means changing a mindset that equates economic health with bulging trade surpluses, and also ushering in a plethora of microeconomic reforms to boost Asian workers’ incomes and encourage consumption. It is now in everybody’s interest to push China to overhaul its health care, pensions and corporate governance.

And, yes, a stronger yuan would also speed up global rebalancing. Yet it is also dangerous for America to make a fetish of China’s currency (see article). Slapping bilateral tariffs on China, which some Democrats want to do to punish it for the low yuan, would hardly help rebalance anything: America would merely import stuff from elsewhere. And the cost in terms of beggar-thy-neighbour protectionism and diplomatic poison would be dire. Far better for Mr Obama to seek a multilateral solution while focusing on rebalancing at home.

How to become thriftier without anybody minding

From that perspective the macroeconomic imperative in Washington is clear: a credible medium-term plan to reduce the deficit. That would avoid premature and dangerous tightening while calming bond markets enough to hold down long-term interest rates. The combination of tight fiscal policy and low interest rates is usually a recipe for a weaker currency.

Plenty of microeconomic reforms could also help with rebalancing. America taxes income and investment too much and consumption too little. So far Mr Obama’s policies have mostly worsened the tilt. Health-care reform applies for the first time a payroll tax (for Medicare) to investment income. His administration has rejected a tax linked to the carbon content of fuel. It has also increased the subsidies, guarantees and preferences for mortgages that helped inflate the housing bubble. The federal government now stands behind 60% of residential mortgages and seems open to the idea of creating a permanently expanded backstop.

Rather than reinforce these biases, Mr Obama should remove them. Getting rid of the tax concessions for housing would help both control the deficit and speed up rebalancing. Housing assistance should be aimed at homeowners who cannot easily move to jobs in brighter parts of the country because their homes are worth less than their mortgages. By helping people reduce their mortgage debts, Mr Obama has taken a step in the right direction.

The world’s biggest economy has begun a long overdue rebalancing. American consumption and borrowing can no longer be the engine of either America’s economy or the world’s. That is the hope. The fear is that politicians everywhere are incapable of dealing with the consequences.