Home > The Economy > Is the United States again driving the world economy?

Is the United States again driving the world economy?

from Dean Baker

In the late 1990s, and again in the business cycle in the last decade, the United States to a large extent was the main engine of world growth. In both cases, growth in the United States, coupled with a rising dollar, led to a growing trade deficit, which provided a boost to demand elsewhere in the world.

There are many who see this pattern repeating based on a pickup of GDP growth in 2014, coupled with considerably faster job growth. This has coincided with a sharp rise in the dollar against other major currencies. However, beyond these outward similarities, there is little basis for the view that the U.S. economy will again be the engine for world growth.

The first and most important reason why this is unlikely is the pickup in growth in the United States is largely an illusion. The economy did grow at a fairly rapid 4.1 percent annual rate in the last three quarters of 2014, but this has to be understood in the context of a first quarter when it shrank at a 2.1 percent annual rate.

The stronger growth of the next three quarters was mostly making up for the negative growth of the first quarter. The first quarter drop was largely driven by weather and other anomalous events, but this negative figure virtually guaranteed that the succeeding quarters would be strong, as the economy returned to its trend growth path.

This is supported by a fourth quarter growth figure of 2.6 percent, which brought the four quarter average to 2.5 percent down from 3.1 percent in 2013. Furthermore, final demand growth in the fourth quarter was just 1.8 percent, as inventory accumulations added 0.8 percentage points to the growth rate.

Looking into 2015 there is little prospect for much of a growth pickup. Recent data on orders for capital goods have been weak. Consumption did surge in the fourth quarter, but much of this was a one-time rise in car buying driven by low gas prices. With car purchases now above pre-recession levels, we are unlikely to see much further growth.

Residential construction seems destined to continue its slow recovery from the collapse of the housing bubble. The government sector will expand modestly, but will not be a major source of growth as the politics of austerity continues to limit spending.

In contrast to the prior two recoveries, there is no asset bubble to act as a driver of growth. In the 1990s the stock bubble created more than $10 trillion in ephemeral stock wealth, an amount equal to the country’s GDP at the time. The housing bubble created $8 trillion in housing wealth in the last decade. These bubbles have not come back and are not likely to in the foreseeable future. This means there will not be a comparable boom in consumption and investment, in the case of the stock bubble, or construction in the case of the housing bubble.

Without the bubble driven demand, there is a limit to the extent to which demand in the U.S. can drive growth in the rest of the world. In fact, the large and growing U.S. trade deficit is likely to be a substantial drain on the country’s growth in 2015 and beyond, if the rise in the value of the dollar is not reversed.

The other point that is often overlooked is the extent to which the U.S. economy has shrunk in size relative to the world economy. This is due to the rapid growth in China and much of the rest of the developing world. Measured in purchasing power parity terms, China’s economy is already larger than the U.S. economy. This means that if the goods and services it produces were sold at the same price as goods and services in the United States, China’s GDP would be larger.

Even on an exchange rate basis China’s economy has grown enormously relative to the U.S. economy. It was just 8.0 percent of the U.S. economy in 1994 and 15.8 percent in 2004. In 2014 it was 59.5 percent of the size of the U.S. economy. The difference between a Chinese economy growing at a 7 percent annual rate, compared with a 4-5 percent annual rate, will matter much to the rest of the world than if the U.S. grows at 3 percent rate rather than a 2.0 percent rate.

In short, anyone who is looking for a boom in the United States to rescue the world economy is destined to be disappointed. The other regions of the world will have to take the steps needed to get their own economies in order, which for the most part means larger budget deficits and lower interest rates.

It is unfortunate that the belief in austerity has come to dominate policy in much of the world. Governments are making painful cuts to infrastructure, education and social services. The main economic impact of these cuts is to slow growth and keep workers from getting jobs. This austerity would still be bad policy in a world where the U.S. had a rapidly growing market for other countries exports.  Austerity is a really bad policy in the world we see today.

View article at original source.

  1. graccibros
    February 23, 2015 at 4:48 pm

    Thanks Dean for your usual good insights grounded in a sober examination of the data.

    On austerity, I agree, and would only ask reader’s consideration of the way this functions at the state level in the US, where most state’s are locked into the equivalent of the old 19th century gold standard because they must legally balance their budgets – and to complete the dismal analogy – like Greece, they cannot issue their own currency. Of course, it is Republican policy to – intentionally? – to drive this austerity even further by insisting, with ideological intensity if not ferocity, on no new revenue, no new taxes. This creates quite a box for stimulating growth at the state level, since it implicitly takes away Keynesian premises and tools – which were never easily utilized at the state level. And then it gets worse, if you think about the dynamics in New Jersey, Wisconsin, Ohio, now Illinois and soon, Maryland (and the Kansas flop, who’s looking closely?) : the way to pull off this intensely constrained austerity box is to get one’s budget balancing savings by reducing the scope of existing public pensions, going after public unions by various means, and keeping privatization always around the corner if not “on the table.”

    In Maryland, the policy drift may be to further reward the small business “job creators” (following the informal but quite rigid commandment that “only the private sector can create jobs) by reducing their property taxes, doing the same for first responders esp. firefighters and police and perhaps tax breaks for the senior citizenry by exempting their pensions, public and private from taxation. You can see the future austerity coalition being built before your eyes.

    With perhaps just a slight detour for the seniors on tax policy, you add these directions up and at the state level fiscal policy is driven by tax breaks in directions that will probably only intensify the trends and data that Mr. Piketty has so called to our attention. If the real underlying problem is lack of income and therefore demand, how do these austerity policies solve that?

    Thanks Dean for putting China’s rise on the table. I want to share with reader’s a Email I sent out in January to a small audience including Bill Greider and the policy director for the AFL-CIO. I wrote it in response to this piece by Ken Rogoff on how we in the “advanced” economies should feel about not doing too well these days: we should refocus and look at all the good we did in the “developing” countries, raising up living standards in India and China.

    I took strong exception to that perspective:

    ” . Project Syndicate recently sent out this Professor Rogoff piece as one of the most commented on in 2014. I missed it the first time around. It carries a dateline of May 14, 2014. Here at : https://www.project-syndicate.org/commentary/kenneth-rogoff-says-that-thomas-piketty-is-right-about-rich-countries–but-wrong-about-the-world

    Does anyone else find this Op-Ed insufferably arrogant? I say that because of its “moral angle,” not towards the poor in the Third World, but towards 60-70% of U.S. citizens. Most of us apparently hadn’t realized what our mission in life was, to raise living standards in India and China. We haven’t seen a “universalism” like this since what John Gray (False Dawn) called the last great Enlightenment projects: the Utopian experiment begun in Russia in 1917 and the second great age of “Globalization” under neoliberal assumptions, which we are still in, the first having been from 1880-1914. And so we know how the first one ended, and the one begun in 1917.

    Say, isn’t that the allegedly model-less Piketty’s time frame for when inequality in the West reached it’s peak, 1880-1914, which we are approaching now, if not surpassing,? And doesn’t Piketty say that the pattern seems to be a characteristic of capitalism, those constant ratio’s only countered in a more egalitarian direction by active government intervention due to great wars and characteristic (?), periodic capitalist upheavals, like Great Depressions/Great Recessions.

    And Bill Greider, I couldn’t help but think of Paul Krugman’s attack on One World Ready or Not, your “mere journalistic” account of what was coming (came out in 1996 or 1997) if I recall, which he said mockingly also didn’t have models…but I think you were right with your observation that no existing world power had ever given up the economic bedrock of “making things” and survived on top of the mountain.

    And Professor Rogoff, are you saying that the great opening to China was done by US corporations out of compassionate third world considerations, and not a burning desire to substitute cheap Chinese labor for America’s old labor “aristocrats”…for the salutary disciplining effect, and the ancient pursuit of the China Market? I don’t remember any contract that I signed or that presented itself in our political arena – that this economic missionary work was the point of the shift in US direction under the Bush I years, and then Bill Clinton? Not at all…like NAFTA before it, it was sold under different premises: jobs at home for the US workers making all that we would sell to China…oops…China has since grabbed a disproportionate share of world manufacturing jobs, the ones that historically have provided the first rung up for uneducated rural peasants, on their way, eventually to the middle class. For immigrants here in the US, 1880-1920. Sorry Mexico, Central America, South America, Caribbean…and much of Eastern Europe as well…I’ve got some bad news for how the Ukraine will fit into this mess, a mess of scarcity already….

    But we ourselves, at least the bottom 60%, are more than partly to blame. The reforming left is paying a very high price for its long standing indifference to the world of political economy. Take a look at the video of a conference held at Boston U.’s law school, starring Hanna Rosin, on the topic of “The End of Men,” or, translated a bit, why women are doing better than men in the new economy.

    She’s sharp and articulate and a better public speaker than both the men who flank her in follow-up presentations, without question, and she’s got important and mostly on target things to say. She speaks a mile a minute but doesn’t really ever falter. But what I heard after listening to the whole thing was the underlying assumption of everyone that said implicitly that the economy we have now is a given, that its basic structure is not what is causing these “lagging men” problems, we have to adapt and look to Scandanavian country for a few tweaks…(better child care provisions)…Remarkably, this was all said well in the wake of the Great Recession…it would have been more justifiable had it unfolded before that revelatory event…and what is most missing is the characterization of our age as one in which there just are not enough jobs to go around anywhere: Mexico, Central American, Europe, Eastern Europe…even Asia…as N. Roubini once summarized our predicament, “…a glut of capital and labor.” And whose model reaches that conclusion? (Roubini is not a modeler, as best as I can judge, he’s a vast data gatherer who has a pretty good command of capitalism’s history, without ever abandoning it as the basic starting point…)

    Rogoff wrote as it if it’s all good inside the benefitting, rising countries. Just as in the age of the first globalization, the one that also spawned the colonialism he insensitively references, sounding like Niall Ferguson in the process, aren’t trends in China and India pushing towards the West’s Victorian Age great – and characteristic – inequalities of wealth and income? Here are two Chinese economists evaluating what has been happening inside China through Piketty’s categories, and finding they fit pretty well…


    In America, just as we were in 1929-1932, we are all still prisoners of the “American Dream,” failing to realize that the Dream operates inside capitalism, and capitalism is no steady state theory. Which “era,” or which decade are we talking about when and if we launch off grandly the way Rogoff does?

    No folks, the smugness of Ken Rogoff is only possible by his isolation from the conditions of those of left behind, the tens of millions working in the retail-service sector for under $10.00 per hour (I still can’t believe it’s 28 million), those in the ghettos, behind the informal bars, and all those behind the very real prison ones. And by our own deference to failed ideas and their apologists. MIke Davis was right in much of his very first book on the history of American labor, we are still “Prisoners of the American Dream,” a dream now operating under vastly different conditions than the golden decades of 1945-1973.

    And maybe what is scariest about Rogoff’s views here is his implicit evisceration, evaporation of most of American Society. It is almost a re-run of M. Thatcher’s quip that there is no such thing as “society,” certainly no classes and no brown or black ghettos – and no de-industrialization and its consequences. And the place of this huge shift in policy in the democracy we’re alleged to have – and that we would like to bring to China? I must have missed a ballot question somewhere in the 1990’s on those new electronic voting machines.”

    And Dean, to support your analysis on China, consider this piece which just showed up in my in-box last night, from Pepe Escobar on the coming “Century of the Dragon,” here at


  2. February 23, 2015 at 6:10 pm

    Economic theorists are so far behind the curve of change and blinded/blinkered by their habituation to economic orthodoxy that we and they would probably all benefit from a kick in the @ss every few minutes so as to bring them/us at least slightly more into present time where they might actually confront the realities there and the desperate need to actively deal with them.

    The problem of advanced economies is not production, it is distribution. Distributism has been around at least since Belloc and Chesterton and coalesced with Douglas. Its rise is urgent if we are to avoid godawful socio-economic and political consequences or worse yet war in an age of modern weaponry.

  3. February 23, 2015 at 6:32 pm
  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s