Home > Uncategorized > Four structural characteristics of the US economy

Four structural characteristics of the US economy

from Dimitri Papadimitriou, Michalis Nikiforos, and Gennaro Zezza

In order to understand the US economy – or for that matter any economy – we need to identify its structural characteristics. These characteristics will allow us to link its precrisis trajectory to the present relatively slow recovery and, most importantly, its future prospects. Through this prism, it is also easier to understand major policy debates and concerns regarding foreign competition, such as the recent much-discussed “trade wars”.

In several previous reports we have identified four main structural problems afflicting the US economy: (1) the weak net export demand for US products; (2) the fiscal conservatism that has prevailed for most of the last three decades; (3) the increase in income inequality; and (4) the associated financial fragility.

These issues are not independent of each other. An economy that faces weak net export demand from abroad tends to have high trade deficits. From the financial balances perspective, a trade deficit implies a negative balance (deficit) for the private sector, the public sector, or both. If trade deficits are accompanied by austerity, the burden of the adjustment falls on the private sector. Such an economy faces the choice between growth accompanied by trade and private deficits – essentially growth fueled by private indebtedness – or a recession that will dampen output and reduce imports, thus reducing trade and private deficits. In the former case, private deficits accumulate into higher stocks of debt and make the financial position of the private sector more fragile.

Increasing income inequality makes the situation worse because households at the bottom and middle of the income distribution have higher propensities to consume than households at the top of the distribution. Therefore, a redistribution of income toward the top, as has happened in the United States over the last four decades, has a negative effect on consumption, demand, and growth. In such a situation, for the economy to keep growing it is necessary that poor and middle-class households finance part of their consumption by borrowing. Hence, income inequality adds another layer of instability, as the balance sheets of most households become more fragile (Papadimitriou et al. 2014; Nikiforos 2016).

Finally, such a situation is facilitated by asset inflation, for an increase in asset prices increases the value of the asset side of balance sheets and masks potential vulnerabilities on the liabilities side. As a result, asset inflation contributes to an increase in both the demand for and supply of new liabilities, as both households or other agents are more willing to increase their indebtedness (e.g., loans) and the banks or other institutions are ready to accommodate them. Asset inflation can also have some direct wealth effects on private expenditure, although according to our estimates for the US economy these are relatively small. This analysis shows the connection that oftentimes exists between the two Minskyan processes of fragile balance sheets, on the one hand, and asset inflation, on the other.

The identification of these four structural characteristics of the US economy allows us to understand the factors that led to the crisis of 2007–09 as well as why the recovery that followed has been so slow. In the decades before the crisis, the growth of the US economy (in the face of increasing trade deficits and strict fiscal policies) was largely based on private indebtedness. Due to widening income inequality, the increase in indebtedness was especially problematic for households at the bottom of the income distribution. This process was facilitated by the stock market inflation and the increase in real estate prices, especially after 2000. The crisis ensued when – in the face of high indebtedness – the Fed increased the interest rate and households increased their saving rates; this led to a decrease in growth rates and triggered the financial crisis, which then further reduced growth and employment.

In the period after the crisis, the slow GDP growth rate can be attributed to the same structural factors. Net export demand was weak (with the significant exception of petroleum products) and fiscal policy was constrained (until last year). Inequality also kept increasing. The major difference with the precrisis period is that the household sector has not increased its indebtedness, hence consumption has grown very slowly. Since most components of demand grew slowly (if they grew at all), it is only natural that the economy as a whole also stagnated.

These four structural characteristics are very important for the present and the future prospects of the US economy, warranting more detailed discussion.

http://www.paecon.net/PAEReview/issue88/Papadimitriou88.pdf

  1. Ikonoclast
    July 22, 2019 at 12:14 am

    The link to the issue 87 article does not seem to be working for me at the moment. If below I repeat anything already covered in the article this will be the reason.

    Since the article mentions asset inflation, Jonathan Nitzan’s work on differential inflation is appropriate to reference here.

    http://bnarchives.yorku.ca/207/

    I would add three or maybe four more structural issues affecting the US economy. Obviously, these have interrelations with the four factors originally mentioned. They may overlap to some extent. Causes and feed-backs can be complex to trace. We can look at Thomas Piketty’s work, “Capital in the 21st C”, as very relevant to this discussion. If return on capital is greater than growth then inequality increases. In turn, growth is now being limited by secular stagnation and limits to growth.

    5. Infrastructure

    Clearly, infrastructure itself is a structural issue and US infrastructure is decaying. See the ASCE’s Infrastructure Report Card.

    https://www.infrastructurereportcard.org/

    The Washington Post and other mainstream outlets are now reporting on this.

    6. The Relative Decline of Manufacturing

    https://www.usitc.gov/research_and_analysis/documents/Pierce%20and%20Schott%20-%20The%20Surprisingly%20Swift%20Decline%20of%20U.S.%20Manufacturing%20Employment_0.pdf

    7. Limits to Growth

    Of course, this affects all nations and regions, albeit at different rates. The US seems to be suffering from secular (long run) stagnation. Some of that is attributable to its being a maturing or matured economy. Some is also attributable to limits to growth. Easy conventional oil, easy minerals, easy farming and grazing expansion on good agricultural country is already exploited and indeed over-exploited. It takes ever increasing investment up front in these arenas to get moderate new returns from ever harder to exploit resources. Also, hindrances to production are increasing along with damage from climate change events. GDP measures do not capture these effect. The GDP measures reconstruction and recovery back to a given level the same as it measures growth.

    Finally, growth itself has to be questioned. Endless growth on a finite planet, or on a finite sub-continent etc. is not possible.

    8. Mal-investment

    Excessive returns to capital can be regarded as a mal-distribution. It is mal-distribution which, at least in part, leads to mal-investment. But the mal-investment problem goes much deeper. In the market fundamentalist system, investment is solely about money returns, specifically as differential profits. (See the Capital as Power project.) Hence, assessments about investments pay minimal attention to social and ecological needs. A nation with infrastructure as decayed as the US (for a developed nation) should not, for example, be investing in publicly subsidized super-stadiums (at over a billion each) when bridges, dams and levees across the nation are decaying and collapsing. Nor should it be “investing” in trillion dollar wars in places where it does not need to be. See John Mearsheimer for an analysis which shows that even on rational, amoral, realpolitik, offensive-realism grounds, the US is greatly over-spending on its military.

  2. Helen Sakho
    July 22, 2019 at 1:24 am

    The Greek economy was so many years ago an excellent example of a “bail out”. And many others phenomena referred to above are indeed applicable to all economies. The US has always overspent on militarism. It would be extremely useful if it stopped and considered for a moment a more peaceful world.
    But peace no longer matters anywhere. It is the economics of hatred that is now dominant, everywhere. And the key targets are the very poor.

  3. July 22, 2019 at 6:43 am

    Of the four signs mentioned above the one [1]about the poor export figures is incorrect. Exports are a cost and imports are a benefit. Exports lose resources to the exporting nation unless it is just intellectual property, like education. Imports get other nations resources and benefit the importing nation. The cost is simply numbers in accounts, which are available to infinity. [2] Fiscal conservatism is another description of Ignorance that is rampant in classical economics i.e., the mainstream. Let it be understood that monetary sovereignty says the nation’s currency comes from government deficit spending [the deficit is of taxes]Tax is a cost to the economy and a permanent loss to it. Once you have paid your tax bill, it is extinguished save for a book keeping entry. Once the government spend occurs, the debt is extinguished and the currency is created. PAYG. [3] no question It will lead to big trouble.[4] The whole debt mountain is living on borrowed time. The derivatives market could only be resolved by a debt jubilee as the money tied up is well beyond being able to repay. Estimates vary between $800 Trillion and $1.4 Quadrillion, but there are only estimates because the transactions are all off the books.
    The breath of necessary fresh air is coming and already it’s being felt by the opposition, who now explode with nonsense straw men in their haste to get to the barricades. But it’s a 3 sided Fort,

  4. Vincent
    July 22, 2019 at 2:12 pm

    I agree with John above here re the trade deficit.But also having your national currency as a global reserve currency is also a factor here and it helps counter much of the trade deficit.As long as this prevails the USA will have free ride on that. Foreign reserev currencies flood into the US in return for printed dollars,a very profitable business to be in.

    Not too keen on the debt jubilee idea however. These are private debts and as Warren Buffet said about these type of deals ,if two parties agree to a deal and one of them misunderstands the terms,then that this error.

    • Craig
      July 22, 2019 at 5:47 pm

      If the system is inherently cost inflationary then it is rigged to require ever increasing indebtedness in order for it to limp through time until it experiences a collapse. This cycle is historically validated time after time. The ancients palliated the paradigm of Debt Only with debt jubilees in order to bring some renewal/reset to the system, and where they didn’t collapse inevitably ensued.

      The only way to invert the cost inflationary nature of the economic system dominated by private finance and its paradigm of Debt Only is to be even smarter than the ancients by starting with the end of for profit private money creation, a debt jubilee, a universal dividend and a paradigm changing 50% Discount/Rebate monetary policy at the point of retail sale.

      Weeping may last for 5000 years, but with a paradigm change there is joy in the morning.

      • Vincent
        July 22, 2019 at 7:34 pm

        Thanks for the reply,I totally agree that debt based economy has been proven to be destined to failure. The debt should wind down over time that way with less immediate chaos/instability in the financial sector that would likely be entailed with a debt Jubilee,though Prof Steve Keen is keen in that option too.
        As you say, citizens dividends would be an excellent way forward to help redress the imbalances and I also agree that stopping private debt creation would be an even better step. However (sadly)all these solutions require an epic paradigm shift.

  5. Ken Zimmerman
    July 26, 2019 at 12:27 pm

    This discussion sounds like the before and after dinner speeches at a convention of loan sharks. Just before the class on using baseball bats to collect from delinquent debtors. And just after the class on why 1000% interest is just too low.

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