Is United States Economic Dominance Threatened?

The US appears to have staunched the precipitous decline in its economy. The economic crises and resulting breakdown of a functioning financial system appears to be healing. Indications suggest we are heading out of the Great Recession and into an era of slow growth with lower than desirable levels of job creation.

The US continues to have the largest GDP of any country by far at around $14 trillion in 2008 (all numbers in USD) according to various sources quoted in Wikipedia. They say the World Bank has the Eurozone at $13 trillion while the CIA and IMF peg it at $18 trillion. The latter figure tops the US even if you throw in Canada and Mexico at around $1 1/2 trillion each. When considering single countries the US is by far the largest with Japan at $4.9 trillion coming up second. China is closing in with about $4.4 trillion. Brazil has passed up Canada at about $1.6 and $1.5 trillion respectively. Russia is right in that range too. India, Australia and Mexico cluster just above the $1 trillion mark.

Growth is estimated to be negative in the US and Japan for 2009 according to this week's Economist (10/3/2009). They estimate growth in the Euro area at 1%. China and India are estimated to grow at 8% and 5% respectively. For 2010 the estimates increase just about everywhere. Clearly India and China will eventually catch up with the US if they continue to outpace it by such a large margin. Both countries are at a much lower level of development so, starting from a lower base, have an easier job of continuing rapid growth. In fact that argument coupled with India's lower dependence on exports could enable India to pass up China's growth rate.

Huge debts and budget deficits are threats to US dominance. High unemployment, near zero interest rates and trade imbalances severely limit policy choices. These are tough problems that deserve the full attention of the government. Unfortunately major distractions include life threatening holes in our safety net, war, and "global warming". It is morally wrong and unnecessarily expensive to deny so many millions of Americans basic health care. The Afghan war is bogging down and the US is still disentangling itself from Iraq. Humankind is changing the environment for the worse by changing the composition of the very atmosphere of the planet. Serious problems indeed.

US consumers have lost trillions in wealth. Their houses have lost trillions in value. Their savings have lost value too. Those who have jobs dramatically reduced spending. Credit is more difficult to obtain. While mortgage rates are near historical lows appraisals and other stiffened requirements make obtaining loans hard. In reaction consumers are paying off debt, car loans, credit cards and such, and are increasing savings. Since consumer spending is 70% of the US economy in the short term the reduction in spending seriously limits growth. In the long term that is great. Savings will go towards investments. Once families have rebuilt emergency and retirement savings they can spend more.

Government has spent more then it takes in for years and years. Ironically the last time we had a balanced budget was under a Democratic president (Clinton). The Regan and Bush tax cuts, wars in Iraq, and the universal tendency of politicians on both sides of the aisle to spend to garner favor have created massive debt. The debt is so large (about $10 trillion last year and maybe $13 trillion in 2009) it will take a very long time to pay off.

Constraints

The US trade deficits hurt the US according to most economists. The deficit is growing. More than half the trade deficit is due to the importation of petroleum products. Any protectionist measures would hinder global trade and backfire hurting the US more than the rest of the world.

Interest rates are near zero. They can not be reduced. The Federal Reserve can, and has, creatively used quantitative easing which is essentially simply printing more dollars. Printing dollars increases the threat of inflation which is balanced by the threat of a double dip recession which would cause deflation. The current policy makers rightly appear to favor inflation over deflation but are running out of choices and walk a very fine line.

To deal with the financial crises huge guarantees and rescues were arranged. A large stimulus package was enacted. These contribute to the large increase in US debt this year. Taxes can not be raised now because that would extinguish the tentative signs of recovery and send the US back into a deeper recession. New stimulus could fan the flames of inflation.

The two most populous nations, India and China, are also the fastest growing. Their continued growth is dependent on continued and increasing availability of commodities such as oil, iron, copper, water and food. While oil continues to be discovered it is most often found in places that are costly to develop such as heavy tar sands and under miles of water. Production at the worlds largest and cheapest wells are in decline. Increasing global demand and reduced supply of basic commodities have increased their cost despite the US recession putting a drag on US growth.

What can be done?

The #1 goal must be to get American back to work. "Full" employment, or to use a better term, "Ideal Unemployment" is considered to around 5%. With almost 10% of the US workforce currently unemployed there is a long way to go. Millions and millions of people want a job or want to work more hours. If they were able to do so they would spend and save more and also pay more taxes. Increased spending would create a positive feedback cycle. Increased tax collection would help the budget deficit.

A stimulus aimed specifically at creating jobs would need to pay for itself. In other words if the government goes further in debt to create jobs it should only do so in an efficient way that eventually generates enough new taxes through growth and direct tax collection on increased income to more than cover the cost.

It is possible to identify policy changes that create jobs. Policy changes can be extremely efficient if they actually create jobs because it is cheap to change policy. These can also backfire if they reduce productivity and/or hamper global trade. Barriers to global trade are an example of policy changes that would backfire.

If a stimulus aimed primarily at creating jobs also addressed other problems it would be more cost effective.

A suggestion

A major overhaul of US Energy policy coupled with a large stimulus aimed towards making the US energy independent would address many deficits and imbalances at the same time. It would also create jobs and reduce American impact on the global climate.

Currently the US Government subsidizes the US oil and coal industries. Direct subsidies should be stopped. This would help the budget. Companies would make less money but would still be profitable. Oil may increase slightly in price but the US does not set prices and an increase in US oil company costs should have little to no affect on global oil prices. Coal is the dirtiest fuel and should be more expensive.

The US should tax carbon production. The cap and trade plan is complicated, expensive to implement and should be abandoned. Currently entrenched powers have neutered the bill by giving away the initial right to pollute for free. A carbon tax would increase the price of oil, gas, coal and derivative products. This would have an immediate affect by increasing conservation. By including the real costs of climate change in fuel prices energy use would shift. For example natural gas generates less carbon per unit of energy compared to oil and coal. By taxing carbon coal consumers would need to figure out if carbon capture is economical or how to make it so.

Natural gas is plentiful in the US. It creates less carbon than oil for the energy it produces. For that reason policy should encourage the use of gas as a transition fuel to power the US until better alternatives are developed. There already exists a decent infrastructure of pipelines and gas can cheaply be transported. Internal combustion engines can be converted to use gas. Combustion engines do not need replacing and run cheaper and cleaner once converted. A concerted effort to encourage the US trucking industry to convert from diesel fuel to gas would create US jobs, improve the environment by reducing soot and carbon dioxide and reduce the trade deficit.

Wind power is already economical in some places. Wind currently produces a tiny fraction of our power. At 1/2 quadrillion BTUs (source: US DOE) it is insignificant compared to the 57 quadrillion BTUs produced by fossil fuels. The US has many areas that can already produce wind energy economically. Dramatically increasing development of wind energy will increase jobs, improve the environment and reduce the trade deficit. While wind can produce energy efficiently in many places development is limited by lack of transmission facilities and lack of a national grid. Any wind subsidies should be long term in nature but a concerted effort to improve our national transmission facilities is a must.

Solar power is tiny producing less than 1/10 quadrillion BTUs. Because of abundant resource it is appealing as a local source of power in the South West. Panels on roof tops put no demand on distribution grids and use previously developed space. It is a technology deserving of long term research and implementation subsidies.

Hydro power is an important source of alternative energy that currently produces more power than wind. New dams and large scale water projects are needed in the West to temper drought and support a growing population. The recent drought in Georgia shows that the western states are not alone in these needs. Red tape needs to be reduced, micro hydro projects encouraged and ways to support river ecologies along with increased power production need further development. These are complicated issues with a long history of competing interests.

Geothermal and biomass also contribute more energy than wind. Though these resources are not evenly spread both are deserving of research and support. Geothermal can be totally self contained releasing no exhaust. Biomass can help reduce material that otherwise would go to landfills.

Nuclear power produces almost 8 1/2 quadrillion BTUs, more than all other non-fossil fuel sources combined. Operating nuclear plants produce no carbon. Continuing technical improvements, an impressive safety record, environmental benefits and the scale necessary to " move the needle" make nuclear power an obvious choice.

While I think Yucca Mountain is a fine place to stash nuclear waste transporting it there is expensive and risky. It is certainly unpopular in Nevada. In any case it is likely not necessary if research and development of spent fuel reprocessing and in situ storage is supported.

So the suggestion is to 1) rewrite US Energy policy to address the issues raised above and 2) introduce a significant stimulus package to address the issues raised above. Doing these two things will put people back to work, improve the environment, increase growth and help the US balance its trade and budget deficits.

The stimulus should focus on development of natural gas as a transport fuel, fast tracking development of a few dozen nuclear units and major improvements to the national electric power distribution grid. Natural gas development includes expanding distribution, adding fueling stations along interstate highways, helping the trucking industry and commercial fleets convert. Construction of nuclear units should start ASAP by adding units to existing facilities. Improvements to our national grid should start immediately with a thought to enabling more rapid development of wind power.

While changes should focus the big guns on the things most likely to have the largest impact policy and stimulus should also provide long term support for research into all forms of alternative energy and also development support for solar, hydro, biomass and geothermal. It is important that these be long term in nature. It is better to have a predictable source of funding than a yo-yo of uncertainty.

Policy changes including a carbon tax and elimination of oil and coal industry subsidies would increase revenue. Job creation, improvements to the trade and budget deficits and environmental benefits would eventually pay off the costs of this stimulus with interest. If these changes are made the US may be able to significantly lengthen the time it remains the largest economy in the world.

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