The United States Economy: A basket Case?

In the late 1990's, following the Asian financial crisis, I recall speaking at world outlook conferences in the United States, where many American economists, when asked about the prospects for Japan, simply threw up their hands and somewhat gleefully dubbed it "a basket case". Ten years later, how the world has changed. Now the United States is the prime candidate to be dubbed the world's economic basket case. But is it?

At those conferences I rejected the notion that Japan was a basket case. It was still among the top three economies in the world, and while prospects for strong growth in the range of 4% to 5% annually were unlikely, and have not been achieved in the past decade, it remains a major player on the world stage. Japan has matured as a major economy and faced some significant structural problems, particularly in the banking sector in the late 1990's, and still does, but these will be addressed over time. Japan remains a significant player on the world stage, and once it has solved it's structural problems, should be able to achieve annual economic growth in the range of 3% to 4%. This rate of growth does not match the 10% to 14% annual growth rates achieved in China over the past decade. However, China is in rapid development mode as Japan was until the 1970's, and once its economy matures, China will also return to more normal rates of growth.

The United States is not a basket case either. It remains the world's dominant economy, but faces significant structural problems in the banking sector, as Japan did in the late 1990's. The financial problems in the United States have had a much more significant impact on the global economy than the Asian financial crisis. Fortunately there has been a more coordinated global response to the structural problems generated by the United States financial system than there was following the Asian generated crisis. There have been a wide range of fiscal and monetary stimulus packages that will drive growth forward. These packages have already had a significant impact, particularly in countries such as China and Australia. China's growth rate could well reach 7% to 8% in 2009. Australia was quick to move early with a massive fiscal and monetary stimulus package, and is probably the only country in the industrialized world to have averted a "technical recession", which is two quarters of negative growth.

In the United States, the new administration has also been quick to respond with monetary and fiscal stimulus packages. Unfortunately, the federal and state governments have accumulated huge debts over the past decade, as has the private sector. The debts are the result of poor government regulation, excessive and poorly targeted expenditure, incorrect monetary policies, and enormous expenditures on the wars in Iraq and Afghanistan. It will be a long haul, but these structural problems will ultimately be resolved, and bring the economy back to a stronger growth path.

However, this will require significant committment to structural reform, effective government regulation, and a very active government to steer the economy forward. It will require a committment not just from government but from private corporations and individuals as well. There is no magic private sector bullet, and this will be no easy task in a country that has many political, cultural and regional divisions.