Dr Bharat Jhunjhunwala
American economy is presently on the upswing. I have doubts whether this will be sustainable though. Reason is that present buoyancy is due to huge loans being taken by that country. The stimulus packages implemented by the US Government have put money in the hands of people. But this is not their own hard-earned money. This is a loan that the government has taken from the global investors. America is the largest and most open economy thus investors feel that it cannot go down under. But there is a limit upto which the US economy can sustain the debt. Sooner or later a tipping point will come and the US economy will again be engulfed in another crisis.
The debate in the US at present is about how much the Government may be allowed to borrow. Increased borrowing requires permission of the US Congress. Both major parties-Democrats and Republicans-had agreed last year to allow the Government to borrow more monies till an agreement could be reached. It was also provided that 20 percent across-the-board budget cut would come into effect if an agreement was not reached. This deadline expired on March 1st. As a result all US Government departments have been subject to reduction in budgets. There are fewer controllers on the airports and less support to the unemployed and the elderly.
This battle between the two parties assumes that the US economic crisis is only a short term affair. The country needs to tighten its belts till the crisis blows over. I think this needs reexamination. The crisis is deeper and requires more forthright efforts to reduce the standards of living of the American people.
The first argument in favour of the crisis being short term is that this is part of the business cycle. It is created by an imbalance between investment and consumption. That does not seem to be the case presently because investment and demand are both falling. Less investment is taking place in the US as American companies invest in manufacturing and service operations abroad rather than at home. Manufacturing has shifted mainly to China while BPO and KPO operations are shifting to India in a big way. Simultaneously there is less demand because wages of American citizens are under stress. Cheap goods and services imported from China and India are leading too low prices of these commodities in the US market. Accordingly the ability of US businesses to pay wages higher than those prevailing in China or India is impaired. President Barak Obama’s call to ‘bring those jobs back home’ is indicative of the mood of Americans.
Second argument in favour of the crisis being of a short duration is invention of new technologies. Truly most commercial inventions in the last century have taken place in America. These include manufacture of cars on assembly line, nuclear power, personal computer and the internet. The US has sold these inventions to other countries at a hefty premium and collected huge ‘technology rents’. The IPR regime was included in the WTO at the behest of the US in order to protect this source of income. Argument is that the US is likely to come up with new inventions and the US economy will look upwards once again. This is precisely what happened in the late nineties. A slowdown in the US led to less imports from East Asia and plunged Thailand and others into a crisis. This, in turn, boomeranged on the US and pulled it down. But the dot.com boom heralded by the internet changed the scene. Once again US-based IT companies like Microsoft and Cisco made huge profits and were able to pull the US economy forward. The NASDAQ was booming then. This experience is true but its replicability is not. Take the example of England. That country invented many of the commercial inventions in the seventeenth century-steam engine and power looms, for example. It was called ‘workshop of the world’. But it did not sustain and the UK economy lost its global grandeur. The same can happen to the US at present time.
Indeed it cannot be said with certainty whether new technological inventions will lift the US economy or not. The US continues to hold the lead in new technologies like ipod and blackberry. However, indications are available that such may not happen. Knowledge Process Outsourcing-software, design, research and clinical trials-is shifting to India. Although the US corporations will still own the patents but the knowledge will certainly spread in the Indian economy. For example, the software written by an Indian engineer for a US corporation will be proprietary property of the latter. But the Indian engineer will get knowledge of writing and marketing software and will be later able to do the same outside the US umbrella. Indian companies have also started making substantial investments in research and are filing patents in larger numbers. We have acquired many frontline technologies like spaceship launch and supercomputer with our own efforts. Thus the lead of the US, though strong at the moment, is weakening. In few years the situation may change dramatically with new inventions coming from India or other countries. The ability of the US economy to pull out of the present crisis on the strength of new inventions will be accordingly less.
Last argument in favour of a short crisis is the flow of petrodollars. The US economy had faced a short crisis of similar nature in the eighties when the OPEC countries had hiked the price of oil as has happened now. But the US economy soon rebounded. The dollars paid by US oil companies to the oil-exporters came back into the US as petrodollar investments. I reckon this flow will be much less at present. The US dollar was the unquestioned leader in world currencies at that time and the US economy was strong. Presently the US economy is being challenged by China and others. Oil-exporters stand to take a huge hit if they invest their incomes in the US dollar. They will certainly diversify their portfolio which means that monies flowing into the US will be much less than previously.
The present American crisis is fundamentally different from the past on all three counts. Both investment and demand are falling presently; technological invention is being outsourced; and flow of petrodollars towards the US is weakening. The present flow of global money towards the US is due to the stimulus package implemented by the government. This cannot go on indefinitely. In this circumstance the present buoyancy is not likely to sustain and the US is likely to face a deeper crisis as soon as the level of debt becomes unsustainable. I think the solution will come from adjusting the standards of living of the American people downwards-closer to the standards of living of people in India and China.
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