THE MAJOR ECONOMIC AND FISCAL CHALLENGES FACING THE UNITED STATES: IMPLICATIONS FOR THE EMERGING MARKETS

Earl H. Fryearl_fry@byu.edu

Presentation at George Mason University

24 February 2011

WHY THE UNITED STATES IS PERHAPS ASUPERPOWER IN RELATIVE DECLINE

(1) The rise of competitor nations and groups of nations (China, EU, etc.); BRICs; few decades ago, China and India considered peripheral players in global economy—a third of humanity

(2) The potent combination of (a) globalization; (b) unprecedented technology change; and (c) creative destruction; 2008-627,000 businesses created and 665,000 lost; 2009—25.1 million jobs created, 30.6 million lost (out of total of 154 million civilian labor force 16 years +); Oct 2010—civilian labor participation rate 64.5%--lowest since 1984—”lost decade” for many American households

(3) 15 major “fault lines” within the United States

AMERICA’S 15 DOMESTIC FAULTLINESBeltway Follies

Campaign FinancingGovernment Debt

External Debt and Dwindling Importance of the U.S. DollarEntitlement Explosion

Health CareEducation

Plight of the American HouseholdThe New Gilded Age and Wall Street’s Debacle

Infrastructure DeteriorationIntergenerational Strife and Festering CleavagesImmigration and the Failure to Attract the Best

and the BrightestFederalism

General Apathy and a Paucity of Civic EngagementU.S. Foreign Policy

GLOBALIZATION, TECHNOLOGY CHANGE, AND CREATIVE DESTRUCTION

• The world is not yet flat, but interdependence, interconnectedness, and vulnerability to external influences are solidifying

• Rapid technology change is without precedent—doubling information base every 5 years or so

• Schumpeter’s creative destruction—simultaneous creation and destruction of businesses and jobs—impact upon nations (Argentina in 1909 world’s 8th highest per capita income—85th in 2008); metro areas (Silicon Valley vs. Detroit), enterprises, and households

• Transitions between now and 2050 will be a rollercoaster ride for many of earth’s inhabitants—”fortunes” of nations and households can increase or decrease rapidly

resources

environment

energy

conflictweapons proliferation

crime

economics cyberspace

immigration

religion and ideology

culture

Connecting The International To The Local

INTERNATIONAL SECTOR

AMERICAN CITIES AND NEIGHBORHOODS

terrorism

sports and entertainment

disease

PINPOINTING DOMESTIC PROBLEMS • A “lost decade”—more private sector jobs beginning 2000 than end

2009; higher poverty rate; larger number of people without health insurance; median household real income lower; threats to 3 major sources of household wealth

• Concentration of wealth and growing political influence of wealthy—taxes on hedge-fund managers—pay to play and golden rule—anonymous campaign contributions—DYSFUNCTIONAL GOVERNANCE

• Wall Street debacle—privatization of profits but socialization of losses

• Brainpower challenges• Attracting the best and brightest from abroad• Government debt—only 45, 46, and 47 worse as % GDP; fy 2012

proposed budget and Germany

AMERICA’S ECONOMIC STRENGTHS

• World’s largest national economy• World’s largest trading nation

• World’s largest foreign direct investor• World’s major portfolio investor• World’s 3rd most populous nation• World’s 4th largest nation territorially

• World’s leader in technological innovation

• Leader in job creation• Very affluent nation with growing

marketplace• World’s most dynamic and diversified

economy• 1 of 3 leading nations in resources and

energy• Very stable political system• Very stable economic system• Resiliency and adaptation

THE UNITED STATES AT MID-CENTURY

• Almost 440 million people with over 80% of growth attributable to immigration

• Perhaps a “majority minority” country by 2042• 85% or more will be urbanized, with most growth

concentrated in largely self-contained suburbs• U.S. will remain a military superpower• In many other dimensions, U.S. may be a declining

superpower in relative terms• What will be the quality of life for the average American?

EMERGING MARKETS AND THE UNITED STATES:THE TECTONIC-CHANGE SCENARIO

• Western vs. other development models• Decline in influence of the trans-Atlantic region• Economic issues• Political issues• Military issues• Globalization, regionalism, nationalism

IMPLICATIONS FOR EMERGING MARKETSIN THE ABSENCE OF TECTONIC CHANGE

• Continue to move forward with successful programs• Asia could become an economic superpower• U.S. will continue to be a huge consumer market—trade, investment,

supply chain, and tourism linkages—U.S. not simply an importer of raw materials and energy products

• Consider free trade agreements with North America• U.S. needs to strengthen North American and hemispheric economic

relations• U.S. and emerging markets need to implement “best practices” from

home and abroad• Maximize the positive features of globalization and technology

transfer—win-win perspectives• Brainpower exchanges

CONCLUDING OBSERVATIONS

• The fate of the United States as a superpower will largely be determined by the American people

• There are also potential weaknesses in all of the competitor nations and groups of nations

• Americans must not succumb to Linus Van Pelt’s lament• RENAISSANCE AMERICA--the plan for renewal can work, but

it will require widespread public awareness, commitment to major changes, and a large dose of short-term pain

• North American economic cooperation• International relations and U.S.-emerging market relations

may change substantially