America becalmed in European waters

America does not face the break-up of its currency or political disintegration, as many fear for Europe. But in many respects the structural 'Europeanisation' of its economy is almost complete.

Another spring, another sputtering American recovery. For the third year in a row, what many anticipated to be a return to robust growth is beginning to look like another summer of hibernation. Last Friday’s payroll numbers showed a 115,000 drop in joblessness, barely enough to match population growth. And the ratio of Americans seeking work continues to go in the wrong direction, which flatters the official unemployment number. It fell a decimal point to 8.1 per cent last month. If no one had dropped out of the labour market, the official rate would have risen.

None of this should be much of a surprise. There are plenty of external factors to blame – the crisis in the eurozone, the persistence of relatively high global oil prices and expectations of a slowdown in China and India. To a greater extent than before, the US economy is affected by what happens to demand elsewhere. US domestic spending power is no longer the prime mover in today’s global economy. That era is unlikely to return.

These are structural forces that have been steadily deepening. With each business cycle in the past 20 years, it has taken longer to return to growth and to restore full employment than before. In each case the market clears at a lower price than in the previous expansion. The US is about to enter its fourth year of recovery. The median household income is considerably lower than it was in June 2009, when the recovery began. It is likely to be lower still in November when Barack Obama faces re-election.

The surface politics will no doubt be ugly. The underlying economic reality is more troubling still. Since the non-rich are far likelier to spend their income gains than the wealthy, the concern with increasingly skewed income distribution goes way beyond fairness. The fact that most Americans remain in recession also harms the bottom line for America as a whole. If the US were Singapore, it could perhaps substitute lack of domestic demand with an export surge. Alas, export growth offers no miracle cure for America’s woes.

If Washington were less committed to austerity than it is, higher public investment could substitute for the anaemic middle-class pocket book. In a seminal recent paper, Brad DeLong and Lawrence Summers showed that America could cut its national debt by taking advantage of zero-bound interest rates to invest in productive capacity, such as infrastructure and large-scale retraining of workers. Without above-trend growth, the US national debt burden will only grow. Indeed, America’s disappointing first-quarter growth of 2.2 per cent would have been 0.6 per cent higher but for the impact of fiscal contraction at the federal and state level. DeLong and Summers may be timely. But they are swimming against the political tide.

What about animal spirits? People forget that during the Great Depression, Franklin Roosevelt and most of his brains trust had little idea of what would make the economy grow. Following his re-election in 1936, Roosevelt plunged the US economy back into depression with a sharply contractionary budget. Only the second world war got the American engine sparking again.

Yet the long decade of dust bowls and migration was also one of the most inventive in US history. If necessity is the mother of invention, the Great Depression was a good example. It produced the Xerox, the mass supermarket, the electric shaver, the chocolate chip cookie and more. America’s Great Recession has come up with the iPad and Twitter – a pretty good record. Yet the rate of entrepreneurship has fallen to record lows.

According to the Bureau of Labour Statistics, US small business creation is in long-term secular decline. In 2010 it hit a historic low: just 8 per cent of all US businesses were less than a year old, against 13 per cent in the 1980s. Again, none of this should come as a surprise. Talk to any venture capitalist in Silicon Valley, and any small business outside Washington, and they say the same thing: risk capital is far harder to come by. With the exception of the social media, which has very low overheads, most start-ups find it hard to get credit from banks or investors.

So where will growth come from? The answer is that it is already here. We are halfway through the new normal cycle. America blessedly does not face the break-up of its currency, or political disintegration, as many fear for Europe. But in other respects its Europeanisation is almost complete. Unemployment will remain structurally high. Labour mobility is declining. And the ratio of Americans working to those not working is bang in the middle of the European average.

Europe is of course unlikely to get the huge energy windfall from which the US is starting to benefit – the fruits of shale gas, tight oil and the potential future supply of tar sand oil from Canada. Nor is the US likely to close the drawbridge to able-bodied newcomers – although immigrants themselves appear to be crossing the moat back home (there are a million fewer 'undocumented aliens' in the US today than when the recovery began).

The details vary. But the biggest challenges are common. Whether you live in Dsseldorf or Dubuque, the old assumptions are withering. In this respect, as in others, America is no longer an exception.

Copyright The Financial Times Limited 2012.

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