Time to buy America

The risks of a US fiscal cliff have been overdone. An abundance of cheap energy, domestic stability and military clout make the country a sure bet.

FT.com

Every time I see a banner headline predicting the US is about to hurl itself over a fiscal cliff, I am more certain in my conviction: China may soon be the world’s largest economy, but now is the time to buy America.

The power struggle about the deficit between Barack Obama and the Republican-controlled House of Representatives could well end badly. A deal requires Republicans to admit that their no-tax-rises-ever pledge cannot survive the latest electoral defeat. Obama must accept that it will take more than squeezing the rich to repair the nation’s finances.

That said, the risks and consequences of failure have been overdone. Even if negotiations do collapse, sequestration does not mean that the economy will be crushed by $600 billion of instant tax increases and spending cuts. The impact would be felt through 2013. The short-term blow to confidence might be severe but what is threatened resembles more a slope than a cliff. If deadlock were to persist, the Congressional Budget Office estimates the US economy could shrink by 0.5 per cent next year – scarcely good news but, by European standards anyway, well short of catastrophe.

In any event, the odds must favour at least a partial deal. The other day Paul Ryan’s office was asked whether the vice-presidential candidate still felt bound by the lobbyist Grover Norquist’s infamous taxpayer protection pledge. The carefully formulated reply was that the Tea Party favourite owed allegiance to the constitution and to the voters of Wisconsin. This sounds like progress.

Obama holds the advantage. Without a deal, all of George W Bush’s tax cuts will expire, leaving Republicans with the opprobrium for attacking middle class living standards. On the other hand, the president has his own incentive to strike a bargain. Restoring America is his big second-term ambition. For that he needs a budget deal.

Looking ahead, as long as the US does not follow Europe in the self-defeating game of competitive austerity, the fiscal gap can be closed over time through a less than draconian mix of tax increases and spending cuts alongside sustained growth. The US economy has already shown a vibrancy that European governments would die for.

The big reason for optimism is structural rather than cyclical. Short-term storms have obscured longer-term trends. These are on America’s side. There is no need to take my word for it. Ask the Chinese.

A year or so ago, the Beijing-based Chinese Institute for Contemporary International Relations made an unpublished assessment of the various components of US power. The CICIR serves China’s intelligence agencies and has a reputation for unvarnished analysis. It found many more entries on the positive than on the negative side of the US balance sheet.

Some of these strengths speak for themselves. America’s military reach will be unrivalled for decades. It has a stable political system. The country’s demographic profile is significantly better than that of any potential rival. Washington sits at the centre of the world’s most powerful alliance system. Its intelligence capabilities are unmatched. The US has huge advantages in technological prowess and intellectual resources. Around the world it exerts a strong cultural draw. It has a global outlook.

The Chinese identified some counterpoints: an underperforming economy, rising public debt and deficits, social polarisation and political gridlock in Washington. What’s striking, though, is the qualitative nature of the pluses and minuses. The advantages are mostly permanent. The security afforded by geography is not something the US can lose. The same can be said for abundant natural resources and relative resilience against climate change. Compare this with the identified weaknesses. With a measure of political resolve, they are all more or less tractable.

The implications of the exploitation of unconventional oil and gas reserves has been underestimated. Most obviously, shale oil and gas will reduce dependency on Middle East petrocarbons. Over time that will encourage a scaling back in the US commitment to the region’s security, freeing up economic and military resources for Obama’s pivot to Asia. Countries such as China that are heavily dependent on imported energy will be much more vulnerable to geopolitical shocks.

The big gain, though, comes in the form of the competitive stimulus promised by abundant cheap gas. The age of offshoring is likely to give way to the era of onshoring. The US growth rate will rise and the current account deficit will shrink.

Europeans are already complaining that cheap US gas is encouraging a flight of energy intensive businesses across the Atlantic. How can, say, Europe’s chemicals producers – buying expensive Russian gas – compete with US rivals guaranteed access to cut-price feedstock.

The US has challenges aplenty. Large chunks of its infrastructure lie somewhere between creaking and collapse. Political funding rules and gerrymandering have corrupted Washington politics. Spending on health is on an unsustainable trajectory. There are others. But everyone has problems. China faces the immense task of adapting an authoritarian political structure to the demands of a rising middle class. Europe is mired in the euro mess.

What’s true is that the US can no longer presume to order the world in the manner it imagined after the end of the cold war. The rise of the rest leaves no room for a hegemon. I am not sure that should be of any great concern. A self-sufficient US may well be more comfortable playing the role of a selective superpower. As I said, it’s time to buy America.

Copyright The Financial Times Limited 2012.