Politics

David Hale: Good and bad news for the US

Five reasons for the superpower to feel cheerful, and five things it must watch out for

May 20, 2014
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The US faces new opportunities—and new challenges. © Sgrstan




This month, Prospect hosted a roundtable discussion with former White House advisor and top economist David Hale, in which we posed the question: "Is the US open for business?"

Hale focused first on the US economy, then moved on to discuss politics and security. His verdict? The economy is looking healthy, but there is cause for concern on the horizon in the shape of China.

Below, we've drawn from his talk five key reasons for the US to be optimistic, and five things it needs to watch out for.

Five reasons for the US to be cheerful

Goodbye to fiscal drag:

“Last year we had big tax increases and spending cuts which came to almost 2 per cent of GDP. That kept the economy's growth rate about 1.9 per cent. If we hadn't had a fiscal drag the growth rate last year would have easily been 3 per cent.”

Monetary policy is stable:

“Fed Chair Janet Yellen is very focused on the issue of long term unemployment, which currently stands at about 2.4 per cent. That's down from 4 per cent three or four years ago but it's still well above the six year moving average of 1.1 per cent. I think she'll want to get that number down to 1.5 per cent before she thinks about changing policy.”

Pent up demand:

“We've been underinvesting for a long time. If we're going to raise productivity we have to spend more on capital goods, indeed fund managers now are telling managements: ‘don't keep buying your stocks back, actually buy some capital goods, because we need to raise investment to improve productivity.’”

Oil and Gas are booming:

“The US oil production has gone from 5.5m barrels four years ago to almost 8m barrels and could within three years be at 10m barrels. Our natural gas prices have now fallen to the lowest levels in the world. That's attracting investment from countries like Germany looking for low cost gas to replace European gas which is currently much more expensive.”

Happy bankers:

“We have had a great recovery in the banking system—bank profits are now back to where they were in 2007 before the financial crisis… There has been in the last three months quite a major increase in commercial lending for the first time in a few years.”

Five things the US should be worried about

The free trade wars:

“[Obama]'s invested a huge amount of capital over the last three years in the TransPacific partnership, and since last October, a possible free trade agreement with Europe. He could not make any progress on this in the US Congress because the Democratic Party is now opposed to free trade. To complete his negotiations he needs something called fast track trade promotion authority, that empowers the president to complete a treaty that congress cannot amend. [Senate Majority leader] Harry Reid will not allow a vote on this legislation because he feels it might cost the Democratic Party trade union votes in the [midterm] elections this November. Ironically, Obama's best hope for getting his trade agreements through is a Republican takeover of Congress.”

China’s economic strength:

"The possibility is, based on new data from the World Bank, that China's GDP may already be larger than that of the United States. Obama recognised we had to make changes to accommodate this four years ago at the Seoul G20 meeting and he proposed then that... [China’s IMF member quota be increased] from 3.5 to just over 6. [IMF's quota system determines voting power—the bigger a member's quota, the more power it has].

"House Republicans will not approve this legislation. They just don't want to reform the IMF because they dislike the IMF. This for the Chinese is a very cantankerous issue... it will boil over at the G20 meeting in Brisbane this November"

Defence spending slashed

“We're now in a process of sequestration to try and reduce our fiscal deficit and because Democrats don't want to go after the entitlement programmes like medicare, medicaid and social security, and Republicans refuse to raise taxes, all they can agree to do is cut discretionary spending, by a trillion dollars over 10 years, and half of that's defence spending. This will take America's defence share of GDP from 4.8 per cent a couple of years ago to about 2.3 per cent by 2024. That's the lowest number since 1940 when it was 1.7 per cent of GDP."

The return of isolationism

“Rand Paul has suddenly emerged as a possible presidential candidate. His father ran for President many times. His father was a total isolationist. He wanted to withdraw all US military forces all over the world. Rand Paul is almost as bad, and right now he’s a serious contender for the Republican nomination in 2016. I'm disturbed by this because the Republican Party has historically fashioned good national security policies, favouring big defence budgets… Now they have got a presidential candidate who argues quite the reverse.”

Weak allies

“We're embarking upon policy which will by 2025 will make us a much weaker military power. And of course the problem with the western alliance is nobody wants to take on this role. The UK is cutting its defence budget to 2 per cent of GDP in the next three years, Germans are already below 2 per cent of GDP, Japan is having a big increase in defence spending because of China, but it will still be only around 1 per cent of GDP. There's no country which can fill this void."