by Joseph Joyce
Can the U.S. Rebalance without Raising Inequality?
Last week’s estimate of an anemic U.S. GDP first-quarter growth rate of 0.1% will be revised. Moreover, the good news regarding job growth in April suggests that the U.S. economy is expanding at a quicker pace in the second quarter. But a closer look at the first quarter data reveals a disturbing drop in investment and net exports that does not bode well for a reorientation of the U.S. economy.
The rise in economic activity was entirely due to a rise in consumption expenditures, which rose at annual rate of 2.04%. Gross private domestic investment expenditures, on the other hand, fell. Private nonresidential investment expenditures totaled $2.091 trillion, slightly down from $2.096 in the last quarter of 2013. Moreover, spending on new plants and equipment, when adjusted by GDP, reflects a continuation of a slow cyclical rise after the global financial crisis, with no sign of any acceleration:
An investment “dearth” (or “drought’) is not unique to the U.S. Antonio Fatas has shown that investment expenditures as a share of GDP have fallen in the advanced economies. Restricted spending on new plants and equipment has been blamed for continuing low growth rates in these countries, presaging a new period of “secular stagnation.”
Stephen Roach, former chief economist at Morgan Stanley and currently a Senior Fellow at Yale University’s Jackson Institute, has another concern. In his recent book, Unbalanced: The Codependency of America and China, he writes about the breakdown of the pre-crisis growth models in the two countries. China’s rapid expansion was based on investment and exports, backed by high savings rates. In the U.S., on the other hand, consumption expenditures, financed in part by borrowing against rising home values, were the basis of the economy’s growth. The flows of goods and capital between the two countries established a pattern of co-dependency between them. But the crisis revealed the weaknesses of both patterns of spending, and the two countries need to rebalance and reorient their economies.
Roach believes that China is taking the first steps to change the structure of its economy.President Xi Jinping and Prime Minister Li Keqiang have pledged to increase the role of private markets in allocating resources. Economic growth will be based on domestic demand, which will be focused on consumer expenditures. Success is not guaranteed, however, as there will be resistance from those who profited from the old export-dependent model and government control of the financial system. The government also faces daunting environmental challenges.
Roach is decidedly not optimistic about the ability of the U.S. to make the corresponding adjustments to its economy. While the deficit in federal budget has shrunk (see above), household savings remain too low. The U.S., he writes “…has ignored its infrastructure, investing in human capital and the manufacturing capacity.” The recent fall of the U.S. current account deficit could be reversed if consumption expenditures remain the engine of economic growth.
Roach is not alone in his concerns about the need for increasing national savings. Former Federal Reserve Chair Ben Bernanke raised the same issue in testimony to Congress last year. Raising savings rates during an economic recovery, however, is difficult, particularly given the slow decline of unemployment. Moreover, the work of Thomas Piketty and others on income distribution has drawn attention to a troubling aspect of this issue: savings are concentrated among the those in highest income brackets who hold such a large share of the wealth in the U.S. Many Americans live paycheck to paycheck, with little opportunity of funding individual retirement accounts to finance their retirements.
Raghuram Rajan, in Fault Lines: How Hidden Fractures Still Threaten the World Economy, pointed to the connection between the U.S. external position and growing inequality. While the U.S. economy has largely recovered from the financial crisis, the “fault lines” that Rajan wrote about still exist. It will be a daunting challenge for the U.S. to increase national savings without reinforcing the “forces of divergence” that skew income distribution.
cross posted with Capital Ebbs and Flows