Wednesday, July 23, 2003

Good ol' Chris Farrell wades into the deep end in this week's issue of Business Week and comes out spluttering.
The economy's Achilles' heel is abroad. America's monetary and fiscal authorities have been far more aggressive in trying to stimulate growth than the governments in either Europe or Japan. Weakness overseas is a limit on U.S. growth.
There is a shred of truth in this statement, but just a shred. Yes, weak global demand is a limit on US growth. If measuring growth as GDP, however, "weakness overseas" will likely never end.

Since the US is a structural importer, exports will never be able to make more than a slight contribution to the country's economic growth. Moreover, real US exports have been stagnant for about 5 years now, i.e. during real economic growth in Europe and long before the latest Bush recession. In fact, real US exports peaked just when the overall US economy peaked, in 2000:III.

In GDP calculations, net exports are what count. Since the US is a structural importer and has been since the 1970s, "overseas" will always reduce US GDP. The gap between the US and the rest of the world (especially Europe and East Asia) has been a function of US overconsumption as much as overseas underconsumption. Moreover, underconsumption in places like China is part and parcel of the entire global system. An imbalanced global economy is capitalism's norm, after all. The uncoordinated Keynesian interventionism of today is a far cry from the managed capitalism of the Bretton Woods era, the only period in which global capitalism even marginally overcame its tendencies of uneven development.

Remember that the flip side of underconsumption (or as polite economists prefer, "lack of demand") is overproduction. Perhaps Farrell might turn his attention in that direction for more profitable insights.

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