The Future will be better tomorrow

No-one can agree who said that first. It has been variously attributed to the American baseball player-philosopher Yogi Berra, the Danish physicist Niels Bohr, and the movie producer Sam Goldwyn. How true it is, though. At the start of this New Year it is especially difficult to make predictions for the global economy because of the many unknowns out there: a US election in November, a French election in the spring, a possible change in the Chinese administration, Persian sabre-rattling in the Straits of Hormuz, the nuclear-armed hermit kingdom of North Korea under new management. But not predicting does not mean not trying to understand the longer term economic trends. So as the year starts we will tease out unfolding events in the three most important economic regions, events that I believe are likely to be cause for concern over the coming year and will shape our future. One of the most remarkable things about the US economy as it has come out of the depths of the 2008-2009 financial crisis is the dramatic improvement in firm productivity. Firms seem to have shed unproductive jobs and plant, and taken advantage of unemployment that is at historically high levels to squeeze wages, improving their overall cost structure. Lower dollar production costs, aided by a weaker dollar compared to the US’s chief trading partners, have led to increased exports and an improved current account deficit, which before the crisis was running at about $60 billion per month and has now come down by a third. Corporate profits are high. Historically the United States has been much better than Europe at reallocating economic resources in the economy following a downturn, and this crisis is no exception. But dark clouds are massing on the horizon. The first of these is that unemployment remains stubbornly high, particularly long term unemployment. Real estate still remains a deadweight on the economy, as millions of home-owners are “under water’ (owe more on their mortgage than their home is worth) which reduces their job search mobility. The trend of greater income inequality, which has been noted for over a decade, has accelerated again, and the “Occupy Wall Street’ movement is crystallizing national dissatisfaction with the bankers and the “1 percent’, the wealthiest who have garnered the bulk of the fruits of economic growth over the decade. The United States now has less social mobility than Europe. At the federal level, public debt exceeded 100% of GDP in 2011 for the first time since the Second World War, largely the result of the federal response to the financial crisis. The budget deficit also remains at an unacceptable 8.7% of GDP, twice as bad as Italy and similar to that of France. The most worrisome issue, though, is the inability of the US congress to agree on the strategy to set things straight. The Republican Party is in thrall to the “Tea Party’ wing which wants only to cut expenditure and social programs without resorting to raising taxes. On the other side of the political divide, many Democrats in Congress believe that the problem can be only solved by raising income taxes on the wealthiest, without touching the sacred cow of entitlement programs. In practice, a combination of both of these will be needed to get the federal budget deficit in order. The general public is exasperated by Congress’s inability to govern, and its approval rating – now down to single digits – is at its lowest level in history. And the timing could not be worse: in 2012 the United States is in the midst of a Presidential election, …