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Peter Morici: American exceptionalism on full display in financial markets ... or is it?



Washington has several options if public debt skyrockets, but none of them are compelling. The U.S. economy has confounded forecasters’ dour predictions, but not the optimism of financial markets.

A recession appears less likely as businesses keep adding jobs. Labor markets are absorbing more immigrants without threatening native-born workers’ wages and at a pace that should give the Federal Reserve patience about lowering interest rates.

The dollar in nominal terms and adjusted for inflation is stronger now than before COVID and the global financial crisis. U.S. stocks are trading at a premium to equities in Europe and Asia.

The bellwether 10-year U.S. Treasury is yielding about 2 percentage points more than its best international rival — the 10-year German government bond. That’s impressive against the historical record.

Inflation is higher in the United States than in Germany, but that accounts for only about half the spread.

Either investors view U.S. debt as riskier or are more confident about the prospects for American growth. Both explanations have some merit.

The federal budget deficit is in danger of flying out of control. With national debt at only 60% of gross domestic product, Germany’s finances pose no such peril.

By 2030, U.S. debt held by the public could easily reach 110% of GDP. Then interest payments would grow more rapidly than nominal GDP. Washington policymakers would risk a run on the dollar in international financial markets and face unattractive choices:

First, they could slash defense spending and withdraw the Navy from defending stability in the Middle East and Pacific.

Second, they could slash Social Security. With the old-age pension trust fund nearly depleted, that would amount to putting the 50% of older Americans who rely solely or mostly on the program for income out on the ice.

Third, they could slash the social safety net. For example, more strictly limit access to food stamps and the earned income and child tax credits.

Fourth, they could slash Biden-era initiatives to improve infrastructure and industrial policies to catch up with auto, battery, green energy and semiconductors with rivals in China and elsewhere in Asia.

Fifth, they could steeply increase individual income taxes on all households and not just the wealthy.

Sixth, they could boost corporate profits taxes, which are barely internationally competitive now.

The first three choices would be risky for any politician, and the latter three, though more likely, would surrender a good deal of growth and future prosperity to China.

We can’t afford to stop competing in industries that are heavily subsidized in Asia and will be central to keeping a continental-sized economy at the leading edge.

Significantly higher taxes would curtail incentives to work among our most productive citizens — especially in high-tax jurisdictions such as New York, Illinois and California.

As demonstrated during the Obama years by the pharmaceutical giants, businesses can move abroad and take sizable taxable income with them if threatened by a hostile and confiscatory regime.

Alternatively, high real rates of return on American stocks and bonds may reflect the U.S. economy’s capacity to create enormous economic rents and extranormal profits in many cutting-edge industries — finance, technology and medical science.

No other economy has created megabusinesses like J.P. Morgan, IBM, Microsoft, Amazon, Facebook, Alphabet and Nvidia with the rhythmic certainty that calendar flips decades, and technological prescience as demonstrated by OpenAI with larger learning models and Moderna and Pfizer-BioNTech with mRNA vaccine technology.

Still, America has its weak underbelly.

With BYD, China threatens to steal leadership from the West by dominating electric vehicles and green energy technology.

Assigning that to Chinese government subsidies and protectionism is dangerously expedient. Ford and GM enjoyed bailouts during the global financial crisis and receive sizable incentives now to make EVs but can’t make those at a profit.

Whereas Korean automakers make money producing EVs.

While Taiwan can profitably manufacture the most sophisticated computer chips, U.S. factories can hardly make those at all without subsidies.

President Biden’s industrial policies prop up those industries with subsidies but don’t confront higher costs — everything from permitting difficulties in construction to high factory labor and executive pay costs.

Europe is squeaking along at near zero growth — with little end in sight — but China is merely experiencing a balance sheet crisis — overvalued property — much as we did en masse during the global financial crisis of 2007-2009.

The underlying core of Chinese competitive strength is solid. It’s a critical supplier of about 275 products, and not all of them are T-shirts made by forced labor in Xinjiang province.

BYD has quality problems, but those are growing pains. Neither President Biden nor former President Donald Trump appears interested in tackling entitlements or broader federal budget deficit issues before those morph into a crisis. Or the underlying cost problems in U.S. manufacturing rather than throwing money at them that the Treasury can’t afford.

Neither man even displays much awareness, but those are among the most significant challenges a president could tackle to ensure continued American prosperity and global leadership.

• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.


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Posted: May 14, 2024 Tuesday 11:44 AM