What is the long term "plan" for the US economy?

[Winner]

^
| As the debt ceiling farce unfolds, perhaps someone should ask this question.

What I mean is this: the US is running a huge trade deficit with China, but it is also running deficits with the European Union, Japan, and probably other smaller developed economies.

This indicates that its manufacturing sector as a whole isn't competitive. Simply put, the US products aren't competing well on world markets, thus the exports stagnate, while the imports soar.

I keep hearing that it doesn't matter, because the US is a "service economy". But what does that mean? As I understand it, a service economy is an economy where most people make livelihoods by selling services to people who can pay for them - which means people who have earned them in the other sectors of the economy. This way, money is spread across the society. But what if there simply isn't enough people with money to buy these services? It can hardly function as a perpetual motion machine, the money needs to come from somewhere. Currently, as I see it, the money is coming from abroad due to the well-known and discussed-to-death effect of the dollar being the world's pre-eminent reserve/transaction currency.

Just yesterday I read how it works with China. China earns a lot of dollars from its trade with the US. It needs to put the dollars somewhere, and so far it has seen the US treasuries as a safe bet, so in essence it kept lending the US government the same money it earned from selling Chinese manufactured goods to Americans. So, the money stays in the US so the "service economy" can "function".

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The problem with this is that it looks awfully like what happened in southern Europe. Germany is Europe's "China" - it is big, it produces a lot of stuff and it exports most of this stuff at competitive prices. Countries like Greece - "service economies" until recently - kept importing manufactured goods from Germany, but their own manufacturing sectors were not competitive so they couldn't offer much "in return". To make up for it, they borrowed the money they needed from German banks (among others) and the cycle repeated itself.

Well, we know what it led to - Greece went bankrupt (for all intents and purposes) when people realized it's economy isn't going anywhere, and other countries whose manufacturing sectors aren't competitive against other EU countries may follow.

Does that ring a bell?

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Now, can somebody please tell me how the US plans to avoid the same fate, considering that

a) its political system is dysfunctional;
b) the two parties can't agree on where the Sun rises, much less on how to reform the health care, pension and welfare system, how to reduce the military budget, how to collect taxes from the rich, how to make American industries competitive again, how to deal with environmental issues, etc. etc. etc. etc. etc.;
c) the Americans have this ridiculous notion that they're somehow unique, exceptional, so that the rules that govern other countries don't really apply to them;
d) the Americans as a people are addicted to a lifestyle their economy is unable to afford without solving all the problems I mentioned, and they're looking for a quick fix rather than complex solutions (hence Tea Party);
e) when someone comes up with a plan (perhaps not the best one, but at least something), like Obama, he's shouted down by a coalition of populist politicians funded by the super-rich who don't want to pay taxes, insane media (like Fox, also controlled by people who are averse to any progressive change), and a collection of "experts" who are about as independent, honest, and impartial as Kim Jong-il.

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So, if anyone has some good answers to my questions, please go ahead and tell me what I've missed/am missing

 

[pi-r8]

I keep hearing that it doesn't matter, because the US is a "service economy". But what does that mean? As I understand it, a service economy is an economy where most people make livelihoods by selling services to people who can pay for them - which means people who have earned them in the other sectors of the economy. This way, money is spread across the society. But what if there simply isn't enough people with money to buy these services? It can hardly function as a perpetual motion machine, the money needs to come from somewhere. Currently, as I see it, the money is coming from abroad due to the well-known and discussed-to-death effect of the dollar being the world's pre-eminent reserve/transaction currency.

No, our money comes from the federal reserve bank, which prints as much money as it wants. It prints paper rectangles with pictures of dead presidents (or adds numbers on computer files), and in return, China, South America, and Africa send us real resources and products. If they decided to stop sending us stuff, we send in our giant army of the apocalypse to massacre them. It's a pretty sweet deal, except for the part where all the profits go to a tiny subset of our population.

The short version is, we don't need to run our economy like we're still in the 19th century.

 

[Snorrius]

Now, can somebody please tell me how the US plans to avoid the same fate, considering that

Unlike Greece which can not print euro US can print dollars in which its debts are nominated, so they can try another option - to burn debts with inflation (using f.e. a series of QEs). They will have to sacrifice dollar most likely in this case and ability to borrow anything in some future but this option may be better (for US) than trying to be honest and keep dollar but defaulting, entering deflationary spiral, selling assets to pay for debts (like Greece) etc.

In any case USA (and the world in general) will have quite harsh decade. At the good side, if the world manage to avoid the big war which is often companion of economy troubles, USA will finally become good-behaving country which will mind its own business.

 

[Skwink]

I don't think there is one.

 

[plarq]

US is not a planned economy, so there's no plan.

 

[Winner]

US is not a planned economy, so there's no plan.

Hence the quotation marks

By a "plan", I simply mean where is it heading, how is the US going to address the issues I am talking about in the OP.

 

[Artifis]

Unlike Greece which can not print euro US can print dollars in which its debts are nominated, so they can try another option - to burn debts with inflation (using f.e. a series of QEs). They will have to sacrifice dollar most likely in this case and ability to borrow anything in some future but this option may be better (for US) than trying to be honest and keep dollar but defaulting, entering deflationary spiral, selling assets to pay for debts (like Greece) etc.

In any case USA (and the world in general) will have quite harsh decade. At the good side, if the world manage to avoid the big war which is often companion of economy troubles, USA will finally become good-behaving country which will mind its own business.

Quantitative easing eh?

There are calls for the USA to revamp its manufacturing industry. I know that Obama is looking into that area. Also, from what I know of the current global food situation, the USA seems be readying itself for increased exports of food products (like grains), what with the vast farms in the Mid-west.

At the same time, I think there's a lot about this country that needs to be changed. Education is a primary concern of mine.

 

[Hygro]

The United States creates the design, the Germans and Japanese engineer it, the Koreans manufacture the advanced parts, and the Chinese snap the pieces together, then the Americans market the product, and everyone buys it.

 

[RedRalph]

Honestly, I know people are going to say this is wishful thinking on my part, but I really get the feeling the US is in serious decline. All the things Winner decribes are symptomatic of a seriously problematic political system.

 

[GoodGame]

No, our money comes from the federal reserve bank, which prints as much money as it wants. It prints paper rectangles with pictures of dead presidents (or adds numbers on computer files), and in return, China, South America, and Africa send us real resources and products. If they decided to stop sending us stuff, we send in our giant army of the apocalypse to massacre them. It's a pretty sweet deal, except for the part where all the profits go to a tiny subset of our population.

The short version is, we don't need to run our economy like we're still in the 19th century.

To be honest, you're just suggesting some sort of hyper-Imperialism that Hitler would have liked. It's really not a healthy economy. And believe it or not, China will have a competitive military.


I like the OP quite a lot, but the fact is that the USA is still a large and competitive manufacturer. We may not be the toaster king, but we have specialty markets, such as aerospace. http://www.compete.org/images/uploa...Manufacturing_Competitiveness_Index_FINAL.pdf

 

[Tahuti]

Honestly, I know people are going to say this is wishful thinking on my part, but I really get the feeling the US is in serious decline. All the things Winner decribes are symptomatic of a seriously problematic political system.

Well, the US is in a relative decline (because of China, India and Europe). It's not that they have less to say, only that there are powers emerging who have increasingly more to say.

It's true that there is a serious sort of political decline in the Western World of the non-relative sort, and these the times that as gov't you simply can't borrow your way to riches. Not only America proves that point; practically every Western country does. It'll be painful, and countries like Greece will probably default eventually, but the West will recover from that.
But the times of gov'ts getting themselves into debt big time will be over for good, that's for sure; Investors and banks will be very reluctant to ever lend money to gov't ever again.

 

[plarq]

Honestly, I know people are going to say this is wishful thinking on my part, but I really get the feeling the US is in serious decline. All the things Winner decribes are symptomatic of a seriously problematic political system.

Actually, it takes much more to take down a giant. You need a bigger giant!

 

[Cutlass]

The US is competitive in every industry. Including manufacturing. And will remain so unless the government continues to screw up in the long run.

Our problems are not really "economic problems" in the long run. But rather social and political problems. And how to fix them is really a harder question than economic problems.

We are becoming a less conservative country on a lot of social issues. And the conservatives are fighting back hard. And have been very successful in making the US far more conservative on government policy and economic policy. The "economic problems" we face, such as they are, are an artifact of that governmental and economic policy conservatism.

It will probably be a long and difficult road to reverse that conservatism and return to policies that work. And out relative place in the world will likely face pressures towards decline while that is happening. But other nations face problems as well. And that will benefit America's relative position.

So the plan is to move away from the conservatives, or accept permanent decline.

 

[Rashiminos]

Hence the quotation marks

By a "plan", I simply mean where is it heading, how is the US going to address the issues I am talking about in the OP.

It will slide further and further down the hill as long as it keeps feeding its stimulus addiction.

 

[Godwynn]

The long-term "plan" for the United States economy?

Keep growing.

 

[Terxpahseyton]

Interesting interpretation the OP offers, certainly has sth. going for it. I also have a hard time to imagine how a permanent trade deficit can not eventually come back and bite you in the butt.
Could/would somebody explain in more detail how the status of the dollar works against the negative effect of a constant trade deficit? It seems relevant to the discussion and I am curious

And addressing the argument the US can print dollars as much as it want: One should keep in mind or be aware that this is - while a good possibility to have - not some awesome trump that will make the economic and financial problems go away. It rather is a fairly desperate massager, carrying its own share of risks and serious problems.

The primary ones being loosing the advantageous status of the dollar (which seems crucial to the American service economy), loosing the ability to get fresh and fairly cheap capital by issuing debt (which may seem awesome to some fundamental fiscal conservatives, but in fact just will mean a big impairment of the room for maneuver the US gov has), destroying monetary savings (admittedly less a problem in the US than elsewhere ) and of course carrying the risk of hyperinflation.
Oh and let's not forget China which in case the US decides to destroy its money lend can grab the US at their financial balls too.

 

[Grimz101]

I wrote an extremely long post & lost it all due to accidentally pressing the back button . So here's the condensed version.

The idea that America's manufacturing industry is declining & no longer competitive is a myth.
The low end jobs that barely pay minimum wage have been shipped off to east Asia.
This low end jobs have terrible profit margins since anyone can enter into the business. China is even now loosing them to East Asian neighbours. This shift of them from America to China is beneficially in that America has experienced the good kind of deflation.
America has many high end tech industries, whose workforce may have shrunk (due to off-shoring all the low end parts) & gaining vast efficiency gains. but they have huge operating profits, that they can reinvest into expansion & technology(See Apple). Which would not happen with companies operating textiles that make small profits.

Regarding the trade deficit, America, the United Kingdom etc have faced these for decades, & they have still had good GDP growth.
I find the dangers relating to trade deficits to be vastly over-exaggerated.
However in the long run the main causes of these deficits are set to change. As the politicians will be forced to stop these budget deficits one main cause of these deficits.
In addition to that China & India's burgeoning middle class will be an ideal market to export to(Think Apple again, everyone loves an iPhone), China & India will be forced to use consumption to drive growth as their reliance on low end manufacturing starts to dry up. To the advantage of America & Europe.

 

[Winner]

Just a side note:

over the past two years, I've lost any faith I might have had that "GDP growth" is really indicative of anything truly important.

Spoiler :

Regarding the trade deficit, America, the United Kingdom etc have faced these for decades, & they have still had good GDP growth.

Greece had a good GDP growth too, until the bubble burst. I find the "argument" that "everything is fine, because nothing really bad has happened yet" fairly unconvincing.

(...) China & India's burgeoning middle class will be an ideal market to export to(Think Apple again, everyone loves an iPhone)

I don't - Apple sells overpriced shiny crap.

 

[Monsterzuma]

Economist Michael Hudson keeps repeating that the trade deficit is almost entirely the result of military spending abroad and imports and exports are in balance where regular trade is concerned.

 

[Hygro]

I don't - Apple sells overpriced shiny crap.

That's silly--Apple products are amazing and I'm not even a loyalist or a fanboy. They are just more comfortable to use and if you aren't obsessed with customizing irrelevant things that have nothing to do with what's important in life--good connections with other people--then you will like Apple products.