Don’t count the U.S. out

Ingenious and resilient may be appropriate adjectives for describing the people – and national economies – of the handful of countries that have staved off the current global slowdown. But the two adjectives understate the resiliency and ingenuity of Americans and their economy. As a certain, iconic American once said – and would say of his country today, “Reports of my death were greatly exaggerated.”

This article makes one point that is important to Canadian executives, namely that the U.S. economy is stronger and more resilient than is commonly thought, and portrayed by the media.

In my view, Canadian executives will regret running their organizations as if the U.S. is in some kind of permanent decline.  Assume that the U.S. is down for the count and you are likely to leave a lot of profits and growth on the table.

The U.S. is critical to the Canadian economy:  three quarters of our exports go to the U.S.; U.S. exports represent one-quarter of our GDP; millions of Canadian jobs are tied to U.S. exports; key industries like car and truck manufacturing are integrated on a just-in-time basis across North America, and the U.S. financial market is an important source of capital for Canadian business.

Every Canadian business either directly or indirectly has a stake in how the U.S. economy performs.  Canadian executives cannot indefinitely make good decisions without getting the future direction of the Canadian economy more or less right, and the road to getting the Canadian economy right goes straight through getting the U.S. economy right.  Getting the U.S. economy right is a big part of successful business planning in Canada.  It is worth serious executive attention.

With the blinkers on, the case for a protracted U.S. decline is compelling.  U.S. government sector finances are a well-documented mess, and it takes optimistic economic growth and spending cut assumptions to get the U.S. federal deficit down to a still unacceptable 5 percent of GDP from the current 9 percent by 2015. The U.S. unemployment rate is stuck in the 9 percent range (average of last 40 years is less than 6 percent) with the actual rate including those that have stopped looking for work much higher. Only two million of the eight million jobs lost in the last recession have been recovered. The U.S. political system seems incapable of dealing with serious issues in a sensible way. A case in point is the high-noon debt-ceiling fiasco. How the U.S. disengages from the unprecedented monetary and fiscal stimulus necessitated by the financial crisis of 2008without derailing its fragile economy is not at all clear but disengage the U.S. must because the stimulus is unsustainable. United States consumer finances are improving but are not close to being healthy. As well, the American psyche has been badly shaken by the likes of the housing collapse, the struggles in Afghanistan and Iraq, and the stunning emergence of China as a world economic powerhouse. Put bluntly, America has lost its swagger, and swagger matters. Even the road, bridge, tunnel, water, sewer, wire infrastructure is well short of the needs of a modern, competitive economy and needs a major rebuild.

Blinkers work with some horses but they are no way to run a business.  Take the blinkers off and the U.S. has a lot going for it:

First, it is not as if the U.S. economy has not come back from big trouble before. Examples abound such as after the Civil War, after the financial panic of 1907, after the Great Depression, and after World War II.  America gets mightily distracted from time to time and is certainly prone to procrastination and denial but their North Star is that they are the number-one economy in the world and there is no quit in them.

America has an astonishing capacity to focus when their back is to the wall and today certainly qualifies as one of those times.  Those who would count America out should reflect on a controversial quote attributed to the Japanese admiral who planned and led the attack on Pearl Harbor in 1941, Istook Imamate, “I fear all we have done is to awaken a sleeping giant and fill him with a terrible resolve.”  Today’s America is now awake and resolved. and the challenge is nothing short of the place of the American economy in the world.

Second, at about 15 trillion dollars, the U.S. economy is massive, and with mass comes momentum.  Even with its current problems, the sheer momentum of the U.S. economy gives it the time to sort itself out that no one else has.

Third, the strength of an economy is as much a relative concept as an absolute concept.  Absolutely, the U.S. has big problems but relative to others, the picture changes.

Among major developed economies, Canada, Australia and Germany certainly look better at the moment than the United States. But, much of the rest of Europe, the UK and Japan put America in a different light.  Among the emerging economies, China, India and Brazil are hot, but sustaining their growth over the next 20 years is going to be much tougher than getting it going over the last 20 years.

Bear in mind that a lot of emerging-economy growth has come from a U.S. willing to run huge current account deficits to buy emerging country goods, a U.S. willing to give emerging countries access to their import market and a U.S. willing to give the world a hard currency on which to base trade.  If the U.S. is in permanent decline, why does the world head for the U.S. dollar and U.S. Treasury securities whenever there is a crisis?

Fourth, many of the problems the U.S. faces are a result of far too much government and household debt.  The process of reducing debt by paying it off is called deleveraging and deleveraging from high levels is always traumatic for the economy involved.  It is a mistake to equate permanent U.S. decline with the predictable difficulties of deleveraging.

It is also important to note that U.S. government debt is denominated in U.S. dollars.  There are grim inflationary implications attached, but when your debts are in the currency you print, it takes the issue of insolvency off the table and buys time.

Fifth, financial problems are never pleasant but the U.S. has an immense tax capacity, borrowing capacity and non-essential places to cut government spending.  The U.S. financial problem is fundamentally a case of a tax system that does not produce the revenues needed to pay for the services Americans want.  Reasonable increases in taxes and cuts to spending can close that gap meaningfully; the unused borrowing capacity is a bridge to a more sustainable financial situation.  Growth will contribute, too.

This is not to underestimate the political problems associated with tax increases and spending cuts.  Regardless, the situation would be immeasurably worse without the tax room, borrowing room and spending-cut room.

Sixth, successful market economies are not driven by governments.  They are driven by corporations run by executives who know how to compete.  In this regard, no one can touch America.  Everyone knows the likes of Wal-Mart, Exxon Mobil, General Electric, Hewlett-Packard, Procter and Gamble, Costco, Apple, Microsoft, Johnson & Johnson, Kraft, Boeing and Caterpillar. But the depth of lower-profile but highly competitive corporations is truly astonishing.

The power and capability of America’s corporate sector is one of America’s greatest but least appreciated assets.  The financial crisis and its aftermath did not have many pluses, but one of the few was that it spurred the U.S. corporate sector to get its products, costs, staffing levels, systems and balance sheets into fighting trim.  It matters, too, that corporate America is loaded with cash.

Seventh, anyone writing off America should read The Doomsday Myth by Charles Maurice and Charles Smithson (Hoover Institution Press, 1984).  Citing numerous examples of resource shortages that popular opinion said would become catastrophic, Maurice and Smithson make a point that can be generalized:  innovation driven by market economics finds solutions time and again to problems that at the moment seem insurmountable.  When faced with doomsday, people react with energy and ingenuity, usually to good effect.  Just because America seems to have unsolvable problems at the moment does not mean solutions will not be found.

Finally, America has three other things that matter going for it.  The U.S. fertility rate is close to replacement, which makes American demographics decidedly positive relative to many developed countries. including Canada.  The U.S. is still the destination of choice for many of the world’s best and brightest.  No country can touch America’s elite universities for cutting edge research.

There is a big difference between being in the ditch and being down for the count.  America is certainly in the ditch but I fully expect a return to the road.  The great financier J. P. Morgan famously said in reference to America when it was down:  “Remember, my son, that any man who is a bear on the future of this country will go broke.” Good advice!  Regrettable he is not available for the sky-is-falling cable news and Sunday talk shows.

About the Author

John S. McCallum is Professor of Finance at the I. H. Asper School of Business, University of Manitoba, and former Chairman of Manitoba Hydro. Contact

About the Author

John S. McCallum is Professor of Finance at the I. H. Asper School of Business, University of Manitoba, and former Chairman of Manitoba Hydro. Contact