The economic fundamentals of the United States have come unstuck, and the problem begins at the water's edge.
A country's Current Account is the balance of payments which records its exports and imports of goods and services, as well as transfer payments related to its foreign assets and liabilities. A persisting Current Account deficit implies that a country borrows funds abroad to sustain its level of economic activity at home.
This has been the case of the United States since the early 1980s, having by now reached a structural annual Balance of Trade deficit - adjusted for temporary effects of the recent financial crisis - of around $1,000 billion, or 7% of Gross National Product, and a structural annual Current Account deficit of around $800 billion.
In the 12 months to March 2011, total U.S. Public Debt increased by $601 billion to $9,652 billion, of which $4,479 were held on foreign hands. The two principal creditor nations were China with 26% of the total held abroad, and Japan with 20%. (So, it is not quite true what we so often hear, that the United States is borrowing all its money from China).
A quick aside on the subject of U.S. government debt might be in place, now that the impending increase of the Federal Debt Ceiling has become a political football in Congress.
At the end of March 2011, total government debt stood at $14,270 billion, of which the $9,652 billion referred to above is debt actually owed to the public, national and foreign. The remaining $4,618 billion is intra-governmental holdings, primarily represented by borrowings from the Social Security Trust Fund which since its inception has been taking in more money in taxes than it has paid out in benefits (a situation which is soon to expire).
The fundamental problem behind the $1,000 billion U.S. structural trade deficit is that non-agricultural imports are twice as large as non-agricultural exports. The classical free-trade answer to that problem would be that the United States needs to double its exports by an additional $1,000 billion.
May I be so free to ask - export exactly what, and to whom?
Dare I instead be so politically incorrect as to suggest that the solution lies in the opposite direction, namely to bring $1,000 billion worth of manufacturing and some 3.5 million jobs back to the United States from overseas? After all, the country also has a serious structural unemployment problem, and not everybody can make a good living from being bankers or lawyers.
Orthodoxy tells us that developed economies are service economies, leaving manufacturing to the low-wage developing world, and that world trade should flow freely and unfettered. The only problem is that the very word TRADE implies exchange of goods and services of equal value between two consenting parties. When such parity no longer exists, one of the parties will eventually go broke, and the other is not going to get paid.
What is more, the orthodoxy about the service economy is fundamentally flawed. Why should not a modern society seek to maintain a vibrant manufacturing sector, particularly the United States which has the privilege of being by far the largest consumer market "under one roof" in the world? Manufacturing, historically the fundamental backbone of the U.S. economy, is now reduced to 22% of Gross National Product, while in tiny Israel it is 33%, in dynamic Finland 29% and in Europe's power house, Germany, 28%. While we hear much about German engineering, we do not hear much about U.S. engineering anymore.
Bringing $1,000 billion worth of manufacturing back to the United States would put the sector close to 30% of GNP and the country back on a solid footing. Government should put in place policies to make it happen.
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