Should Joe Biden win the US election he may find that the country he leads is no longer capable of setting the pace for the global economy. It was clear, as the pandemic took hold, that countries which successfully managed the first wave of Covid-19 would emerge by the end of the year in a far stronger competitive position than those that flunked the test. Initial forecasts by the International Monetary Fund (IMF) over the summer already suggested that China was likely to recover rapidly, posting a minimal annual decline in GDP. It has already outperformed those expectations even as the IMF has revised its long-run forecasts for the US downwards.
Clearly, the US retains immense economic strengths, with its tech giants the most obvious ones. Five of the world’s largest companies are US-based tech firms and the expansion in both breadth and depth of the digital economy that the pandemic has heralded – from online shopping to mass homeworking – has merely reinforced their dominance. Their position is jealously guarded by the current US administration – including making direct threats against the UK government’s plans to introduce a digital services tax – and it is unlikely that any future president will want to seriously deviate from what amounts to digital mercantilism. The extraordinary rise of US tech stocks this year, and their rapid rise after the election, reflects that widely held belief.
Securing the prosperity of what remains a small part of the US economy is one thing. Generalising that prosperity across a vast nation is another and, as research now indicates, the rise of tech has simply accelerated the concentration of wealth in the hands of the very few. Donald Trump’s tax cuts, at an expected cost of $2.3trn over a decade, reinforced the tendency: the cuts were large enough to deliver a short-term shot in the arm to the economy, but real wages have continued to decline. Creating a broad-based US recovery will require major investment by the government and a deliberate effort to build out an industrial strategy, intervening to create secure, well-paid jobs.
But even retaining the technological lead in those few critical sectors is becoming harder. The emergence of China as a “peer competitor”, able to coordinate and mobilise the resources needed to match American investment is a direct threat to the US’s own position. And given the winner-takes-all dynamic of the digital economy, in which whoever grabs a data technology first can establish an insurmountable lead, the prospect of China and Chinese companies relegating the US to a permanently subordinate role in new markets and products has concentrated minds in Washington. Donald Trump’s trade war with China was never really about securing jobs in the US: it was about thwarting China’s ability to develop new technologies, hampering its access to US technical know-how and leaving the US in pole position.
Inevitably, this has produced a response. The Chinese Communist Party’s fifth plenum, the strategy-setting gathering of its central committee, wound up last week, with a final communique that made the party leadership’s intentions plain. China, it argues, facing global competition, must look to develop “scientific and technological independence and self-reliance” in line with the need for “dual circulation”, a phrase first used by Xi Jinping in May this year, to describe the different paces of domestic economic growth and China’s engagement with the world. The next five-year plan, the 14th in a sequence that has attempted to guide China’s development since 1953, will set out priority areas for investment, most likely in artificial intelligence, semiconductors – considered an area of critical industrial weakness – and 5G.
If implemented, this would be a further significant turn away from the direction set in the two decades since China joined the World Trade Organisation in 2001, in which increased trade with the world was seen as the key to the country’s economic growth. The switch to a focus on the domestic economy, and creating major new internal markets, has been in train for a while, but clashes over trade and technology with the US has reinforced the change.
The US could attempt something similar: a focus on investment in key sectors, ideally around creating green jobs and decarbonisation, backed up by an industrial strategy that sought to deliver rising real incomes across the board. But a US elite that can barely manage to run a democratic election in good order, after two centuries of practice, is hardly a prime candidate to drive the comprehensive modernisation of the economy. Over the past four years Donald Trump has failed to deliver his promised $1trn infrastructure investment to overhaul the US’s creaking transport and energy systems and, if you were Steve Bannon, to lay the foundations for the secure jobs that would create a permanent and insurmountable majority for an economically nationalist Republican Party. Bannon’s falling out with Trump was, very significantly, over the failure to deliver this programme.
Instead, the Republicans defaulted to type, slashing taxes for the mega-rich and stoking up the stock market via quantitative easing (QE). This has been the pattern of Republican administrations since Ronald Reagan – military spending pushed to giddying new heights, coupled with eye-watering tax cuts for the wealthy that had turned the US budget deficit into a yawning chasm even prior to the pandemic. That deficit can be ignored, as can the more than $7trn of QE money issued since 2009, for as long as the rest of the world believes the dollar to be the central currency of the global system, seeks to hold it as a safe reserve asset and uses it as its preferred money for international trade. US government borrowing will always look like a safe asset and the rest of the world will continue to demand US Treasuries.
The challenge today is to push fiscal intervention in the other direction – away from military spending, and into delivering for main street. With even the IMF’s chief economist insisting on the need for fiscal stimulus, in the form of dramatic government spending to support economic activity and provide for additional healthcare costs, the US’s political decay has an immediate political cost. A deadlock between a Democrat presidency and a Republican Senate puts any such spending programme at risk – at least on the scale that is needed. Biden’s $2trn infrastructure plan presently looks set to go the same way as Trump’s.
If fiscal stimulus can’t be agreed, the immediate prospects for a US recovery look bleak; and with Washington deadlocked, it will be left to the Federal Reserve to take up the strain. Alongside the continued expansion of QE, the pandemic has seen interest rates cut to near zero, and some talk of introducing negative rates. But with the domestic political and institutional breakdown only too obvious, the limits to the dollar’s “exorbitant privilege” may appear rather sooner than we think, as former Morgan Stanley chief economist Stephen Roach has warned – particularly in a world where the US’s technological lead is no longer assured.
We are witnessing the end of the US as the world’s absolutely dominant economy, although it will retain its relative advantages for some time. Washington will rage and flail against the loss of its position but if it cannot overcome its profound domestic failings – and neither party shows any signs of being able to do so – it will succumb to the inevitable.