What it might take for the US to remain No. 1

Economists call for greater thrift, less dependence on foreign oil, and a closer watch on Wall Street.

By , Staff writer of The Christian Science Monitor

After the dust settles on the deepest economic slump since the Great Depression of the 1930s, will the United States retain its status as the No. 1 economic power in the world?

If you listen to economists, the answer is very much in doubt.

"The jury is still out," says Allen Sinai, the chief economist of Decision Economics, a consulting firm in Waltham, Mass.

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Mr. Sinai is "incredibly disappointed" by the damage Wall Street excesses have done to American capitalism and the economy. Americans are already far less rich than they were a year ago, he says, adding, a bit sardonically, that some families will have to live with two cars, not four or five.

Another economist, Peter Morici of the University of Maryland, College Park, also sees "a real danger" of the US losing its top economic status. He suspects the American standard of living could decline by as much as 10 percent in the years ahead as the country moves to reduce its massive trade deficit, restore a reasonable savings level, and eventually bring its federal budget into better balance.

"The [President] Bush years will seem like a walk through the park compared to the real income losses Americans will suffer during the [President] Obama years," he maintains.

Such views have grown from the widespread greed, dishonesty, and inadequate regulation on Wall Street in recent years. That trend, some economists say, could badly weaken the financial sector's competitiveness in the world and its ability to help finance the US economy for years to come.

"The current financial crisis presents the greatest immediate threat to America's prosperity and financial leadership in many decades," writes Robert Hormats, vice chairman of Goldman Sachs International in The International Economy, a magazine.

These economists and others offer policy suggestions to avert, or at least ameliorate, the damage from the present crisis to the long-run economy.

Sinai welcomes President Barack Obama's effort to end the current recession with a massive stimulus package. He hopes that Mr. Obama will do more than the Bush administration to achieve greater energy independence, keep health costs in better control, and get the nation back to "basic principles of thrift." That includes getting the federal deficit under control once the economy is growing again.

Moreover, he urges Obama to be "more alert" in supervising the financial system and preventing it "from running amok" again.

"The kind of society we live in does not take action until we have a crisis," he notes. But Americans, he says, also have a "DNA set for renewal and regeneration."

Mr. Morici is wary of Obama appointments to positions dealing with the economy such as that of Timothy Geithner, selected as Secretary of the Treasury, and Lawrence Summers, designated as director of the National Economic Council.

They "don't get it," he says, because of their past connections with the Bush and Clinton administrations, adding that they were "born and bred on Wall Street."

Morici wants change in the "incentive structure" in the financial system so managers aren't tempted to take reckless positions, such as excessive financial leverage, in order to get rich quick.

"We can expect to lose our financial leadership," he predicts. Financial business will be dispersed to locations with excess funds, such as the Middle East and Asia. "We have let bankers line their own pockets and destroy their own country in the process."

Further, Morici calls for stronger action to reduce the massive US trade deficit and the borrowing required to finance that red ink, particularly by tackling its huge deficit with China. As it is, "We are selling our country to foreigners" as they use their surplus dollars to buy US companies and other assets, he says. Americans will end up "paying rent" to foreign landlords in Saudi Arabia, China, and elsewhere.

Morici suggests a tax on Chinese exports, structured so that it would decline if China let its currency rise in value to a more realistic level. A highly valued yuan would make China's exports more expensive, slowing the flood of Chinese goods to the US.

Though welcoming Obama's intentions to reduce the dependence of the US on imports of oil, Morici cautions, "Don't trade oil dependence for battery dependence." Asian nations, he says, are already striving to grow their capacity to build batteries as the US shifts its auto fleet to hybrids and electric cars in the years ahead.

Not every economist has such a negative outlook for the American economy. Irwin Stelzer, a scholar at the Hudson Institute in Washington, points out that because the US has such an economic lead in terms of per capita gross domestic product (the national output of goods and services), he doesn't expect any major nation to catch up within 50 years.

Even if one did, he says, "It's nice when other people are rich."

Mr. Stelzer also suspects Wall Street has "a kind of energy" that will enable it to retain its top standing in global finance. A believer in the Sarbanes-Oxley regulatory act of 2002 that requires greater transparency in American corporations, he figures the US will be faster now than other financial centers in getting its regulatory system "in order."

US capitalism won't die, he maintains. "It will emerge stronger."

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