Wilson Briefs l July 2015

How to Secure a
Competitive U.S. Economy
by Meg Lundsager

SUMMARY
Global economic dependence on U.S. consumer spending is unlikely
to dwindle, despite significant national and international efforts outside
the United States to support demand and improve economic flexibility.
Because that dependence increases U.S. trade deficits and threatens
U.S. competitiveness, the United States should take measures to
open foreign markets, assert U.S. leadership, and promote domestic
confidence and growth.

International reliance on the U.S. consumer economy

Economic crises worldwide lead many countries with both large and small economies to
rely on exporting their products to the American consumer to generate growing demand
that their own consumers and investors cannot provide.

Europe needs more internally generated demand, especially from Germany. This would help
other European countries as they undertake needed reforms. Monetary policy is already
providing stimulus. Fiscal policy theoretically could be used, but as
European countries prioritize reducing national debt they are unlikely

Fiscal policy theoretically

could be used, but as
policies generate stronger confidence in Germany, the Germans and
European countries prioritize
other Europeans will continue to rely on exports for growth.
reducing national debt they
are unlikely to cut taxes or
Chinas current financial market gyrations are clearly challenging the
increase spending.
to cut taxes or increase spending. So unless European Central Bank

ability of its leaders to prevent significant market downturns, which

could quickly translate into dampened domestic investment and

consumption. This may push China once again to intervene in foreign exchange markets
to depreciate the yuan and encourage more exports. And Japan, even if it vanquishes
deflation, will not be a source of global growth as its population continues to shrink and
structural reforms take years to transform labor markets and encourage more domestic
consumption.
The European crisis centered on Greece epitomizes the global macroeconomic outlook.
Weak growth, with bouts of volatility in financial markets, makes consumers and investors
more cautious. Even with the boost from lower oil prices, much of Asia and Latin America
share Europes challenge of building more diversified internal markets that will contribute to
global demand, instead of depending on global demand for strong growth.

A pressing need
Effective government action is needed worldwide. The European Central Bank and Bank of
Japan are both taking unprecedented steps to provide monetary stimulus to keep inflation
positive and support businesses and consumers willingness to spend. In the short run,
this will help prevent backsliding into recession.
In the long run, however, these economies need more resilience and flexibility to generate
conditions that encourage consumption and investment. The International Monetary Fund
(IMF) has outlined broad ranging reforms that could revitalize Europe and Japan, such
as raising retirement ages to global norms and reforming product and labor markets so
that firms can expand and contract more easily as economic conditions change. These
measures are needed to expand labor forces, which will generate growth, raise incomes,
and help reduce national debts. They will nonetheless bring pain to those who have
enjoyed generous national systems.

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Several countries in eastern and central Europe, such as Poland, have taken such steps and
seen positive results, including increased foreign investment that creates jobs and imports
knowledge and technology. But other countries inside the Eurozone have shouldered little
real economic reform while taking advantage of reduced government borrowing costs,
resulting in higher debts and deficits. Greece is the obvious outlier, but others have also
lagged in enhancing their economic flexibility.

The U.S. economy is

much more flexible, resilient,
Global overreliance on U.S. consumers generates larger U.S. trade and innovative than Europes
deficits and reduces U.S. growth. The U.S. economy is much more or Japans.

Where does this leave the United States?

flexible, resilient, and innovative than Europes or Japans. Despite

these traits, U.S. businesses currently hesitate to invest and U.S.
consumers, the backbone of the U.S. economy, are prudently saving more of their incomes
than before the 2008 economic crisis.
The United States needs to be mindful of global developments that can undermine U.S.
competitiveness. The U.S. dollar has appreciated some 20percent against the euro over
the past twelve months, and the effects became visible when U.S. exports declined in May
2015 (http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf).
The IMF warns that further dollar appreciation is a prominent risk to the U.S. economic
outlook (http://www.imf.org/external/pubs/ft/scr/2015/cr15168.pdf).
The United States cannot solve Europes or Asias problems for them, but it can take steps
to secure a competitive American economy, which will help improve the global outlook.
Timely US actions are required:
To provide competitive financing for U.S. exports, Congress should reauthorize the
Export-Import Bank. Other countries exporters benefit from government facilitated
financing; this step would provide equivalent support for U.S. companies.
U.S. negotiators should conclude negotiations on the Trans Pacific Partnership (TPP)
and continue the Trans-Atlantic Trade and Investment Partnership (TTIP) negotiations.
TPP includes some of Asias younger, faster-growing populations with rapidly
developing economies, generating more demand for American-made goods and
services. Finalizing TPP would also spark more interest in other countries to join,
such as Philippines, Indonesia, and India. TTIP, which addresses the large if stagnant
European market for U.S. producers and services providers, will keep the United
States from losing ground and help U.S. firms to benefit from Europes eventual
recovery.

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 The United States should ratify the IMF reform package negotiated in 2010, which
will shift governance roles toward emerging market and developing countries, in
order to demonstrate U.S. recognition of emerging markets growing contribution
to the global economy as Europes share declines. The United States should also
press the IMF and World Trade Organization to coordinate their oversight of trading
relationships to discourage countries that intervene in foreign exchange markets to
promote exports.
The United States should address its own fiscal disarray, first of all by abolishing the
debt ceiling to bury permanently any risk of debt default (Congresss real control
over government spending comes through its approval of the various agency and
program budgets), and secondly by initiating discussions between administration
officials and congressional leaders on permanent tax reform for the sake of the
future competitiveness of the United States. Personal and corporate income taxes
should be simplified and loopholes closed to make the system equitable, and
infrastructure upgrades and other productivity enhancing investments should be
included to keep the U.S. economy at the forefront of global innovation.

Meg Lundsager
Public Policy Fellow
Meg.Lundsager@wilsoncenter.org
Meg Lundsager is former U.S. executive director of the International
Monetary Fund. She is a public policy fellow at the Wilson Center.

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