Saturday, June 04, 2011

The Bullish Case for the U.S. Economy: Our Ability to Be Productive and Innovative in a Tough World

From today's WSJ interview with Robert Doll, Wall Street's perma-optimist and chief equity strategist for BlackRock, "The Bullish Case for the U.S. Economy":

"As intriguing in this moment of U.S. pessimism is the 56-year-old uber-investor's long-term bullishness on American companies and U.S. competitiveness. "You could say we're the best house in a bad neighborhood," says the man who has spent 28 years managing money. "We have fewer problems and more solutions than Europe or Japan." 

"Over the next 20 years, the U.S. work force is going to grow by 11%, Europe's going to fall by five, and Japan's going to fall by 17. This alone tells me the U.S. has a huge advantage over Europe and a bigger one over Japan for growth," he says. "And the reason for this is pretty simple. We have higher immigration than both of these, and we make more babies. We have a higher fertility rate. And they are the long-term determinants of population growth and therefore work force growth." 

But can we really win merely by staying ahead of Europe and Japan? So far the answer seems to be yes. People are invariably shocked when Mr. Doll tells them that in 1995 the U.S. produced roughly 25% of the world's goods and services and in 2010, after 15 years that included a tech bust, a terrorist attack and a housing bust that triggered a financial crisis, the U.S. was still producing that same 25% of global GDP (see chart above).

How is this possible given the rapid rise of China and India? Mr. Doll says the increase in emerging markets' share of the world economy has come "at the expense of mostly Japan and a bit Europe. The U.S. has held its own, which I think is a statement of our ability to be productive in a tough world."

But even with all our problems, he says, "I think the entrepreneurial spirit is alive and well in the U.S." He argues that we are still the source of technological innovation and home to the greatest universities and the most creative businesses. He sees promising advances in health care and alternative energy technologies. By alternative he doesn't necessarily mean "green" energy, but simply new power sources given that he expects oil prices to keep rising."

MP: The chart above of world GDP shares (data here) from 1969 to 2010 confirms Mr. Doll's claim about America's amazingly stable share of world output, which has remained at about 26% for more than forty years.  As I've indicated on the chart, the U.S. share of world GDP in 2010 (26.3%) was exactly the same as in 1975 (26.3%). It's also interesting to note that: a) the shares of world GDP in 2010 were almost exactly the same for the U.S. (26.3%), the EU-15 (26.4%) and Asia/Oceania (26.6%) and b) the shares of world GDP for Latin America and the Middle East + Africa have remained relatively stable since 1969.  

The biggest change over time has been the gradual decline in the EU-15's share of world GDP from almost 36% in 1969 to less than 27% by 2010, while Asia/Oceania's share has increased from less than 15% in 1969 to almost 27% in 2010. The fact that America's share of world GDP has remained constant over time is a testament to how America's dynamism, resiliency, and culture of innovation and entrepreneurship have enabled us to be "productive in a tough world."  In contrast, the EU-15's declining share of the world economy demonstrates the failure of anti-growth, European-style socialism with high taxes and excessive regulations that creates a culture of dependency and entitlement.        

25 Comments:

At 6/04/2011 12:57 PM, Blogger Larry G said...

well.. when I look at the chart - it appears that the US and Europe are on a very similar trajectory and Asia/Oceania are going to clean both our clocks in short order.

:-)

 
At 6/04/2011 1:17 PM, Blogger PeakTrader said...

Actually, the U.S. share of world living standards has increased, because the U.S. consumes more than it produces (up to $800 billion a year; U.S. GDP would be higher without negative net exports; and the real gains-in-trade are understated).

 
At 6/04/2011 1:26 PM, Blogger Rufus II said...

Yep, we're living on credit. Wonder how that'll work out.

 
At 6/04/2011 1:31 PM, Blogger PeakTrader said...

Rufus, if someone lent you $1, and told you to pay them back $0.95 next year, or $0.90 the year after that, or $0.85 the year after that, etc. of course you'd borrow and pay them back at a late future date.

 
At 6/04/2011 1:40 PM, Blogger Larry G said...

" if someone lent you $1, and told you to pay them back $0.95 next year, "

then again why would the Chinese buy our treasury notes knowing that?

why would ANY investor buy US treasuries ?

 
At 6/04/2011 1:45 PM, Blogger Rufus II said...

Yes, PT; but, I wouldn't borrow the money to give it to Pakistan, or Egypt, or Colombia, or to one of the other fifty or so countries that will never pay us back.

And, I wouldn't borrow it to put in my gas tank so I could go "cruisin' around." I wouldn't borrow it to spend protecting Saudi Arabia, just so I could borrow some more to put saudi gas in my gas tank, and go "cruzin' aroun'."

There's no future in what we're doing, PT. We're gambling with wrecking our credit rating, and ending up in the "poor house."

 
At 6/04/2011 1:46 PM, Blogger PeakTrader said...

Larry, it's the cost to maintain employment, i.e. generate a virtuous U.S. cycle of consumption-investment, where they sell their goods too cheaply and lend their dollars too cheaply.

 
At 6/04/2011 1:51 PM, Blogger PeakTrader said...

Rufus, trade deficits have strengthened the U.S. economy, over the past 30 years.

And they'll continue to strengthen the U.S. economy over the next 30 years.

 
At 6/04/2011 2:06 PM, Blogger Rufus II said...

PT, I think a little trade deficit is fine. Probably even "good," as long as the money is coming back in real, honest to goodness, investment.

But, running a trade deficit, just so the the Chinese, et al, can loan the money to our crooked politicians to buy votes, and fight wars to enable us to buy oil to waste, nonsensically, just doesn't make financial sense. It has to end in disaster.

We will end up with nothing to show for it but a big stack of IOUs that we can't pay.

 
At 6/04/2011 2:08 PM, Blogger Larry G said...

" But, running a trade deficit, just so the the Chinese, et al, can loan the money to our crooked politicians to buy votes, and fight wars to enable us to buy oil to waste, nonsensically, just doesn't make financial sense. It has to end in disaster."

SCORE!

 
At 6/04/2011 2:26 PM, Blogger PeakTrader said...

Rufus, if foreigners didn't invest in U.S. Treasury bonds, there'd be less investment for the private sector.

The U.S. consumes more than produces in exchange for protecting the civilized world. That's the price we pay.

The bigger the U.S. trade deficit the better, because it means the rest of the world is financing the U.S. military.

The U.S. has a world empire to defend anyway, and Middle Eastern oil is very cheap to produce.

 
At 6/04/2011 2:40 PM, Blogger Rufus II said...

PT, if the Chinese didn't have the Treasury Bonds to buy they Would Have to Invest in our Private Sector (or, whoever they sold the bonds to would have to.)

I'm loathe to use an expression that's been way overworked, recently, but this Treasury bond thing HAS turned into a Ponzi Scheme. And, those guys Always, eventually, end up in jail.

Now, as for that "International cop" metaphor: Cops get paid; we're not getting paid. We're being allowed to "Borrow Money." More money than we can pay back.

Cops can go bankrupt, too.

 
At 6/04/2011 2:57 PM, Blogger Rufus II said...

(or, whoever they sold the bonds to would have to.)

should read: or, whoever they sold the "dollars" to

 
At 6/04/2011 3:28 PM, Blogger juandos said...

"...but this Treasury bond thing HAS turned into a Ponzi Scheme. And, those guys Always, eventually, end up in jail"...

Just remember, FDR didn't go to jail for his Ponzi scheme...

 
At 6/04/2011 4:18 PM, Blogger Larry G said...

" The U.S. consumes more than produces in exchange for protecting the civilized world. That's the price we pay."

well....no....

we borrow 1.5 trillion a year from the Chinese to do it.

at some point - the Chinese use that money to outbid us for Middle-East oil.

 
At 6/04/2011 4:48 PM, Blogger Rufus II said...

We have some problems (like housing) that will just have to, more or less, work themselves out, but we can get busy on that Imported Oil thingie. We have stuff we can do, there.

 
At 6/04/2011 5:16 PM, Blogger NormanB said...

MP you've produced some great pieces but this one is right up there, maybe the best I've seen.

US in decline due to the tremendous energy in other parts of the world? Sorry that isn't true!! I love it. Go to hell Krugman others of his ilk.

So we want to be like Europe? Go to hell Obama and the Democrats in Congress. No wonder China, India, etc copied our system and not theirs.

Now if we can only get this chart disseminated to everyone in the US and even Europe we could continue doing smart things.

 
At 6/04/2011 7:11 PM, Blogger PeakTrader said...

Larry, unless the yuan, or a universal currency, replaces the dollar as the world's reserve currency, China has to pay, whether it benefits or not.

China buys oil with dollars, i.e. petrodollars, which come back to the U.S., either directly or indirectly.

China needs oil, in part, because the U.S. offshored heavy goods to China (which to a large extent is a U.S. factory), and imported those goods at lower prices and higher profits.

 
At 6/04/2011 7:24 PM, Blogger Rufus II said...

The problem is, PT, a few of my neighbors used to work at that factory before they moved it to China. Now, I'm stuck paying their unemployment, Food Stamps, SCHIP, and Medicaid; which isn't leaving me much money to buy stuff from Any factory.

The thing is, the local factory made it almost as cheap, and a hell of a lot better.

I'm trying to look at it from your standpoint (the accepted "Economics" view,) but my pocketbook just keeps getting in the way.

 
At 6/04/2011 7:41 PM, Blogger PeakTrader said...

Rufus, when a U.S. firm offshores production of a good to China, because China can produce the same standardized good at half the cost, then U.S. consumers benefit from a lower price and the U.S. firm benefits from a higher profit.

So, U.S. living standards rise, which is the ultimate goal.

Of course, that will displace U.S. workers, who are freed from unnecessary jobs, and can work in new jobs, in new industries, or work less for lower prices and lower interest rates.

 
At 6/05/2011 4:30 AM, Blogger Shane Leavy said...

So how significant is population change in that graph? I'd also like to see "share of GDP per capita". A region could increase its share of GDP even with stagnant economic growth. Individuals living in that area could experience little improvement in standards of living, which presumably is the whole point of economic growth.

 
At 6/05/2011 4:58 AM, Blogger Shane Leavy said...

Right, from the ERS statistics:

United States GDP per capita in 1969 was $21,021. By 2010 it was $42,517. This is an increase of 102%.

EU15 GDP per capita in 1969 was $15,383. By 2010 it was $32,531. This is an increase of 111%.

So the EU15 actually grew faster than the US, when expressed as GDP per capita. The US is still wealthier, but the gap closed. So I would question the usefulness of showing only the share of GDP. I guess one wouldn't be particularly bothered by GDP share, or by population decline, if one's income has risen faster than one's neighbours' incomes. No?

 
At 6/05/2011 9:05 AM, Blogger PeakTrader said...

That's why GDP is a poor measure of living standards.

For example, in the E.U., the mix of GDP is different than the U.S..

In the E.U., there's more public consumption and less private consumption, some countries have trade surpluses, and the entire E.U. economy is on the verge of collapse from its bureaucratic weight.

 
At 6/05/2011 10:12 AM, Blogger VangelV said...

It is amazing how cherry picking and a biased approach can hide what is obvious from plain sight.

First, Mr Doll is quoted as saying that, "Credit markets are sound. Money growth is good." But is this really true? Anyone who has paid attention to the earnings and conference calls knows that the bank profit recoveries have come from the from reclassification of reserves the banks had set aside to cover bad loans. Those bad loans did not go away and were never recognized as such. (Which is probably why the BKX is down around 20% since February.) The bad loans were hidden on the books while a lot of the other paper was sold to a Fed desperate to bail out its friends in the banking system. If the financial system were to recognize its bad bets much of the reported GDP would vaporize and the picture would not look as good.

Then we have the the honesty in reporting issue. The US has not recovered from the contraction. All we have seen is a massive influx of liquidity from the Fed and huge borrowing increases from the federal government.

My Doll claims that, "Over the next 20 years, the U.S. work force is going to grow by 11%, Europe's going to fall by five, and Japan's going to fall by 17. This alone tells me the U.S. has a huge advantage over Europe and a bigger one over Japan for growth," he says." While it may be true that the US could do better than Japan or the EU over the next few decades that does not mean that the unemployment picture shows any real recovery now. Over the past year the number of people not in the labour force rose Those not in the American labor force rose by 2.4 million and the data shows that one in seven Americans is now on Food Stamps. That is hard to spin into a positive no matter how much we try.

And let me point out the obvious. As usual we are given the optimistic side while much of the negative is left to the reader to discover by going to the story.

Mr Doll's optimism contains a few negatives. He claims that much of the stimulus was wasted, that Obamacare, Dodd-Frank and tax increases will provide headwinds to recovery. He admits that higher inflation and oil prices are likely but hopes that the Fed will keep things under control and that new alternatives will develop. It is interesting that he believes that over the next few decades the developing world will do better than the US and that his is a short term call on the equity markets because he excepts much of the S&P 500 earnings will come from foreign markets.

A cynic like me also likes to point out that Mr. Doll has admitted to being optimistic even as the markets went into a free-fall. That means that his positive outlook at the bottom should not have been much of a surprise. The question is what happens now. And for that Mr. Doll may not be of much use.

 
At 6/06/2011 3:56 AM, Blogger randian said...

The notion that trade deficits are bad is wrong. There is a striking correlation between high deficit years and US GDP growth. In years in which the trade deficit is high, the US economy grows robustly. In years in which it is low, the economy is flat or declining.

 

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