The Two Sides of the American Economy

As readers of this blog no doubt have noticed, I am more bearish (pessimistic) about the outlook for the American economy than most other libertarians and objectivists, particularly the Swedish ones. That is because they either tend to focus exclusively on the microeconomic conditions in America or because they are guided by non-misesian monetary theories like supply-side economics or Friedmanite theories.

The microeconomic conditions in America are indeed highly competitive, one of the strongest in the world with just a few exceptions like Hong Kong and Latvia and Estonia. Tax rates are much lower than in Western Europe, unions are very weak (almost non-existent outside the government sector and a handful private industries like the Detroit car industry)and the federal minimum wage of $5.15 is so low (In France and other Western European countries minimum wages are twice as high) that it doesn't create much unemployment. Extremely few companies are state-owned (with the notable exception of the U.S. Postal Service).Meanwhile, the U.S. have a more reliable property rights than most third world countries and a far less corrupt justice system than for example Mexico.

These strong microeconomic characteristics are the reason why America have kept outperforming most other advanced economies and why it is the world's third richest country after only the tiny bank haven Luxembourg and oil rich Norway.

However, while the microeconomic characteristics of America is strong, the macroeconomic characteristics is very troublesome. First of all, the budget deficit for the entire public sector is the largest of all mayor economies except for Japan . And secondly and more importantly, the U.S. have long had a highly inflationary monetary policy worse than most other advanced countries, as I have highlighted in this blog and in several mises.org articles (See here, here and here ). For the specific statistics of the situation, I refer to the linked articles, but in short, Alan Greenspan's policies have created large imbalances with dangerously low savings and a dangerously high debt burden, particularly in the household sector.

So far the strong microeconomics of the U.S. economy mostly won out over the weak macroeconomics, particularly since the short-term effects of the macroeconomic imbalances on GDP is actually positive. However, in a likely not too distant future, the macroeconomic imbalances will be proven unsustainable, something which will create a recession, most likely a severe one (though probably nothing like the Great Depression).

The problem for the libertarians who use America as a role model on account of its strong microeconomics is that at that point, socialists will use the recession to reject, not Bush's reckless fiscal policies or Greenspan's reckless monetary policies, but the relatively low taxes and flexible labor market in America. By failing to recognice America's weak macroeconomics, Swedish libertarians are setting themselves up for socialist attacks on the relatively good microeconomic policies of America.