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Some Reasons for Optimism on the U.S. Economy

by Edward Alden
July 17, 2013

The 2013 A.T. Kearney Foreign Direct Investment Confidence Index. The 2013 A.T. Kearney Foreign Direct Investment Confidence Index.

Two reports that came out today left me feeling more optimistic than I have in some time about the prospects for the U.S. economy. The first was an annual survey by A.T. Kearney that asks foreign executives which country in the world offers the most attractive investment opportunities. The United States topped the list for the first time since 2001.

The second is a new study on the U.S. economy by the extraordinarily productive McKinsey Global Institute entitled “Game Changers: Five Opportunities for U.S. Growth and Renewal.” The economists who wrote the study suggest that with a little bit of sensible effort by policymakers and business leaders (always a challenge to be sure), the United States could quickly re-ignite much higher rates of growth and job creation than we have seen in recent years.

First on foreign direct investment (FDI). In a global economy, the ability to attract FDI is probably the best single measure of a country’s overall competitiveness, since foreign companies are unlikely to invest anywhere that does not offer solid returns. The United States has long attracted more FDI than any other country, but its share of global FDI fell sharply for much of the 2000s; most of that was due to growing investment opportunities in China, Brazil, and other fast-growing economies, but the United States lost ground even compared to European and other advanced economies.

The new survey out today, based on interviews with more than 300 global executives, puts the United States back on top as the country deemed most attractive to foreign investors, up from 4th in 2012. Nearly 40 percent of those surveyed said the investment outlook had improved in the United States, versus just 11 percent who said it had worsened.

That confidence is underscored by some solid trends. The McKinsey study notes that since 2008 the United States has been outperforming most other advanced economies in terms of average FDI flows as a percentage of GDP. Only Australia and Canada – buoyed by investments in commodities and natural resources – have done better.

The McKinsey report, which is based on a broad analysis of U.S. economic performance and prospects, has some surprisingly encouraging conclusions about the rather modest initiatives that are needed to jump start stronger growth. It identifies five “game changers,” which are a mix of developing trends and low-hanging fruit that could be seized with a little effort. The five are:

  • Energy and the shale revolution. U.S. natural gas production has risen by 51 percent annually since 2007, driving gas prices down to a third or less of European and Japanese prices. This is a boon not just for industries that rely on gas such as petrochemicals and fertilizer, but also in energy-intensive industries like steel, glass, paper, and pulp.
  • Trade in knowledge-intensive industries. The United States, which is the world’s technological and scientific leader, is one of the few advanced countries that runs a large trade deficit in knowledge-intensive goods such as automobiles, aerospace, semiconductors, and pharmaceuticals. Bringing the U.S. trade deficit in these sectors back to 1990s levels would create some 1.8 million new jobs, the study says, and strong recent export growth in these industries is an encouraging sign that a turnaround is possible.
  • Big data. The United States is the leader in the development and storage of data, but has only begun to harness its possibilities for improving economic performance. Better use of data to track outcomes in health care, education, government services, and retail sales could accelerate productivity gains in sectors that have seen little or no productivity improvement in recent decades.
  • Infrastructure. As we noted in “Road to Nowhere,” our progress report and scorecard on U.S. transportation infrastructure, the United States is investing much less than it should to meet future needs. The McKinsey study suggests the shortfall is about one percentage point of GDP, or $150-180 billion annually. Making those investments, which some states and municipalities are starting to do, would be a powerful short-term stimulus and set the foundation for stronger future growth.
  • Invest in talent. Finally, as we laid out in “Remedial Education,” the recent progress report and scorecard on federal education policy, the U.S. is slipping badly in moving its young people through to college completion, particularly in the STEM fields. Reversing that trend would offer the biggest long-term payoffs of any of the Big Five game changers identified by McKinsey.

While some of these are certainly hard, they all strike me as quite do-able. And that should be cause for optimism.

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  • Posted by Alexis de Pleshcoy

    It is very difficult to post in a couple of sentences disagreements which should span hundreds of pages.
    Renewing America has in its mission a fundamental flaw: “rebuilding American economic strength”.
    The simple question is how did we get in the position to rebuild, how did we lose it in the first place?
    After Europe’s self-destruction in the Greatest War of 1914-1945, and especially after gaining the right to print gold after Bretton Woods, the fundamental question is how did we get in the position to rebuild what was so evidently ours? I did even mention the gigantic transfer of science and technology, including physical brains from Europe and all over the world, which occurred especially after 1945.
    Nothing symbolizes better the present state than the bankruptcy of Detroit, once one of the wealthiest cities in the world, a magnet in the 30’s, the arsenal of democracies in the 40’s.
    The “game changers” listed in the McKinsey report are not really reason for optimism.
    “Energy and shale revolution” – it is true that the technologies behind this are truly revolutionary, but it is still harvesting the natural bounties of the continent and eventually exporting them for manufactured products. Environmental impact aside (after all ours is a huge country), it is still transitional technology, if we judge in centuries.
    “Big Data” – “track outcomes in education”. It would take a book to explain what is wrong with our educational system, “for profit” being one of the more important. Tracking outcomes is infinitesimal, if at all, but it could be twisted for infinitely arguing about infinitely reforming the educational system, as always, politically motivated. “retail sales” – we have one of the worst customer service, and we look to improve productivity?
    “Infrastructure” – “States and municipalities” can find $150-$180 billion annually to re-build the crumbling roads and bridges? With rising pension and health care costs, and with the exiting level corruption, it is hard to even dream this will materialize.
    “Trade in knowledge-intensive industries” and “Invest in talent” – these are not low-hanging fruits. There is no indication that they are attainable in any way.
    It would take again a book to discuss why, but there is one fundamental one: the curse of the reserve currency. Bretton Woods made the US dollar the reserve currency, and from that day on it made it easier to make money by being a financial engineer rather that building a Large Hadron Collider.
    I could anyway comment on what the first step could be.
    Create a parallel educational system, university level, where admission is solely based on knowledge rather that the present bureaucratic system. Outsource the admission process to the organizations running the admissions for the Indian Institute of Technology (The Joint Entrance Exam) and the French “Grandes Ecoles”.

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