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There remain dark clouds on the horizon for US economy

Friday, 2 November 2012 - 4:09pm IST | Place: NEW YORK | Agency: The Daily Telegraph
The most pessimistic economists estimate the damage from Hurricane Sandy will knock a few percentage points off US economic growth this quarter.

As residents in New York and New Jersey survey the destruction wrought by Superstorm Sandy, they are wondering how quickly the local economy will rebound and what the lasting impact will be. They are the same questions Americans have been asking about the wider economy since it officially emerged from recession in the middle of 2009.

The most pessimistic economists estimate the damage from Sandy will knock a few percentage points off US economic growth this quarter. But even they believe the effects will have all

but vanished next year. "History shows little discernible macroeconomic impact from hurricanes," is how one report put it this week.

That may be what the data shows, but that offers little comfort to the New Jersey resident whose house is submerged in the Atlantic or the Manhattan shop owner still without power and customers four days after the storm barrelled in. The relationship between the picture economic statistics paint and people's daily experience has always been a complicated and sometimes treacherous one.

Encouraging evidence that US house prices have reached a bottom will not mean much to the 180,000 homeowners who had their houses repossessed in September. The drop in the national unemployment rate to 7.8% will jar with the experience of those who live in the 16 states where it remains 8.5% or higher.

In a country as geographically large and diverse as the US, there are bound to be sharp differences between people's experiences of their economic conditions and prospects.

It is the interplay of Americans' experience of the past four years and the latest statistics on key economic measures, such as unemployment and house prices, that will determine who wins the presidential race next Tuesday. With the odd interruption over US policy in Libya and the rights and wrongs of abortion, the economy has dominated the campaign.

The quality of the debate, though, has often short-changed American voters and those interested in the direction the world's largest economy will take over the next decade. Neither candidate has given the public much beyond the very broadest of ambitions.

Each has also been happy to warn voters they are inviting economic catastrophe if they let the other bloke in. According to Mitt Romney, Barack Obama will bankrupt the country. Obama, in turn, would have us believe there will be another financial crisis within weeks if Romney gets anywhere near the Oval Office. It may be standard election fare but it is not what Americans need.

It is little surprise that a video of a four-year-old girl bursting into tears after hearing another radio report about the election went viral this week. It has gone on far too long. Despite the bitterness of the fight, both Obama and Romney have at least raised three issues that offer reasons to be optimistic about America's long-term economic future. The campaign has also ignored or offered little to tackle two major clouds on America's economic horizon.

As both candidates embark on a final onslaught on the other's economic plan, it is worth briefly highlighting these five issues. This column being about America, let's start with the reasons for optimism.

Energy independence
Analysts at Citigroup deliberately caused a stir earlier this year when they published a report arguing that the US could eclipse the Middle East as an energy producer.

Obama and Romney have each latched on to America's energy resources as a driver of prosperity over the next decade. They are right to. US oil production is at an eight-year high and the country is sitting on huge reserves of shale gas. What is more, US cars are guzzling less petrol. The efficiency of the average US passenger vehicle climbed to 26.9 miles per gallon last year from 19.9 in 1978, according to the National Highway Traffic Safety Administration.

Obama has also, rightly, pushed the development of renewable energy sources. Energy brings with it risks and hazards, and the environmental effects of drilling for shale will have to be closely monitored. But the potential benefits of growing energy resources are substantial, including lower energy costs for manufacturers and a reduction in the amount of oil the US needs to import from the Persian Gulf.

Tax reform
The sheer size of Tolley's Tax Guide to UK tax law points to a system in need of reform. So, too, is America's labyrinthine tax code, which had its last substantial overhaul under Ronald Reagan in 1986.

Encouragingly, both Obama and Romney have at least acknowledged that the tax system manages to be a burden on the economy at the same time as failing to raise enough revenue.

The Treasury estimates that it loses just over $1trillion (pounds 620bn) a year from loopholes and deductions. That roughly matches the US budget deficit last year. Done sensibly, reform should both stimulate the economy and go some way to reducing America's $16?trillion debt pile.

Innovation
Facebook's $104bn flotation may have been a near calamity, but that should not obscure what a success story the company has been. It is still hard to imagine a company anywhere else in the world innovating - and being allowed to risk failure - as Facebook and others in the US regularly do.

Fortunately, both candidates recognise that America cannot assume it will be the top innovator indefinitely. As well as competition from Britain and Europe, the fast-growing economies of China, Brazil and India are producing engineers and scientists in larger numbers. Whatever the result next Tuesday, reforming immigration rules to make it easier for foreign science and engineering students who study in the US to stay, work and possibly establish companies, seems likely.

While there is encouragement to be taken from both Obama and Romney putting these issues on the agenda for the next four years, there is plenty this campaign has either ignored or failed to address. Here are two of the most serious.

Middle class
Romney and Obama appear to say these two words every other sentence. There's a simple explanation for that. The most recent major survey of the US middle class by the Pew Foundation found 51pc of Americans consider they belong to the middle class. It also found that the last decade saw average incomes in this group drop for the first time since the Second World War.

Although both candidates have acknowledged this problem, neither has really put forward policies that begin to address two of its causes. Firstly, that globalisation means jobs that used to be done by middle-class Americans have been and will continue to be shipped abroad. Secondly, the housing boom of the 2000s that helped offset declining wages is not coming back. More imaginative solutions will be required.

A divided Washington
According to Julian Zelizer, a professor of history at Princeton University, American politics has not been as divided as it is now since the 1890s. Then, he says, society was grappling with the profound change wrought by industrialisation. Now, it is globalisation and the internet that are reshaping the economy and broader society.

Throw in the worst financial crisis since the Great Depression, and we should not be surprised that the past four years have been marked by sometimes poisonous divisions in Washington. Equally clear, though, is that it cannot last. Further gridlock is an invitation for US debt to balloon and the rest of the world to lose confidence in America's political system.

It would have been easier to add to the three causes for optimism about America's long-term economic future than to pile up the reasons for pessimism. America is lucky that is the case. But whoever wins next Tuesday should work hard to disperse the clouds on the horizon, too.


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