The U.S. economy cannot grow fast alone. The prosperity of other countries brings prosperity to the United States. That, no doubt, is one reason why Washington has for so long recommended that foreign countries open their markets.

Bubble Economy and Unwise Policy

All the above may lead to some questions. Why is the United States losing jobs if unfair trade is not the reason? What has gone wrong? What does the United States need to do to regain a truly thriving economy?

My argument, stated briefly, is as follows. The United States has enjoyed, since the mid-1990s, a period of generally high growth. In the late 1990s the U.S. economy (and, in consequence, the world's) was distorted by inflation in stock prices and the wealth effect that generated. The American "economic miracle" was a stock bubble that fostered high spending, high growth, high inflows of foreign investment (drawn to the miracle economy) and a consumer boom.

After the false boom promoted by stock price inflation, the natural tendency of the economy has been to feel deflationary forces. That tendency, though painful, was salutary. Very low rates of saving, with the counterpart of a very high trade deficit, had to be corrected. But both Bush and Greenspan have fought to prevent this rebalancing--and have succeeded temporarily. Now a huge budget deficit joins the trade deficit while house-price inflation emulates the stock market bubble of the late 1990s.

As the Democrat presidential candidates reiterate, unemployment has risen by close to three million in the United States under President Bush. But this rise cannot be blamed on Bush. On the contrary, if he and Greenspan had not stimulated consumption by pursuing such expansionary policies, the rise would have been much greater. The U.S. trade deficit continues to be evidence not of an economy that is growing too slowly, but one that requires a correction greater than can be provided by the falling dollar.

The United States has been living beyond its means, saving little, consuming generously. The brief and shallow recession of 2001 was insufficient to provide a correction. The cyclical correction will come. This is the macroeconomic side to the U.S. economy's difficulties.

But there are also microeconomic aspects in the difficulties of the U.S. economy. In the boom years greed prospered. A part of the American tradition of hard, honest work may have given way to another American tradition: carpetbagging.

In the boom years, too, other excesses may have prospered. Government spending at federal, state and municipal levels has not been curbed. And many costs that fall upon government, companies and individuals have not been restrained. Witness, for example, the inexorable and rapid rise in costs for health care and health insurance. All these factors are affecting America's competitiveness.

Perhaps former candidate Edwards is more on track, seeing what is wrong with the American economy when he says this about education:

American high school students are almost last in the world in math and science. In addition, each year, Chinese universities graduate five times more engineers than do American universities.

Health costs, corruption in business, poor (and often expensive) education: these are the problems on which American government should be focusing if the United States wishes to thrive. But instead, the Bush Administration has resorted to a protectionism that Democrat presidential candidates threaten to deepen, putting forward manufacturing tax credits, or tax rebates for state governments as means to achieve prosperity. Where is the faith in honest endeavor for honest reward?

Lean government, free trade, excellent education: it is telling that U.S. politicians are working against the first two while doing little to promote the third. At a time when the macroeconomy has been harmed by a stock market bubble, the United States needs to be clear about policies that yield economic success. Instead it seems drawn to wild fiscal and monetary policies and to protectionism. America has lost its way.

Ian Campbell, formerly the Chief Economist for Emerging Markets at ABN AMRO Bank and Director of Latin American Research at Bank Boston, is a writer and economist.

Essay Types: Essay