Economists foretell of U.S. decline, China's ascension

DENVER Sun Jan 9, 2011 12:32pm EST

DENVER (Reuters) - To hear a number of prominent economists tell it, it doesn't look good for the U.S. economy, not this year, not in 10 years.

Leading thinkers in the dismal science speaking at an annual convention offered varying visions of U.S. economic decline, in the short, medium and long term. This year, the recovery may bog down as government stimulus measures dry up.

In the long run, the United States must face up to inevitably being overtaken by China as the world's largest economy. And it may have missed a chance to rein in its largest financial institutions, many of whom remain too big to fail and are getting bigger.

On the one hand, Harvard's Martin Feldstein said he believes the outlook for U.S. economic growth in 2011 is less sanguine than many believe.

First, the boost to growth from government spending will be drying up this year, he said. Renewal of expiring tax cuts is no more than a decision not to raise taxes, and the impact of one-year payroll tax cut is likely modest, he said.

"There's really not much help coming from fiscal policy in the year ahead," he said. Woes from the dire situations of state and local governments may actually be a drag on growth, he said.

Growth got a lift from a lower saving rate in 2010, but that probably will not last this year as households worried about an uncertain future return to paring back debt and socking more away, Feldstein added. Discouraging declines in home values mean there is less to save from, he said.

"People are worried, so there's a strong reason for precautionary saving," he said.

THE RACE IS ON

On the other hand, there is the race with China and the dynamic Asian economies, including India. Most estimates put the size of the Chinese economy on par with the United States by the early 2020s, said Dale Jorgenson, also of Harvard.

Jorgenson sees Asian emerging markets as the most dynamic in the world, eclipsing other emerging market contenders such as Brazil and Russia with steady growth over the next decade.

"The rise of developing Asia is going to accompany slower world economic growth," he said.

The United States will need to come to terms with the fact that its prevalence in the world is fated to come to an end, Jorgenson said. This will be difficult for many Americans to swallow and the United States should brace for social unrest amid blame over who was responsible for squandering global primacy, he said.

MIT's Simon Johnson put it more bluntly, saying the damage from the financial crisis and its aftermath have dealt U.S. prominence a permanent blow.

"The age of American predominance is over," he told a panel. "The (Chinese) Yuan will be the world's reserve currency within two decades."

Johnson said he believes the United States has failed to learn its lesson from the financial crisis and continues to implicitly back its largest financial institutions.

"I'm concerned about the excessive power of the largest global banks," he said. "Who are the government-sponsored enterprises now? It's the six biggest bank holding companies."

To be sure, Raghuram Rajan, a former IMF chief economist now with the University of Chicago's Booth School of Business, could still envision an ongoing U.S. leadership role.

Nothing proceeds in a straight line, he said, and there are many pitfalls along the way even for dynamic Asian economies.

"I would say the age of American dominance may be nearing an end. But America as the biggest mover will be in place for a long time," he said.

(Reporting by Mark Felsenthal; Editing by Maureen Bavdek)

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Comments (168)
neahkahnie wrote:
Yes,these were the same economists who failed to predict the crash of 08-09. These were the same economists who predicted a rosy future a few years ago with the housing bubble. Paraphasing Mark Twain,”the news of the collapse of the U.S. economy is premature.” Put three economists in a room and you have five opinions.

Jan 09, 2011 1:36pm EST  --  Report as abuse
stynger76 wrote:
The US may not be the economic power that it was in the 20th century but it will continue to be a large market and a key influence in global politics in the future. Instead of a Unipolar world we now have to be a bi or a even a tri polar world to resolve issues.

Jan 09, 2011 1:47pm EST  --  Report as abuse
vince_vega wrote:
If the US is going to descend, China probably won’t be the nation to replace it. Facing upcoming public uproars, a collapsing social system due to its demographic policy and, even if no one talks about it, huge budget shortfalls of local governments could lead China into the same mess the US is in right now.

Jan 09, 2011 1:50pm EST  --  Report as abuse
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