The Telegraph, Jun 6, 2016
Falling levels of unemployment. A return to growth. House prices recovering. And, perhaps most significantly of all, a central bank that has felt so convinced the economy is on the mend that it has actually raised interest rates once in the past year and may do so again before Christmas comes around.
The American President Barack Obama had some fair points to make as he defended his economic record over the last eight years.
As he prepares to start writing his memoirs, Obama has started what is usually the final lap of any term in the White House – securing his legacy, and doing what he can to make sure his own party, no matter how much he may dislike the nominee, keeps the keys to the Oval Office.
And yet while Obama undoubtedly has steadied what was a very rocky ship, in reality his economic record has been a dismal one.
Labour participation rates have been terrible, wages have been weak, corporate taxes have become ridiculously high compared with the rest of the world and, worst of all, the United States has lost much of the entrepreneurial drive that made it so rich in the first place. He has done nothing to turn any of that around – and in many ways has made it worse.
With the fluency and intelligence that marks all his speeches, Obama made a powerful defence of his economic record when he spoke in Elkhart, Indiana, last week. “America’s economy is not just better than it was eight years ago – it is the strongest, most durable economy in the world,” he said. He went on to argue that “we’ve seen the first sustained manufacturing growth since the 1990s” amid a broad based recovery from the financial crisis he inherited from the Republicans.
Well, up to a point. True, no one would deny that the American economy is in better shape now than it was when Obama took office. It is growing at a respectable rate, wages are increasing, it has avoided deflation, and the stock market, while hardly exciting, has kept one of the longest bull markets in history going. The trouble is, when you dig into the detail, there are some long-term trends that suggest an alarming decline in the competitiveness of the US – and Obama has done nothing to reverse them.
Such as? First, the US has witnessed a terrifying drop in labour participation rates. In simple terms, it is not that unemployment is that high – it is that people don’t bother looking for work. America used to lead the world in the numbers of people with jobs, but the overall participation rate has fallen from 67pc in 2000 to 62pc now. It is still two percentage points below where it was before the last recession. By contrast, in this country, the rate has climbed past 70pc to hit all time highs. True, a lot of those jobs are not terribly well paid, but an economy can’t grow without lots of people working – and that is not true of the US any more.
Next, for all his boasts, wages have been stagnant under Obama. The shale boom has created a few centres of prosperity – indeed all of the ten towns with fastest growing earning are energy producers, led by places such as Midland, Texas, and Bismarck, North Dakota (the two places where earnings growth has been strongest in the last decade). With the oil price under pressure, that probably won’t keep going – and once you strip those few booming cities out, wages have hardly grown at all under this Presidency.
Thirdly, corporate tax rates have been allowed to drift upwards. As other countries have cut their rates of corporation tax, Obama has kept the American rate stubbornly high, preferring to punish companies that want to escape, rather than the rather more obvious solution of simply cutting it. In the US, the corporate tax rate is 35pc, and state taxes levied on top of that mean it is often closer to 40pc.
By contrast, our rate is coming down to 17pc, half what American companies pay. Heck, even the French rate is lower than the American one. Globally, only the United Arab Emirates, at 55pc, and Chad, at 40pc, now levy more. The result? American companies have started to move abroad, and even though Obama has threatened to slap extra taxes on them for doing so, more and more are likely conclude that they have little choice but to locate somewhere more competitive.
Fourthly, he has presided over a mountain of new regulations. According to a Heritage Foundation study, new rules imposed on business last year cost $22bn, and the total since Obama became President has gone past $100bn. A total of 20,000 regulations have been imposed since 2008. In the last year alone, there have been costly new rules micro-managing overtime, clean air, and financial advice. Even by European standards, where markets are far from liberal, much of the American economy is now ridiculously bound up in meddlesome red tape. One example: in Tennessee, you now need a state licence, involving 300 hours of training, just to shampoo hair in a barber shop. How is that meant to help people start businesses or get jobs?
Finally, and perhaps more worryingly of all, the US now has a lamentable rate of start-ups. The number of new companies being formed every year barely exceeds the number that close down, and in several of the last eight years it has actually seen a net rate of closures. According to a report this month by the Economic Innovation Group, this recovery has seen a net 165,000 new enterprises, compared with more than 400,000 in the 1990s and 2000s. By contrast, this country, even though it is only a fifth of the size of the US, has a million more companies than it did before the crash, and the total has hit an all-time high (on average, we now create more than 250,000 new enterprises a year). Our image of the US is shaped by its history, and by the huge success of Silicon Valley. But that is a unique economic eco-system, and if you strip that out, the US is not a nation of entrepreneurs any more.
In reality, the American economy has lost much of its appetite for innovation and its dynamism. A few giants such as Google and Amazon, and a booming energy industry, have helped to mask that, but the underlying trends show a relentless decline in competitiveness. It is too early to describe the US as the new France – but the comparison is not as ridiculous as it once would have been.
It has taken about four decades longer than it took Europe, but in many ways America has started to turn into a continental social democracy, with all the sluggishness and slow growth that implies. With his emphasis on subsidies, heath care and regulation, Obama has accelerated that process – and Hilary Clinton would do so even more. America may be losing global economic leadership because countries such as China are growing. But it is also losing it because it has abandoned many of the qualities that made it so prosperous in the first place – and Obama showed no sign of wanting to recover them.