Thursday, September 17, 2009

The Challenges of This Century

"The United States "continues to surprise ... It continues to renew itself." - Secretary Condoleezza Rice, U.S. Department of State, 2008

The financial crash of 2008 brought a sudden, traumatic halt to a quarter-century of U.S.-led global economic growth. The final consequences of this shock for the U.S. and world economies remain uncertain at this writing. But in the midst of the crisis, Americans chose new national leadership in a peaceful transfer of power that demonstrated again the strength of the country's democratic process and the people's confidence in the ultimate resilience of the American economy.

Since the election of Ronald Reagan as president in 1980, the United States had championed globalization of trade and finance. It opened its doors wider to foreign products and investment than any other major economy. America's entrepreneurial culture was the world's model. The synergy of U.S. political freedoms and free markets appeared vindicated by the Soviet Union's collapse in 1991. At home, a bipartisan consensus emerged in favor of further economic deregulation, which, in turn, spurred a freewheeling expansion of new types of investments that helped fuel a vast increase in international finance and commerce.

But America's growth came to rely increasingly on debt. Consumers, businesses, home buyers, and the U.S. government itself borrowed heavily in the belief that the value of their investments-including, fatefully for many, their homes-would continue to grow. The ready availability of credit on easy terms drove home prices, in particular, ever higher.

When the housing boom finally collapsed in 2007, it exposed a fragile layer of high-risk home loans made over a decade to families that could not afford them, particularly if the economy weakened. Some borrowers had purchased homes they could not afford, trusting that in a rising market they could always sell their properties at a profit. As housing prices fell, homeowners who no longer could keep up with their mortgage payments were unable to pay their debt by selling their homes. These home loans thus were the unstable foundation for a massive but largely invisible speculation on mortgage securities and financial contracts sold around the world.

Triggered by the housing collapse, this edifice toppled in 2008. Foreclosures grew and panic followed. Giant Wall Street financial firms fell, reorganized, or were combined with larger competitors. Stock markets plunged, and the world's economies headed into the worst crisis since the Great Depression of the 1930s.

The catastrophe revealed weaknesses unheeded during the boom. U.S. consumption had for too long outpaced savings. Financial regulators' faith in the efficiency of economic markets led them to underestimate the mounting risks. Optimism and ambition among many Americans bred excess and recklessness. Lessons from past booms and crashes were ignored as many focused only on the present.

But the crisis also revealed the ability of the American government to respond quickly and decisively to the challenge. Even at a peak of the crisis in the last two months of 2008, foreigners viewed the United States as among the most economically safe and politically stable investment arenas. So eager were they to purchase U.S. Treasury securities that the return on these investments dropped nearly to zero: Once again, the dollar was a refuge in financial storms.

Washington officials responded with unprecedented measures to head off a global collapse of lending. The federal government and the Federal Reserve central bank seized control of the two largest U.S. home mortgage firms and bailed out leading banks and a major insurance company, actions that would have been politically unthinkable before the crisis. An initial $700 billion bank rescue plan won bipartisan support in the U.S. Congress.

Since the start of the global crisis in 2008, U.S. government agencies and the central bank had pledged an astonishing $12.8 trillion-equal to nearly the entire U.S. annual economic output-in loans, loan purchases, and credit guarantees seeking to halt the financial freefall. The Federal Reserve also promised to buy more than $1 trillion in bonds backed by devalued home mortgages. A leading economist observed that "no one else-not even China-had a big enough balance sheet" to mount such a response.

The crisis erupted in the midst of the 2008 presidential election and helped clinch victory for Senator Barack Obama, the Democratic Party candidate. Many interpreted the electoral triumph of the United States' first African-American president, a man who rose rapidly from humble origins, as an affirmation of the nation's signature traits of optimism and faith in this country. As President George W. Bush's secretary of state, Condoleezza Rice, put it, one can "go from modest circumstances to extraordinary achievement."

This edition of the Outline of the U.S. Economy is a primer on how the U.S. economic system emerged, how it works, and how it is shaped by American social values and political institutions. Always present, given the trying times during which this edition neared completion, is a sense of how all these factors may guide the nation's responses to the extraordinary economic challenges that lie ahead.

This chapter offers a brief overview of the U.S. economy today. Chapter 2 follows the historical evolution of the economy from colonial times to the present. Chapter 3 concerns the beliefs, traditions, and values that underpin the United States' representative democracy and its economy. Chapter 4 profiles the makeup of the U.S. economy-what it produces, exports, and imports. Chapter 5 focuses on the major regions of the country whose cultures are responsible for much of America's diversity, and the linkages of infrastructure and education that have tied the country together. Chapter 6 describes the ongoing debate over the government's role in the economy. Chapter 7 examines the impact of globalization and trade on the U.S. economy, its companies, and its workers. And Chapter 8 sums up the hurdles that confront the American economy in a fast-changing and less-predictable world.

(Published by the Bureau of International Information Programs, U.S. Department of State)