Why the Economy Could... Pop!

Housing is coming back. Banks are lending again. Energy is booming. A prominent Democrat argues that the U.S. economy is finally coming back to life

By Roger Altman Monday, Aug. 12, 2013
    • Illustration by R. Kikuo Johnson for TIME

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    Nevertheless, American regulators have not finished turning the screws, nor should they. Some banks remain too big to fail, and that's why there are ongoing regulatory efforts to shrink them. In fact, a set of even tighter capital requirements for banks was approved by the Federal Reserve on July 2.

    FACTOR NO. 5

    TECHNOLOGY IS STILL OUR BEST FRIEND

    Not only has the U.S. retained its edge in technology, but its advantage has widened in several categories. According to Battelle, the U.S. contributed 29% of global R&D; spending in 2012, compared with nearly 14% for China, the next largest contributor. And absolute levels of R&D; have grown impressively over the past five years, despite the recession.

    Also, the rate of patenting by U.S. inventors is near an all-time high, according to the Brookings Institution. The value of such patents appears to be rising, based on how often these patents are cited or referenced by other patents. Most important, the primacy of the U.S.'s research-focused universities remains unchallenged. According to most rankings, 25 to 27 of the world's 30 leading universities are in the U.S.

    Despite claims that more engineering degrees are being awarded elsewhere, the quality of most overseas degrees is lower than that of their American counterparts. It's true, however, that U.S. junior and senior high schools must be strengthened for this technology edge to continue over the long term.

    For the time being, the U.S. can readily afford the investments to maintain its top technology ranking. By one measure, the U.S.'s fiscal condition actually is improving. The Congressional Budget Office now estimates that the 2013 budget deficit will come in at about $640 billion. This is still too large, but it represents only 4% of GDP, down from more than 10% in 2009. Higher tax revenue from an improving economy, a slower rise in health care costs and three separate stabs at deficit reduction since 2011 are helping clean up our balance sheet.

    By another metric, cash levels in the U.S. corporate sector are at historical highs. That's one reason tech firms are pouring cash into R&D; budgets. Microsoft spent $9.8 billion last year, Intel spent $10.1 billion, IBM spent $6.3 billion, and Google spent $6.8 billion. These are four of the five largest tech budgets in the world.

    THE CHALLENGES

    Given all the positive signs, it's surprising that this story is so little known. That probably reflects the attention on Washington and its controversies over surveillance, immigration reform and political gridlock, as well as violence and instability in the Middle East. The President's recent speech notwithstanding, it's surprising that the Obama Administration has not been more vocal about the economy's rebound.

    Especially because the comeback is so badly needed. American labor markets remain weak, and years of continued growth will be necessary to repair them. According to the Department of Labor, 2.4 million fewer citizens were working as of June 2013 than just before the 2008 collapse. The unemployment rate remains high at 7.6%, and 4 million Americans have been out of work for longer than six months. The labor-participation rate is at a 30-year low, which means many people have stopped looking for work altogether.

    In addition, according to the Census Bureau, median household income in 2011 was $50,054, down 8% from 2007. With the stock market strong, this income weakness illustrates the growing inequality challenge. Incomes of the top fifth of Americans may have grown in 2011, but they fell for everyone else.

    The U.S. is not the first country to see strengthened growth after a deep financial crisis. We saw it in South Korea following the Asian financial crisis in 1997, in Mexico after the collapse of its currency in 1994, and in parts of Latin America after its sovereign-debt crisis in the 1980s.

    The U.S. is waging a surprising economic comeback. Uniquely American strengths and powerful cyclical forces are driving it. And it couldn't come at a better time for Americans.

    Altman, who served as Deputy Secretary of the Treasury during the Clinton Administration, is the founder and executive chairman of Evercore Partners

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