America: The world’s scariest emerging market economy

Americans have long viewed their economy as the shining city on the hill for other countries to emulate. Yet since the 2008 Lehman bankruptcy, and especially over the past four years, the U.S. economy has increasingly resembled the emerging market economies to which we have been so free with our economic advice. 

A principal challenge of the incoming Biden administration will be to arrest the country’s drift towards emerging market status. 

Among the more glaring weaknesses of many emerging market economies are their poor systems of governance. Not only do they have weak economic institutions that are unable to stand up to political pressure and hew an independent and technocratic course. Their governments also are often peopled by or subject to the will of a few oligarchs who use the government to feather their own nests. 

Even before the Trump administration took office, the 2008-2009 economic and financial crisis revealed the heavy economic and social price that the country had to pay for allowing a handful of Wall Street firms to play too great a role in determining the country’s housing and financial sector policies. The COVID-19 crisis is now exposing the heavy economic and health price the country is having to pay for turmoil and a lack of competence in government, as well as for allowing its institutions to be sidelined by a president who disregards expert advice. 

Judging by Joe Biden’s past record in government, there is reason to believe that his administration will be staffed by more competent people. There is also reason to believe that he will have more respect for expert advice and for institutional independence than did Trump. However, the jury is still out as to whether he will be able to arrest the other emerging market tendencies to which the U.S. has succumbed. 

One defining feature of a dysfunctional emerging market economy is the lack of any semblance of budget discipline that eventually leads to a damaging period of inflation. On this score the U.S. is hardly looking very good. 

Even before the pandemic, through a large unfunded tax cut, the Trump administration managed to run up a very high budget deficit at a time that unemployment was at a 50-year low. This put the country in a very poor position to weather the public spending demands of the COVID-19 pandemic. That pandemic has now caused our budget deficit to balloon to more than 15 percent of GDP and our public debt-to-GDP ratio to skyrocket to around 130 percent, or to its highest level in the post-war period. 

A major challenge for the Biden administration will be to restore order to our public finances if we are to avoid eventually having a dollar crisis and a nasty bout of inflation. Whether or not Biden will meet that challenge will depend on his ability to rein in those in his party who are in favor of opening up the spending spigots on items like universal health care and free education. Biden’s electoral campaign promises on that score are hardly encouraging for the restoration of sound public finances. 

Another defining feature of a sclerotic emerging market economy is its antipathy to market competition and free international trade. Here as well the U.S. economy does not appear to be in a good place following four years of an “America First” trade policy and many more years of very weak ant-trust policy enforcement that have given rise to a general weakening of competitive forces in our economy. Under Trump’s watch, the U.S. has engaged in a haphazard trade policy that has imposed import tariffs on allies and foes alike, as well as in market intervention of the sort all too reminiscent of an emerging market economy.

While there might be reason to hope that a Biden administration will be better than the Trump administration was in standing up to the Amazons, Googles and Facebooks of the world and to reassert America’s traditional international economic leadership role, the same cannot be said of his trade policy. Indeed, there is every reason to fear that Biden’s “Build Back Better” plan is no less protectionist than was President Trump’s “America First” policy. This appears so even though he might choose to pursue those policies in a multilateral framework.

Biden will be assuming office at a time when the country is deeply divided and finds itself in the grips of its worst economic and health crisis of the past 90 years. This will make it all the more difficult for him to restore order to our public finances and to resist calls for protection. For which reason we must hope that he can exercise real leadership to build bipartisan support for policies that can save our country from drifting further in the direction of the emerging market economies.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.