A fading U.S. economy? The numbers say no

A fading U.S. economy? The numbers say no

NEIL REYNOLDS

Globe and Mail Update

February 15, 2008 at 2:14 PM EST

“‘I am a huge bull on the American market. It is not a smart thing to sell the United States short over the years – or Canada, for that matter.”

– Warren Buffett in Toronto

U.S. President George W. Bush has submitted to Congress his federal budget for 2008-09, calling for spending in the next fiscal year to break through $3-trillion (U.S.), anticipating further deficits in excess of another trillion, pushing balanced budgets into 2012 and beyond – indeed, into the second term of his successor in the White House. All in all, it's a management mess of appalling proportions. Why, then, is Warren Buffett, the world's second-richest man, such a “huge bull” on America?

The answer is that the United States economy is now so productive and so resilient that it will take much more to bring it down than anything thrown at it in the past decade – an almost biblical list of tribulations that includes the high-tech bubble, the recession of 2000-01, the terrorist attacks on the U.S., the Afghanistan war, the Iraq war, the killer hurricanes, the escalating crude oil prices and the high-risk mortgage meltdown.

So how's the U.S. doing? Like Job after all the curses had passed, it finishes each period of tribulation richer than it started. Setting aside all the market hubbub that comes with geopolitical angst, setting aside the ups and downs that come with the business cycle and taking a longer-term perspective – “over the years,” as Mr. Buffett put it – the U.S. has performed better thus far in the 21st century than it performed in the 20th century.

Start with national net worth, a comprehensive prosperity measurement (rarely used). Mr. Bush's supplementary budget papers provide the data, from 1960 through the end of 2007, and constitute a national prospectus on the longer-term outlook.

At the end of last year, the net stock of wealth in the U.S., the country's net worth, exceeded $112-trillion – notwithstanding the erosion in the market value of residential housing during 2007. U.S. net worth (which includes public and private assets) increased last year by 3.9 per cent – the average annual increase since 1995.

U.S. net worth is now slightly more than eight times the country's GDP – the highest multiplier in 50 years. In 1960, for example, it was 6.7 times GDP; in 2000, at the end of the presidency of Democratic President Bill Clinton, it was 7.5 times GDP. The country's net wealth, in other words, has always grown faster than GDP and continues to do so – and at a record-setting pace. (The average annual real-dollar increase in GDP for the past five years was 2.8 per cent.) Note that national net worth identifies the assets that remain after all foreign debt has been subtracted. In 1960, again for example, the U.S. had no foreign debt whatsoever; net worth (expressed in 2007 dollars) was $20-trillion. In 2000, at the end of Mr. Clinton's presidency, the country had foreign debt of $3.4-trillion and net worth of $88.9-trillion. In 2007, the country had foreign debt of $8.3-trillion and net worth of $112-trillion. Thus U.S. net worth increased 25 per cent in the first seven years of Mr. Bush's presidency – notwithstanding the economic tribulations and notwithstanding the foreign debt.

The increase in the U.S. current account deficit, which accounts for most of the country's foreign debt, declined last year for the first time in a number of years – falling to 5 per cent of GDP ($712-billion) from 6.6 per cent of GDP in 2006 ($758-billion). Last year's $712-billion increase in foreign debt represents something like 0.5 per cent of U.S. net worth.

The U.S. government analysis of this data calls the foreign debt “very high,” in historical terms, but adds that it remains “relatively small compared to the country's assets.” Throw in every federal government liability (including, for example, environmental cleanup of all superpolluted military sites) and the government's financial obligations equal 5.7 per cent of U.S. net worth.

Look also at U.S. net worth on a per capita basis (in 2007 inflation-adjusted dollars): in 1960, $110,000; in 1970, $150,000; in 1980, $220,000; in 1990, $256,000; in 2000, $306,000; at the end of 2007, $360,000. As an economic indicator that extends back for half a century, through war and peace, through Democratic and Republican administrations, U.S. per capita national net worth accurately tracks the country's relentlessly upward-bound trajectory.

As accurately as any indicator for the long term, it explains why Mr. Buffett is right to be optimistic and why investors shouldn't sell America short – or, since our economic destinies are ultimately inseparable, Canada either.