The Impact on Georgia of the Decline in the U.S. Economy

Edward Raupp, The University of Georgia, Tbilisi

Abstract
As a nation in transition to a market economy, Georgia looks to the West, especially the United States, for appropriate paradigms and for active partners.

Unfortunately, the economy of the United States is in decline, a process that began during the Reagan-Bush administrations and has accelerated during the current administration of George Walker Bush. The decline of the American economy calls into question its role as a model for Georgia and invites inquiry into the nature and extent of its effect on the economy of Georgia.
The Impact on Georgia of the Decline in the U.S. Economy
This paper raises questions about the role of the U.S. economy as a model for the Georgian economy as the latter moves ahead in its transition to a free market system. It also addresses the near-term impact of the declining U.S. economy on Georgia’s own economic progress. The paper investigates signs of the decline in the U.S. economy; the near-term impact of that decline on Georgia; the mid-term prospect for the U.S. economy; and the role of The Georgia Forecasttm in assessing the outlook for the Georgian economy.
Signs of the Decline in the U.S. Economy
The clearest signs that the U.S. economy is in decline may be seen in (1) the GDP growth rate, which is at or below zero; (2) the debt condition of the nation, its consumers, and its corporations; (3) the depreciation of the U.S. dollar; and (4) the deficit in the current account balance.
Recession
The traditional definition of “recession” is two consecutive quarters of negative growth in gross domestic product (GDP). Increasingly, economists have been rejecting that definition. Britt Beemer, chairman of America’s Research Group, said in November 2007, “If the consumer doesn’t shop at Christmas time it would signal to Wall Street that we are in a recession” (Yost, 2008). The National Bureau of Economic Research (NBER), the keeper of the keys to the definitions of economic terms, says, “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales” (NBER, 2008).
The U.S. economy is either stagnant or negative at this time. In February 2008, for example, the economy lost 63,000 jobs (Andrews, 2008). Bankruptcies are at record levels, at a rate of some 4,000 per day. Over 70% of economists surveyed recently said that the U.S economy is “in recession now” (Izzo & Reddy, 2008).
Leising and Matthews (2008) report that, “Harvard University economist Martin Feldstein, a member of the group that dates business cycles in the U.S., said the nation has entered a recession that could be the worst since World War II.” Dr. Feldstein is president of the National Bureau of Economic Research. “I believe the U.S. economy is now in recession,” Feldstein told the Futures Industry Association conference in Boca Raton, Florida. “Could this become the worst recession we have seen in the post-war period? I think the answer is yes. I would emphasize the word `could.’ ” Prominent Wall Street business journalist Dan Dorfman recently reported “talk of worst recession since the 1930s” (2008).
The impact on Georgia is clear. A United States that is in decline will be less likely to buy from abroad.
Debt
It took the United States government 200 years to amass a national debt of $1 trillion. Ronald Reagan tripled it in eight years. George Herbert Walker Bush added another trillion in just four years. Bill Clinton balanced the budget and even earned a surplus. George Walker Bush is now adding another trillion every 2-3 years, and the total national debt now stands at a staggering $9.4 trillion, or $31,000 for every man, woman, and child in America (Michigan, 2008).
National debt as a percent of GDP declined from the end of World War II until the start of the Reagan administration then rose for the 12 years of Reagan-Bush. It declined during the Clinton terms and is rising again under the present Bush administration.
If it were only the national debt that gives us concern about the decline in the U. S. economy, that would be bad enough, but personal debt and corporate debt are also soaring to dangerous levels.
Personal debt as a percent of disposable income is rising dramatically. The impact on Georgia is that the soaring mortgage debt of Americans reduces their discretionary income, income that could in some degree be used to buy goods from Georgia. Also, as the U.S. government spends billions to bail out domestic actors, there will be less likelihood of raising, or even continuing at the same levels, aid to other nations.
Georgians save on average about 10 percent of their income. Americans do not save at all; their savings rate is negative, which means they are taking money out of the banks rather than adding to their accounts. Savings deposits today mean investments tomorrow and improved prospects for longer term growth. Negative savings mean less investment and slower growth. The impact on Georgia is negative, as increased U.S. bankruptcies will reduce purchases. Financial markets, which are currently growing in Georgia, will weaken in the U.S. or collapse.
Corporate debt as a percent of GDP is also soaring. This means American firms are less likely to increase their global outreach, and it also means that, while investing in Georgia may be profitable, it may decline or rise at a slower rate as the supply of funds for investment shrinks.
Dollar Depreciation
The value of the U.S. dollar is shrinking and is at its lowest level in recent memory. According to a 2005 Bloomberg report (Pesek, 2008), speaking about the crash of the dollar,
“Bill Gates, chairman of Microsoft Corp., left no doubt of that, telling television host Charlie Rose ‘I’m short the dollar.’ The world’s wealthiest man called the record $7.62 trillion federal debt [now $9.4 trillion] ‘a bit scary’ and lamented that the U.S. is in ‘uncharted territory’ fiscally.
And he’s right. Just ask Warren Buffett, the world’s No. 2 moneyman, who has been buying foreign currencies since 2002, citing concerns about the U.S. deficit. The bet is paying off, too. Buffett’s Berkshire Hathaway Inc. reaped a $412 million pretax gain on the trade in the third quarter of 2004.”
George Bush’s trashing of the U.S. dollar is a threat to global reserves of a kind an extent never before known. Nations that might have had a billion dollars of reserves in U.S. currency would have lost $400 million since Bush became president. It would be entirely reasonable to see nations swapping out their dollars for euros, pounds, yen, Swiss francs, and gold. If that happens, the dollar may become one of the weakest currencies in the industrialized world. Georgia’s economy will be harmed to the extent that it is holding U.S. dollars in its reserve deposits.
Trade Deficit
The fourth sign of a declining American economy is found in its trade deficit, the largest by far of any in the world. At the end of the day, when American buyers have purchased more than they have exported, there must be a settling up. If other nations will not buy American goods – and it clear that they are not – then the settling must be done in hard currencies or gold. It is likely that China, Japan, and other nations with a trade surplus against the U.S. will insist on payment in other than dollars; moreover, if the settlement is in dollars, it is a safe bet that those nations will quickly put those dollars on the market and trade them for a stronger currency or gold.
The impact of the U.S. trade deficit on Georgia is clear. Americans will buy less abroad, including from Georgia and from those nations that buy from Georgia. Georgia already has a trade deficit against the U.S., and that deficit will grow.
It is said that “When America sneezes, the rest of the world catches cold.” Further, “When America catches cold, the rest of the world catches pneumonia.” The severity of the cold – or pneumonia – is related to the degree to which a nation is dependent on American trade. Fortunately, Georgia does not have a strong trading relationship with the U.S., and as noted earlier, that relationship is in deficit from the Georgian perspective. Unfortunately, Georgia trades with other nations that do have strong trade ties with the U.S., and it is this indirect relationship that will cause harm to the Georgian economy.
What will turn around the U.S. economy? On January 20, 2009, George W. Bush ceases to be president of the United States. It is unlikely that his successor could possibly do a worse job. But the U.S. economy is like a 500,000-ton cargo container ship; if the captain issues an order “Hard aport,” it may take as many as two miles to make the turn. Whatever changes the new U.S. president orders, it will take a very long time to repair the damage done to the economy in the areas of growth, debt, currency, and trade deficit.
At the University of Georgia in Tbilisi, a new organization has been formed to assess the impact of such forces as the decline of the American economy as well as other global and local factors. The mission of The Georgia Forecasttm (TGF) is to conduct and publish research that will assist decision makers in the economic development of Georgia. TGF is an Ltd. associated with the Advanced Research Center of the University of Georgia and is governed by its own Board. The TGF motto is “Applied econometrics for society.” TGF consists of some 150 volunteers who scan the environment, survey consumers and producers, and assist in the formulation of the forecasts.
Anyone can make a forecast; the test of a forecast, however, is in its accuracy. For 2007 real GDP growth, TGF released a forecast of 13 percent when other, quite large and famous firms were showing 7-8 percent. The actual figure turned out to be 12.7 percent. TGF, with its staff on the ground, and a mix of mathematical and judgmental techniques, is off to a good start.
For 2008, TGF has released its preliminary forecasts: (1) Real GDP growth rate, 8-10 percent, reflecting a variety of factors, most notably the contractionary monetary policy of the National Bank of Georgia. (2) Inflation rate, 8-10 percent, down from about 11 percent in 2007, again reflecting contractionary monetary policy. (3) Unemployment rate, ? This will depend on the outcome of contractionary monetary policy on the one hand and expansionary fiscal policy – including higher pensions, salary increases for teachers, and a general campaign to reduce poverty – on the other.

TGF does not flip a coin to calculate its forecasts. The TGF model uses the best information available, consisting of both primary and secondary sources. Unique to TGF is it Producer and Consumer Outlook Surveys. Each month in Tbilisi, surveyors ask 200 consumers and 40 producers about their expectations. At the same time, Gori surveyors ask 100 consumers and 20 producers the same questions. When results are tabulated, TGF computes an index based on those respondents who think things will get better to those who think things will get worse. An index greater than 1.0 means that a higher percentage of respondents believe things will get better than those who think things will get worse. An index lower than 1.0 means the opposite. Survey results from September 2007, when the project started, through February 2008 reveal consistent results greater than 1.0 both in Tbilisi and in Gori. In short, Georgians are fairly optimistic about the future. One may hope that the damage done to the global economy by the current U.S. administration will not diminish that optimism or the reality of a prosperous future for Georgia.

References
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