How to save the U.S. economy

Last week Prof. Shlomo Maital created an uproar with his article in TheMarker, "Killing the fatted economy", in which he argued that the U.S. economy is doomed. . His theory of inevitable collapse is based in part on America's towering national debt, which has mushroomed even more since the Iraq war began, and the debt that American households are accruing.

I have often presented opinions that might sound bearish about the American economy. Perhaps, therefore, you may be surprised when I deem Maital's use of "collapse" in the context of America's economy to be ludicrous.

I have no dispute with Prof. Maital over the facts. The U.S. as a country and its citizens as individuals (on average) live beyond their means. They are financing their consumption using credit borrowed from other countries.

My problem is with Maital's conclusions.

There are two basic positions regarding the U.S. economy. Maital's is the pessimistic one, which predicts economic collapse leading to worldwide recession, because a recession in the U.S. will ruin the economies that export to it.

Another position is the optimistic one, that the U.S. can go on forever because it's in the interests of all parties.

I think the optimistic position is a bit silly: the current balance is unstable, and is unlikely to be perpetuated.

There could of course be interim scenarios between these two extremes. They may be unpleasant for the U.S. and everybody else, but they are still far from "collapse".

Rabble-rousing headlines

"Collapse" is a big word. So is "doom": there is nowhere to go from there. A building that has collapsed is now rubble. It can't be fixed. A company that collapses is history.

The word is employed much too often in economic opinion pieces.

When the markets turn bearish, rest assured that somebody's going to report "crash", "collapse" and so on. The media loves scary words. The dollar didn't just lose ground lately, it "collapsed", just as it "collapsed" against the euro two years ago, only to rally and then "collapse" again.

Asian economies and Russia "collapsed" in 1998, South American countries "collapse", rise again and so on. Yet wonder of wonders, these corpses are looking mighty sprightly, in some cases better than they did before their much-vaunted "collapse".

Abuse of language

In short, the word is abused. When we try to analyze economic processes, use of extreme phrases does not help us either understand, or reach conclusions.

The American economy, and other economies around the world, do have a problem. It would be a mistake to ignore it. But the fact that the biggest economy in the world has a problem doesn't mean that the problem cannot be solved.

Not every company losing money will "collapse". Not every person in debt will go bankrupt. Not every disease is a death warrant.

Companies can restructure. People can have therapy. Economies can too. History has more examples of economies that rebounded, than ones that collapsed and died, never to arise again.

True, recovery is not fun, which is why politicians tend to delay it as long as possible.

How to cure a sick economy

Say the U.S. economy is sick. How can it be cured?

For the sake of argument, let's assume that the U.S. does slide into an acute economic crisis, due to imbalance between debt and revenue.

Let's assume that the predictions of a steep dive in U.S. property prices come true; that the dollar drops against other currencies; that private consumption plummets; that long-term interest rates soar because everybody's dumping U.S. paper; that corporate profits slump and unemployment rises; and naturally that American stock markets drop hard. That is a nasty scenario indeed.

But fixating on the symptoms of the crisis blur the view of the points that can help overcome it. Let us look at some of these points.

Http://www.themarker.com/ibo/images/pics/1.gif The first thing is more efficient use of sources. The U.S. and Americans are the most wasteful consumers on the planet. Energy, raw materials, food, you name it, they squander it. Consumption per capita in the U.S. is enormously greater than anywhere else.

It would be enough for Americans to slightly moderate their habits regarding imported goods, to enormously reduce American imports, which is the reason for the vast unevenness of the U.S. trade balance, and the reason for its mounting debt.

Http://www.themarker.com/ibo/images/pics/2.gif On the political side, Americans have to curb their instinct to influence the rest of the world. The U.S. tries to rule using the stick (military power) and the carrot (economic incentives). Israel knows both very well.

But the cost of the U.S. carrots and sticks is prohibitive, to the Americans. Economic slowdown is a terrific excuse to scale back both.

Http://www.themarker.com/ibo/images/pics/3.gif Resume production. The U.S. as an industrial power has weakened. It has become more services-oriented. But its industrial base, its knowhow, technology, infrastructure and logistical capabilities have not disappeared. A rehabilitation process can bring American industry back into the picture. At lest when it comes to technological capabilities, America is still by far the leader, and is  under no threat.

The U.S. has many internal advantages. It has been blessed with great wealth, arable land, quarries, water. The fact that it overconsumes doesn't mean it has no resources.

Other advantages include its organizational culture, science, management capabilities - the "American way". You can love or hate it, but you can't argue with the results of this American way over time. The combination of entrepreneurial spirit, good management and motivation won't disappear just because of an economic downturn.

There are countless other factors that could exacerbate or ease the potential economic slowdown that America faces. But you get the point. America's economy may slow but it has the tools to rally without any "collapse", "crash", "meltdown" or call it whatever excessive name you will.

As it recovers, its people will have to lower their standard of living. The consumption gap between Americans and the rest of the people must narrow. But America will remain a big, rich nation.

These things have happened before to just about every superpower in history. Crises happen, and are overcome. To us in Israel, living nestled under the American wing, the American economy is an existential issue. The question is whether we will prepare ourselves for a day that America stops being a political and military superpower, and settles for being just an economic one.

The author is the CEO of Compass Mutual Funds.