What is the biggest problem the USA has economically? The trade deficit caused by China. There are two things happening here an economic downturn which was caused by poor monetary management (central bank) and the trade deficit. Of the two problems the government involvement in credit and money is bad, and is responsible for the business cycle. However, the long-term problem is the USA can not compete with other emerging countries in the long-run. Why not? The solution is actually very simple.

Cause of the economic crisis

What is the root cause of the economic crisis?  The the trade deficit is the root cause of the economic problems in the USA. In the USA we import oil and Chinese consumer good and spend our excess capital on consumption rather than reinvestment and this has resulted in a trade deficit and weakened industrial base.

Consumption and service economy in the US

We are all pressing each other pants and living with a sense of entitlement.  I can say this. I am an American, I live in Poland and I see how spoiled Americans are.  There is no way we can solve the long run problems of the US economy unless we are an export driven country, instead of a consumption based service economy. I know this sounds like a mercantilist argument. However, I am no mercantilist. In theory services should be an extension of the production process and therefore it does not matter we are a service economy. But look around and use your common sense. We can not be a nation of shop keepers and expect to maintain the standard of living in the past. The US has to create something, whether it be high-tech or old school industries like cars. If it does not it will be like a house that spends all its money at the mall but the breadwinner works at Wal-Mart for 8 dollars an hour.

Credit, China and crisis

An extension of credit in the USA is applied to consumption rather than investment and this deepens the hole.  We can not compete with China because China has low labor cost, and devalues its currency. No one can compete with China with these policies.  However,  if we invested instead of consumed and did not sell the US to China and China traded more fairly, then US  industry would have been able to better compete. Not with labor cost but with technologically, the US would have still retained the competitive advantage.

Solutions to the US economic problems

  • Get government out of monetary and fiscal management of the economy. Allow weak businesses and industries to fall, including banks and auto manufacturers. Let the markets in the US become more efficient. Government involvement makes the US lose its competitive advantage as we become inefficient.
  • Get government out of trying to plan an industrial or technology policy with subsidies. Let the markets determine which is a better sector to invest in. If private industry did not have to compete with the government debt, spending and get crowded out, the world could not complete with the USA including China. All roads would lead to the USA for innovation and manufacturing again.
  • The US needs to improve its products though entrepreneurship and creativity not government