Possible Tripwires for the Global Economy: Robert F. Wescott, Ph.D. ISEO Conference Bergamo 4 July 2005

Energy, Deficits, and Dollar Worry Financial Markets Source: UBS Index of Investor Optimism, May 2005 Factors “Hurting” Investment Climate “A Lot” Energy Prices Outsourcing Budget Deficits Bad Accounting Illegal Immigration Falling Dollar Iraq Threat of Terrorism

Possible Global Tripwires Removal of policy support: greater than realized? Oil prices: more slowing than expected? Can U.S. consumers keep driving the world economy? Widening shift from labor to capital in industrial countries hurting growth? Fracturing of international relations: Is Osama bin Laden winning? Shoehorning China into the world economy and China’s international relations George W. Bush: leadership challenges?

2005: Economic Policy Floodgates Closing Source: IMF WEO, Author’s calculations for China

Oil: A Growing Burden on the World Economy Source: EIA

$20 per Barrel Higher Oil Prices Will Lower Economic Growth, Boost Inflation, and Raise the Unemployment Rate Source: Average of model results from Macroeconomic Advisers, Global Insight, and the International Monetary Fund

Out of Control? The U.S. Trade Deficit Source: BEA, OECD

First Main Cause: American Households Save Almost Nothing Source: OECD

Second Main Cause: U.S. Budget Deficits Source: BEA

Foreign Official Purchases of U.S. Debt Have Declined for More than a Year Source: U.S. Treasury Department

U.S. Debt, Total and Total Held by Private Sector Source: U.S. Treasury, Federal Reserve

Despite Strong U.S. Investment, 20-Year Trend for Large Economies is Down Source: IMF WEO

Historically, Rising Interest Rates Add Financial Pressures Source: Federal Reserve

Financial Sectors to Watch Closely in as Interest Rates Rise AIG Sub-prime Loans Airlines U.S. Housing Chinese Banking Corporate Governance Risks Autos

Falling U.S. Real Wages for the First Time in a Decade Source: Bureau of Labor Statistics

Profit Share Has Jumped under President Bush Source: BEA

The Bush Legacy: Consumer Patterns Tilting Toward the Rich How Spending Has Changed by Quintile in the Bush Administration Source: BLS, Consumer Expenditure Survey 2003 Bottom Quintile 2 nd Quintile 3 rd Quintile 4 th Quintile Top Quintile Recreation, cultural events +28.6%+29.5%-1.5%-0.7%+11.0% Boats, recreational vehicles +85.5%-10.3%+49.4%+13.0%-32.5% Air travel, public transportation +35.9%+25.3%+22.9%+9.5%+5.3% Recreation, cultural events -33.8%-25.2%-2.4%+4.8%-0.7% Boats, recreational vehicles -55.8%+14.6%+16.2%-2.3%+49.6% Air travel, public transportation -27.4%-7.1%-25.0%-1.4%-3.9%

Returns to Capital Continue to Increase Faster than Wages Percent change 2004 Q1 to 2005 Q1 Source: BEA and BLS

Income Inequality Affecting Consumer Spending? Source: International Council of Shopping Centers-UBS Same-store Sales, April 2005 vs. April 2004

Germany: A Decade without Wage Growth Source: OECD, IMF WEO

German Wage Share Falling: A Shift from Labor to Capital Source: OECD Down 5% points since re-unification

A Fracturing of International Relations? Pre-9/11 (2000) After Fall of Saddam (2003) Today (2005) UK France6243 Germany Russia Turkey (Percent reporting favorable view of the United States) Source: Pew Research Center for the People and the Press, June 2005

Do You Support the U.S.-Led War on Terror? (Percent responding “yes”)

Should Western Europe be more independent from the U.S.? (Percent saying “yes”)

Big differences between U.S. and most other countries Source: Pew Research Center for Public and Press, June 22, 2005

U.S. China Japan Germany Italy China’s Trend Has Been Sharply Upward (Share of world economy, PPP basis) Source: IMF WEO

China’s Exports Are Increasing as a Share of World Trade Source: World Bank, World Development Indicators 2005 Others

Source: Angus Maddison, The World Economy: A Millennial Perspective and International Monetary Fund China, U.K., U.S., Japan, GDP, % of World Total, PPP Basis

Sources: International Iron and Steel Institute, Japan Iron and Steel Federation, Barraclough: Steelmaking, Hogan: The Economic History of the Iron and Steel Industry in the U.S, Hudson & Sadler: The International Steel Industry China, U.S., Japan, Steel Production, Millions of tons <10% of world (1843) 36% of world (1900) <5% of world (1950) 19% of world (1974) <4% of world (1980) 29% of world (2005)

George Bush’s Political Capital Source: Gallup

Among Presidents Early in Their Second Terms, Bush is Quite Unpopular PresidentPositiveNegativeDifferentialDate Johnson66%21%+45% June 1965 Eisenhower64%22%+42% 6-11 June 1957 Truman57%26%+31% June 1949 Reagan58%32%+26% 7-10 June 1985 Clinton55%35%+20% June 1997 Nixon44%45%-1% June 1973 GW Bush47%51%-4% June 2005 Source: Gallup Presidential Approval Ratings

Are U.S. Casualties in Iraq Worth It? Source: Washington Post, June 8, 2005

Americans Feel the Country is “Losing Ground” on Most Issues Losing GroundMaking Progress Budget deficit65%6% Social Security’s finances63%6% Health care system62%9% Medicare’s finances56%5% Job availability55%15% Illegal immigration52%11% Quality of education50%20% Illegal drugs46%16% Political corruption41%10% Environmental pollution37%21% International Terrorism31%36% Source: Pew Research Center, May 19, 2005