Why the U.S. Economy Isn't Half Bad

When I visited Toyota's Tsutsumi plant in Toyota City last summer, it was as if I'd entered a bizarro auto world. Back then, America's carmakers were effectively wards of the state, technological laggards operating at a fraction of capacity. Yet here was a solvent, fully automated factory running three shifts, churning out Priuses—some equipped with solar panels in the roof. The welding shop looked like a scene from The Terminator.

But these icons of Japan's superior manufacturing practices have turned out to be clunkers. In a development that has brought much distress to pockets of America (like Cambridge, Mass., and San Francisco), Toyota has recalled Priuses to fix malfunctioning brakes—just after an image-marring recall for faulty accelerators on other models. The only thing more shattering to the bien-pensant world view would be news that Chez Panisse in Berkeley uses Crisco.

In the past couple of years, Americans have been down on themselves for having failed at the practices they're supposed to be really good at: creating jobs, innovating, growing, getting things done. In 2008 and 2009, America's competitive advantage seemed to melt away, and our loss was other countries' gain. London was eating New York's lunch in financial services. China was assuming global economic leadership. We came in third—third!—in the 2009 World Baseball Classic tournament.

But recent events suggest the cleat is on the other foot. Japan was supposed to have a huge competitive advantage in high-quality manufacturing. Well, not so much. The biggest beneficiary of the Prius debacle is likely to be Ford, the last truly independent U.S. automaker, which has already been taking market share from busted domestic rivals.

In the same vein, much of Prius-driving America believed Europe had a competitive advantage over the U.S. because of its greater social cohesion and careful coordination—at both the national and transnational levels. The Old World's safety net provides health care to all, and doesn't leave those down on their financial luck to fend for themselves. As a result, Europe weathered the economic downturn without suffering the mass bankruptcies, foreclosures, and rising hunger the U.S. has experienced.

But now the bonds that tie Europe together are coming asunder due to the travails of its less economically robust members. As Greece struggles to cope with high debt and a dysfunctional political system, it is threatening to drive a stake into the heart of the European monetary union. In theory, Europe's modus operandi—a single monetary policy for the 16 countries that use the euro—was supposed to help weaker members and allow for swift coordinated action in times of stress. But in practice, it's precisely the opposite. "The monetary union allowed Greece to push the solution to problems much further out in the future," says Daniel Gros, director of the Centre for European Policy Studies (no relation). "It turned out to be a fair-weather construction."

And when the clouds over Europe turned dark, the response was tough love, not aid and comfort. Europe's central powers have essentially told member countries that run into trouble—first Ireland, now Greece, and Portugal and Spain—to forget about bailouts. They must slash budgets, cut wages, reduce pensions, and generally stop sitting around in cafés watching soccer. Once again, the U.S., having taken its medicine quickly, looks better by comparison. Partly as a result of the most widely watched Greek drama since Euripides, the dollar has rallied strongly against the euro in the past three months.

There's more. London's goal of surpassing New York as a financial center crumbled in the fall of 2008; the U.K.'s financial sector is arguably in worse shape than America's. Two years ago Dubai was going to be the next Las Vegas/New York/Miami rolled into one, all because it was proving more adept at diversifying its economy from energy into tourism, services, and financial services. Now it's looking like the next Scranton.

Meanwhile, despite all the hand-wringing over unemployment and Washington's pathetic inability to deal with health care, the U.S. economy grew at a 5.7 percent annual rate in the fourth quarter. In the same quarter, productivity grew at a 6.2 percent annual rate—about three times the historical average. These numbers show America still has a competitive advantage in the disciplines that matter most right now: restructuring, adapting, and recovering.

Daniel Gross is also the author of  Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation  and  Pop!: Why Bubbles Are Great For The Economy.

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