Financial markets are bullish on America.

U.S growth prospects are first in class among major developed countries, American equities are trading at a premium to those in Europe and Asia.

The dollar in nominal terms is stronger now than before COVID and the global financial crisis.

The bellwether 10-year U.S Treasury is yielding almost 2 percentage points more than its best international rival—the 10-year German government bond.

Impressive against the historical record, that premium could reflect higher inflation expectations for the United States but at least for now, a faster pace of price increases in the United States is hardly enough to justify about a 200-basis point premium.

Investors could view U.S. debt as riskier or are more confident about the prospects for American than German growth.

Both narratives have merit and together illuminate critical policy challenges awaiting whoever is elected president in November.

The U.S. federal budget deficit is in danger of flying out of control whereas German finances pose no such peril.

By 2030, U.S. debt held by the public could easily exceed 110% of GDP and the interest payments on U.S. debt could exceed growth in nominal GDP. Then Washington policymakers would risk a run on the dollar in international financial markets and face unattractive choices:

• Slash defense spending and withdraw the Navy from defending stability in the Middle East and Pacific.
• Slash Social Security. With the old age pension trust fund nearly depleted, that would amount to putting the 50% of seniors who solely or mostly rely on the program for income out on the ice.
• Slash the social safety net. For example, limit eligibility for Food Stamps and the Earned Income and Child Tax Credits.
• Slash Biden-era initiatives to improve infrastructure and industrial policies to catch up the U.S. auto, battery, green energy and semiconductors industries with rivals in China and elsewhere in Asia.
• Steeply increase individual income taxes on all households and not just the wealthy.
• Boost corporate profits taxes, which are barely internationally competitive now.

The first three choices would be perilous for any politician, and the latter three, though more likely, would surrender a good deal of growth and future prosperity to China.

We can’t afford to stop competing in industries that are heavily subsidized in Asia and will be central to creating quality jobs in a continental-sized economy.

Significantly higher taxes would curtail incentives to work among our most productive citizens—especially in high tax jurisdictions like New York, Illinois and California.

As demonstrated during the Obama years by Big Pharma, businesses can move abroad and take sizeable taxable income with them if threatened by a hostile and confiscatory regime.

Alternatively, high real rates of return on U.S. stocks and bonds may reflect the U.S. economy’s capacity to create enormous economic rents and extranormal profits in many cutting-edge industries—finance, technology and medical science.

No other economy has created mega businesses like JP Morgan Chase, IBM, Microsoft, Amazon, Facebook, Alphabet and Nvidia with the rhythmic certainty that calendar flips decades, and the same technological prescience as demonstrated by OpenAI with larger language models and Moderna and Pfizer with mRNA vaccine technology.

Still, America has its weak underbelly.

China poses formidable challenges in green energy technology, and BYD threatens to steal leadership from the West in the transition to electric vehicles.

Assigning those to Chinese government subsidies and protectionism is a dangerous rationalization.

Ford and GM enjoyed bailouts during the global financial crisis and receive sizeable incentives now to make EVs but can’t make those at a profit. Whereas Korean automakers make money producing EVs.

Taiwan can profitably manufacture the most sophisticated computer chips, U.S.-based factories can hardly make those at all without subsidies.

President Joe Biden’s industrial policies prop up those industries without confronting the sources of higher costs—everything from permitting difficulties in construction to high-cost factory labor and executive pay.

Europe is squeaking along at near zero growth—with little end in sight—but China is merely experiencing a balance sheet crisis—overleveraged property—much as we did in mass during the global financial crisis.

The underlying core of Chinese competitive strength is solid—it’s a critical supplier of about 275 products and those include some quite sophisticated items.

BYD has quality problems, but those are growing pains.

Neither Presidents Biden nor Donald Trump appears much interested in tackling entitlements or broader federal budget deficit issues before those fester into a crisis. Or the underlying cost problems in U.S. manufacturing rather than throwing money at them that the federal treasury can’t afford.

Neither man even displays much awareness, but those are among the most significant challenges a president could tackle to ensure continued American prosperity and global leadership.
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Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.