The U.S. Economy, Leading by Default

United States’ free market model still works better than social or state-run capitalism.

By SHARE

Beverly Hills--If you're a global investor, the world is a sorry-looking place right now. And the United States is like a shabby and infuriating old friend.

At the annual confab of financiers and business leaders sponsored by the nonprofit Milken Institute in Los Angeles, the woes of the world economy dominate the discussion. Europe is dysfunctional, likely to get worse before it gets better. China is an adolescent economy not quite ready for prime time. Emerging markets like Brazil and India are promising, but prone to unpredictable upheavals that can swamp outsiders who never see it coming.

[See a collection of political cartoons on the economy.]

Then there's America, with its entitled consumers, its gridlocked government and its omnipotent central bank. A major reckoning is coming, with Washington facing the almost certain need to raise taxes, cut spending, and remove some of the many subsidies that keep the economy humming. Yet there's something reassuring about America, too. "It's like the cleanest dirty shirt," says Mohamed El-Arian, CEO of the bond-trading firm Pimco. "When you're on a business trip that gets extended and you don't have any more clean shirts, you wear the one that's least dirty."

A couple years ago, it looked like emerging markets such as China and Brazil would lead a global recovery, with the overindebted United States and slow-growing Europe taking a secondary role. Countries like China and Brazil are in fact growing rapidly, but they're not generating stability elsewhere or establishing a model many other countries are following. The U.S. economy, meanwhile, is churning forward. Jobs are slowly returning, and most importantly, U.S. companies have found new ways to stay profitable. "The United States has become the locomotive of the world in terms of pulling the global economy along," says Scott Minerd, chief investment officer Guggenheim Partners.

[See 6 reasons America will rebound.]

There's still plenty that could set the nation back. The "fiscal cliff" approaching at the end of the year will require some kind of compromise in Washington over tax hikes, spending cuts and reining in the national debt. Business leaders and ordinary people have weak confidence in Washington. We may still face painful debt write-offs or punishing inflation. Yet America's fragmented political system still seems more functional than the stitched-together Euro Zone or China's black-box economy. And the risks elsewhere seem worse. "I feel very constructive about the United States," Jim McCaughan, CEO of Principal Global Investors, told me. "There are a lot of paradoxes here, but the United States is my favorite equity market for the next year."

American-style capitalism also seems to be more robust than it did a couple years ago, when Wall Street nearly sank the world economy. Harvard historian Niall Ferguson argues that there are three types of capitalist economies: the U.S. free-market model, Europe's social welfare model, and Chinese-style state-run capitalism. China's high growth rate over the last decade has fueled the idea that state-run capitalism might be more effective than the disruptive creative destruction that takes place in America "That's a fairy story," says Ferguson. "China is leading a shift away from state-run capitalism." It's becoming more like America, in other words, and other nations like India and Brazil may do the same as they mature.

[See why the party is ending for the rich.]

The resilience of the U.S. economy doesn't excuse the need to make Washington more effective, fix some drastic flaws in the U.S. education system and continue paying down debt. But America may have a renewed opportunity to assert itself once again as the world's economic leader. It may mean less than it used to, but we're still No. 1.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success. Follow him on twitter: @rickjnewman