1 I will focus my remarks on economic issues pertaining to US decline in
recognition that my geopolitical knowledge cannot match the erudition of the
other speakers. Economic power is, of course, fundamental to geopolitical
power; it underwrote America’s rise to a global superpower and is therefore
instrumental in its relative decline. None other than Ronald Reagan, the patron
saint of anti-declinism, recognized the importance of economic foundations to
America’s global power. Reflecting in his memoirs on the severe economic
problems enveloping America when he became president, he remarked: “No
problem the country faced [in 1981] was more serious than the economic
crisis... Nothing was possible [in terms of winning the Cold War] unless we
made the economy strong.”
It is no coincidence that American global power was at its peak while the
American economy was also at its peak. A strong and growing economy
generated the buoyant tax revenues that funded America’s hard power in the
form of its huge military from World War II to the present. This was also the
foundation for its soft power and its promotion of free-market values in the
international economy.
In contrast to the economic success story of the twentieth century,
however, America faces a more constrained economic future in the twenty-first
century. At first sight, this statement may seem contentious since America’s
approximately 25 percent share of nominal global GDP outstrips that of any
2 other nation and its own gross domestic product was roughly twice as big as its
nearest single-country rival, China, in 2011. However the US GDP was eight
times as large as China’s as recently as 2000. In the ensuing decade China’s
economy grew on annual average by 10.5 percent in real terms compared to
America’s 1.6 percent. On current trends, therefore, China’s GDP will eclipse
America’s on a purchasing-power parity basis in 2016 and, far more
importantly, in dollar terms converted at market-exchange rates in 2018.
Anyone wishing to compare China and America as economic rivals
should visit The Economist chinavusa website. That must-read journal for
political and intellectual elites is in no doubt that the United States is in relative
decline. Signifying this, in last week’s edition it began a weekly section
devoted entirely to China, the first time it has singled out any nation since it
began detailed coverage of the US in 1942 – symbolically the very year that
Henry Luce pronounced the arrival of the American Century.
The US still has 133 firms in the Fortune 500 global list of top
companies, twice the number China has, but it has already fallen behind China
on a whole set of other economic power indicators – steel consumption (1999),
exports (2007), fixed investment (2009), energy consumption (2010) and
patents granted to residents (2011). The US is still ahead – if only just – in
retail sales, stock-market capitalization, and consumer spending, but current
projections suggest the lead will change hands on all these indicators in the next
3 10 years. Finally China will outstrip the US on the ultimate index of hard
power – defence spending – in 2025.
Of course these predictions might be wrong. America’s economic
strength was on an upward curve of sustained pre-eminence in the twentieth
century. Why should the present century be any different? The answer is that
the US has to grapple with a problem of economic rebalancing that China and
other emergent economic powers do not face.
For the United States recovery from the Great Recession is not the same
as renewing the foundations of its economic pre-eminence. Cyclical bounceback will not resolve the structural weaknesses that have been slowly eroding
the foundations of America’s economic strength for a quarter-of-a-century. In
essence the United States has relied too much on internal consumption and debt,
both private and public, to drive its economic growth from the 1980s through
the first decade of this century. The real renewal of its economic strength
requires a rebalancing of its economy to focus more on saving, investment, and
exports, but this will be difficult to pull off.
The US is so far showing at best mixed signs of its capacity to rebalance.
Household debt, which grew from $1.4 trillion in 1980 to $13.8 trillion in 2007,
is now in decline thanks to the Great Recession, with the result that household
saving is at its highest level in twenty years. But recession-swollen public
4 deficits counterbalanced this to produce a negative rate of national saving in
2009-10. Meanwhile the trade gap, having narrowed in 2009 began to grow
again in 2010, when America’s bilateral deficit with China reached a historic
peak ($273 billion).
The United States still leads in key economic sectors, of course,
particularly knowledge-intensive capital goods, but only about 4 percent of all
American firms and 15 percent of manufacturing enterprises do any exporting at
all and just 1 percent of firms account for 80 percent of America’s export trade.
US exports of goods and services made up just 10.9 percent of GDP in 2009.
For economic rebalancing to occur, a goodly number of respected economists
estimate that the export share of GDP will have to double within ten years, a
very tall order.
Economic rebalancing also requires the state to play a constructive role in
the process. In part this will be through greater public investment in all levels
of education, in worker training, environmental safeguards, and infrastructure
improvement to enhance competitiveness and productivity. Most significantly,
economic balancing requires the national government to put its finances on a
sustainable basis for the medium to long term so that credit is freed up for
productive investment in the private sector.
5 A fiscal course correction will have to await stronger economic recovery
lest it flatten the current expansion, of course. Sometime in the middle of this
decade, however, the United States will have to take action to control
entitlement spending on Social Security, Medicare and Medicaid and to boost
revenues through tax hikes. Without such a course correction, the
Congressional Budget Office estimates that the US public debt ratio to GDP
will in 2023 surpass its previous peak 109 percent, reached in 1946 when
America was paying for WWII borrowing, and hit 185 percent GDP in the mid
2030s. In those circumstances, legally required entitlement spending and
interest repayment would increasingly squeeze out the availability of tax
revenue for other programmes. This would leave the US government reliant on
borrowing to finance essential programmes like defence, education and
infrastructure, but interest rates would become sky-high because of investor
concern about the sustainability of the public debt.
The current state of intense political polarization inhibits America’s
capacity to address its fiscal problems. Republicans insist on spending
retrenchment on entitlements and domestic programmes as the only route to
fiscal salvation, while the Democrats want revenue enhancement to be part of
the mix. Both are essential to achievement of fiscal sustainability. The
Republican notion that tax increases for the rich will inhibit growth is not
supported by the historical evidence from the 1990s (when the economy and
6 taxes rose) and the Bush era (when both declined). Moreover the current tax
system underwrites the extreme inequality of income that is retarding America’s
capacity to move from consumption and borrowing to savings and investment.
In essence, this income inequality leaves the rich with so much money that they
binge on bubble-creating stock-market and real-estate speculation, and leaves
the middle class without enough money to buy the things they think they
deserve, which leads them to borrow and go into debt.
Without a fiscal course correction, too, America will not have the public
investment funds to spend on programs that will keep it competitive in the
future. Big education spending is needed to upgrade the qualifications and
skills of the immigrant population that is essential to America’s vibrancy. The
states patently cannot sustain the public university system. California, which
once had the greatest public universities in the world, is moving towards semiprivatisation through charging high fees that discourage low-income and lowermiddle income applicants. As a result, a recent reported concluded, the Golden
State will have a one-million graduate shortage by 2025 that will seriously
threaten its knowledge-intensive industries.
Is America in economic decline? The simple answer is “Yes.” Can it
recover the Number One spot – this is possible but highly unlikely. But its
strategy for doing so would be mistaken if this involved trying to block China’s
rise, which benefits the global economy and that of the US. The challenge
7 facing America is to be a vibrant number two in a revitalized global economy
rather than seek to be top dog in a stagnant one. As Britain and other European
nations have found out, being economic number one is a finite rather than
infinite status. Even allowing for American ingenuity, the rest of the
developing world is catching up in economic power and technological
inventiveness. Therefore, in a fitting symbol of economic torch-passing, we
should expect the next Mark Zuckenberg to emerge not in Boston but in
Beijing, Bangalore or Brasilia.