Is the United States in inexorable economic decline, destined to be overshadowed by an emerging Chinese economic superpower? This seems to be a popular view among commentators of various political persuasions. I am happy to report, however, that America's economic demise is not around the corner.
One of the most frequently cited examples of American economic decline, particularly from those on the Right, is the decline of the manufacturing sector (which now accounts for only about 12% of GDP). I remember hearing the argument that we are economically weak because "we don't make things here anymore" as far back as the mid-1980s. Yet, as pervasive and long-standing as this view is, it is wrong.
The largest private employer in my hometown, San Diego, is Qualcomm. Qualcomm did not exist prior to 1985. Two of the six largest private employers in the greater Seattle region are Microsoft (founded as a two-man company in 1975) and Amazon (founded in 1994). The largest employer in Idaho is Micron Technology (founded in 1978). Thirty years ago, Amgen, Apple, Cisco, E-Bay, EMC, Genentech, Google, and Oracle did not exist, or were tiny companies. American companies all, they are now all major employers in the United States. While commentators have been wringing their hands over the decline of U.S. manufacturing, the American economy, through American entrepreneurship, has revolutionized the world in which we live. And this transformation has not been achieved through shedding jobs or replacing high paying jobs with low paying ones. Over the last 30 years, real (inflation adjusted) average hourly earnings have remained steady, and the unemployment rate for most of the 20 years prior to the start of the current recession, remained under 6%.
When wage and benefit costs are not the overriding factor, and in states and localities where government has not imposed unduly burdensome taxes and regulations, locating manufacturing operations in the United States is viable. The comparative advantage of lower production costs in lesser-developed nations, however, will be insurmountable in many instances. But in the modern technology economy, it is not so important where our tennis shoes or toaster ovens, or even cell phones or circuit boards, are stamped out, but where the ideas behind them -- the design, the computer code, or pharmacological compound -- is created. The greatest value add, and hence the best paying jobs, are not typically in traditional manufacturing, but in research and development. And, as would be expected in what is still, relatively, the freest large economy in the world, it is the American economy that has been, and still is, the driving force in these endeavors.
Despite the fact that the technological revolutions of the past 30 years have been achieved through the dynamism of American free enterprise, the Obama administration is not enamored with American capitalism and believes that we need a big government push for America to ride what it has identified as the next big technology wave -- "green energy" -- and has set itself up as the "creator" of thousands of new "green jobs." In typical government style, the Obama administration intends to "create" these jobs through regulation, taxation, and subsidies. While this may prove a boon to some industries that otherwise would not have done so well, like various environmental consulting firms, and uneconomical "alternative" fuels (witness our decades-long support of ethanol), the only thing that is guaranteed to come of this meddling is that more manufacturing will be shifted from American factories, powered by relatively clean coal, oil, or natural gas fueled power plants, to Chinese factories powered by the dirtiest coal power plants in the world. The good news, however, is that much of the current administration's environmental agenda (particularly cap-and-trade) appears destined for indefinite delay.
Can we continue to lead in technology when our schools are struggling, particularly in math and science? That is an issue, but one that is ameliorated by the fact that, to the chagrin of many developing nations, many of the best and brightest from around the world are attracted to the United States, not just because they can make more money working here, but also because they can live a better, more fulfilling life here. One of the compelling points made by Amy Chua in her otherwise not very compelling book, Day of Empire, is that it is still relatively easy for anyone in the world to become "American." We are already a multi-ethnic society that is relatively welcoming of self-supporting immigrants. This is not the case, for instance, in China. Not only do few outsiders dream of working and living under the Chinese system, it is also near impossible for an outsider to "become Chinese." Despite the attempts of liberal multiculturalists in our educational system and government, America still retains much of its "melting pot" ethos. And as long as Obama and his ideological allies in Congress do not succeed in turning America into a variation of a European welfare state, many talented people from around the world will be drawn to all that America has to offer.
Still others worry, however, about the persistent American trade deficit. These people contend that our imbalance of trade shows that our prosperity has been an illusion, fed by "living beyond our means." But the fact is, the trade deficit indicates nothing of the sort.
The trade deficit is one of those figures that does not convey a lot of meaning. All it says is that we have been importing more goods and services than we are exporting. In the zero-sum, debit and credit world of accounting, that means we are running a deficit, and the natural conclusion is that that is bad, and that by running a deficit we somehow are in debt to the rest of the world. That is not true.
A trade deficit is neither inherently good nor bad. It could be caused because the domestic economy is comparatively stronger than the rest of the world (so, creating comparatively more wealth, we buy more from others than they buy from us). The last year the U.S. had a trade surplus was the recession year of 1991. China's current huge trade surplus is largely the result of its being poor. China has a large underutilized (cheap) work force, which until very recently had little disposable income.
A key point to keep in mind is that the foreign goods we import are bought and paid for; we don't go into "debt" by importing. Foreigners have accepted our dollars for their goods. They can then turn around and buy American goods with those dollars, buy U.S. dollar denominated investments, convert them to their own currency or trade them for other currencies to buy goods from other countries, or just hold them as foreign exchange reserves. If they don't want to buy U.S. goods or dollar denominated assets, there will be downward pressure on the value of the U.S. dollar. And that's really the most instructive thing a trade deficit tells us. A persistent trade deficit will likely result in a lower trade value of the U.S. dollar, meaning prices of imports will rise and the price of our exports to foreigners will fall. This, over time, usually results in imports declining and exports increasing, as the markets continually seek equilibrium.
These market dynamics are, of course, sometimes skirted by governments setting artificial values for their currencies. For instance, the Chinese government has pegged the value of its currency, the yuan, to the U.S. dollar, effectively preventing appreciation of the yuan versus the dollar, thus serving to keep Chinese goods cheap, protecting its export driven economy not just from U.S. competition, but also from competition from other emerging low cost producers such as Vietnam and Thailand.
THE ONE SCENARIO THAT REALLY IS BAD NEWS, is a trade deficit not supported by internally created wealth but by depleted savings or debt. This, despite much talk to the contrary, is not the condition of the United States. For the past 30 years, net saving (which includes government deficits), has been positive every year except for 2008. In the 10 years leading up to 2008, average annual net saving was $420 billion. Pushed down by falling stock and home values, and a soaring federal deficit, 2008 was a negative $23 billion. Due to massive deficit spending at the federal level, 2009 will likely also be negative. There is good reason to fret about uncontrolled government spending and overextended consumers, but this does not appear to be the mechanism by which our trade deficits of the past 25 years have been supported.
The U.S. economy does not need the government to step in to set up trade barriers to protect manufacturing, or subsidize industries that government bureaucrats believe aren't getting enough investment through the free market, or to tax and regulate some businesses out of existence to make room for "better" or "cleaner" ones. What has made the U.S. an economic powerhouse is the relative lack of such interventions.
But if the U.S. economy is not rotting from within, are we still destined to be overtaken by the Chinese economic juggernaut, fueled by its vast population and cheap labor? No. Upon further scrutiny, the Chinese tiger is far less formidable than many have portrayed, and its rise to world economic dominance is hardly inevitable.
First, consider that from the time Deng Xiaoping introduced meaningful market reforms in the 1980s the Chinese economy has predictably grown prodigiously -- but from a very small base. The Chinese economy is still only one-fourth the size of the U.S. economy. And that is using official Chinese figures. Most economists regard Chinese GDP numbers with some degree of skepticism, and the ways the Chinese do their calculations is somewhat questionable (such as including the purchase and stockpiling of natural resources as GDP). Now that China is more developed, it will not realize the huge return on investment that it has on past grand infrastructure projects. And as China succeeds in growing its economy, inevitably its cost of producing goods and services (particularly wage rates) will increase. This will fuel the fabled Chinese domestic consumer (including the consumption of imports), but will also cause a slowdown in the growth of China-based production as other low cost countries become more competitive.
Second, a vibrant economy is at odds with a totalitarian political system. A vibrant economy needs markets, which need freedom, which creates personal wealth, which creates a shift in power from government to individuals and businesses. By accommodating the economy, the Chinese Communist Party knows that it is riding the back of a tiger and that conflict is inevitable. For China truly to become a dominant economic power, freedom will need to win out. It very well may do so, but it will take decades and great societal upheaval. The Communist overlords will not give up without a fight. In the meantime, the consequences of the Chinese Communists' success in constraining their people's fertility rates will play out. The UN estimates that by 2050, the percent of China's population above 60 years old will triple, to 31%. Meanwhile, the Chinese workforce-age population (15-59) will decrease by 3%. These are the demographics of economic disaster. Indeed, as Mark Steyn has reported in America Alone, the United States is the only major economy that is sustaining its population with a fertility rate at or about 2.1 children per couple. In Japan the rate is 1.32; the EU average stands at 1.38. So the United States seems destined to remain the world's most powerful economy into the second half of this century if only by default.
If Americans can succeed in limiting the damage done by President Obama and his leftist allies in Congress, however, the United States can do much better than winning by default. But the fight will be a tough one. We will soon have enormous issues with unfunded Social Security and Medicare entitlements (though, as the Obama administration is fond of admonishing us, we are well behind our European and Canadian friends in construction of an unsustainable welfare state). And we could be facing enormous tax increases and a crippling of the pharmaceutical and medical device industries under the guise of "healthcare reform." But if we can manage to stay true to our proven formula of free enterprise tempered by modest regulation and moderate taxation, there is good reason to be optimistic about America's economic future.