The Globe and Mail
May 16, 2012
What will be the role of the United States in the 21st century? This is a question I rashly agreed to address last week at the Carnegie Council in New York. In analysing it, I considered a closely related issue that also exercises Americans: is the future role of the U.S. in its own hands? The answer is: yes, but only up to a point. The U.S. can control what it does. But it cannot control what others do.
The historic dominance of the U.S. is the fruit of its exceptional assets. It is a continental power bounded by oceans to the east and west, and unthreatening neighbours to the north and south. It has huge, albeit dwindling, natural resources. It has had the world’s largest economy and the highest output per head since the late 19th century. The market-driven U.S. economy has also been the world’s most innovative since at least the same era.
The U.S. is home to the world’s most influential financial markets, albeit ones that triggered the Great Depression and Great Recession of recent years. It has been the issuer of the world’s main reserve currency since the first world war. It has offered one of the largest import markets, surpassed only by external imports of the EU.
The U.S. possesses the world’s most technologically advanced and potent military. Since the Second World War, it has also had more of the world’s leading universities and research institutions than any other country. It has the world’s most potent popular culture. Its political values still grip the world’s imagination, even if it has frequently fallen short in practice. Its democratic system has proved sufficiently legitimate and flexible to cope with the many challenges history has thrown up.
Possessed of all these assets, the U.S. managed to form strong alliances and to win its 20th-century wars, both hot and cold, against Germany, Japan and Russia. It shaped the open world economy, which was born after the Second World War then became global after the collapse of the Soviet empire. It has offered the world’s most influential model of modernity. Whether we like it or not, we all live in the world it has made.
How much of this array of assets will the U.S. retain in this century?
The obvious threat is to its position as the world’s largest economy. At market exchange rates, its economy is still roughly twice the size of China’s. Yet, according to the International Monetary Fund, it is only 30 per cent larger, at purchasing power parity. Since China’s gross domestic product per head, at PPP, is still only 20 per cent of U.S. levels, this leaves huge room for it to catch up. China’s growth is likely to slow in coming decades but it should still converge further on U.S. productivity levels. The likelihood is that China will have a bigger economy than the U.S. by the early 2020s. Unlike, say, Japan, China has the numbers on its side. If its GDP per head were to reach half of U.S. levels, its economy would be as big as those of the U.S. and EU together.
China’s gross exports of merchandise products already exceed those of the U.S. Its imports will soon do the same. Being a relatively resource-poor country, China is likely to remain a bigger trader, relative to GDP, than the U.S. A more controversial question is how soon the renminbi will rival the dollar as a reserve currency. The rise of China’s trade suggests the answer is: soon. Against this, I would argue that China’s party-state, not being subject to the rule of law and fearing loss of control, will be neither able nor willing to provide the open capital markets that outsiders want if they are to hold their safest assets in renminbi. At least, this shift is likely to take decades, not years.
In principle, the U.S. could also maintain its frontier position in science and commercial innovation. But, as my colleague Edward Luce shows in his thought-provoking new book Time to Start Thinking , the combination of xenophobia with hostility to science, self-inflicted fiscal constraints and weird spending priorities risks robbing the U.S. of its access to the world’s talent and its commitment to world-leading research and innovation. Nothing captures the point better than this grim quote: “In 1990, [California] spent twice as much on its universities as its prisons. Now it spends almost twice as much on prisons.” That the U.S. has the highest rate of incarceration in the world is not only a social statistic; it is also an economic one. The same is true of the costliness and inefficiency of the U.S. healthcare system, which is the principal reason why long-term fiscal prospects look so grim.
What is needed is serious reform. But this has become impossible, because of the exploding role of money in politics and the rising intransigence of the Republican party. In a system built on divided government, regarding compromise as weakness risks repeated chaos.
The U.S. economy is also no longer bringing the widely shared benefits it once did. In the last full business cycle, between 2002 and 2007, the top 1 per cent captured almost two-thirds of the rise in incomes, while the top 0.1 per cent captured more than a third. Such a zero sum economy breeds disaffection and despair. The crisis has made the anger far worse.
All of this will also affect America’s ability to play its historic role in the world. The looming fiscal squeeze will undermine military spending. More important, the financial crisis and other large mistakes have robbed the U.S. political, economic and social models of the prestige they enjoyed. Europe is in no better shape. But that merely means the west as a whole is less credible and so far less able to serve as leader.
Whatever happens inside the U.S., its influence will be smaller in the 21st century than it was in the 20th. This is largely because others have learnt so much from it. Even so, the U.S. could retain huge, possibly unrivalled, influence, since its main rivals face even bigger challenges. Yet if the U.S. is to be what it can be, it has to rediscover the pragmatism that long marked its policy making, notably in its responses to the many challenges of the 20th century. No democracy can thrive if its citizens view their own government as their greatest enemy. If Americans choose to make their government fail, the U.S. is sure to do so, too.