Why America Will Win the 21st Century

[File this under “ideas written in an extraordinarily broad brush that will be useful as a base, jumping-off-point for later, more specific posts.”]

For the first decade of the millennium, I thought that America was in decline. The tech bubble had burst. The economic headlines that had once focused on ever-rising NASDAQ prices now focused on China’s spectacular economic growth in the wake of its WTO accession. September 11th made us fear that the 21st century could be one in which new, non-uniformed, non-traditional enemies could constantly disrupt and damage American life and business. It then dragged us into two wars that became expensive quagmires, and cost the U.S. enormous amounts of money and international political capital and esteem. W. struck so many of us as an incompetent embarrassment; his presidency (though he was not solely to blame for this) oversaw growing, toxic political and cultural division in the U.S. And at the end of his term, America suffered a financial crisis that brought its economy into the worst recession since the Great Depression. We spent every new quarter after the crisis debating why the recovery was not as strong as we thought it should be.

But through that, the news from Asia remained promising. America’s hopes for the 21st century looked dim. Was it, like every great empire before it, now entering its own twilight?

Over the past year, I’ve become increasingly optimistic about America’s future, and I think the 21st century will be another American century. It’s not that I don’t think America has huge problems and challenges. It does. But every prospective alternative global leader has even bigger problems. More, America is “locked in” to several key advantages and it has several key features that make it particularly suited to enjoy the benefits of the 21st century economy. Let me lay these out in brief:

 

Alternatives:

Who could possibly replace the U.S. as the most economically and geopolitically significant country in the world in the 21st century? The most obvious option is the most populous country in the world, with the second-largest and fastest-growing economy in the world—China. And there’s absolutely no doubting that China will continue to become more and more of a force in the future. Its sheer population size means that it must, so long as it even does the bare minimum to drag its median citizen out of poverty. The spectacular and consistent economic growth it has enjoyed since its late-70s, early-80s market reforms have shown some small cracks in recent months. But those cracks are indeed small relative to its long, sustained trend. Its technocratic government appears to have done well in managing its economy through several stages of development. China even has a number of apparent cultural advantages. For example, both Chinese citizens and Chinese diasporas appear to be very successful in educating their children, which will help them succeed enormously in the future, knowledge-based economy. These are all serious advantages.

But I think we tend to go overboard with these. For one, China’s spectacular economic growth since the 1970s really shouldn’t be too much of a mystery. What we really ought to marvel at are the countries who haven’t achieved it. There’s a very simple reason why China has grown so quick, and it is this: It had been so poor. Because China was and is poor, labor is very cheap. Because its labor was so cheap, Chinese manufacturers could easily undercut the prices of developed-world manufacturers in international markets. Lots of foreign multinationals consequently wanted and want to locate and source their manufacturing there. That brought in a lot of technological know-how and competition for labor that has allowed the country to modernize, industrialize, and develop much more quickly than had been possible for today’s developed countries when they were at that frontier. China’s growth is what we should expect from a country that is poor, but meets basic standards of some rule and law, protection of property, citizens who want to work to get richer, etc. The fact that other poor countries haven’t kept up with China is a testament to their most basic dysfunctions.

But the thing to keep in mind is that eventually you run out of this kind of growth. I.e., as China gets richer, its wages go up, thereby undermining its entire export-based growth model. Already, we are reading more and more stories about American companies that are “insourcing”—once again relying on domestic manufacturers, now that China’s wages have risen to the point where they no longer compensate for the country’s disadvantages. This leads to what economists call a “middle-income trap”—a point at which countries that were once growing quickly get trapped, once their export-oriented formula has been exhausted.

In order to avoid the middle-income trap, the country needs to find really smart ways to let its old, export-oriented manufacturers die off, and transition the country to develop a comparative advantage in more technologically advanced, higher margin industries—i.e., communication technologies, financial services, computers, biotech, etc. Will China manage this transition well? Maybe. Few have. But there are a couple of reasons to be doubtful. First, China has a number of obvious political problems (to put it more plainly: it is not a democracy) that could come to the fore just as China is managing this difficult transition. It’s likely the Chinese government will come under significant popular pressure for democratic reform. Why? As countries grow wealthier and better educated, its citizens come to demand more liberalism (in the broad, classical sense of the word). The CCP propaganda directives that have helped dampen public demands for democracy will become less effective as social media and digital communication technologies become ever-more ubiquitous.

So, I see a critical inflection point sometime in the next two decades. (1) Young Chinese will have enjoyed lives of sufficient wealth and education and media exposure to make political demands—pro-democracy, anti-government protests will become a major force. (2) Meanwhile, the economy will inevitably slow, as export-oriented growth opportunities evaporate.  The slowing growth will further undermine the CCP’s claims to political legitimacy, and could result in widespread youth unemployment. (3) This will, in turn, make it extraordinarily difficult for the government to manage the middle-to-high-income transition. There will be enormous political pressure to use government subsidies and currency manipulation to help the then-old (now current) manufacturing industries to survive. This will limit political leaders’ ability to facilitate—and business leaders’ ability to undertake—a transition to a higher-tech, higher-margin industrial structure. More, it’s possible that as China makes a messy transition to more democratic government, several of China’s political problems—its dubitable rule of law, which discourages investment, and the ethnic conflicts in its interior—could be exacerbated, while its political advantages—the technocratic, unified, and hence-fast-acting nature of its government—could be eroded. Even if it China gets through that tricky passage, it will eventually face unavoidable demographic problems. China’s population will eventually start to decline (a product of its one-child policy), which will further raise its labor costs, discourage investment in the country, and burden its government. China might not only get ‘trapped’—it could then follow with steady decline.

If China had transitioned to a stable democracy well in advance of reaching middle-income levels, I think it would have a better chance at becoming the major power of the 21st century. As it is, it still seems likely that, simply thanks to its enormous population, China will surpass the U.S. in terms of total GDP sometime in the next two decades. But because most of its population will still be mired in poverty, and because of the questionable legitimacy of its government, this will not be enough to make it the major geopolitical power.

So what are some other alternatives? There’s Russia, the successor state to America’s former superpower rival. It has grown quickly over the past decade. But this growth is almost entirely attributable to rising global energy prices and its extraction of its domestic oil riches. So Russia has the problems a lot of oil-rich countries have—its oil wealth has helped revalue the ruble in ways that have actually perhaps hurt its other industries, leaving the country without much industrial diversity, or a clear economic future that isn’t solely dependent upon oil. And the fact that “control of the pumps” is preeminent has left the country with enormous inequality and political corruption (a “resource curse”). Russia’s population is also in steep decline; it lacks international weight and legitimacy; and so I doubt it can challenge the U.S.  in the 21st century.

What about the EU? This seemed plausible until recently. Europe’s current financial crisis, political disorder, and long-term demographic issue (precipitous population decline), however, make it seem ever less likely. As we read over and over again: You can’t do a monetary union without a fiscal and political union. And full political union is seeming ever less likely—so the EU’s basic model seems flawed.

What about India? I actually think India has the best chance, but the past year has witnessed unexpected cracks in its economy. It remains to be seen.

 

Advantages:

Anyways: Let me move on from just being critical of the alternatives. What does America’s future look like? Well, one of the big problems for a lot of potential challengers is demographic decline. Simply put, it’s hard to carry much geopolitical weight when you are not very many people. It’s hard to carry much economic weight when your not-many people are consequently producing not-many goods. More, population loss over time brings a lot of problems and dysfunctions. As people retire, they stop doing as much spending (all things considered) and start drawing down savings. This means that “gray tsunamis” lead to negative demand shocks on an economy, which risks leading to deflation (which is devastating). The collective drawing-down of savings deprives the country of loanable funds for investment. Modern welfare states largely rely on pay-as-you-go social security systems; they were premised on continuing population growth. But once states’ populations start to decline it becomes well extremely difficult to pay out all of their pension obligations without drowning in debt.

So one of the U.S.’s biggest advantages is decidedly unglamorous—it’s just that we’re still growing, population-wise, and are on pace to do so for a long time.  That means we’ll continue to be a place where everybody will want to market their goods. That means we have good long-term growth prospects such that everyone will still want to invest here. That means we’ll have a bigger talent pool in the next generation from which the next Steve Jobs might emerge—more kids mean more prospective geniuses. That means that—for all the talk of our growing national debt—we may have an easier time meeting our obligations than other nations.

Why is the U.S. still growing? It’s a mix of a two factors: (1) Immigration—people love to come to the U.S. (land of opportunity and all that) didja know? (2) Fertility rates are somewhat higher than in other developed countries, for somewhat mysterious cultural reasons.

But America’s advantages go beyond that. The main one is that we are enjoying enormous success in” frontier industries”—i.e., those high-tech, high-margin, firms that are building the world’s technological future. As I write this blog post from Chicago, I do not have a single item of clothing or bag made in the U.S.A., but every glowing gadget I am using, every window I have open in my browser, etc., is all American. Apple sends all of its low-skill, low-cost manufacturing overseas—but its most well-paid employment in research and software engineering and systems-management goes on here, in the U.S. And these well-paid, intellectually challenging jobs attract immigrants from elsewhere to the U.S.—an ironic contrast to its manufacturing outsourcing.

Why is that the case? Well, first, people want to live here, because life is safe, reliable and pleasant—and the taxes on the wealthy aren’t reputed to be that bad. But, second, it’s because we have lots of high-tech computing “clusters,” which give us big advantages from “network effects.” That is to say, Apple computers started in California. They got tech-savvy workers to come work for them, and helped train them. Those workers sometimes founded their own tech firms, which staid nearby and attracted new, tech-savvy employees. And so on and so forth, until California and Silicon Valley had such a critical mass of tech savvy workers and know-how and tech-business infrastructure (i.e., the bankers and consultants with tech expertise), that nobody could doubt that this was the place to start a tech firm. (This is, of course, a highly stylized narrative.) If you want to do high-tech well, the place to go is Silicon Valley, because, well, that’s where all the high-tech is. It pains my Northeastern heart to say it, but it’s not so much the case that America is the future as it is more plainly the case that California is the future.  America is very lucky to have this important cluster at home—and its seems we’ll be locked into the advantages that it will accrue over time.

More generally, the fact that America’s universities are so extravagantly funded and are the envy of the world means that America will always have cutting edge research, super smart PhDs, and the high-margin industries and jobs that come with them. Again, remember that being good at lower-tech, lower-margin industries, such as manufacturing or basic services (like call centers), can only get you so far. Once your wages catch up to those of the countries you export those goods or services to, you’re out of luck. To be the world economic leader, then, you need to be higher up the technological ladder than others—producing goods, programs, websites, apps, nano-bots, etc., that have production processes that are so technologically and socially complex that they can only be made in your clusters of super-skilled workers, such that countries with the competitive advantage of lower wages can’t undercut you, because they just simply can’t produce what you’re producing. And the fact that Facebook, Google, Apple, etc., are all here, in close proximity, bodes well for our ability to maintain that advantage.

Does America face a lot of problems in the future? Definitely. The most obvious one is: not everyone can be a computer engineer or nano-technician. We have extraordinarily high levels of income and social inequality. We have clusters of brilliant computer engineers in California; and we also have cities in which the public schools graduate less than half of their students. I think it’s almost certain that inequality will become even greater in the U.S. in the future, due to technological change and globalization. The historical legacy of slavery has been vicious cycles of racial inequality and alienation yielding more inequality. Our racial inequality has proved stubbornly persistent. It seems unlikely the U.S. will overcome it soon, as it must if all of America is to join in on the 21st century’s prosperity.

But here are two things to keep in mind: First, the wages for low-skilled service jobs get pulled along with those of the dominant advanced industries. A barber in Manhattan or Silicon Valley gets paid more than a barber in Cairo or Slater, Missouri, because the wealthy, high-tech industries bring with them more dollars demanding labor for the service industries that support them. So a growing and prosperous high-tech industry in the U.S. will benefit the rest of us too, even if not as directly as it will benefit brilliant computer programmers. Second, inequality isn’t always, necessarily, the worst thing, from the perspective of the country as a whole. When I was in Japan, I had a fascinating conversation with a major hedge fundie, who argued that the source of the American economy’s dynamism was that it combined first-world features and third-world features (or developed and undeveloped country features). That is, we, obviously, have clusters and firms at the technological frontier, but we also have an influx of low-skilled, low-wage immigrant labor from south of the border that allows our most primitive industry, agriculture, to still be competitive. If America’s growing inequality in the future will also be accompanied by growing opportunities for low-skill immigrants, and even opportunities for social mobility, then it will be worth it.

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One thought on “Why America Will Win the 21st Century

  1. Pingback: Regional economics: The trivial, the despair-inducing, and the ethically problematic | This is your brain on economics

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