America Is Not in Decline ... Yet

The United States is a contradictory mess of economic successes.

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There is a new book, "The Myth of American Decline: Politics, Economics and a Half Century of False Prophecies" by Josef Joffe. Is he right by stating that American's decline is a myth? After all, many Americans have seen their living standards drop over the last six years and even more have read about China's rise to prominence.

Joffe claims that Americans have been unnecessarily afraid over the last 80 years; first, the Russians were coming, then we were losing the space race, followed by the Vietnam fiasco, the demoralizing Carter years with high oil prices and unemployment and finally the Japanese buying up America. Miraculously Americans have survived all this so far.

But now the Chinese are coming. Will this be our undoing? Or is this yet another false prophecy?

As the Washington Post's Carlos Lozada notes, Joffe argues that "long term, China can’t prevail. Its model of state capitalism — he calls it 'modernitarianism,' defined as 'markets minus freedom' — leads to corruption, favoritism and inefficiency; its rising wages don’t reflect equivalent increases in worker productivity; and its population is aging so much that 'a burgeoning army of pensioners and infirm will eat up investment funds as a fire will consume oxygen.'”

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

Is Joffe right? Others like Paul Kennedy disagree and say that all great powers rise and fall inevitably. Perhaps the truth is somewhere in the middle, as always.

The U.S. is a contradiction. It doesn't fit into easy allegories. In the midst of the worst financial crisis in 80 years, in 2009, more money came into the country than prior to the crisis in 2007. Why?

First, the U.S. dollar is a safety currency, and there is a flight to safety (i.e. buying U.S. dollars or dollar-based assets) in times of turmoil. Second, there is an inherent belief among global investors that the U.S. markets will always somehow bounce back – thus global investors were cherry picking during the American financial crisis. Third, the numbers do speak for themselves (at least for now). For example:

  • America's political dysfunction guarantees that U.S. productivity will be compromised – yet so far it is the only developed economy growing, while Japan and Europe languish.
    • America's math and science education trajectory, if not corrected, will diminish our competitive advantage – yet for the time being there is immigration, because the world's most prominent universities, which are American, are drawing the brightest minds.
      • America's huge energy consumption has been a gnawing problem for decades – yet all of a sudden it's solvable.
        • America's unstoppable widening income inequality is daunting – yet  it is still the richest country in the world in total gross domestic product at more than $16 trillion, and number six in GDP per capita behind Qatar, Luxemburg, Singapore, Norway and Burnei – which are all small countries and hardly global superpowers, with Singapore being the largest with a 5 million person population versus a U.S. population of 313 million.
          • U.S. debt is larger than the largest economy in the world – but its GDP is $8 trillion more than the second country in line (America's GDP is worth two Chinas).
          • [See a collection of political cartoons on the budget and deficit.]

            This list is long, but I want to caveat that the numbers supremacy is not guaranteed in the long-term if corrective measures are not made soon. Somehow America always seems to get done, but is it different this time? Are you a "declinist"?

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