Can America Keep Up?
Why so many smart folks fear that the United States is falling behind in the race for global economic leadership
The next time there's a moon shot, don't expect the United States to take the prize.
Over the past century, Americans have become accustomed to winning every global battle that mattered: two world wars, the space race, the Cold War, the Internet gold rush. Along the way, Americans have enjoyed unprecedented prosperity and lived lives that were the envy of the rest of the world.
It was nice while it lasted. Today, while unemployment remains low, home values continue to surge, and fearless American consumers keep spending beyond their means, the land of the free is slowly, but unmistakably, yielding advantages earned over decades to foreigners who work harder, expect less, and, often, are better educated. Taken piecemeal, these shifts are virtually imperceptible to most Americans. But business leaders, top academics, and other experts--especially those who travel abroad frequently--increasingly see America as a nation that has pulled into the slow lane, while upstarts in a hurry outhustle Americans in the race for technological, industrial, and entrepreneurial supremacy. "Every one of the early warning signals is trending downward," frets Intel Chairman Craig Barrett. "We're all fat, dumb, and happy, which is one reason why this is so insidious."
In academics, America's mediocrity is a familiar story, one factor in President Bush's call, in this year's State of the Union address, for rigorous new training for 70,000 high school teachers. The reading literacy rate for 15-year-olds in the United States is barely above the average for western countries. American eighth graders rank ninth worldwide in science scores--and 15th in math, behind students in Estonia, Hungary, and Malaysia. And for years, U.S. students have been migrating away from hard sciences--which tend to be the source of cutting-edge new products and other innovations--toward business, law, and liberal arts degrees. "We had more sports-exercise majors graduate than electrical-engineering grads last year," lamented General Electric Chief Executive Jeffrey Immelt in a January speech. "If you want to be the massage capital of the world, you're well on your way." While the United States still boasts many of the world's premier universities, world-class schools are taking root in India, China, South Korea, and other nations--often under the tutelage of academics at top American institutions.
Losing ground. Vaguely worrisome long-term trends are finally becoming today's problems. General Motors, America's biggest industrial company, is a poster child for America's waning influence, as it staggers toward possible bankruptcy. Japan's Toyota Motor Co., meanwhile, is likely to overtake GM as the world's largest carmaker as early as this year. The job toll at GM: 30,000 and counting. And while GM's woes may represent an "old economy" hangover, the same patterns are emerging in modern technological areas, too. Many of the leading breakthroughs in semiconductor development, telecommunications, nanotechnology, and Internet services--once dominated by U.S. companies--are steadily migrating overseas. American businesses are seeking legions of talented technical specialists abroad, partly because they're cheaper there but also because they're far more plentiful than in the United States. "What's happening now with cars is working its way up to higher technology," says David Calhoun, General Electric's vice chairman. "I hate to see a market as big and strong as the U.S. market growing weaker."
In malls and car dealerships and suburban communities across America, it might not be obvious there's a problem. But Americans are often the last to know about fast-moving changes beyond their shores, and many other foreign innovations may surprise Yanks accustomed to the premise that we're No. 1. In Hong Kong, 60 percent of homes get television service through ultra-high-speed broadband connections, which transform TVs into computers and make "video on demand," sophisticated gaming, and other futuristic services possible. Nearly two dozen cities in China are installing radio-frequency tracking systems, the most sophisticated in use anywhere, for cargo that arrives in ports and air terminals. Throughout Europe and Asia, smart cards with embedded memory chips are replacing credit cards and even cash, simplifying shopping, reducing fraud, and putting an infrastructure in place for consumers to receive real-time traffic data and other useful info. And as most Americans who travel overseas recognize, the ubergizmo known, for now, as the cellphone typically works better and does more things in many other countries than do the phones in the United States.
Connected. There's much more at stake than a few additional amusements for couch potatoes. New technologies tend to get developed in markets where there's infrastructure that supports them and consumers who demand them, which often spurs further innovation and the high-paying jobs that come with it. When Internet service provider EarthLink was looking for a partner to help launch a cutting-edge cellphone service in the United States, it didn't even consider Verizon or Cingular or any other U.S. company. Instead, it began scouting for a partner in South Korea, where the government has aggressively pushed broadband connectivity to every home, advanced cellular technology, and other innovations. "They're doing things we haven't even contemplated in the United States," says EarthLink founder Sky Dayton. Many Korean phones, for example, double as smart cards that can be waved in front of a vending machine to make a purchase. Some even get TV reception, via satellite. EarthLink ended up striking a deal with SK Telecom, Korea's largest cellular operator, to form Helio, which will start offering upscale cellular services aimed at tech-savvy Americans this spring.
The fast advance of other nations, of course, can be good for companies and workers in the United States, especially as a massive new middle class with money to spend--some of it on stuff from America--emerges in places like India and China. Nor is the United States going to cede its status as an economic, political, and military superpower anytime soon. The U.S. economy is the world's largest by far, and gross domestic product per capita remains among the highest in the world. America spends almost as much on national security as all other nations combined, with a defense budget nearly 15 times as large as that of China--the one big nation that seems willing to play geopolitical chess with Washington. America's huge defense budget also funds lots of new technologies that eventually benefit American companies and consumers.
And much is going right in America. Despite political hysteria over foreign companies like Dubai Ports World and Chinese oil giant CNOOC buying assets in the United States, overseas investment in U.S. properties like factories and buildings jumped 20 percent in 2005, to $129 billion. The Dow Jones industrial average is back over 11,000, and U.S. markets are attracting cash from all over the world. And many experts think rapid changes taking place in the global economy highlight U.S. strengths, rather than weaknesses. "What makes the United States great is the ability of people to adapt and migrate," says Dennis Nally, chairman of the consulting firm PricewaterhouseCoopers. "We need to be thinking about areas where we have tremendous strength, such as services, entertainment, and finance, and get ahead of the next curve." He also argues that the rapid spread of American companies into other countries opens new experiences to more Americans than ever: "There's a tremendous opportunity for U.S. employees to do a lot of things outside the U.S., in places with growth rates like you see in China or Brazil."
But if American firms and their workers don't keep up with tenacious foreign competition, American prosperity won't keep up either. And a few shingles may already be falling off the American dream. The median net worth of an American family rose just 1.5 percent after inflation between 2001 and 2004, according to the Federal Reserve. That's a significant slowdown from growth rates in the 1990s--and it occurred while the economy was expanding, unemployment was low, and home values were soaring. More startling, average wages actually fell 3.6 percent after inflation, a reversal of rising incomes in the 1980s and 1990s. And while wealthier households got richer, those in the lower rungs got poorer--effectively weakening America's middle class. "You should be worried," Nicholas Donofrio, IBM's No. 2 executive, told a gathering of colleagues and clients earlier this month. "We have no right to the standard of living we have. It can disappear as fast as it came."
America's changing status in the world is partly a historical correction. "We had an unusual share of global economic power after World War II, with China and Russia under Communist systems," says former CIA Director Robert Gates, now president of Texas A&M University. Progressive governments in India and China have helped harness the talents of millions of well-educated, industrious workers, increasing their standard of living and spending power. And economic strength begets geopolitical and military strength. China is particularly emboldened, aggressively competing with the United States for everything from arms deals to oil and gas fields. "China could be a truly global superpower within a few decades," predicts Stapleton Roy, former U.S. ambassador to China. "Terrorism will turn out to be far less significant than China's burgeoning economic growth."
To the victor... But for the foreseeable future, the battles will be over technology, jobs, and money. Telecommunications is emerging as a particular U.S. weakness, especially as phone, TV, and Internet services--still largely separate here in the States--merge into a single universe. "We had an absolutely dominant position in communications technology for a century," points out Dave McCurdy, president of the Electronic Industries Alliance. "Now we're losing our edge." The newest standard for cellphone services--"3G," which allows the high-speed Internet-like transmission of data and video to cellphones--is widely available in much of Europe and Asia and is likely to be the dominant standard in China by the time of the 2008 Summer Olympics in Beijing. But it won't become commonplace in the United States until about 2010. The head start could allow alliances of Asian nations like Japan, China, and South Korea to set some of the world's standards for telecom and Internet-based products. "The second Internet revolution won't be North American-centric," predicts the Gartner consulting firm. That means some of the richest spoils will go to companies like LG and Samsung in Korea, closest to the epicenter of change, just as U.S. businesses like IBM, Microsoft, and Intel benefited for decades from the predominance of U.S. products and standards around the world.
Those dynamics have already been playing out in the market. Lucent Technologies--home of the storied Bell Labs--and the Canadian company Nortel, which together wired much of North America for phone service, are struggling to stay above water, with weak stock prices and few new jobs in the United States. Meanwhile, Chinese telecom firms that few Americans have ever heard of, like Huawei and ZTE, are gobbling up business in Asia and developing countries and eyeing the industrialized world--the same pattern that made upstarts like Samsung and Chinese appliance maker Haier successful. American firms are moving aggressively into fast-growing overseas markets, too. Half of IBM's 190,000 engineers and technical experts now reside overseas, for instance. And while Big Blue is still hiring modestly in the United States, it has 30,000 Indians on its payroll and plans to add thousands more.
In fact, there appear to be few areas across the business landscape where American dominance is immune to plucky foreign competition. At General Electric, a similar pattern has emerged among several of its varied product lines: In lighting, appliances, power generators, and other products, the plunging price and improving quality of foreign-made goods have forced GE to move work overseas, where costs are lower. Now, the company goes abroad to take advantage of the multitudes of skilled workers, too, according to Vice Chairman Calhoun: "When we have to look for deep technical talent, not just 10 or 20 people--especially in high technology--the places you can go and know you can hire somebody every day are India and China."
Calhoun and other American executives stress that they see the United States as a massive ship that is slowly losing its steam--not a distressed vessel rapidly taking on water. And many economic advantages still reside within America's shores: a razzle-dazzle financial system, ready capital for new businesses, world-class management expertise, and entrepreneurial free-thinkers, not to mention the world's biggest consumer market. "The creative empowerment is here," says Lakshmi Narayanan, CEO of the outsourcing firm Cognizant, which is co-located in India and the United States. "You start the chain. Pharmaceuticals, medical equipment, the iPod--you create all that." And many foreigners coming here to study remain mightily impressed. Jun Wang is founder and president of the Dalian Changhai Fengyi Aquatic Co., a seafood business in Dalian, China. He spent four weeks last summer on an exchange program at the State University of New York's Levin Institute, in New York City, learning how U.S. companies operate. "When we saw the financing, how the U.S. system supports its companies ... it's huge compared to what the Chinese can provide," he says. Still, not every impression was favorable: Jun found the New York subway system old and dirty. "The subway in Shanghai is much better," he boasts.
In some ways, it is America's very success that holds the nation back now. Since the United States long had the world's best system of telephone land lines, there has been less urgency about creating a state-of-the-art cellular network, such as those in South Korea, Japan, and parts of China and eastern Europe, which are now leapfrogging U.S. capability. American retailers and banks have invested so much in credit-card equipment that the cost of switching to smart cards, packed with much more capability, is higher than in places that never enjoyed widespread credit. "Other countries, where there's less credit infrastructure, went straight to smart cards," says Paul Beverly, head of North, Central, and South America for the French smart-card company Axalto. "The U.S. has lagged behind significantly."
The United States also used to be the first and last stop for the world's finest talent, in areas ranging from electronics to medicine to chemistry and physics. That alone helped generate cutting-edge start-ups like Intel and Google. But as fast-growing foreign companies have begun to conquer new markets, they have been luring away top managers and scientists looking for exciting new challenges. Gregory Lee, for instance, spent most of his 23-year career scaling the corporate ladder at white-shoe American firms like Procter & Gamble, Kellogg, and Johnson & Johnson. But when Samsung, which has carved out a leading position in memory chips, semiconductors, and consumer electronics, asked him to be its chief marketing officer in 2004, he turned down an appealing new post at J&J and packed his bags for Seoul. "There are not that many companies in the world that are large and growing and doing exciting things," he says. To accomplish those exciting things, he adds, Samsung has been aggressively recruiting hundreds of the world's most capable workers from graduate schools and other companies--many in the United States. And the Chinese government has been aggressively wooing home Chinese nationals working in science, technology, education, and other leadership positions abroad. Cheng Li, who runs the Asian Studies program at Hamilton College in Clinton, N.Y., estimates that in recent years China has persuaded more than 200,000 foreign-educated students living abroad--many in the United States--to return. More than 600,000 others are still abroad. "They constitute a potentially enormous source of talent and human capital for China," Li wrote in a recent paper.
Lands of opportunity. Lots of other overseas companies are luring the best and brightest away from America, especially students who have come here to study. David Heenan, author of Flight Capital, estimates that several hundred foreign-born professionals leave the United States every day--"exactly the kinds of people we should be keeping our hooks into." Many are lured back home by exploding opportunity, high incomes, and generous government support for scientific research. Singapore, for instance, has set up a huge government-funded biotechnology R&D complex that has drawn leading experts from the United States and elsewhere--partly because it supports stem cell research, which gets little U.S. public funding on account of political battles over the use of fetal tissue, highly controversial among conservatives. "We have no incentives at the national level," says Heenan. "We're losing our glow to some of these folks." Iceland has become a hub for genetic research, buoyed by government policies that permit the collection of anonymous DNA data from every citizen. The South Korean government's push to equip every home with a broadband connection is producing one of the most Net-savvy populations on the planet. "The U.S. used to be the mecca for the innovative technology of the future," says John Mullen, stateside CEO of DHL, the global shipping company. "Now the rest of the world is developing that capability. It's weakening the whole power base of the U.S."
Compared with activist governments in China, India, South Korea, and other countries, which generously subsidize technology and innovation, America's policymakers have generally taken a laissez-faire approach. Some think it's time to take a more aggressive tack. "We like to let market forces prevail," says Bob Cohen of the Economic Strategy Institute, a Washington, D.C., think tank, "but that doesn't assure we have better access to services and technology." Even some corporate leaders, typically wary of government intervention, agree. Yahoo!, for instance, is interested in generating webcasts and other educational services featuring some of the world's best instructors, so that lectures and presentations now offered to a privileged few could reach a much bigger audience. But it probably won't happen in the United States--at least not first--since the country ranks 12th in the number of broadband subscribers per 100 inhabitants. South Korea, Singapore, and several European countries would make better test beds. "The U.S. is not in a leadership position as it relates to broadband," Yahoo! CEO Terry Semel said at a conference in New York last fall. "If it were a government priority ... what it could do in terms of jobs, healthcare, and other things we could do for our country."
President Bush's "competitiveness initiative," supported by several bills pending in Congress, is designed to improve public education, encourage more students to pursue science degrees, and goose technology research. Specific proposals include doubling the budget of the National Science Foundation, offering stipends to graduate students who specialize in math and science, and establishing a permanent federal R&D tax credit for U.S. corporations. But even if millions of dollars of funding materializes, that would do very little to address other major shortcomings. "Everything we're doing is the status quo," argues Ron Hira, author of Outsourcing America and a professor at the Rochester Institute of Technology. "Investing in K-12 . ... How does that help a 43-year-old displaced worker? China and India, meanwhile, are playing a very smart game of industrial policy."
Complacency. Besides, many people see deeper problems--widespread American complacency, an entitlement mentality about jobs, and a pure lack of awareness about how tenacious some foreign companies and their employees have become--that can't be fixed by a few federal grants. "When you're in college drinking beer and watching the Super Bowl, your counterpart in China is on his fourth book," says Roy Singham, CEO of ThoughtWorks, a software consultancy with offices in the United States, India, China, and elsewhere. "I'm not predicting the end of American entrepreneurship, but we will lose 10 to 30 percent of our high-end start-ups."
For all the talk about what to do--which is likely to get louder in the years ahead--it may simply take a national dose of humility before America musters its famed resolve and strives once again for global leadership. "The attitudes I see in Estonia, Mexico, Brazil, China, Latvia--they're hungrier than we are," IBM's Donofrio says. That's one reason, he explains, that IBM is "reallocating" many of its jobs to vibrant new markets. When enough of those jobs have migrated to other countries, maybe Americans will get hungry, too.
Estimated amount U.S. companies spend annually on R&D: $194 Billion
Estimated amount U.S. companies spend annually on tort litigation: $205 Billion
Rank of American eighth graders in science proficiency among 45 countries: 9
Rank of American eighth graders in math proficiency among 45 countries: 15
Percent of engineering Ph.D's awarded in the United States that go to foreign-born students: 56
Number of the world's Top 25 information-technology companies based in the U.S.: 6
Number of the world's Top 25 information-technology companies based in Asia: 14
U.S. trade balance in high-tech manufactured goods, 1990: $33 Billion
U.S. trade balance in high-tech manufactured goods, 2004: -24 Billion
With Carol S. Hook and Allegra Moothart
This story appears in the March 27, 2006 print edition of U.S. News & World Report.