Fretting over a U.S. decline? Fear not

Frontier Centre, Globalization, Uncategorized, Worth A Look

OTTAWA — In the 1960s, it was Germany. In the 1980s, Japan. Throughout the postwar years, until the 1990s, it was the Soviet Union. Now it’s China. A devastated nation starts from nothing, introduces market-economy reforms, goes to double-digit growth — and people everywhere anticipate the decline and fall of the United States. Illustrious University of Toronto political economist John Crispo has now expressed his own farewell in a quizzical op-ed eulogy for a fallen friend (“Uncle Sam’s puzzling decline,” The Globe and Mail, Aug. 13). This grieving is premature.

The best way to assess the U.S.’s economic dominance is to look at it across a reasonable period of time, across a few wars, across inflation, stagflation and deflation, across market crashes, across a succession of White Houses. We’re at a particularly good moment to do so now. At the end of 2004, the net worth of the U.S. passed $100-trillion (U.S.), which is a remarkable accumulation of wealth by any historic standard. It’s more than eight times the gross domestic product in an economy that can throw off $60-billion in tax receipts in a single day — as the U.S. Treasury Department reported it did in setting an all-time record on June 15.

In an analysis of its 2006 budget, the U.S. government reported the country’s net worth has grown (in real dollars) at an average annual rate of 3.7 per cent every year for the past 45 years. In the past decade, gains in productivity have created wealth at a faster rate still — an average annual rate of 4.2 per cent. This advance, achieved in a decade divided equally into good times and bad times, into boom and bust, is the product of a phenomenal economic machine that’s now operating at a high level of efficiency.

In 1960, the U.S. economy produced $13,840 in real GDP per capita. In 2004, it produced $30,128 per capita — more than a two-fold increase. Along the way, poverty fell from 22.2 per cent to 13.8 per cent. GDP measures the relative prosperity of peoples; it also tracks a country’s capacity to keep the peace and to finance wars. U.S. GDP growth is as robust as it was 40 years ago.

The U.S. current account deficit has induced much fretting in recent years because of the foreign debt it represents. It seems a country can borrow safely from family, but not from business associates. The U.S. owes investors (ranging from private individuals to central banks) $4.3-trillion. Less than half of this debt is held by foreign investors. (China holds a few hundred billion of it.) As a percentage of national wealth, U.S. publicly-held debt represents 4.3 per cent of the country’s net assets. In 1995, at 3 per cent of national assets, it was unremarkable. At 4.3 per cent, it’s a national disaster? Not likely. As the U.S. budget analysis notes: “Foreign debt remains relatively small.”

What will happen when foreign investors pull their money out of U.S. Treasury bonds? It won’t happen. On this, you can trust the markets. The 10-year Treasury pays a mere four and change. The risk premium is almost zero. In 2003, long-term government interest rates reached their lowest levels in 45 years. The U.S. government’s implicit credit rating is the best in the world. The message from investors around the world is blunt: Relax.

The U.S. military commitments in Afghanistan and Iraq are expensive in lost lives and in damaged lives, as are all wars, but they are not very expensive (for a multitrillion-dollar economy) in dollars. The fact is that the U.S. spends relatively little money on defence, as it always has. Throughout most of its history, military expenditures have consumed less than 1 per cent of GDP. At the end of Dwight D. Eisenhower’s presidency in 1960, when he warned of the dangers of the “military-industrial complex,” military spending took 5 per cent of GDP. In the sixties, with Vietnam, it briefly took 10 per cent. It now takes 3.5 per cent. The Soviet Union apparently spent as much as 25 per cent of its GDP on military expenditures, hastening its demise. China could do the same in the years ahead unless it comprehends the military power inherent in a single percentage point of U.S. net worth.

Mr. Crispo laments an apparent American retreat from intellectual achievement. Especially as measured in public schools, he may be right. As long as the U.S. remains the world’s top meeting place of bright minds, however, economic advance will continue, driven — as productivity can only be driven — by brainpower and invention. Inventors applied for 370,000 patents in the U.S. last year, twice as many as in 1992. The Geneva-based World Intellectual Property Organization (WIPO) reported 120,000 applications for international patents last year. The U.S. finished first, as it always has done, with 34.9 per cent of all applications. Runners-up: Japan (16.6 per cent), Germany (12.4 per cent), France (4.4 per cent), Britain (4.2 per cent). WIPO reported that China could overtake Australia this year for the No. 12 position.

The U.S. still has the money and the brains. Far from declining, it still ascends.

Neil Reynolds is an Ottawa writer whose columns on national economic issues appear Wednesday and Friday. He is the former editor-in-chief of The Vancouver Sun and the Ottawa Citizen.
neilreynolds@rogers.com