Is America in Decline? Becker

Articles about whether America is in decline is a cyclical industry that rises and falls over about a twenty-year cycle. The previous cycle started with Paul Kennedy's bestseller of 1986 "The Rise and Fall of the Great Powers", and was vigorously discussed during the next decade. It was finally dismissed after starting in the early years of the Reagan presidency there was more than twenty-five years of vigorous growth in GDP-much faster than in Western Europe- declines in unemployment to very low levels, and the complete absence of any inflationary pressure. This gloom and doom industry has begun to grow again during the past few years. Kennedy had attributed his projected decline of the United States to its role as the world's policeman, and the resulting spending on defense and military manpower and equipment, Yet, defense spending did not account for more than six percent of GDP, and some of the military spending went for military R&D and training that had carryover to civilian products and services, such as the development of the Internet, and the training of pilots. The new pessimists continue to blame America's role as policeman, and in particular its protracted involvement in Iraq and Afghanistan. They also see possible doom in the debacle in the US housing market, the high price of oil, and the current economic slowdown in income growth, and declines in employment. Much emphasis too is placed on the growth of China and India, and also Brazil, and the shift of the world's attention toward these large rapidly developing nations. Some members of the doom school claim in addition that the United States is getting "old", like old Europe, and is suffering from ailments that afflict old nations. Readers of our blog will realize that I generally do not subscribe to this gloom and doom school concerning America. I do agree that being the world's policeman does take resources that could be producing civilian output, and countries in Europe and elsewhere free ride off of America's efforts, but when done right this policeman's role also makes the world a safer place in the future. However, the resources spent on military manpower and equipment is not large enough to have a serious effect on the growth of US civilian output. The economy and housing market will before long recover from their current difficulties. The rapid expansion of China, India, and a few other large nations does mean that the share of world GDP produced by the United States has begun to decline, and is likely to continue to decline over the next decade and longer. After all, these two huge nations, along with Brazil, comprise over forty percent of the world's population, so their rapid growth must lead to a decline in America's share of world GDP. But the success of other nations should not be taken per se an indication that America is in decline. Moreover, and on the whole, the growth of these other nations will help US growth prospects. The United States has been for several decades the world's leader in technological innovation, so that other nations have been able to free ride to some extent over US investments in new ideas and technologies. With the rapid growth of China and others, they too will begin to make considerable innovations, and the US will now be able to take advantage of their technological advances. In other words, in the future, America will become more of an importer as well as continuing to be an exporter of new ideas and innovations. The expansion of exports from China and other poorer nations has not benefited all nations, especially those that compete with exports of similar products. However, it has greatly benefited the US and other developed countries because the rich countries can import amazingly cheap consumer goods, and these developing countries provide a market for the industrial goods and advanced services of richer nations. As the rapidly developing countries get richer, the mix of their products and services will change, and some of them will compete directly with those of richer nations. Yet the evidence is strong that trade is stronger in general between countries of similar levels rather than different levels of economic development, but is mutually beneficial to both sides. I see no reason why this should not continue as China's, India's, and Brazil's economic development become much closer to that of the US, Japan, and Western Europe. Another argument made by the America is declining camp is that as countries continue to get richer, individuals lose their motivation and begin to sharply cut their hours of work and ambitions regarding further accumulation of wealth and income. In a celebrated article published in 1931 called, "Economic Possibilities for our Grandchildren", the great economist John Maynard Keynes predicted that as incomes continued to grow, then adults in Europe and the United States would by the year 2030 be working about 15 hours per week, and they would spent most of their time in leisure pursuits. Keynes’ predictions about the long-term rates of growth of income were surprisingly quite accurate, despite the worldwide depression then in effect, but his predictions about how people would spend their growing wealth were way off the mark. He did not appreciate that higher hourly earnings could lead people to work more hours even though their incomes were higher, and that the continuing development of new products, such as computers and television, would increase people's desire for more spending power. These effects were magnified by the interest in relative economic position since that induces men and women to strive for higher incomes in order to move ahead of their peers (on all this, see the article by Luis Rayo and me "Why Keynes Underestimated Consumption and Overestimated Leisure for the Long Run", in the recent collection of essays, "Revisiting Keynes". I am an optimist about the future prospects of America; that is, I believe the individuality, entrepreneurship, and drive in this country will continue to propel the economy and society forward at a good pace. The biggest risk to America's continuing success lies not in the considerations already discussed, but in the expansion of government regulations and controls that can throttle the dynamic energies of its competitive private sector. Clearly, various forms of government spending and regulation, such as spending on police and the military, on schools and other infrastructure, are crucial to any prosperous society. However, the tendency during the past half-century has been to go further than is warranted as different interest groups look to the government for help. Governments now often decide what consumer goods can be produced (see our blog discussion last week), subsidize housing and other goods, and regulate who can be fired and hired (especially in many European countries but also increasingly in the US). Governments also are placing greater stress on equality as opposed to opportunity and efficiency, and pay for medical spending, provide retirement incomes, and often impose heavy taxes on persons who earn more than average. So far, this expansion of the role of government has not been a crucial deterrent to entrepreneurship and private energies in the United States-a much greater expansion of government has had much more harmful effects in countries like Italy and France. Although I remain optimistic, I do fear that interest group pressures toward a much larger role of government in the United States may become much harder to resist in the future, and that this could eventually kill, or at least badly wound, the free market-entrepreneurial goose that has been laying the golden eggs.

Comments

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[Jack]

Michael, Exactly. EVERY time regulations are eased or relaxed Wall Street comes in an steals us blind. The last couple decades have been the undoing of the protections put in after 1929.

Nader has a GOOD handle on this. As you imply, Nader specifically favors having derivatives audited in the same GAAP manner as other instruments. $500 trillion of these are "traded" per year and few buyers know what they are "worth", that's why the term "illiquid is used so much. Translation: a pawnbroker wouldn't give two cents on the dollar for them.

The new joke should be "the check is in the mail, government is your enemy and deregulation and leaving it to "the market" is the cure for all ills" What has been stolen and lost in the last 8 years is beyond imagination and can never be recovered.

[neilehat]

"Is Ameri'k'a in decline?" Depends. To quote Dylan from the Sixties, "Those who aren't busy being born are busy dieing". Now, that, was a time when the Nation was truly dieing. Yet, somehow we managed to survive. Or how about the Civil War? Now, there was a time, when the existence of the Nation was up for grabs. Yet, somehow we managed to survive. Or how about the Great Depression? Now there was an economic failure and collapse. Yet, somehow we managed to survive.

Through out our history, limited as it may be, The Nation has been in decline in one way or another. What has been our salvation is a peculiar American genius for recognizing what the real problems are and working to correct them in a rational, and clear headed fashion. Regardless of ideology and other forms of "Group Think". Perhaps the powerful tool of survival and regeneration is the ability to come up with practical pragmatic solutions to the problems at hand.

As T.Paine so aptly put it, "These are the times that try men's souls, the summertime soldier and fair weather patriot ...", or as A.Lincoln put it, "We must learn to think anew and act anew ...", or as B.Dylan put it, "Those who aren't busy being born are busy dieing ...".

If we lose that, we are in decline.

[David Merchant]

I'm not sure if America is in decline or not. I hope it is not, but blind hope defeats itself. We need the pessimists to keep us aware.

Where I get pessimistic is when I read 1) that the citizens of over two dozen countries live longer, healthier, lives that Americans; 2) that we have more of our population in prison than any other country (including China, where we have more in both percentages and actual numbers); 3) gun violence (Switzerland is basically an armed camp, with soldiers allowed to bring their weapons and ammunition home with them yet has less gun violence than we do, so there's something else wrong besides the number of weapons), and 4) the disparity between the rich and the poor increases and the middle class is disappearing (an alarming trend).

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