Predictions about the death of American hegemony may have been greatly exaggerated

Let’s face it, there’s a general anxiety about the future of America.  There’s Tom Friedman’s column today, which my doctors have now forbade me from critiquing in order to keep my blood pressure down.  Books suggesting the United States is kowtowing to China are forthcoming.  The Economist recently observed on the highlights of a sobering survey of Harvard Business School graduates, which contained the following:

Fully 71% of the businesspeople polled expected America’s competitiveness to decline over the next three years. (National competitiveness is a slippery concept: countries do not compete in the same way that firms do. But the businessfolk in question answered some clearer questions, too.) Some 45% said that American firms will find it harder to compete in the global economy. A startling 64% said that American firms will find it harder to pay high wages and benefits.

Intriguingly, the Harvard alumni were gloomy about where America is headed, rather than how it is now. Some 57% felt that today the business environment in America is somewhat or much better than the global average; only 15% said it was worse. But when asked to compare its prospects with those of other industrialised economies, only 9% felt that America was pulling ahead; some 21% said it was falling behind. A striking 66% expected America to lose ground to Brazil, India and China; only 8% thought it would pull away from them.

This would seem to jibe with popular laments about why Apple can’t make its products domestically.  There are a lot of reasons, but a significant one is the lack of necessary skills for higher-end manufacturing.  This is in no small part because American students shy away from the training necessary to do these kind of jobs even if they originally think they want to be engineers.   Why?  Because American college students don’t like doing homework. 

So, America is doomed, right? 

To be honest, this sounds like a lot of pious baloney.  As Michael Beckley points out in a new article in International Security, "The United States is not in decline; in fact, it is now wealthier, more innovative, and more militarily powerful compared to China than it was in 1991."  The whole article is worth a read, and a good cautionary tale on the dangers of overestimating the ease of national catch-up:

The widespread misperception that China is catching up to the United States stems from a number of analytical flaws, the most common of which is the tendency to draw conclusions about the U.S.-China power balance from data that compare China only to its former self. For example, many studies note that the growth rates of China’s per capita income, value added in hightechnology industries, and military spending exceed those of the United States and then conclude that China is catching up. This focus on growth rates, however, obscures China’s decline relative to the United States in all of these categories. China’s growth rates are high because its starting point was low. China is rising, but it is not catching up.

What about the future?  One could point to the last few months of modestly encouraging economic data, but that’s ephemeral.  Rather, there are three macrotrends that are worth observing now before (I suspect) they come up in the State of the Union: 

1)  The United States is successfully deleveraging.  As the McKinsey Global Institute notes, the United States is actually doing a relatively good job of slimming down total debt — i.e., consumer, investor and public debt combined.  Sure, public debt has exploded, but as MGI points out, that really is the proper way of doing things after a financial bubble:

The deleveraging processes in Sweden and Finland in the 1990s offer relevant lessons today. Both endured credit bubbles and collapses, followed by recession, debt reduction, and eventually a return to robust economic growth. Their experiences and other historical examples show two distinct phases of deleveraging. In the first phase, lasting several years, households, corporations, and financial institutions reduce debt significantly. While this happens, economic growth is negative or minimal and government debt rises. In the second phase of deleveraging, GDP growth rebounds and then government debt is gradually reduced over many years….

As of January 2012, the United States is most closely following the Nordic path towards deleveraging. Debt in the financial sector has fallen back to levels last seen in 2000, before the credit bubble, and the ratio of corporate debt relative to GDP has also fallen. US households have made more progress in debt reduction than other countries, and may have roughly two more years before returning to sustainable levels of debt. 

Indeed, the deleveraging is impressive enough for even Paul Krugman to start sounding optimistic: 

the economy is depressed, in large part, because of the housing bust, which immediately suggests the possibility of a virtuous circle: an improving economy leads to a surge in home purchases, which leads to more construction, which strengthens the economy further, and so on. And if you squint hard at recent data, it looks as if something like that may be starting: home sales are up, unemployment claims are down, and builders’ confidence is rising.

Furthermore, the chances for a virtuous circle have been rising, because we’ve made significant progress on the debt front.

2) Manufacturing is on the mend.  Another positive trend, contra the Harvard Business School and the GOP presidential candidates, is in manufacturing.  Some analysts have already predicted a revival in that sector, and now the data appears to be backing up that prediction.   The Financial Times’ Ed Crooks notes:

Plenty of economists and business leaders believe that US manufacturing is entering an upturn that is not just a bounce-back after the recession, but a sign of a longer-term structural improvement. Manufacturing employment has grown faster in the US since the recession than in any other leading developed economy, according to official figures. Productivity growth, subdued wages, the steady decline in the dollar since 2002 and rapid pay inflation in emerging economies have combined to make the US a more attractive location.

“Over the past decade, the US has had some huge gains in productivity, and we have seen unit labour costs actually falling,” says Chad Moutray, chief economist at the National Association of Manufacturers. “A lot of our members tell us that it sometimes is cheaper to produce in the US, especially because labour costs are lower.”

Now, whether this boom in manufacturing will lead to a corresponding boom in manufacturing employment is much more debatable.  Still, as The Atlantic‘s Adam Davidson concludes:  "the still-unfolding story of manufacturing’s transformation is, in many respects, that of our economic age. It’s a story with much good news for the nation as a whole. But it’s also one that is decidedly less inclusive than the story of the 20th century."

3) A predicted decline in energy insecurity.  British Petroleum has issued their Energy Outlook for 2030.  The Guardian‘s Richard Wachman provides a useful summary:

Growth in shale oil and gas supplies will make the US virtually self-sufficient in energy by 2030, according to a BP report published on Wednesday.

In a development with enormous geopolitical implications, the country’s dependence on oil imports from potentially volatile countries in the Middle East and elsewhere would disappear, BP said, although Britain and western Europe would still need Gulf supplies.

BP’s latest energy outlook forecasts a growth in unconventional energy sources, "including US shale oil and gas, Canadian oil sands and Brazilian deepwater, plus a gradual decline in demand, that would see [North America] become almost totally energy self-sufficient" in two decades.

BP’s chief executive, Bob Dudley, said: "Our report challenges some long-held beliefs. Significant changes in US supply-and-demand prospects, for example, highlight the likelihood that import dependence in what is today’s largest energy importer will decline substantially."

The report said the volume of oil imports in the US would fall below 1990s levels, largely due to rising domestic shale oil production and ethanol replacing crude. The US would also become a net exporter of natural gas.

Note that this will take a while, and doesn’t mean that the U.S. will be energy independent.  Still, it’s quite a trend.  Or, rather, trends.   

Since the Second World War, the pattern in the global political economy has been for the United States to adjust to systemic shocks better than any potential challenger country.  A lot of very smart people have predicted that this time was different — the United States wouldn’t be able to do it again.  These trends suggest that maybe, just maybe, that might be wrong. 

Am I missing anything?