The American decline debate

A spate of recent books and articles has brought the long running debate over whether it’s morning or dusk in America back to the front burner of public debate.

Writers like Robert Kagan and Walter Russell Mead argue that American fears of being surpassed by the Soviet Union and Japan proved groundless in the 1980s and 1990s and that similar fears of being overtaken by China and the other BRICS today will prove similarly unfounded. America they say is not in decline but is rather in the process of re-ordering a global structure weakened by the decline of Japan and Europe. Acute observers like Edward Luce of the Financial Times say it’s Time (for America) to Start Thinking — the title of Luce’s just published book.

While I respect all three writers and consider them friends and colleagues, it will surprise no one who has read my own 2010 book — The Betrayal of American Prosperity — that I line up with Luce on this one.

Writing about The Myth of America’s Decline in Monday’s Wall Street Journal, Mead argues that the post World War II tri-lateral global system based on the U.S., Europe, and Japan is in decline because Japan and Europe have stagnated demographically and economically. So while the United States is faced with the necessity of constituting a new international system, it is not faced with any threat of its own decline.

But wait a minute. This line of argument presumes that the U.S. economic performance has been vastly better than Japan’s over the past twenty years since the bursting of the Japanese asset bubble in 1992. This presumption is certainly in line with the generally accepted conventional wisdom. I mean, how many times have you read or heard about Japan’s "lost decade" or "lost two decades?" The popular line of the media, professional economists, and conservative writers is that over that time poor, little, old Japan has languished while America has galloped ahead to ever new economic triumphs. The only problem with this view is that it’s not true. What looked like high U.S. growth in the late 1990s and between 2002 and 2008, was actually two highly destructive bubbles from which we are still recovering. Once you account for differences in population growth, inflation, and differences in counting productivity, the rates of GDP and productivity growth of Japan and the United States over the past twenty years are not terribly different. So if Japan has stagnated, so has America.

But you don’t need to compare to Japan to see that. Just compare to America. Except for the top one percent of the income distribution, Americans today have not seen much of an increase in real income since 1975. You’d have to be blind not to see the deterioration of our infra-structure. We used to have trade surpluses. Now we have chronic deficits. We used to tell ourselves that didn’t matter because we had surpluses in high tech items. But now we have deficits there too. We used to be the world’s biggest creditor. Now we are its biggest debtor. The dollar used to buy 360 yen and 4 German Marks. Now it buys only 80 yen and about .7 euros.  How can anybody claim we’re not suffering decline?

Of course, we’re in decline. That’s obvious to everyone outside the United States and to most inside except for firm believers in American exceptionalism for whom eternal American ascent and economic dominance must be articles of faith.

But the fact of decline is not the main issue. The real question is whether the evident decline is inevitable, stoppable, or reversible. Here I am much more positive. I say reversible.

Look at it like a round of bridge. Each country has a hand of cards. Ask yourself whose cards you’d prefer to play  given a choice. I say America’s. America’s cards today are not as good as those of ten or twenty years ago. But they’re still the best, the best universities, the most stable large market, the leading position in many technologies, the easiest place to take risks, and so forth. But, of course, in bridge as in life, you can lose with a good hand if you play the cards badly.

Here’s America’s real problem and one that Luce really puts his finger on. The United States is playing its cards just about as badly as it is possible to play them.

So what needs to be done. Nothing too complicated really. Just watch Singapore, China, Germany, and Brazil and do what they do. Do they offer substantial financial incentives to induce off-shoring of production to their shores? Fine. Study their programs and copy them. Do they target key industries for development? Fine, do the same. Do they coordinate closely between government, labor, and management. Great. Do the same.

Anything they can do we should be able to do as well, sometimes maybe even better.