August 3, 2008
Is America in Decline?
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.
Is America in Decline? Posner's Comment
I agree that there is no reason to expect the rate of growth of per capita income in the United States to decline in the foreseeable future. Of course it may decline; the future is uncertain; a particular uncertainty concerns the ever-present possibility of catastrophe (see my book Catastrophe: Risk and Response [2004]). Abrupt global warming, nuclear terrorism, a pandemic, an asteroid strike—all are possible events that could have cataclysmic effects on economic growth. Also, it is important to distinguish between monetary income and economic welfare. Increases in leisure and in the quality and variety of products and services can increase welfare without increasing per capita income; conversely, expenditures on security, while they may be cost-justified because of the risk of terrorist or other attacks, reduce consumption; and service deteriorations, for example due to congestion, can reduce welfare; but in neither case would the welfare loss show up in lower per capita incomes. A related example is wasteful expenditures on health care, all of which show up as income to providers, though it is possible that as much as a third of all expenditures on health care in the United States either yield no benefits in greater longevity or better health or exceed what it would cost to achieve the same benefits more cheaply (for example, by exercise and healthy eating).
I do not share Becker's pessimism about the rise of regulation. The deregulation and privatization movements have, since their beginning in the late 1970s, freed large parts of the economy from government control; income tax rates have fallen; unions have continued to decline; and the courts have become more conservative with respect to economic issues. (The Supreme Court's "liberal" Justices are liberal mainly concerning issues, such as abortion, capital punishment, and homosexual rights, that have little economic significance.) There will now be some re-regulation, but I would be surprised if it went far, given the political power of business.
Environmental regulation has increased, but it deals with real externalities. The increased regulation of labor markets, however, mainly as a result of antidiscrimination laws, is difficult to justify on economic grounds, though its economic effects may be largely offset by the decline of unions. Even after the recent increase in the federal minimum wage, that wage in real (i.e., inflation-adjusted) terms is no higher than it was in 1960.
Social conservatives believe that the nation is in free fall because of the decline of traditional social values, a decline reflected in low marriage and high divorce rates, a high rate of births out of wedlock, increases in pornography and vulgarity, the flaunting of homosexual relations, and abortion on demand. Becker does not cite any of these factors as inimical to economic growth; nor would I.
But there is a crucial ambiguity in the word "decline" when applied to a nation, and I will devote the rest of my comment to that. To begin with, the word might denote not a reduction in the rate of growth of per capita income but a reduction in that rate relative to the rate in other countries. Small differences in growth rates cumulate over time, like compound interest. Some nations will grow faster than the United States, but I do not see the growth rate of the United States dropping below the world average.
The idea of national decline might even refer to a decline in a nation's share of world income. The U.S. share peaked in 1951 at 28 percent, fell to 21 percent by 1975, and is about 20 percent today. The percentage will continue to fall as incomes in China, India, Brazil, and other rapidly developing countries rise. This almost certain "decline" has, however, no significance for the welfare of Americans--except insofar as a nation's share of world income is correlated with the nation's political (and ultimately military) power--"geopolitical power." And when one speaks of a nation in "decline," it usually is to the nation's geopolitical power that one is referring.
Although China's military expenditures are far smaller than those of the United States, they are increasing more rapidly and eventually may surpass ours; and their increase is driving Japan to become once again a major world military power. Russia's military expenditures are increasing as well. India's too. And these are all countries that have potential enemies and so take military preparedness seriously (unlike Western Europe). What is more, the power of large countries such as the United States (and before that, notably, Great Britain) to coerce small ones has declined. When early in World War II Iraq and Iran began leaning toward the Axis powers, Britain (aided in Iran by the Soviet Union) quickly intervened and, more or less effortlessly, changed the governments in those countries. Britain of course for centuries controlled a vast empire with slight military forces. Tiny Holland ruled what is now Indonesia. France ruled what is now Vietnam, Cambodia, and Laos. Japan ruled Korea and Taiwan. The Western nations, including the United States, are vastly less powerful than they were half a century ago. The U.S., despite a military budget roughly equal to that of all other nations combined, has its hands full trying to control two militarily third-rate countries, Iraq and Afghanistan, and is incapable of preventing Iran from becoming a nuclear power.
From a political rather than an economic standpoint, the United States today may be in a position comparable to that of the Roman Empire in the fourth century A.D. or the British Empire in the 1930s: the world's leading "empire" (in the sense not of having colonies, but of having the most influence over other countries), but, as an empire, in decline.