Are We Reaching America’s Moment?

May 24, 2012

This article first appeared in Business Horizon Quarterly, a publication of the National Chamber Foundation.

For a generation, the conventional wisdom in academia, the media, and the punditry held that America is a nation in decline.  Many other Americans have embraced this view. According to a poll by The Wall Street Journal, most respondents believe the country is heading in the wrong direction. In a 2011 Pew Survey, close to a majority felt that China has already surpassed the United States as an economic power.

In reality, a confluence of largely unnoticed economic, demographic, and political trends has put the United States in a far more favorable position than its rivals. Rather than facing the end of its preeminence, America may well be entering its greatest era of opportunity since the fall of the Soviet Union.

In part, this has as much to do with the deficiencies of America’s competitors than its own basic virtues. For instance, the European Union’s prolonged crisis will likely only end in further economic decline. Relative to 2009, for example, U.S. exports have risen by over 10 percent, while those of the Eurozone, including Germany, have increased by roughly one-fifth as much. 

Aging Japan has fared better in export growth, but its GDP is expanding at one of the slowest rates in the high-income world. The once fearsome Japanese empire has long passed its prime, with its market share receding in everything from automobiles to high tech. 

China’s impressive economic juggernaut is now slowing, and the Middle Kingdom faces increased social instability, environmental degradation, and a creaky one-party regime. Foreign investors, for example, increasingly complain about difficulties with protecting trademarks and technology in China—even in simply transferring money out of the country.

The United States faces its challenges, but it is positioned to achieve a more solid long-term trajectory than its European and Asian counterparts. What it lacks, however, is a strong political leadership capable of seizing this opportunity.

Resources

In contrast to the information-age theorists, we are far from the end of the “petroleum” age or even the industrial era. As the world’s population grows and its middle class expands—particularly in the developing world—the demand for products, either for direct consumption or used in manufactured goods, seems likely to continue to expand. Energy consumption itself, according to International Energy Agency, could rise as much as 50 percent by 2030, with over 84 percent of that increase coming from fossil fuels.

Some assert that this new scarcity regime hurts the United States; it is assumed that as an already developed country, there is little more to be exploited. The prediction of “steady American decline,” predicted by researchers at the Singapore Ministry of Trade and Industry, is just the most recent example of a globalized conventional wisdom.

This assessment may be premature. Unlike most of its major competitors, the United States remains extraordinarily resource-rich; on a per capita basis, the United States’ endowment in terms of raw materials is far greater than that of its prime competitors, including the European Community, India, China, and Japan.    

In a world where demand for food is on the rise, both in total and in terms of demand for proteins and higher quality grains, countries with large agricultural surpluses—Australia, Canada, Brazil, and the United States—enjoy intrinsic economic advantages compared to their less well-endowed competitors. America’s exports of soybeans to China have more than doubled in the last four years, topping $10 billion last year. Overall, U.S. farm exports reached a record $135.5 billion in 2011. With global demand increasing, we can expect sustained growth will continue across America’s fertile agricultural regions.  

Of course, having a strong food resource base may not guarantee a strong overall economy—witness Argentina over the last century. Yet it does give a leg up on those countries that can use their agricultural surplus as a base for wider economic growth.  

Similarly, energy has helped shape the level of economies from antiquity, although it is no guarantor of future growth. After growing largely based on its huge oil and coal reserves in the last half of the 20th century, America fell into the position of a major importer of raw materials—especially oil. Constituting at times close to half of U.S. imports, a persistent negative balance in energy has been eroding the country’s economy for years.

Some more histrionic pundits, such as James Howard Kunstler, predict a coming catastrophe due to depleted resources, bringing with it the end of the largely suburban “American way of life.” Such predictions now seem particularly overdone, given recent shifts in energy discoveries. Due in part to new technologies, such as hydraulic fracking and vertical drilling, estimates of North America’s energy resources have skyrocketed. By 2020, the United States, according to the consultancy PFC Energy, will surpass Russia and Saudi Arabia as the world’s leading oil and gas producer. 

In 2011, the United States became a net exporter of petroleum products for the first time in 62 years. American imports of raw petroleum have fallen from a high of 60 percent of its total demand to less than 46 percent. Overall, according to Rice University’s Amy Myers Jaffe, U.S. oil reserves now stand at over 2 trillion barrels (Canada has slightly more). America and Canada together constitute more than three times the total estimated reserves of the Middle East and North Africa. Observers such as Michael Lind believe that new discoveries, particularly of natural gas, mean that we might actually be living in an era of “peak renewables” and are at the onset of a “very long age of fossil fuels.”

Manufacturing

 In the end, it turns out that tangible things still matter, even at the onset of the global information age. Outside of the energy producing countries, the greatest growth in the past fifty years has come from manufacturing-led growth: first in America, then in Europe, Japan, Korea, and now China.

We are far from the end of the “petroleum” age or even the industrial era. Since the onset of the new century, the most sustained growth in the world has taken place not in the financial or information capitals, but in those places that produce things. These include the emerging manufacturing centers such as China, the
energy economies in the Persian Gulf, or economies that produce both, like Brazil. In the high-income world, the same pattern exists, particularly relating to resource rich countries like Australia and Canada. Even Germany, the strongest European player, has thrived almost exclusively due to its remarkable industrial exports.

Many conclude that America has already passed its period as an industrial power. Yet the nascent energy revolution also provides the basis for an expansion in manufacturing. Indeed, some of the biggest backers of shale gas exploration are prominent CEOs of industrial firms. A recent study by PriceWaterhouseCoopers suggests shale gas could lead to the development of one million industrial jobs.

Manufacturing’s role in promoting job and income growth is often understated. Although manufacturing employment overall has dropped, the percentage of higher-wage, skilled industrial jobs has been climbing over the last two decades. Much of this growth has been concentrated in formerly rural regions in the West and South, as well as in small towns.

Yet this industrial resurgence is also seen in the American industrial heartland, with rising employment in states such as Ohio and Michigan. U.S. manufacturers have expanded their payrolls and increased production for two straight years, while Japan, Germany, China, and Brazil have scaled back.

Many factors contribute to this resurgence. The shale energy boom is one, but foreign and domestic manufacturers, alarmed by rising wages and labor unrest in China, are seeing more reasons to invest in America. Japanese, German, and Korean companies also have concerns about China’s policies that favor local firms and abscond with investor’s technology. Much the same can be said about American industrial firms. A recent survey of manufacturing CEOs revealed that 85 percent believe production could soon shift from overseas. As President Obama recently acknowledged, this is America’s “moment” to seize the industrial initiative. 

Foreign Investment

Rising foreign investment reflects the new American competitiveness. Since 2008, foreign direct investment to Germany, France, Japan, and Korea has stagnated; in 2009, overall investment in the E.U. dropped by 36 percent. In contrast, foreign investment in the United States—by far the largest international recipient of new investment—rose 49 percent in 2010. Canada, Europe, and Japan contributed much of this investment in the United States. Foreign investment now stands at the fourth highest total in American history.

Critically, these firms are investing in sectors including manufacturing and energy. Industrial investment rose by $30 billion between 2009 and 2010, while investment in the energy sector more than tripled to $20 billion. This growth is particularly marked in parts of the country, such as Appalachia and the Southeast, which have historically lagged in terms of higher wage economic growth. Over 30 percent of all new investment in Kentucky in 2010 came from foreign sources, and in 2011, these overseas investors were expected to account for some 40 percent of total investments.

These firms are making a real difference. Energy giants from China, France, and Spain have snapped up stakes in fields in Ohio, Mississippi, Colorado, and Michigan, helping to finance new energy production. In fact, much of the new industrial growth in both the heartland and in the Southeast comes from foreign companies, increasingly including China itself.

The Information Sector

Perhaps the most important test of dominance in the future will be technological. In terms of published technical articles, for example, the United States alone produces three times as many as second-place Japan. 

This preeminence is reflected in business. The vast majority of the world’s leading software, biotechnology, and aerospace firms are concentrated in English-speaking countries. Britain and America account for nearly three-fifths of the world global pharmaceutical research spending. 

Particularly revealing has been the composition of the critical software industry. A review of the top 500 software companies in the world shows that over 400 of these firms are based in America, as are nine of the top ten in that list.

This dominance also extends to the whole of the Internet, social media, and electronic commerce. Outside of the United States, there are no significant equivalents of Apple, Google, Microsoft, Amazon, and Facebook. This preeminence suggests that the U.S. technology sector remains in a good position to dominate over the next decade.

This technological advantage parallels an arguably equally important cultural one. The United States is by far the world’s largest—in dollar terms—exporter of audiovisual products. Hollywood, for its part, rules the entertainment world, producing 40 percent of the world’s audiovisual exports, a dominion that troubles China’s President Hu Jintao, who recently complained that the “cultural fields” represent “the focal area” for Western “infiltration.”  

Demographics

The Great Recession slowed population growth everywhere, but the United States maintains the youngest and most vibrant demographic profile of any advanced country. Between 1980 and 2010, the U.S population expanded by 75 million to over 300 million. In contrast, many European countries, including Germany, have suffered from stagnant population growth; in Russia and Japan, populations have already started declining.

This is not to say that America does not face some severe demographic challenges. Immigration rates are slowing and that could, along with a long-term recession, lead to a difficult slowing in population growth. Overall, according to the Mexican government, the number of people leaving that country dropped from 450,000 annually in the first five years of the last decade to barely 145,000. Similarly, the number of naturalizations from South Korea, India, and Taiwan are still at levels well below those seen in 2008.

 If this negative trend continues, by some estimates we could reach zero population growth by 2100 at population levels far below those predicted by the United Nations. More importantly, a decline of immigration and an aging labor force represents a serious threat to the long-term trajectory of the global economy.

Political Factors

Given the political difficulties that arose in the last two presidential administrations, enthusiasm about America’s political system is hard to justify. Regardless of these shortcomings, America’s constitutional systems of laws and checks on central power remain a critical advantage. Immigration has declined with the recession, but the United States can expect to welcome religious and political exiles—such as Middle Eastern Christians displaced by the “Arab Spring”—as well as Greeks and Irish fleeing Europe’s economic decline.

Many from Russia and China are seeking to immigrate to the United States, Canada, or Australia to protect their property or to live a freer life. Indeed, among the 20,000 Chinese with incomes over 100 million Yuan ($15 million), 27 percent have already emigrated and another 47 percent have said they were considering it, according to a report by China Merchants Bank and Bain & Co., published in April 2011.

Ultimately, America’s power lies with the appeal of its language, culture, scientific prowess, and democratic legal structures. Yet this power needs to be unleashed and America’s distinctiveness leveraged. Sadly, no leading politician or political party seems ready to embrace the country’s new strategic advantages. Many may find the very notion distasteful, having swallowed declinism with their academic mother’s milk.

Worse still, some national policies today work against the wellsprings of national resurgence. Proposals to raise income taxes on families making over $250,000 directly threatens the aspiring entrepreneurial class more than the real “rich” whose fortunes are protected by low capital gains taxes and family trusts. Most critically, the current hostility by those on the political left to fossil fuels represents a direct threat to the country’s greatest new source of economic advantage and threatens to strangle America’s recovery in its infancy.

Not that Republicans are any less short-sighted. Many reject the infrastructure needed for an expanding economy—ports, roads, bridges, as well as worker training and support for basic research—as mere “pork.” Budget restraint and fiscal discipline are important, but preparing the country for more rapid economic growth requires an active, supportive government for such things as oil and gas pipelines.

Many on the political right also tend to view immigration as something akin to a hostile invasion.

Yet some key industries—notably manufacturing and high tech—rely heavily on immigrant entrepreneurship, intelligence, and the values of hard work. Running against immigration constitutes an assault on the nation’s increasingly diverse demographics.

So although all of the essential elements for a strong, sustained recovery are in place, the big question remains whether America will find political leaders capable of tapping the country’s phenomenal potential. Even for an optimist for America’s future, it’s hard to be too terribly hopeful that this leadership will emerge in the near future. n  

NCF Fellow Joel Kotkin is an internationally-recognized authority on global, economic, political and social trends. Kotkin is a distinguished presidential fellow in Urban Futures at Chapman University and an Adjunct Fellow for the Legatum Institute in London. Kotkin is also the author of The Next Hundred Million: America in 2050, The New Geography: How the Digital Revolution is Reshaping the American Landscape, and Tribes: How Race, Religion and Identity Determind Success in the New Global Economy.

 

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