A Relative Decline: Challenging But Not Terminal

A reply to FP’s Clyde Prestowitz Blogpost 1 and Blogpost 2

Points 1-3, While I agree that US infrastructure is sub-par given its riches, comments about “manufacturing workforce dying off” and hand-wringing that services and healthcare being dead-ends are dead-wrong. Prestowitz is right that we should have a big fiscal push and an industrial policy to raise employment (politically impossible now), but xenophobia and protectionism are ill-placed.

a.       The main force depressing manufacturing short-term is the deep recession, but long-term the cause of our disappearing production-line workers is productivity, not China. Post-war US industrial production is up 550%, with only 80% of the 1948 workforce. Manufacturing payrolls have been steadily declining for 3 decades, with the trend slowing before that. (See attached; IP is in real terms)

b.      For a more detailed look at secular, sectoral change, look at agriculture. Employment is down 77% since WWII ended. Disaster? No, far from it. Miraculous success led by knowledge and technological innovation, which continues at a breathtaking pace. The numbers are here: the labor input and materials (chemicals, services)

c.       Infrastructure will need construction workers and engineers, not the same as manufacturing workers.

d.      Healthcare in the US has big problems, including the supply constraint by the ADA monopoly, and issues raised by Atul Gawande in a series of essays. But increasing healthcare employment is inevitable given the demographic trends, and should be encouraged as the U.S. may well have an absolute and relative advantage in many areas, and so can bring down prices and increase exports of medical services.

China’s FX is indeed quite undervalued, but they are the losers in this bargain, working for the rest of the world on the cheap. Their $3 trillion in reserves is an outgrowth of this mercantilist policy and captures the size of their subsidy to the rest of the world. The PBOC has made the worst FX trade ever in history, and has deeply disfigured its own economy as a result. Rebalancing will be painful for both sides.

Points 3-5, of course the US needs better education. As an aside, the college-educated unemployment rate in the US is 4.5% (normal is 2.5%), with participation rate back to pre-crisis levels, so far better than the remaining 2/3rds of the population. But if research moves to China, so what? From an economic standpoint, it is important to realize that most innovation is non-rival and non-excludable, if not anti-rival; copyright and patent law are important but weak protections that try to solve this important market failure (the far-seeing US Founding Fathers were aware of this, putting patent protection into the Constitution!) The Chinese have been stealing a lot of others’ work; maybe they will appreciate how damaging that is when they get a taste of their own medicine.

6. See point b. The US is not in terminal decline or on the verge of a Dark Age. That is where China has been for a couple of centuries (from the Opium Wars to the Great Leap Backward), but its relative gain on the U.S. doesn’t mean an absolute collapse. One should be careful to avoid the intuitively appealing but intellectual erroneous Malthusian doom-mongering or 1980’s style Japanophilia/phobia; serious people have been worried about America’s terminal decline since shortly after the country was founded. I’m not taking a Panglossian view – RGE is the first to point out serious, short and long-term problems and mistakes of the US. Yet China has at least as many problems, and more serious ones at that. Zakaria’s perspective is useful here. Of course, the “rise of the rest” means resources and commodities and farmland are great long-term investments. The US’s overall educational performance is dismal, but it is not close to losing its leadership in R&D, look at the companies in the Nasdaq and the quality of our universities. I agree 100% that having educated immigrants, the US ought to do a far better job keeping them.

7. The US military-industrial complex is still very healthy, and has no serious rival, even of the number of Chinese aircraft carriers does finally go above zero.

8. Britian has indeed been in relative decline for a century and a half. This is my second stint living here, and it isn’t Sweden, but it is a rich, free, modern country. Living standards are high and rising, thanks again to the trade-openness and rise in productivity in both the UK and RoW. Non-oil exports total $US35bn per month (20% of GDP. double that of the larger, more autarkic US) include a lot more than pharma and Will-and-Kate paraphernalia. It is a manufacturing powerhouse; see http://www.statistics.gov.uk/statbase/product.asp?vlnk=731 for detailed exports by industry.

Hope those comments help shed light on some important issues, and of course they’re only one man’s opinion.

3 Responses to "A Relative Decline: Challenging But Not Terminal"

  1. EconoMonitors   July 7, 2011 at 6:05 pm

    A comment sent in by a reader:

    Interesting post! A few notes.

    (1). The author of blogpost 2, Dalal, is an engineer, not an economist. So his expression of these problems is often technically incorrect. But that does not mean the problems are not real.

    (2). For manufacturing in his article substitute trade. Current account deficit, Triffen Dilemma, impossible trinity — a difficult trap to escape. Exports remain strong, but imports are not. The approach of peak oil (highly likely during the next decade) will exacerbate the problem, as would the decline in production of coal from the Applachian mines (coal production peaking cannot be reliably forecast, but prices are rising as the world taps lower quality reserves).

    (3). Expenditures on the US military and foreign intelligence are roughly $1T/year, aprox the size of the Federal deficit. And largely unrelated to any actual threats, hence not a source of national advantage or competitiveness. The most recent DoD strategy documents focus on al Qaeda as the primary foreign threat. Not only is almost the entire US military apparatus irrelevant to such a threat, public information provides no basis to believe that AQ any longer exists as an effective force (dismantled by global police, security, and inelligence services since 9-11).

    (4). Health care

    The cost structure of US health care is a serious competitive disadvantage, on several levels. Showing any kind of substantial relative advantage seems unlikely, IMO.

    Higher costs seem more likely to lead to a services deficit than net exports, as both processing (radiology sent to India) and end demand ("medical tourism") flow elsewhere.

    Massive internal subsidies and higher costs drive medical device and drug exports, but funding cuts might slow both of these. Many studies show that aprox 80% of global medical drug/device industry profits are from the US, another of the many unsustainable imbalances which may signal the end of the post-WwIi global regime.

    (5). I agree that describing these problems in emotional, even apocalyptic, terms is both foolish and pointless. But neither should we be blind to their consequences. The UK suffered in many ways during it's post-imperial adjustment from 1918- 1980. As Keynes said, just because they came through the storm does not mean that storms are not painful.

    (6). Shifting to speculation, I suspect that objectively the US has fewer serious problems than the other great powers. Rather, its most serious problem is a dysfunctional political system. Unfortunately, history suggests that these can be difficult to reform and cause serious difficulties. The English civil war and Japan's WW2 involvement are sobering examples.

  2. lastdaysofrome   July 7, 2011 at 7:10 pm

    David is exhaustively convincing above, but I'll add one note from my perspective. Britain's decline owed far more to the relative backwardness of the rest of the planet than the looming decline in American power. In fact, the nature of British power was to fiercely resist the advance of rival powers, either by colonizing, strangling them economically, co-opting them or, when that failed, war. The system Britain propagated, merchantist capitalism, was designed to forestall challenges to British hegemony. It was the great good fortune of the British Empire that, when it finally had exhausted itself holding off Germany, it fell into the hands of a relatively benign emerging power in the U.S.
    This looks unlikely to be the fate of the U.S. hegemon. China has good reason not to want to displace the U.S. from its role as global stabilizer – to what purpose when China enjoys such a fast, happy surplus in trade with the US. Unlike the situation in 1900, when Victorian power was starting to wane, the rise of current emerging powers is taking place because of the US propagated system of global institutions (not just finance), rather than in spite of it. This, a direct clash with the emerging powers of Asia is less likely. (A direct class between them is another story, and the US could be pulled into such a war).
    The great impediment to a stable transition of the world from its current state, where the US remains first among equals, to its inevitable, more equitable distribution of power, is the self-delusional rhetoric of the American political class (which, of course, is enabled by the bankrupt state of U.S. education).
    So there …

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