Head of the Class

Don't look now, declinists, but the U.S. economy is strong and poised to beat its rivals. Yes, even China.

After World War II, when fear of Hitler was giving way to fear of Stalin, George Orwell rebuked intellectuals for "the instinct to bow down before the conqueror of the moment, to accept the existing trend as irreversible." In recent decades, the chattering classes have continued to show the same reflex, bowing down before the rise of Japan in the 1980s, Silicon Valley in the 1990s, and the broad rise of the big emerging markets -- known as the BRICS -- in recent years. After a decade in which the U.S. share of the global economy declined from 32 to 22 percent, while the emerging market's share rose from 20 to 35 percent, many intellectuals assumed emerging countries led by Brazil, Russia, India, and China were to be the conquerors of the future.

Not so fast. In fact, the hot trend of the 2000s is fading fast this decade, and the BRICS are all falling back to Earth. Only China is growing faster than the emerging-market average, and even there the annual GDP growth rate dropped from the 11 percent pace of the past decade to below 8 percent last year -- and will possibly slow to 5 to 6 percent in the next few years, weighed down by the sheer size and age of China's increasingly middle-income economy. India has slowed just as dramatically, Russia and Brazil even more so, and it is now possible the latter two will grow slower than the United States in coming years -- a shocking comedown given that their per capita incomes are much lower. Those who forecast the inevitable rise of the BRICS and decline of the West may have to pick new conquerors.

The world economy is returning to its normal pattern, which produces an ever-changing roster of few winners and many losers. In the developing world, the slowdown in the BRICS has been accompanied by the emergence of new stars, from the Philippines to Nigeria to Turkey. In the developed world, by most key measures of recovery, France, Italy, and Japan are doing quite poorly, whereas Germany and some Nordic countries seem to be faring better. But despite the recent uptick in unemployment, the United States is the leading "breakout nation" -- the one most likely to beat the growth rate of rivals in its income class, as well as expectations for that class, over the next five years.

The markets tend to register these changes faster than pundits do. Over the past year, the U.S. economy grew at about the same pace as the global average for the first time since 2003, halting the decline in its share of the world economy. In fact, the United States was the only Western country to stop its losing streak -- and it came as such an unexpected surprise to investors that they have driven U.S. stock prices to all-time highs. Meanwhile, the BRICS economies are not living up to the hype, so on average their stock markets, in dollar terms, are trading 40 percent below their historical peaks.

It's no secret that the United States is younger and more flexible than other rich economies, but it is not well understood that these advantages are now propelling a broad advance in America's competitive position -- an advance that could largely erase many of its worst fears, over mounting debt, high gas prices, the falling dollar, and a shrinking manufacturing industry.

Here's how the United States really stacks up against the competition, in these critical areas. The United States is winning the race to dig its way out of debt, a process called "deleveraging." While total U.S. debt (combining government, corporate, and household debt) is now strikingly high, at 340 percent of GDP, what matters most for growth is the pace and direction of change. The McKinsey Global Institute has shown that the United States is the only major developed economy that since 2008 has lowered its total debt as a share of GDP, while that burden is rising in the leading European economies. One reason is that the U.S. system allows banks to force delinquent mortgage holders into foreclosure, from which Europeans are still heavily protected. This is brutal but effective because an economy is hard-pressed to recover when its debt pile is growing. China, with a total debt burden that has hit 200 percent of GDP and is still rising fast, arguably faces a bigger challenge than the United States, in part because it's much less wealthy.

The falling value of the dollar over the past decade is another important sign of American competitive flexibility that has been widely misinterpreted as a symbol of weakness. The dollar is now around 25 percent below its peak in inflation-adjusted terms against its trading partners, which makes U.S. exports more affordable abroad. The U.S. share of global exports is currently up a full point from its all-time low of 7.5 percent, hit in 2008. More importantly, for all the talk about the dollar's demise, its international status has not slipped in decades, with the dollar share of global foreign exchange reserves holding steady at more than 60 percent. Neither the euro nor the Chinese yuan poses a serious challenge to the dollar as the world's preferred currency.

The competitive exchange rate also fuels the renaissance of manufacturing in the United States, which reacted much more quickly than Europe or Japan to new competition from the emerging world. In the 2000s, U.S. manufacturers cut back wages, replaced expensive American suppliers with foreign ones, and cut 30 percent of factory jobs, while European manufacturers cut just 17 percent. These moves were tough, but the result was that China's share of manufactured exports rose almost entirely at Europe's expense, while the United States held steady. By 2011, U.S. manufacturers had put themselves in position to make a comeback as employers, creating around 200,000 jobs in each of the last two years, the best showing since the 1990s. Meanwhile, Europe and Japan, which resisted adapting to a more globalized world, continued to lose manufacturing jobs or saw no change.

The U.S. energy revolution is also helping manufacturing stage a comeback, boosted in particular by the increasing production of oil and natural gas from previously unreachable reserves trapped in shale rock. This has driven down U.S. natural gas prices to one of the world's lowest rates, which helps explain why domestic manufacturers are now moving plants back home. Often, America's economic rivals lack the large supplies of water required for blasting gas out of shale rock or the clear land-use laws and ready financing that make the revolution possible in the United States. As a result, the United States now has a huge lead in fracking technology, with 425 gas rigs drilling in operation versus about 30 in Europe. The United States also has a significant lead over the BRICS countries in developing the expertise and infrastructure for this energy boom.

The question after a global economic crisis is always the same: What is the next growth driver? At a recent conference, entrepreneur Peter Thiel argued that the answer is usually a major advance in technology, which is most likely to emerge in a country like the United States that promotes innovation. The United States still accounts for one-third of global R&D spending, which is why it is leading critical advances in digital technology, such as cloud computing. As factories come to rely more heavily on digital technology than on cheap labor, the edge in manufacturing shifts from developing countries like China back to developed countries like the United States. And as China and other BRICS grow richer, their citizens will demand the kind of kind of custom-designed products made in the most advanced factories, which are emerging first in the United States and the West.

In a global economy now defined by competing forms of capitalism, the American brand appears to be winning. The biggest risk by far is government debt because the U.S. government lags well behind its households and companies in beginning the painful deleveraging process. In coming years, the U.S. government debt burden is likely to slow GDP growth by about a point, to around 2.5 percent, compared with the historical average -- but that will still be fast enough to lead the rich world. It won't be the only success story in the West: Germany has much less of a debt problem than France, Spain is moving much faster to pare down labor costs than Italy, and so on. It's a tough age, but also very fair in the sense that there is no global tailwind for any country, rich or poor. The winners will take their mantra from a Latin proverb: "If there is no wind, row."

Spencer Platt/Getty Images

National Security

Time to Face Facts

Three years in, New START has performed exactly as advertised.

Three years ago today -- April 8, 2010 -- President Obama and then-President Dmitry Medvedev signed the New START agreement to reduce American and Russian deployed strategic nuclear forces to their lowest levels since the days when Dwight Eisenhower was president and the Cold War defined our relationship with the Russians.

That December in the Senate, we clawed our way to ratification with 71 votes, a big bipartisan statement that the arms control and nonproliferation consensus could hold together even in a polarized political culture. That statement was reaffirmed by treaty supporters from Henry Kissinger and James Baker -- and every other living secretary of state -- to President George Herbert Walker Bush.

Still, when I noted that far more ambitious treaties had previously been approved by votes of 90 or 95 to zero, a colleague of mine wondered whether in this hyper-partisan Washington, 71 might be the new 95.

I'm proud that in the end we sent a signal to the world that in American foreign policy, however uphill the slog and improbable the victory, partisan politics can still stop at the water's edge.

But I'd like to see our country get back to the days of near unanimity on these vital issues -- because the commitment to nonproliferation and arms control that began under Presidents Nixon and Reagan should continue well into the future.

How do we do that?

We start by relentlessly following the facts, and the facts are that through the last two-plus years since the treaty entered into force, despite any of the alarm bells treaty foes may have rung, the treaty is working -- exactly as advertised.

Follow the facts.

We and the Russians both have "boots back on the ground" -- inspectors who monitor the inner workings of our respective strategic forces. 

New START is maintaining stability and predictability between the world's largest nuclear powers, as we promised.

So far, the United States and Russia have completed 78 on-site inspections. On top of that, we have exchanged over 4,000 notifications on the numbers, locations, and movements of our strategic forces.

On a day-in, day-out basis, we have a real-time picture of what is going on with the Russians' strategic forces, and they have the same with ours.

The inspection teams are thus steadily confirming that the treaty's verification regime works. Accurate and timely knowledge of each other's nuclear forces dampens the risks of misunderstanding, mistrust, and worst-case analysis and decision-making. Such mutual confidence and predictability are crucial to international stability.

Looking ahead, the administration is going to continue to advance nuclear security policies in ways that meet both the challenges of the world in which we now live, as well as those on the horizon. We know that the traditional concept of nuclear deterrence -- the idea that a country would not initiate a nuclear war for fear of nuclear retaliation -- does not apply to terrorists. We know that our greatest nuclear threat is no longer a large-scale nuclear exchange, but the danger that terrorists could acquire nuclear materials or, worse, a nuclear weapon.  

That is why concerted action by the United States and Russia -- and indeed, by all nuclear-weapon states -- to reduce their arsenals is important. These reductions go hand in hand with our efforts to strengthen the nuclear nonproliferation regime, hold Iran and North Korea to account, and secure vulnerable nuclear materials around the world against terrorist theft. All of these steps contribute to countering the paramount threat of nuclear terrorism.

As we move forward, Washington and Moscow have a particular responsibility to set an example for the world, because we still deploy over 90 percent of the nuclear weapons on our planet.

When signing New START three years ago in Prague, President Obama made it clear he intended to seek further reductions in all types of nuclear weapons: strategic and nonstrategic, deployed and non-deployed.  

We will follow through on this goal in a deliberate, step-by step manner, proactively consulting with Capitol Hill, talking with our allies and engaging Russia on future negotiations. To be clear: reducing nuclear weapons is not an end in and of itself, but a means toward creating a safer and more stable world. We'll only make reductions that are in our national security interest, and that of our allies.

But make no mistake on this anniversary of its signing: New START was neither the first step nor the last, but a vital step that moves us forward.

In a dangerous and volatile world, those are the facts, and as we confront threats far and wide, from the DMZ to Tehran, it is through facts that we need to rebuild consensus -- and do what we must to keep America safe.