Have we hit Peak America?
The sources of U.S. power and the path to national renaissance.
American leadership in the world is imperiled. And at a fundamental level, the American people sense it. A number of recent polls show that more Americans than ever before -- nearly 60 percent, in some cases -- believe U.S. power is waning.
In other words, a greater number of Americans are worried about diminishing U.S. influence today than in the face of feared Soviet technological superiority in the late 1950s, the Vietnam quagmire of the late 1960s, the 1973 oil embargo, the apparent resurgence of Soviet power around the 1979 invasion of Afghanistan, and the economic concerns that plagued the late 1980s -- the five waves of so-called declinist anxiety that political scientist Samuel Huntington famously identified.
Many analysts have attributed Americans' current anxiety to the aftershock of waging two long wars in Iraq and Afghanistan. But the polls actually reflect something deeper and more potent -- a legitimate, increasingly tactile uncertainty in the minds of the American people created by changes in the world and in America's competitive position, which they feel far more immediately than do the participants in Washington policy debates. Average Americans do not experience the world through the lens of great-power rivalry or U.S. leadership abroad, but rather through that of an increasingly competitive globalized labor market, stagnating income growth among the middle class, and deep and unresolved worries about their children's future. A recent CNN poll, for instance, found that Americans think by a 2-to-1 margin that their children's lives will be worse than their own. They are questioning the promise of growth and expanding opportunity -- the very substance of the American dream.
This anxiety is real and justified, and it lies behind much of the public's support for withdrawing from the world, for retrenchment. Yet American leadership and engagement remain essential. The United States cannot hide from the world. Rather, it must compete. And if it competes well, it can restore not only its economic health, but also its strength for the long haul. That resilience will preserve Americans' ability to determine their fate and the nation's ability to lead in the way its interests require.
Unfortunately, absent from current discussions about U.S. foreign policy has been a hardheaded assessment of what it will actually take to rejuvenate and compete. Policymakers and experts have not yet taken a clear-eyed look at the data and objectively analyzed the fundamental shifts under way globally and what they mean for America's competitive position. Nor have they debated the steps necessary to sustain U.S. power over the long term.
Many foreign-policy experts seem to believe that retaining American primacy is largely a matter of will -- of how America chooses to exert its power abroad. Even President Obama, more often accused of being a prophet of decline than a booster of America's future, recently asserted that the United States "has rarely been stronger relative to the rest of the world." The question, he continued, is "not whether America will lead, but how we will lead."
But will is unavailing without strength. If the United States wants the international system to continue to reflect its interests and values -- a system, for example, in which the global commons are protected, trade is broad-based and extensive, and armed conflicts among great nations are curtailed -- it needs to sustain not just resolve, but relative power. That, in turn, will require acknowledging the uncomfortable truth that global power and wealth are shifting at an unprecedented pace, with profound implications. Moreover, many of the challenges America faces are exacerbated by vulnerabilities that are largely self-created, chief among them fiscal policy. Much more quickly and comprehensively than is understood, those vulnerabilities are reducing America's freedom of action and its ability to influence others.
Preserving America's international position will require it to restore its economic vitality and make policy choices now that pay dividends for decades to come. America has to prioritize and to act. Fortunately, the United States still enjoys greater freedom to determine its future than any other major power, in part because many of its problems are within its ability to address. But this process of renewal must begin with analyzing America's competitive position and understanding the gravity of the situation Americans face.
The relative economic decline of the United States is a fact. For the first time in 200 years, most growth is occurring in the developing world,and the speed with which that shift -- a function of globalization -- has occurred is hard to fathom. Whereas in 1990 just 14 percent of cross-border flows of goods, services, and finances originated in emerging economies, today nearly 40 percent do. As recently as 2000, the GDP of China was one-tenth that of the United States; just 14 years later, the two economies are equal (at least in terms of purchasing power parity).
This shift reorders what was, in some sense, a historical anomaly: the transatlantic dominance of the past 150 years. As illustrated by the map below, it wasn't until the Industrial Revolution took hold in the 19th century that the world's "economic center of gravity" decisively moved toward Europe and the United States, which have since been the primary engines of growth. Today, however, the economic center of gravity is headed back toward Asia, and it is doing so with unique historical speed.
This trend will persist even though emerging economies are hitting roadblocks to growth, such as pervasive corruption in India and demographic challenges and serious distortions in the banking system in China. For instance, according to the asset-management firm BlackRock and the Organization for Economic Cooperation and Development (OECD), consumption in emerging markets has already eclipsed that in the United States, and spending by the middle classes in Asia-Pacific nations is on track to exceed middle-class spending in North America by a factor of nearly six by 2030.
U.S. wealth is not shrinking in absolute terms -- and it continues to benefit from economic globalization -- but the United States and its allies are losing might compared with potential rivals. Although Europe and Japan have been responsible for much of the developed world's lost relative economic power, the U.S. economy has also slowed from its traditional rates of expansion over the past several decades. Worsening productivity growth has played a particularly large role in the U.S. slowdown, dropping to around 0.5 percent annually, which the Financial Times has referred to as a "productivity crisis." A range of factors are responsible, including a decline in the skill level of the American workforce and a drop in resources allocated to research and development.
Overall, the U.S. economy has become less competitive. The McKinsey Global Institute, for instance, has measured the relative attractiveness of the United States across a range of metrics, such as national spending on research and development and foreign direct investment as a percentage of GDP. It found that U.S. business attractiveness relative to that of competitors fell across 14 of 20 key metrics from 2000 to 2010 -- and improved in none. And according to the Harvard Business Review, U.S. exports' global market share dropped across the board from 1999 to 2009 and suffered particularly sharp falls in cutting-edge fields such as aerospace.
This shift in economic growth toward the developing world is going to have strategic consequences. Military power ultimately derives from wealth. It is often noted that the United States spends more on defense than the next 10 countries combined. But growth in military spending correlates with GDP growth, so as other economies grow, those countries will likely spend more on defense, reducing the relative military power of the United States. Already, trends in global defense spending show a rapid and marked shift from the United States and its allies toward emerging economies, especially China. In 2011, the United States and its partners accounted for approximately 80 percent of the military spending by the 15 countries with the largest defense budgets. But, according to a McKinsey study, that share could fall significantly over the next eight years -- perhaps to as low as 55 percent.
The resulting deterioration in American military superiority has already begun, as the countries benefiting most rapidly from globalization are using their newfound wealth to build military capacity, especially in high-tech weaponry. As Robert Work and Shawn Brimley of the Center for a New American Security wrote this year: "[T]he dominance enjoyed by the United States in the late 1990s/early 2000s in the areas of high-end sensors, guided weaponry, battle networking, space and cyberspace systems, and stealth technology has started to erode. Moreover, this erosion is now occurring at an accelerated rate." (Work has since been confirmed as deputy secretary of defense.)
China, in particular, is acquiring higher-end capabilities and working to establish "no-go zones" in its near abroad in the hopes of denying U.S. forces the ability to operate in the Western Pacific. China's declared defense budget grew 12 percent this year -- and has grown at least ninefold since 2000 -- and most experts think its real defense spending is considerably larger. The International Institute for Strategic Studies has judged that Beijing will spend as much on defense as Washington does by the late 2020s or early 2030s. Meanwhile, regional powers like Iran -- and even nonstate actors like Hezbollah -- are becoming more militarily formidable as it becomes easier to obtain precision-guided munitions and thus threaten U.S. power-projection capabilities.
Simultaneously, the United States is slashing its defense spending while allocating its remaining funds less strategically. Not only has the Defense Department estimated that it has already cut almost $600 billion from its budget plans for the next decade, but if current trends continue, by 2021 nearly half of the Pentagon's budget will go to personnel-related costs, rather than procurement, training, research and development, or operations.
The U.S. National Intelligence Council recently projected the future distribution of global power using two distinct methodologies that incorporated a range of "hard" and "soft" factors. By both estimates, the U.S. share of global power will fall dramatically, from around 25 percent in 2010 to around 15 percent in 2050. The National Intelligence Council predicted that over the same period, the relative power of the European Union and Japan will fall significantly as well.
The United States is worsening this problem by refusing to confront its federal debt and deficits. Unsustainable fiscal policy will limit U.S. competitiveness and freedom of action in the world with a severity and alacrity not remotely appreciated in today's U.S. foreign-policy debates. The total federal debt currently held by the public, which includes foreign creditors, is approximately $13 trillion. That is almost three-quarters of U.S. GDP, the highest it has ever been except for a brief period during and after World War II. Moreover, the drivers of the debt are entitlement programs that will impose enormous costs indefinitely.
Today, well over 60 percent of federal revenue is consumed by spending on Social Security, the major health-care programs (including Medicare, Medicaid, and subsidies under the Affordable Care Act), and interest payments on the federal debt. By 2043, spending on entitlements and net interest payments will consume all federal revenue, according to the Congressional Budget Office. Every dollar the U.S. government spends on anything else -- defense, intelligence, foreign affairs, the federal justice system, infrastructure, science and technology, education, the space program -- will be borrowed. And by that time, the total federal debt held by the public will far exceed U.S. GDP.
Recent attempts to address the problem have only resulted in fiasco. The "sequester" imposed automatic, arbitrary, across-the-board cuts to discretionary spending -- precisely the spending that is not causing the fiscal problem -- with the heaviest burden falling on defense. Most spending for entitlements was untouched. One could hardly imagine an outcome more likely to reduce American power, and quickly.
The unwillingness to choose a sustainable fiscal path is forcing the United States to forgo the investments necessary to sustain the domestic sources of its power, and it is already eroding its strength abroad. Among allies, adversaries, and swing states alike, U.S. fiscal policy is increasingly calling into question America's ability to lead globally.
For all these challenges to its influence, the United States retains enormous potential strength. Far more so than other great powers, it has the advantages and resources -- political, economic, geographical, geologic, and cultural -- to maintain the greatest freedom of action over the long haul. But it needs to focus on its competitiveness, beginning with a few key priorities.
Because America's fiscal policy affects everything else and because the current trajectory is unsustainable, entitlement reform is inevitable. The only question is when it will begin. A number of the fixes that could have the most significant impact are straightforward and could be phased in over time with minimal disruption. For example, increasing the retirement age -- which could be done over a decade or longer -- would substantially improve America's fiscal condition.
Investing effectively in infrastructure -- long a U.S. comparative advantage, now increasingly a relative weakness -- would boost productivity and growth over the long term. So would reforming corporate tax laws to encourage companies to bring profits home. (The current system creates perverse incentives for companies to maximize tax advantages by keeping profits out of the United States.)
The nation can also focus on enhancing productivity in parts of its economy that would benefit greatly from even modest improvements. As writer Reihan Salam and others have shown, sectors such as health care and education -- which together comprise a quarter of the country's economy -- are inefficient compared with other OECD nations. Government services are laggard. Introducing best business practices and up-to-date information technology to those areas would not only improve Americans' lives, but would also tap underexploited sources of national wealth.
With respect to defense policy, the United States must be ruthlessly strategic in its spending and preparations, prioritizing the principal source of its military advantage: technological superiority. This means focusing increasingly scarce defense dollars on next-generation weapons, such as stealthy bombers and quiet submarines, and on the assets that make them smarter than their enemy counterparts -- command, control, communication, and computer systems, as well as intelligence, surveillance, and reconnaissance capabilities. And it means fielding these capabilities with a better-trained, leaner military that de-emphasizes less lucrative investments, such as personnel strength and systems that cannot survive or prosper in the tougher emerging military-technological environment.
The key to preventing relative decline -- and perhaps sparking a renaissance in American power -- lies not simply in remedying problems with fiscal responsibility, economic productivity, and military spending, but in leveraging the country's comparative advantages, which are significant. The United States has an open political system that, historically, has proved able to self-correct and adapt. It has a culture that favors economic growth, accepts and integrates people from all over the world, and enables mobility, creativity, and personal renewal and reinvention. As a result, the nation remains an abiding destination for foreign investment -- a reliable source of growth and safety in uncertain economic and geopolitical times.
In particular, America's energy boom and its ability to attract talent from around the world could yield an outsized return on investment.
Less than a decade ago, energy loomed as an enormous challenge for the United States. Not anymore. The combination of horizontal drilling and hydraulic fracturing, or "fracking," technologies has generated a surge in U.S. oil and natural gas production. Between 2007 and 2012, U.S. production of shale gas increased from roughly 3.5 billion cubic feet per day to over 28 billion, a jump of over 700 percent. In the same period, shale gas's share of U.S. gas production grew from 5 percent to 45 percent. With each year, the efficiency of fracking has improved, and estimates of recoverable reserves of shale gas have nearly doubled. Driven by the production of tight oil made possible by fracking, U.S. crude oil production has also soared in the last five years, following four decades of decline.
In 2013, the United States overtook Russia as the world's leading producer of oil and gas. Within two years it is likely to surpass Saudi Arabia as the world's largest crude oil producer. U.S. imports of oil and gas have fallen steeply in the last five years, reducing the trade deficit. The United States will soon be a net exporter of energy.
The economic boost from the so-called "North American energy revolution" has already been profound. Natural gas prices in the United States have plummeted, both in absolute terms and relative to other markets around the world.
Consequently, the United States is now uniquely advantaged in industries, such as petrochemical production, that require massive amounts of energy. Billions of dollars of investment capital have flowed into the United States, thereby helping to revitalize the manufacturing sector. Energy analyst Daniel Yergin has linked the creation of 2 million jobs to the development of shale energy, and other reports suggest that the renewal of the energy industry (and associated manufacturing and support services) is pumping hundreds of billions of additional dollars into the U.S. economy every year.
The energy boom has also significantly reduced carbon dioxide emissions in the United States, even as the emissions from other, more traditionally "green" states, like Germany, have increased. A large part of this shift has been driven by the rapid transition from coal to less expensive and less emissions-intensive gas-powered electricity. According to the U.S. Energy Information Administration, in 2012 alone, a year in which U.S. GDP grew nearly 3 percent, the country's energy-related carbon emissions fell almost 4 percent, to their lowest level since 1994 and 12 percent below their 2007 peak.
Admittedly, some enthusiasts have overhyped the strategic implications of this revolution. True energy "independence" -- defined as isolation from shocks to global energy markets -- is impossible. And the United States has not gained newfound leverage over energy producers such as Russia. Nonetheless, the energy revolution has given the United States an important strategic capability. In 2011, the growth in U.S. and Canadian production helped moderate global oil prices when supplies from Libya were interrupted during that country's revolution. Going forward, the United States will be better able to help allies by diversifying their energy options and, in some cases, offering them more secure supply lines. To Japan, for example, energy flowing from North America is vastly preferable to Middle Eastern supplies that must transit the South China Sea.
Preserving and furthering the energy revolution and its boost to U.S. competitiveness is crucial. But it first requires a Hippocratic oath mindset: Do no harm. The North American energy revolution has been made possible in part by supportive property rights and state laws and regulations. But fracking does have risks. A prudent, predictable regulatory regime, one that provides rigorous monitoring and reduces potential environmental risks, benefits both industry and the public. By contrast, efforts under way in some states to ban the transport of fracking wastewater on state roads -- or even ban fracking entirely -- could curtail one of the country's greatest comparative advantages.
Looking outward, Washington must change its mindset toward its place in the global energy market. The United States is the world's leading energy superpower. It is time to reverse prohibitions on the export of oil and other hydrocarbons, many of which date from the OPEC embargoes of the 1970s. The government should continue to grant licenses to export liquefied natural gas to countries with which it does not have free trade agreements, and reverse the ban on crude oil exports.
Another strength of the United States is its edge in human capital -- the productivity, innovation, and entrepreneurship of its workers. The United States remains an attractive destination for smart, skilled, and creative individuals, even as the global competition for such workers intensifies. In 2010, for instance, Gallup reported that over 165 million of the approximately 700 million adults worldwide looking to emigrate would like to move to the United States, well ahead of second-place Canada. The United States did particularly well among younger respondents.
U.S. advantages in the global "war for talent" include the perception of meritocracy and mobility in the American system, exceptional centers of economic activity in places like New York and Silicon Valley, and the allure of American higher education. Shanghai Jiao Tong University's influential annual review of the world's top universities, for instance, lists 17 American universities among its top 20. Major U.S. universities also have much larger endowments than potential rivals abroad, helping them lure the best and the brightest, which in turn enables them to serve as incubators for innovation.
These assets have made the United States the leading destination for high-skilled immigrants, who provide an essential engine for economic growth. William Kerr of Harvard Business School, for instance, found that American immigrants of Chinese and Indian extraction accounted for 15 percent of U.S. domestic patents in 2004, up from just 2 percent in 1975. And the Brookings Institution has estimated that a quarter of technology and engineering businesses started in the United States between 1995 and 2005 had a foreign-born founder.
Preserving the U.S. edge in human capital is essential. But the United States is not exploiting this advantage as much as it should. Its current approach to H-1B visas, for instance, is overly restrictive and ultimately harmful. The United States regularly educates and trains hyperskilled Ph.D. students in the sciences, for example, and then makes it difficult for them to stay in the country. America should welcome and try to keep skilled and talented workers and entrepreneurs. The payoffs are clear: Every H-1B visa granted for an employee to join a high-tech company adds another five jobs to the economy. Other countries, such as Canada and Australia, already understand this dynamic. They are attracting talent through incentives and criteria, such as educational attainment and work history, that suggest great economic potential. The United States ought to learn from their example.
More broadly, improving America's world-class universities and research centers is essential to building and attracting the world's best talent and to fostering the innovation that will fuel economic growth in the 21st century. The U.S. experience in the last century demonstrated the multiplier effect of public investments in basic research. Failure to prioritize funding for such bodies as the National Science Foundation, the National Institutes of Health, and the Defense Advanced Research Projects Agency is penny-wise and pound-foolish. It was technological innovation that produced the startling boom in oil and gas production, and the country's ability to generate and exploit alternative energy sources will be driven by scientific breakthroughs -- as with graphene, a nanomaterial that has the potential to revolutionize batteries.
The United States also needs to tap fully its existing reservoirs of domestic talent. Extending the careers of the country's 76 million baby boomers -- perhaps through encouraging flexible working hours and changing how Social Security retirement benefits are calculated -- would not only help alleviate the strains on entitlement spending and increase retirement savings, but it would also help the economy grow as more mature workers continue to contribute the lifetime of expertise they have developed.
Building such skills among the coming generation of workers is critical as well. Even during the recent recession, employers could not fill certain high-skilled positions -- a supply-demand imbalance projected to continue through the decade. One way to address this gap may be through education tailored to specific careers. The Automotive Manufacturing Technical Education Collaborative, for example, partners auto companies and community colleges in 12 states to train students for high-skilled careers in the auto industry.
Perhaps the single most important thing Americans can do, however, is to be honest with themselves about the challenges the country faces and the seriousness with which it needs to treat them. America needs to talk less about its exceptionalism and focus more on demonstrating it.
If America chooses the path of economic adaptation, reform, and restored productivity -- that is, if it resolves to make tough choices -- it will be able to remain prosperous and strong and therefore retain extraordinary influence over its future and in the world. If it does not, it will see the domestic sources of its power erode far more quickly and with far more damaging consequences than is currently appreciated.
Within the United States, there is an ongoing debate about the appropriate uses of American power abroad. But whatever one's views on how U.S. power should be used, there is little reason to support its erosion. If one favors extensive American engagement, a resilient America will be better able to lead and intervene effectively. If one favors retrenchment and restraint, a more powerful America will be better insulated from outside threats. If one favors measured engagement, strength provides options and the firmest basis for sustained success. And, irrespective of foreign policy, an economically dynamic, growing America will benefit all its citizens, particularly the generations to come.
Otto von Bismarck is often quoted as having said that God takes special care of drunks, children, and the United States of America. But as another saying goes, God takes care of those who take care of themselves. Although the former may still be true, the latter certainly is.
While believing that America is doomed to decline is a fallacy, refusing to confront the problems that imperil its economic vitality would be no less a failing. American strength and freedom of action are not rights to be inherited but outcomes to be earned. Preserving U.S. influence abroad requires that Americans focus on renewing the sources of their nation's power and mitigating its weaknesses. It is time to play the long game.