Have We Hit Peak America

8/31/2014 Have We Hit Peak America?
http://www.foreignpolicy.com/articles/2014/07/03/have_we_hit_peak_america 1/24

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
THE WORLD'S ECONOMIC CENTER OF GRAVITY
The larger a country's GDP, the greater its pull on the world's economic center of gravity. So when the
Industrial Revolution spurred massive growth in the United States, the center moved west, eventually out
over the Atlantic Ocean. Today, it is moving back toward Asia.
SOURCE: MCKINSEY GLOBAL INSTITUTE, WITH DATA FROM ANGUS MADDISON OF THE UNIVERSITY OF
GRONINGEN
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
U.S. REVENUE VS. SPENDING
By 2043, federal spending on entitlements and net interest payments will exceed federal revenues,
meaning funds for any discretionary programs will be borrowed.
SOURCE: CONGRESSIONAL BUDGET OFFICE
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.
GDPs OF G-7 AND E-7 COUNTRIES
SOURCE: PRICEWATERHOUSECOOPERS
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.
2013 CHANGES IN ENERGY SUPPLY
In 2013, while the United States enjoyed a surge of over a million barrels per day in its liquid-fuels supply --
including crude oil and biofuels -- supply from OPEC countries dropped sharply. The United States is on its
way to being a net exporter of energy.
SOURCE: U.S. ENERGY INFORMATION ADMINISTRATION
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
According to a 2010 study, about 24 percent of the world's adults hoping to emigrate listed the United
States as their ideal destination -- more than three times the number wanting to head to second-place
Canada.
SOURCE: GALLUP
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
17 OF THE TOP 20 UNIVERSITIES ARE IN THE UNITED STATES.
ACADEMIC RANKING OF WORLD UNIVERSITIES, SHANGHAI JIAO TONG UNIVERSITY, 2013
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.
Elbridge Colby is the Robert M. Gates fellow at the
Center for a New American Security. Paul Lettow
was senior director for strategic planning on the U.S.
National Security Council staff from 2007 to 2009.
The views expressed here are theirs alone.
Infographics by MGMT. design.

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8/31/2014 Have We Hit Peak America?

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