America's Biggest Enemy

A leading business economist looks at the fallout from the Great Recession and examines whether the United States is in decline.

The 800-pound gorilla in the room during nearly every discussion about U.S. manufacturing is China. For years, it symbolized the outsourcing of U.S. jobs as manufacturers closed factories here and shifted production to China. More recently, as the Chinese economy grows and a middle class develops, China increasingly represents a market, the biggest in the world, at least in terms of population and a magnet for U.S. industrial investment.

The economic, political and certainly emotional context for all of this is concern, if not fear, that America's best days are behind it and that the rise of China and other emerging nations necessarily means the decline of the United States. Not necessarily, says George Magnus, senior economic adviser and former chief economist at UBS Investment Bank. In his new book "Uprising: Will Emerging Markets Shape or Shake the World Economy?," Magnus looks at a wide range of economic, demographic and technological issues in the wake of the global financial meltdown of 2007. One startling statement: "America's biggest enemy is not China or anyone else, but the fear of its own decline."

Magnus doesn't deny the rapid rise of China or its ability to implement quick and effective policy initiatives, such as its stimulus package. But he argues in "Uprising" that countries such as China with "strong central authorities that operate without accountability and strong political and social institutions lack transparency and a capacity to change and adapt responsively." In his view, China's own growth and prosperity will begin to trip it up because it does not have the legal and financial systems to handle an increasingly complex economy. The question will become, Magnus writes, whether "an autocratic China with weak legal institutions can avoid the likely clash between accelerating economic development and the rising demands for commercial and political freedoms, especially as the growth momentum in the economy mellows."

China is not immune from some of the same demographic tides that are sweeping over the United States, symbolized by soaring medical costs and the first Baby Boomer retirements. China is the fastest-aging country in the world, Magnus notes. "By 2050, China will be very old. It will have more people aged over 65 than the entire U.S. population predicted at that time, and more people aged over 80 than any other country," he writes. As a result of its aging population, says Magnus, the "linear path" of growth that some believe China is on is not a certainty at all. In fact, Magnus forecasts, there will be a decline in its productivity growth that will "render China's growth rate quite pedestrian over the coming decade or so."

Does America have its problems? To quote one popular politician, "you betcha." Magnus notes that the Congressional Budget Office estimates that the national debt could reach $22 trillion by 2020, or more than 100% of GDP. Our net foreign debt is $3.6 trillion, and China is our biggest creditor with $1 trillion of U.S. Treasury bonds. We need to put our fiscal house in order.

Just as Chinese supremacy is not ordained, neither is the decline of the United States. What America has -- and China doesn't -- is a "legal, political and institutional system based around private property rights, independent adjudication, contract law and, above all, the rule of law." This allows the country to "change and adapt," Magnus states, so it can meet the challenges facing it.

Magnus' prescription for the United States starts with leadership that acknowledges the need for a "complete reboot" of our economy. That means deep budget cuts and a tax reform, but it also means a commitment to investing in areas that will preserve our "highly innovative and dynamic culture," such as research and development and education. Magnus told me the country needs an industrial policy not to determine individual winners and losers, but to ensure that we are supporting industries that can contribute to the "new global supply chains that are forming as the next billion consumers grow up in the emerging countries." So while the Great Recession brought a financial crisis, he warns, it's vital that we not submit to our biggest enemy -- a crisis of confidence.

Steve Minter
Editor-in-Chief
[email protected]

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