01 Dec 2008
A U.S. Turnaround?
America’s Decline Will Not Be Easily Reversedby Byron WienTopics:
In 1945, the United States was clearly the world’s leader militarily, economically, and politically. Its universities were preeminent, and its cultural life was enriched by the migration of Europeans during the previous decade. This position of leadership lasted 35 years until 1980. It received a boost from Russia’s launching of a space satellite, Sputnik, in 1957. This was a shock because Russia’s scientific prowess was not taken seriously at the time. The United States committed to putting a man on the moon in the next decade. Government funding for space research expanded, and the objective was met.
Our space research gave rise to Silicon Valley, and U.S. industrial strength was enhanced by technology innovation derived from products created for our satellite program. By 1980, however, Europe, helped by the Marshall Plan, was back on its feet, and the Japanese car and electronics industries were developing momentum. We took our leadership for granted, ignored this shift, and became complacent.
Our problems became more serious when communism failed in Russia, Chairman Mao died, and reforms that were started in China and India began to play a role in the world economy. During the 1960s and 1970s, U.S. textile, apparel, and shoe manufacturing migrated to Latin America and Asia. By 1990 many products formerly manufactured in the United States were being produced abroad. In addition, foreign automakers were taking market share from Detroit, and we became more dependent on imported oil.
Our initial reaction to the end of communism was to take a victory lap because capitalism had won. We talked of 3 billion new customers without realizing that many of these people would also become competitors. We began to view ourselves as a service economy without recognizing that services do not export well. During the past twenty years our balance of payments deficit has expanded to 6 percent of our gross domestic product, putting our currency in peril because our low savings rate requires us to finance our deficits with borrowing from abroad.
One of the reasons we feel so overburdened by debt is that it has steadily taken more borrowing to finance our growth. In the 1950s the economy grew by 73 cents for each dollar of added debt. In the 1960s it was 65 cents. By the 1980s it was only 34 cents, and so far in the current decade it is less than 20 cents.
We all know the sad story of our slippage in mathematics and science. In fourth grade, American children are ahead of almost everyone in the world. By the eighth grade they are even, and by twelfth grade they are seriously behind. If you walk through the labs of our great scientific universities you see many Asian faces. Some of them are Americans who grew up here, but many are foreign students. In the past, most of them stayed to enjoy the benefits of our open society, but now many are going home. Since September 11, 2001, many have trouble getting visas, and there are now considerable opportunities for them in their native countries. Today, America is the leader in only five product areas: computer hardware, software, biotechnology, aerospace, and entertainment. That is not enough to provide job opportunities for a country of 300 million people.
America’s decline has been a long time in coming and will not be reversed quickly, if it can be reversed at all. To do so will require exceptional leadership from the new president, since some aspects of life in the United States may get worse before they get better. To get started we will need to spend billions in a man-on-the-moon type program to move from fossil fuels to alternative sources of energy. We will need to finance research in technology innovation and biotechnology, including stem cell research. We will need to generate most of our electricity using nuclear fuel. We will need to bring our infrastructure into the 21st century.
The new president’s biggest challenge will be to prevent America’s slide into a position where it is dependent on foreign sources for both capital and energy. We have the human resources to accomplish these goals. The question is whether we have the will.
— Byron Wien is chief investment strategist for Pequot Capital Management. A longer version of this article appeared in the Financial Times, August 10, 2008.
Class of MBA 1956, Section E