tMichaelB is the web site for Tom Bengtson, who writes about business, religion, family and politics.

Thursday, October 14, 2004

What's America's future in the global economy? Journalists offer two views

In the last couple of weeks, I have had the opportunity to listen to two noted journalists offer vastly different views of the United States' place in the global economy.

On September 19 in Des Moines, I heard Stuart Varney describe a world economy dominated by the United States. He sees a future in which the United States maintains a position of world leadership. Varney helped launch CNN in 1980 and has contributed to a variety of cable news programs during the last 25 years. Last January, he joined the Fox News Channel.

On October 4 in New York, I listened to a speech by Fareed Zakaria, who sees numerous challenges to the United States' position at the pinnacle of the global economy. He sees America's leadership waning and proposes that other countries are much more suited to succeed in the global economy. Zakaria is the editor of Newsweek International Magazine. The former managing editor of Foreign Affairs magazine, he is the author of the best selling book, “The Future of Freedom.”

Zakaria argues that economics and technology were the great drivers of globalization in the 1990s. Many countries were swept along by these factors, adopting laissez fair economic structures that resembled those of the United States. Zakaria said these countries felt like they were in a "golden straight jacket," where they no longer controlled their own economic destiny, but if they went along they would succeed in the end.

A few countries, however, resisted the U.S. economic model, and Zakaria points to Sweden as an example. He noted Sweden has 62 percent of its GDP devoted to state spending, compared to America, with 32 percent. It has inflexible labor markets and it is increasing its subsidies, not cutting them back. "By American standards of capitalism, Sweden is doing everything wrong," Zakaria said. But, "what is Sweden's GDP growth rate over the last 10 years? The same as the United States."

Because countries like Sweden are proving that a country can succeed economically without adopting all components of American capitalism, a new kind of globalization has emerged for the 21st century. "You are seeing globalization 2.0, which is quite different from the globalization of the 1990s," Zakaria said. "If you look at the 1990s version of globalization, everyone believed that the only thing countries could do was to become like the United States and deregulate their economy. Now, what you are beginning to see is a globalization that the rest of the world is owning, and using as its own."

While countries recognize the need for economic reforms, they are realizing they don't have to do everything at once. Some countries, like India and China for example, are resisting a fully convertible currency. The South African government, Zakaria noted further, is spending money on the rural poor. "Brazil is finding ways to provide farmers with some safety net," Zakaria continued. "The result is we are increasingly finding ourselves in a world where these countries are stable, with effective government, moving forward economically, with comfortable political support... a world in which these countries are confident and increasingly these countries see themselves as actors on the world stage," Zakaria said.

"This is a world the United States has not known, a world in which we are not the single dominant power that we have become used to."

Zakaria qualified that the U.S. military remains by far the most powerful in the world but, regardless, he said, the United States will have to "contend with a world in which people are not as comfortable with U.S. leadership."

Zakaria cited world initiatives underway without the involvement of the United States, listing first the Kyoto accord. Although he said the participating countries will never meet the accord targets for limiting carbon monoxide emissions, "they will coordinate without American leadership or involvement."

He also noted that the international standard for bar codes recently adopted the European model instead of the U.S. model. The European Union, Zakaria pointed out, is larger than the United States.

"The universe of trade is no longer a uni-polar world, it is a bi-polar world," with the United States and Europe, Zakaria said. "In fact, one could argue we are no longer the strongest pole."

He cited the growing confidence of other countries that want a place on the world stage. At the world trade talks earlier this year, he said, Brazil walked away from the talks because Europe and the United States refused to reduce their subsidies to farmers. Brazil, representing poor countries, gave up access to U.S. markets by refusing to negotiate. "Their feeling was," Zakaria explained, "we'll get access to your markets. There will be another time to have this negotiation but we're not going to sign on to a bad agreement right now. That confidence is new."

Zakaria further noted our mono-lingual culture and our unwillingness to convert to the metric system as evidence of the United States' inability to deal with a global marketplace. "It's a whole new world out there and my greatest fear is we are not prepared for it," Zakaria said.

Our budget deficit, Zakaria argues, hurts the United States. "Every morning Treasury Secretary John Snow wakes up trying to find someone willing to buy $2 billion worth of U.S. Treasury bills because we have a current account deficit of some $500 billion per year, about 5.5 percent of our GDP," Zakaria said. "If we were any other country, the rest of the world and the IMF would have put the U.S. government in receivership."

Zakaria said that the United States is getting a "grand exception," and wonders how long that will last. "Probably a long time," he said. "They have a vested interest in not plunging the United States into chaos. But one of the problems is there has never been an alternative [to the dollar, the international currency]. There is an alternative now with the Euro. There is a foreign Euro bond market. It is smaller than the dollar market, but you are beginning to see things. You are beginning to see small attempts to price oil in Euros," he said.

Zakaria's conclusion: "These trends all point to a world in which the United States is going to have to come to grips with a world in which its special position is substantially reduced."

Zakaria's view was quite a bit different from Varney's, who agrees there is a shift going on in the global economy. Varney, however, sees the United States emerging as an even stronger player in international markets.

Varney said that during the 1980s and 1990s, the conventional wisdom was that the U.S. economy was in decline while Japan and Western Europe offered real economic opportunity. As we enter the 21st century, however, Varney said we have moved into a bi-polar economy with the United States and China taking charge, leaving Japan and Western Europe distant also-rans.

"During the nine years leading up to March 2000," Varney said, "the United States created 220,000 new jobs every month. Europe, with a population of 385 million people, in the last five years has created one million net new jobs. The United States, with a population of 280 million, was creating one million new jobs every five months."

Varney noted that the United States is home to the most important industries in the world, particularly computing. He said the top five computer companies in the world are located in the United States, with the exception of Japan's NEC. "But what's inside an NEC computer?" Varney asked. "Intel, an American company." He further noted that the software industry is dominated by American companies.

Japan, once held up as the economic future of the world, is not keeping up with the United States, Varney said. "In 1990, the Japanese economy was two-thirds the size of the American economy," he said. "By 2000, it had shrunk to two-fifths. That's the story of America clearly pulling away."

Japan, nonetheless, continues to represent the second-largest economy in the world -- behind the United States. "This year, America will have GDP of some $11 trillion," Varney stated. "That's the dollar value of the total economic activity within our society. Japan is second with $4 trillion. Germany is third with $2 trillion. Britain is fourth, fifth is France, and sixth is California. Seventh is China; eighth is Mexico; ninth is India; and tenth is the city of Los Angeles."

China has emerged as the "great factory to the world," Varney noted. The country's economy is growing. "Sooner or later, to make it in this world, you have to compete with China," Varney said.

Varney sees a bright future for the United States and China, and a dim future for Western Europe because of changing demographics. "Fertility rates have fallen in every developed country on this planet, so much so that we are about to see population declines throughout the developed world," he said.

"You need a fertility rate of 2.1 to keep your population stable," Varney explained. "The fertility rate is defined as the number of live births per year, per 1,000 women of child bearing age.

"The fertility rate in Italy, Spain and Russia is 1.2. In Germany, Greece and Japan, it is 1.3. In Austria and all of Scandinavia, it is 1.4. In Taiwan, South Korea and Singapore, it is 1.2," Verney said.

"We are about to see population decline in about 55 countries around the world. It is beginning to hit Japan. It already has hit Italy. The Economist magazine says Germany, with a population of 82 million people, because of its fertility problem, will have a population of only 60 million by 2030. In one generation, the country will lose one-quarter of its population. It will be the first time that has happened without the aid of war or disease. This will have a radical impact on economic and social policy.

"We must also consider the aging of society," Varney continued. "In developed countries, people are living longer, so you have this great bubble of people who are retiring, and fewer people actually working to support them. How can you possibly maintain health and pension benefits for an expanding retirement community with a smaller working community? You cannot keep those levels of health and pension benefits in retirement. To keep it up, you have to have mass immigration, which most European countries will never allow."

The situation in the United States, however, is not so bleak, Varney said. The U.S. fertility rate is 2.0, which is actually up from the 1.9 rate that held through most of the 1990s. That's still slightly below the replacement rate but he said the decline is being more than offset by the arrival of millions of legal and illegal immigrants into the United States.

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