The Post-American World: Release 2.0 (25 page)

Economists define saving as the income that, instead of going toward consumption, is invested to make possible consumption in the future. Current measures of investment focus on physical capital and housing. Cooper argues that this measure is misleading. Education expenditures are considered “consumption,” but in a knowledge-based economy, education functions more like savings—it is spending forgone today in order to increase human capital and raise future income and spending power. Private R&D, meanwhile, isn’t included in national accounts at all, but rather considered an intermediate business expense—even though most studies suggest that R&D on average has a high payoff, much higher than investing in bricks and mortar, which counts under the current measures as savings. So Cooper would also count as savings expenditure on consumer durables, education, and R&D—which would give the United States a significantly higher savings rate. The new metric worldwide would raise the figure for other nations as well, but the contribution of education, R&D, and consumer durables to total savings “is higher in the United States than in most other countries, except perhaps for a few Nordic countries.”
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With all these caveats, the United States still has serious problems. Many trends relating to the macroeconomic picture are worrisome. Whatever the savings rate, it has fallen fast over the past two decades, though a new recession-driven thriftiness has raised it to about 5 percent in the last two years. By all calculations, Medicare threatens to blow up the federal budget. The swing from the surpluses of 2000 to the deficits of today has serious implications. For most families, moreover, incomes are flat or rising very slowly. Growing inequality is the signature feature of the new era fueled by a triple force—the knowledge economy, information technology, and globalization. Perhaps most worryingly, Americans are borrowing 80 percent of the world’s surplus savings and using it for consumption. In other words, we are selling off our assets to foreigners to buy a couple more lattes a day. These problems have accumulated at a bad time because, for all its strengths, the American economy now faces some of its strongest challenges in history.

Everyone Is Playing the Game

Let me begin with an analogy drawn from my favorite sport, tennis. American tennis enthusiasts have noted a worrying recent trend: the decline of America in championship tennis. The
New York Times
’ Aron Pilhofer ran the numbers. Thirty years ago, Americans made up half the draw (the 128 players selected to play) in the U.S. Open. In 1982, for example, 78 of the 128 players selected were Americans. In 2007, only 20 Americans made the draw, a figure that accurately reflects the downward trend over twenty-five years. Millions of pixels have been devoted to wondering how America could have slipped so far and fast. The answer lies in another set of numbers. In the 1970s, about twenty-five countries sent players to the U.S. Open. Today, about thirty-five countries do, a 40 percent increase. Countries like Russia, South Korea, Serbia, and Austria are now churning out world-class players, and Germany, France, and Spain are training many more players than ever before. In the 1970s, three Anglo-Saxon nations—America, Britain, and Australia—utterly dominated tennis. In 2007, the final-sixteen players came from ten different countries. In other words, it’s not that the United States has been doing badly over the last two decades. It’s that, all of a sudden, everyone is playing the game.

If tennis seems trivial, consider a higher-stakes game. In 2005, New York City got a wake-up call. Twenty-four of the world’s twenty-five largest initial public offerings (IPOs) that year were held in countries other than the United States. This was stunning. America’s capital markets have long been the biggest, deepest, and most liquid in the world. They financed the turnaround in manufacturing in the 1980s, the technology revolution of the 1990s, and the ongoing advances in bioscience. It was the fluidity of these markets that had kept American business nimble. If America was losing this distinctive advantage, it was very bad news. The worry was great enough that Mayor Michael Bloomberg and Senator Chuck Schumer of New York commissioned McKinsey and Company to do a report assessing the state of New York’s financial competitiveness. It was released late in 2006.
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Much of the discussion around the problem focused on America’s overregulation, particularly with post-Enron laws like Sarbanes-Oxley, and the constant threat of litigation that hovers over business in the United States. These findings were true enough, but they did not really get at what had shifted business abroad. America was conducting business as usual. But others were joining in the game. Sarbanes-Oxley and other such regulatory measures would not have had nearly the impact they did had it not been for the fact that there are now alternatives. What’s really happening here, as in other areas, is simple: the rise of the rest. America’s sum total of stocks, bonds, deposits, loans, and other instruments—its financial stock, in other words—still exceeds that of any other region, but other regions are seeing their financial stock grow much more quickly. This is especially true of the rising countries of Asia—at 15.5 percent annually between 2001 and 2005—but even the Eurozone’s is outpacing America’s, which clips along at 6.5 percent. Europe’s total banking and trading revenues, $98 billion in 2005, have nearly pulled equal to U.S. revenues of $109 billion. In 2001, 57 percent of high-value IPOs occurred on American stock exchanges; in 2005, just 16 percent did. In 2006, the United States hosted barely a third of the number of total IPOs it did in 2001, while European exchanges expanded their IPO volume by 30 percent, and in Asia (minus Japan) volume doubled. IPOs are important because they generate “substantial recurring revenues for the host market” and contribute to perceptions of market vibrancy.

IPOs and foreign listings are only part of the story. New derivatives based on underlying financial instruments like stocks or interest-rate payment are increasingly important for hedge funds, banks, insurers, and the overall liquidity of international markets. (Derivatives can be important in bad ways, of course; derivatives based on home loans helped cause the mortgage crisis. But many derivatives are plain-vanilla contracts that help businesses minimize their risks.) And the dominant player on the international derivatives market (estimated at a notional value of $300 trillion) is London. London exchanges account for 49 percent of the foreign-exchange derivatives market and 34 percent of the interest-rate derivatives market. (The United States accounts for 16 percent and 4 percent of these markets, respectively.) European exchanges as a whole represent greater than 60 percent of the interest rate, foreign exchange, equity, and fund-linked derivatives. McKinsey’s interviews with global business leaders indicate that Europe dominates not only in existing derivatives products but also in the innovation of new ones. The only derivatives product in terms of which Europe trails the United States is commodities, which accounts for the lowest overall revenue among major derivatives categories.

There were some specific reasons for the fall. Many of the massive IPOs in 2005 and 2006 were privatizations of state-owned companies in Europe and China. The Chinese ones naturally went to Hong Kong, and the Russian and Eastern European ones to London. In 2006, the three biggest IPOs all came from emerging markets. In 2010, China Agricultural Bank raised $22.1 billion in the largest IPO ever. (It beat out the $21.9 billion IPO of another Chinese bank to win the title.) But this is all part of a broader trend. Countries and companies now have options that they never had before. Capital markets outside America—chiefly Hong Kong and London—are well regulated and liquid, which allows companies to take other factors, such as time zones, diversification, and politics, into account.

The United States continues functioning as it always has—perhaps subconsciously assuming that it is still leagues ahead of the pack. American legislators rarely think about the rest of the world when writing laws, regulations, and policies. American officials rarely refer to global standards. After all, for so long the United States was the global standard, and when it chose to do something different, it was important enough that the rest of the world would cater to its exceptionality. America is the only country in the world, other than Liberia and Myanmar, that is not on the metric system. Other than Somalia, it is alone in not ratifying the international Convention on the Rights of the Child. In business, America didn’t need to benchmark. It was the one teaching the world how to be capitalist. But now everyone is playing America’s game, and playing to win.

For the last thirty years, America had the lowest corporate tax rates of the major industrialized countries. Today, it has the second highest. American rates have not gone up; others have come down. Germany, for example, long a staunch believer in its high-taxation system, cut its rates (starting in 2008) in response to moves by countries to its east, like Slovakia and Austria. This kind of competition among industrialized countries is now widespread. It is not a race to the bottom—Scandinavian countries have high taxes, good services, and strong growth—but a quest for growth. American regulations used to be more flexible and market friendly than all others. That’s no longer true. London’s financial system was overhauled in 2001, with a single entity replacing a confusing mishmash of regulators, one reason that London’s financial sector now beats out New York’s on some measures. The entire British government works aggressively to make London a global hub. Washington, by contrast, spends its time and energy thinking of ways to tax New York, so that it can send its revenues to the rest of the country. Regulators from Poland to Shanghai to Mumbai are moving every day to make their systems more attractive to investors and manufacturers all over the world. Even on immigration, the European Union is creating a new “blue card,” to attract highly skilled workers from developing countries.

Being on top for so long has its downsides. The American market has been so large that Americans have always known that the rest of the world would take the trouble to understand it and them. We have not had to reciprocate by learning foreign languages, cultures, and markets. Now that could leave America at a competitive disadvantage. Take the spread of English worldwide as a metaphor. Americans have delighted in this process because it makes it so much easier for them to travel and do business abroad. But for the locals, it gives them an understanding of and access to two markets and cultures. They can speak English but also Mandarin or Hindi or Portuguese. They can penetrate the American market but also the internal Chinese, Indian, or Brazilian one. (And in all these countries, the non-English-speaking markets remain the largest ones.) Americans, by contrast, can swim in only one sea. They have never developed the ability to move into other peoples’ worlds.

We have not noticed how fast the rest has risen. Most of the industrialized world—and a good part of the nonindustrialized world as well—has better cell phone service than the United States. Broadband is faster and cheaper across the industrial world, from Canada to France to Japan, and the United States now stands sixteenth in the world in broadband penetration per capita. Americans are constantly told by their politicians that the only thing we have to learn from other countries’ health care systems is to be thankful for ours. Most Americans ignore the fact that a third of the country’s public schools are totally dysfunctional (because their children go to the other two-thirds). The American litigation system is now routinely referred to as a huge cost to doing business, but no one dares propose any reform of it. Our mortage deduction for housing costs a staggering $80 billion a year, and we are told it is crucial to support home ownership. Except that Margaret Thatcher eliminated it in Britain, and yet that country has the same rate of home ownership as the United States. We rarely look around and notice other options and alternatives, convinced that “we’re number one.” But learning from the rest is no longer a matter of morality or politics. Increasingly it’s about competitiveness.

Consider the automobile industry. For a century after 1894, most of the cars manufactured in North America were made in Michigan. Since 2004, Michigan has been replaced by Ontario, Canada. The reason is simple: health care. In America, car manufacturers have to pay $6,500 in medical and insurance costs for every worker. If they move a plant to Canada, which has a government-run health care system, the cost to the manufacturer is around $800 per worker. In 2006, General Motors paid $5.2 billion in medical and insurance bills for its active and retired workers. That adds $1,500 to the cost of every GM car sold. For Toyota, which has fewer American retirees and many more foreign workers, that cost is $186 per car. This is not necessarily an advertisement for the Canadian health care system, but it does make clear that the costs of the American health care system have risen to a point that there is a significant competitive disadvantage to hiring American workers. Jobs are going not to countries like Mexico but to places where well-trained and educated workers can be found: it’s smart benefits, not low wages, that employers are looking for. Tying health care to employment has an additional negative consequence. Unlike workers anywhere else in the industrialized world, Americans lose their health care if they lose their job, which makes them far more anxious about foreign competition, trade, and globalization. The Pew survey found greater fear of these forces among Americans than among German and French workers, perhaps for this reason.

For decades, American workers, whether in car companies, steel plants, or banks, had one enormous advantage over all other workers: privileged access to American capital. They could use that access to buy technology and training that no one else had—and thus produce products that no one else could, and at competitive prices. That special access is gone. The world is swimming in capital, and suddenly American workers have to ask themselves, what can we do better than others? Or, to rephrase the question in a more direct way, the American worker is now wondering, does this competition mean I’m going to lose my job?