“21st economy in the US” doesn’t refer to a specific entity, but rather to a conceptual framework for the modern U.S. economy, characterized by globalization, technological advancements like AI and quantum computing, and challenges in intangible capital, income inequality, and global competition. The U.S. has the world’s largest economy by nominal GDP, and this conceptualization of the “21st century economy” focuses on the need for new policies and investments in areas like high-tech entrepreneurship, education, and infrastructure to maintain competitiveness.
Key Characteristics of the 21st Century Economy
- Globalization and Technology: Enhanced global trade in services driven by advanced communication technology and the rise of new, disruptive “Tough Tech” sectors such as AI, quantum computing, and biotechnology.
- Intangible Capital: Growing importance of intangible assets like R&D, brand reputation, worker training, and management systems, which require new methods of measurement.
- High-Growth, High-Tech Firms: A significant portion of economic growth comes from intensely competitive high-tech firms and entrepreneurs that disrupt markets.
- Policy Challenges: Addressing issues such as wage stagnation for workers without four-year degrees, the need for human and physical capital investments, and ensuring a strong social safety net for all workers.
Addressing Economic Challenges
- Investment: Proactive policies are needed to invest in skills, game-changing technologies, and sustainable energy to remain competitive in a hyper-competitive global marketplace.
- Education and Skills: Reforms are required to ensure the U.S. workforce is skilled and competitive, with increased emphasis on STEM education.
- Infrastructure: There is a critical need for investments in both physical infrastructure and digital infrastructure to support economic growth and competitiveness.
- Fairness and Inequality: Acknowledging the worsening income inequality and poverty, there is a focus on policies that support bargaining power for workers, raise wages, and create a robust job guarantee.
US Antitrust legislation has been around for about 100 years and continues to evolve to regulate emerging industries like information technology and e-commerce. In reality, the US has failed to fulfill the core goal of antitrust laws. The federal government has in fact enabled monopolistic corporations to grow more powerful, be it in food and agriculture, technology, banking or healthcare. When it comes to corporate consolidation in our food systems, the FTC has really failed us.
The US’s legacy of racism and oppression still drives extractive monopoly power which burdens people of color first and worst, whether as workers, consumers, small businesses or residents. We are living in an ‘oppression economy’ where the “racist tools of theft, exclusion, and exploitation to strip wealth from people of color, so that the elite can build their wealth”.
The economy worsened in 2001 with output increasing only 0.3% and unemployment and business failures rising substantially, and triggering a recession that is often blamed on the September 11 attacks.
An additional factor in the fall of the US markets and in investor confidence included numerous corporate scandals.
In 2001–2007, the red-hot housing market across the United States fueled a false sense of security regarding the strength of the U.S. economy.
Decline of labor unions
Most unions in America are aligned with one of two larger umbrella organizations: the AFL–CIO created in 1955, and the Change to Win Federation which split from the AFL-CIO in 2005. Both advocate policies and legislation on behalf of workers in the United States and Canada, and take an active role in politics. The AFL–CIO is especially concerned with global trade issues.
In 2010, the percentage of workers belonging to a union in the United States (or total labor union “density”) was 11.4%, compared to 18.3% in Japan, 27.5% in Canada and 70% in Finland.
The most prominent unions are among public sector employees such as teachers, police and other non-managerial or non-executive federal, state, county and municipal employees. Members of unions are disproportionately older, male and residents of the Northeast, the Midwest, and California.
The majority of union members come from the public sector. Nearly 34.8% of public sector employees are union members. In the private sector, just 6.3% of employees are union members—levels not seen since 1932.
Union workers in the private sector average 10–30% higher pay than non-union in America after controlling for individual, job, and labor market characteristics.
The Great Recession was a sharp decline in the United States’ economy. In 2008, a series of related economic disasters hit the American and European financial systems. The bursting of a worldwide bubble in housing set the recession in motion. The end of housing bubbles in California, Florida and Arizona led to the collapse of housing prices and the shrinkage of the construction sector. Millions of mortgages (averaging about $200,000 each) had been bundled into securities called collateralized debt obligations that were resold worldwide. Many banks and hedge funds had borrowed hundreds of billions of dollars to buy these securities, which were now “toxic” because their value was unknown and no one wanted to buy them.
A series of the largest banks in the U.S. and Europe collapsed; some went bankrupt, such as Lehman Brothers with $690 billion in assets; others such as the leading insurance company AIG, the leading bank Citigroup, and the two largest mortgage companies were bailed out by the government. Congress voted $700 billion in bailout money, and the Treasury and Federal Reserve committed trillions of dollars to shoring up the financial system, but the measures did not reverse the declines. Banks drastically tightened their lending policies, despite infusions of federal money. The government for the first time took major ownership positions in the largest banks. The stock market plunged 40%, wiping out tens of billions of dollars in wealth; housing prices fell 20% nationwide wiping out billions more. By late 2008 distress was spreading beyond the financial and housing sectors, especially as the “Big Three” of the automobile industry (General Motors, Ford and Chrysler) were on the verge of bankruptcy, and the retail sector showed major weaknesses. Critics of the $700 billion Troubled Assets Relief Program (TARP) expressed anger that much of the TARP money that has been distributed to banks is seemingly unaccounted for, with banks being secretive on the issue.
President Barack Obama signed the American Recovery and Reinvestment Act of 2009 in February 2009; the bill provides $787 billion in stimulus through a combination of spending and tax cuts. The plan is largely based on the Keynesian theory that government spending should offset the fall in private spending during an economic downturn; otherwise the fall in private spending may perpetuate itself and productive resources, such as the labor hours of the unemployed, will be wasted. Critics claim that government spending cannot offset a fall in private spending because the government must borrow money from the private sector in order to add money to it. However, most economists do not think such “crowding out” is an issue when interest rates are near zero and the economy is stagnant. Opponents of the stimulus also point to problems of possible future inflation and government debt caused by such a large expenditure.
In the U.S., jobs paying between $14 and $21 per hour made up about 60% those lost during the recession, but such mid-wage jobs have comprised only about 27% of jobs gained during the recovery through mid-2012. In contrast, lower-paying jobs constituted about 58% of the jobs regained.
Gig work
In the 21st century, proliferation of smartphones and increasing reliance on outsourced labor led to a class of “gig workers” who perform work such as package delivery for a company like Amazon.com or Walmart, food delivery for a company like DoorDash, or driving for a ridehailing company like Uber or Lyft. This has led to disputes alleging misclassification of employees as independent contractors.
Great Lockdown and aftermath (2019–present)
On September 16, 2019, the Federal Reserve announced that it would begin acting as the role of investor in order to provide funds in the repo markets after the overnight lending rate jumped above 8% due to a series of technical factors that limited the supply of available funds. Five months after the decision was made, the American stock markets suffered their biggest crash in modern U.S. history as a result of concerns surrounding the coronavirus pandemic and the Russia-Saudi Arabia oil price war. Before the crash happened, the unemployment rate in the United States stood at 3.6% in late 2019, which was the lowest unemployment rate since World War II. Although the unemployment rate decreased substantially between 2009 and 2019, income inequality continued to increase. In September 2019, the United States Census Bureau reported that income inequality in the United States had reached its highest level in 50 years, with the Gini index increasing from 48.2 in 2017 to 48.5 in 2018. Despite the low unemployment, the ISM Manufacturing Index dropped below 50% in August 2019, reaching a record low of 48.3% in October of that year (which was the lowest level since June 2009); it would continue to remain below 50% in the months leading up to the crash.
Measuring the Economy of the 21st Century
The first meeting of the Conference on Research in Income and Wealth (CRIW) occurred in late January of 1936 in the midst of the Great Depression. The general objective of the conferees at this meeting and those that followed was to help fill the void created by the absence of a national statistical system. The CRIW provided conceptual support for the task of developing such a system, and a complex task it was indeed. A national economy is a system of interconnected flows of quantities and payments involving a vast number of goods and services. Fitting all this together into a national accounting framework has justifiably been called one of the “great inventions of the 20th Century.”
We are now well into the 21st century, and as with many other great inventions, there are constant challenges in updating the national statistical system to reflect the current technological environment. GDP is an aggregate measure of the flows of goods and services through product and factor markets, one that provides a statistical portrait of the economy as it evolves over time. However, the process of evolution itself has altered these flows in ways that undermine the accuracy or relevance of past concepts and data sources. The rapid transformation of the U.S. economy brought about by the revolution in information technology has introduced a profusion of new products and processes, new market channels, and greater organizational complexity. Parts of the statistical system are struggling to keep up.
The problem is nowhere more evident than in the difficulties associated with the Internet’s contribution to GDP. Valuing the ‘net and the wide range of applications offered with little or no direct charge is challenging because there is no reliable monetary yardstick to guide measurement, and their omission or undervaluation surely affects GDP.
This is important for the recent debate over future living standards and employment. The two percent growth rate of real U.S. GDP since the end of the Great Recession has lagged the long-term historical rate of three percent, inviting speculation about the emergence of a New Normal. This view is reinforced by Robert Gordon’s recent suggestion that the growth effects of the information revolution are not of the same order of importance as those of previous technological revolutions and are, in any event, playing out. The future may look very different if recent GDP growth is significantly understated because of the mismeasurement of new goods and services.
Sorting out the many issues involved in “measuring” the economy of the 21st century has dominated the CRIW agenda since the early stages of the information revolution; it is a large job, and will occupy the CRIW for years to come. Past and cur-rent efforts are reviewed in this summary, starting with the importance of accurately accounting for new goods and improvements in the quality of existing ones, and the related problem of measuring the output of the service-producing sectors of the economy. The following sections take a closer look at three of the most important service sectors: health care, education, and finance. Subsequent sections focus on capital and labor in the new economy, the role of entrepreneurship and company formation, and the problem of national income accounting in an increasingly globalized world. A final section sums up.
New Goods and Quality Change
In his discussion of “Effects of the Progress of Improvement upon the Real Price of Manufactures” in The Wealth of Nations, Adam Smith dodged the problem of changing product quality by saying “Quality, however, is so very disputable a matter, that I look upon all information of this kind as somewhat uncertain.” He was referring to price trends in the production of cloth, but fast-forward more than two centuries, to William Nordhaus writing on the history of lighting, when he argues that official price indexes may “miss the most important revolutions in economic history” because of the way they are constructed. The quality problem endures and, if anything, has gotten more difficult with the profusion of new and improved goods.
The quality change problem arises when a new version of a good is introduced that embodies characteristics that make it more desirable. The new model may not cost much more than the old, but represents a greater effective amount of output from the user’s standpoint. If the price per unit transacted in the market does not change, the substitution of a new unit for an older model will not affect either nominal or apparent real GDP, because the apparent market price has not changed. However, effective real output has increased, and the benefits of the innovation are lost in the official data. Personal computers are an important example, and in the mid-1980s, the Bureau of Economic Analysis began adjusting computer prices to better reflect the technological gains in computing power.
The new goods variant of the product innovation problem is even more challenging because, unlike the quality change problem, there are no prior versions of the good on which to base price comparisons. Current procedures for incorporating new goods into existing price indexes are complicated, but may miss much of the value of these innovations. At the same CRIW meeting at which Nordhaus examined the history of lighting, Jerry Hausman examined the introduction of a new brand of breakfast cereal and found that the treatment (or non-treatment) of new goods in official statistics resulted in a 20 percent upward bias in that component of the Consumer Price Index. He arrived at a similar conclusion in a subsequent paper on mobile cellular telephones, though the magnitude of the bias is larger. By implication, the benefits of important new information technology goods, like the Internet and the many applications it enables, may be subject to significant undervaluation.
Papers on various aspects of price measurement have appeared frequently in other CRIW proceedings, and in 2004, the CRIW hosted a conference on Price Index Concepts and Measurement devoted to the subject. Papers in the resulting volume, published in 2009, ranged over theoretical areas in price measurement, from the reassessment of quality change in computer prices and the issue of outlet substitution bias to measurement problems in specific applications in finance, health, and education. An earlier volume, Hard-to-Measure Goods and Services: Essays in Honor of Zvi Griliches, published in 2007, included six papers devoted to price measurement. One, by Jaison Abel, Ernst Berndt, and Alan White, moves beyond the rapid increase in the power of computer hardware to show that improvements in software are also important.
The question of how much product innovation has been omitted from estimates of real GDP is germane to the issues raised by Gordon. If the upward bias in price indexes is of the magnitude suggested by Nordhaus, Hausman, and others, then the growth in real GDP may be considerably greater than the official estimates suggest. Whether the bias has increased in recent years and is large enough to offset the apparent slowdown in recent growth is another matter. It is a subject that will undoubtedly be on the agendas of future CRIW conferences.
The Services Sector Problem
The private services-producing sectors of the U.S. economy constitute some four-fifths of recent private business value added. Not only do they account for a large fraction of GDP, these sectors are essential for understanding the trends in aggregate economic growth. In his introduction to the CRIW volume Output Measurement in the Service Sectors, Zvi Griliches wrote that the much-discussed productivity slowdown of the 1970s and 1980s might be due to two factors: “Baumol’s disease,” in which the relative labor intensity and a high income elasticity of demand doom these sectors to slower productivity growth, and the possibility that the output of these sectors was inherently more difficult to measure.
Fast forward, again, to the 2007 CRIW paper by Barry Bosworth and Jack Triplett on service sector productivity. This paper revisits and updates Griliches’ earlier finding that services were a drag on overall growth during the slowdown. Looking at a longer period, they report a speed-up in services relative to the goods-producing sectors: Labor productivity growth in services rose from an annual rate of 0.7 percent in 1987–1995 to 2.6 percent for 1995–2001, while the corresponding numbers for the goods-producing sectors were 1.8 percent and 2.3 percent, respectively. They also find that 80 percent of the increase in overall labor productivity growth after 1995 came from the contribution of information technology in the service sectors, contrary to the Baumol hypothesis that services were inherently resistant to productivity change.
Sorting out changing sectoral trends is made more difficult because the output of the services sectors is resistant to accurate measurement, in part because the quality change problem is particularly large in many of these sectors, and in part because of their very nature. Griliches also observed that a “problem arises because in many service sectors it is not exactly clear what is being transacted, what is the output, and what services correspond to the payments made to their providers.” A simple contingency-state model illustrates the problem. The outcome of expert advice or intervention (e.g., medical, legal, financial, educational, management consulting) can be thought of as a shift from an initial state of being to a post-intervention state, where “state” refers variously to the condition of wellness, legal or financial position, knowledge, etc. The subject purchases expert services, X, in the expectation or hope that they will have a positive outcome. However, the outcome also depends on the subject’s own efforts and initial state of being. Measured GDP records the payment for X, and perhaps ancillary expenses incurred (e.g., joining a health club), but not necessarily the value of the outcome to the recipient, which may be different and is often complex and subjective.
A fundamental problem arises when trying to separate X into price and quantity components in order to measure real GDP: In what units do you measure X? Doctors and lawyers may provide information but bill by the visit, or the hour, or the procedure. This is their “output,” and it is not measured in bits or bytes of expert information. The service providers usually do not sell guaranteed outcomes, since the advice they provide may not be heeded and outcomes are often uncertain. There is a parallel problem in the units in which outcomes are measured: Whatever these units are, they are not necessarily the same for buyers and sellers. But if there are no clear units of measurement, how is it possible to determine the level of output and tell if improvements in technology have increased outcome-based output over time? This is a problem for understanding the factors driving recent GDP growth, given the service sector’s technological dynamism in recent years and the increased availability of expert advice and information on the Internet.
Selected Service Industries
Rising health care costs and the aging of the baby boomers have focused much attention on the health services sector. Not surprisingly, the measurement of health care cost and output has been the subject of two recent CRIW meetings: the 2001 Medical Care Output and Productivity conference and the 2013 Measuring and Modeling Health Care Costs conference. The 31 papers in the two conference volumes range over a number of issues, many organized around what Berndt and David Cutler, the editors of the first volume, call the “outcomes movement” in health economics, which is the attempt to measure the health impact of medical care rather than the amount expended. The paper by Triplett in this volume elaborates on this point, arguing that it is not the expenditure on health care inputs that is needed for the study of medical productivity, but the output associated with these inputs and how it has changed over time. Anyone who remembers a visit to the dentist in the 1950s can testify to the enormous gains in efficacy and patient comfort that have occurred. Huge advances have been made in diagnostics (e.g., the MRI), treatment (e.g., laparoscopic surgery), and drug therapies (e.g., statins). Any attempt to measure real output in the health sector and its contribution to real GDP growth must account for these advances. More technology is on the way, with gene-based therapies, robotic surgery, and diagnoses that make use of the potential of Big Data. A pure expenditure approach misses some of the most important technological advances of the last 50 years.
Adjusting expenditures (X) to reflect better outcomes is not a simple matter, as the contingent-state model illustrates. Out-comes have a subjective component, like improved quality of life, and depend on the pre-treatment state of health. Expenditures are price-denominated, whereas outcomes are not, at least not in their pure state. However, progress can be made by adjusting the price estimates used to deflate nominal-price expenditure data for those outcomes that can be measured (e.g., cures, survival rates), and by the use of disease-based price indexes to better reflect the bundle of services received by the consumer. This is an important step for measuring the growth in real GDP, given the growing size of the health sector and the manifest importance of advances in medical technology.
The same general line of analysis applies to the education sector. The overall objective of schooling is to move a student from one state of knowledge or capability to another. The “output” of the sector, as measured by educational attainment, has increased dramatically in the United States, as have per capita expenditures. The fraction of the adult population with a bachelor’s degree increased from less than 10 percent in 1960 to around 30 percent today, and some two-thirds of high school graduates go on to some form of tertiary education. The improvement in educational outcomes is another matter. The recent “Nation’s Report Card” from the National Assessment of Education Progress reported that literacy and numeracy scores of 12th graders have been stagnant in recent years, and that a majority of students are stuck at skill levels that are rated below proficient, with one-quarter of students below “basic” in reading and one-third below “basic” in mathematics. International comparisons have found similar results.
However, test scores are only one aspect of the educational process, and formal education is only part of the maturation and skill development process. In a paper presented at the 2015 CRIW conference on Education, Skills, and Technical Change: Implications for Future U.S. GDP Growth, Valerie Ramey and I note that factors like family and peer environments also matter, and that “cognitive and non-cognitive skills developed by age three have fundamental effects on life outcomes and on the ability to learn. Schools thus have little control over student characteristics, a key input into their production functions, and the deficits revealed by test score data are not simply a reflection of weak schools – though they undoubtedly contribute to the problem.” Initial conditions are important and affect the link between expenditures and outcomes. Still, the apparent lack of progress in test scores is of concern when assessing educational output in general and prospective gains from IT-related innovations like online education.
The difficulty that statisticians have in keeping up with rapid changes in technology and markets is another complicating factor. This is nowhere more apparent than in the financial services sector in the years after the financial crisis and sharp economic downturn. Why wasn’t a crisis of such huge proportions more evident beforehand in official aggregate statistics of the economy? The papers presented at the CRIW conference that led to the 2015 volume Measuring Wealth and Financial Intermediation and Their Links to the Real Economy attempt to answer this question. In our summary, Marshall Reinsdorf and I argue that “The possibilities introduced by the IT revolution transformed the way stocks were traded and financial markets were organized… facilitated innovations in the areas of securitized lending and financial derivatives… and the organization of the financial intermediation industry also changed as some activities migrated to unregulated industries with few data reporting requirements.” We go on to observe that new financial instruments and market innovations are disruptive and take time to understand and integrate into large-scale macro data systems like the national accounts, which have requirements of temporal consistency and breadth of coverage that limit the rate at which the accounts can change and the detail needed to anticipate disruptive change before it occurs.
Labor and Capital in the New Economy
The input side of the economy has also been affected by the digital revolution. This is apparent in the 2005 volume Measuring Capital in the New Economy, which is largely devoted to the growing importance of intangible capital formation. This form of capital investment includes scientific and other R&D, brand equity, customer lists and reputation, worker training, and management and human resource systems. Carol Corrado, Daniel Sichel, and I find that investment in intangibles has become the dominant source of business capital formation, far outstripping the rate of investment in tangible plants and equipment, where the rate has been on a downward trajectory. In 2010, the investment rate in the latter was around 8 percent, versus an estimated rate of 14 percent for intangibles. This is relevant for the debate over slowing productivity growth, since most of the studies do not include intangible capital and thus omit a major and growing source of technological and organizational innovation.
Measuring intangible capital presents a host of problems, since much of it is produced with firms on “own account” without a market transaction to fix prices and quantities. However, while the problems are difficult, progress is possible. In a major advance in innovation accounting, the Bureau of Economic Analysis successfully incorporated own-account R&D into the national accounts in 2013, along with artistic originals.
Labor markets also are changing, and the 2010 volume Labor in the New Economy takes up some important issues, including the outsourcing of jobs, job security, “good” jobs versus “bad” jobs, the aging of the workforce, different forms of worker compensation, and rising wage inequality. The IT revolution has also affected the workplace through an increase in the demand for non-routine skills at the expense of jobs demanding routine skills, a central theme of the conference Education, Skills, and Technical Change: Implications for Future U.S. GDP Growth. Future changes in the labor market will undoubtedly inspire future CRIW research on issues like changing labor force demographics and participation rates, deindustrialization and technological obsolescence, wage inequality, and the rise of the “gig” economy, in which growing numbers of Americans no longer have long-term employment with a particular firm but work “gigs” for a number of clients.
Firm dynamics are another important dimension of innovation on the production side of the economy. The 2009 volume Producer Dynamics: New Evidence from Micro Data looks at the processes of firm entry, growth, and exit, which are integral parts of resource reallocation and growth in a market economy. Advances in the construction and availability of microdata from statistical agencies, particularly longitudinal microdata, have enabled researchers to track new firms over their lifetimes. The papers in this volume cover a broad range of issues, including cross-country differences in firm dynamics, job openings and labor turnover, and the dynamics of young and small businesses. The firm dynamic issues are also the subject of the forthcoming conference volume Measuring Entrepreneurial Businesses: Current Knowledge and Challenges, which includes papers on high-growth young firms, entrepreneurial quality and performance, venture capital, job creation in small and large firms, and immigrant entrepreneurship.
Globalization and International Trade
The globalization of the world economy has also received attention in the conference on International Trade in Services and Intangibles in the Era of Globalization. The delivery of many services has traditionally involved physical proximity, but this is changing with the revolution in information and communication technology. The new technologies have enhanced the capacity for global trade in legal, financial, medical, and communication services as well as in software. The editors of the conference volume note that world trade has grown more rapidly than world production, and that trade in services has grown faster than trade in goods. These flows have added an international dimension to the pricing and quantity measurement problem already noted for services in general, and have added problems associated with currencies and taxes.
Summing Up
Since 2000, 15 CRIW conferences have been held, and the proceedings, published or in process, contain well over 200 papers. The great diversity of topics covered is impossible to summarize in a short review, and many important topics have been omitted. Some measurement issues, in areas such as medical services, banking, price measurement, and education, have been considered in many conferences.
The US in the early 21st century: decline or renewal?
Theme: The core challenge for the US in the first quarter of the 21st century is the capacity of its political system to fashion and implement public policies to respond effectively to today’s and tomorrow’s concerns.
Summary: The bitter impasse finally, if temporarily, resolved in Washington last week made it absolutely evident to all that the US faces serious problems. These problems did not suddenly arise, nor are they limited to the showdown regarding the shutdown of government activities and services and raising the national debt limit. The difficulties are not only political, but also economic and social; they have developed over many years, and they are by no means resolved. Nevertheless, the core challenge for the US in the first quarter of the 21st century is not the prowess or potential of its economy nor its relative external power and influence. The central question is, rather, the capacity of the US political system to fashion and implement public policies to respond effectively to today’s and tomorrow’s concerns. Whether the US political system can regain its former capacity, evident in past times of war and other crises, to mobilise the country’s resources and energies is the central question for the US in coming years.
Analysis: The bitter impasse finally, if temporarily, resolved in Washington last week made it absolutely evident to all that the US faces serious problems. These problems did not suddenly arise, nor are they limited to the showdown regarding the shutdown of government activities and services and raising the national debt limit. The difficulties are not only political, but also economic and social; they have developed over many years, and they are by no means resolved.
GDP growth in the US was more than 4% in the early 1960s, fell below 3% in the late 1970s, regained some strength in the late 1980s and early 1990s, but then dropped to its current level of less than 2%, with most forecasts suggesting that it will remain in that range for some considerable time. The US has had prolonged high unemployment, sharply reduced consumer confidence and the spectre of likely eventual inflation. With tax revenues down and high deficits but staunch political resistance to tax increases, public services had been sharply cut back even before the 2013 ‘sequestration’ (across-the-board budget cuts throughout the federal government), caused by another Congressional impasse.
America’s once-vaunted infrastructure is beginning to crumble, undercutting competitiveness. Roads and bridges are in disrepair, and some are collapsing. The air traffic control system is dangerously antiquated, and the railroad system is creaking. The energy grid sometimes malfunctions. Cellular and broadband systems are slow compared with those in many other advanced nations; the US ranks 20th in broadband penetration and 33rd in broadband speed.
The quality of education, especially at the primary and secondary levels, has been declining in comparison with other nations. The US ranks 28th in the world in the overall quality of the educational system and 38th in the quality of primary education.
Even higher education, long the forte of the US, is now declining, at least by some measures, in relative terms. The US ranks 14th among 32 countries in the percentage of college graduates, for example. Public universities across the nation are being severely weakened by budget cuts, and many private colleges and universities are similarly challenged.
Poverty in the US has worsened, especially for African Americans and Hispanic Americans. More than 46 million people today live in poverty, the highest number in more than 50 years. Income inequality has worsened significantly; the percentage of national income earned by the top 1% of Americans has risen from about 9% in 1980 to 23.5% in 2007 and more today. The percentage of wealth owned by the top 1% is even higher, more than 34%. One family, six descendants of Sam Walton of Walmart, owns more than the combined wealth of the bottom 30% of the entire US population.
This has been in many respects a Lost Decade for the US economy. Median household disposable real income is 4% lower today than it was in 2000, though it has risen in most OECD countries. Unemployment is more than double what it was 10 years ago. The percentage of Americans relying on food stamps to afford basic necessities has doubled. The middle-class dream of the single-family home has become problematic for millions of Americans.
Meanwhile, the federal government’s debt climbed from 36% of the GNP in 1970 to 59% in 2000, 64% in 2007, and now exceeds 100%. Structural deficits at federal, state and municipal levels will likely be hard to reduce significantly for years to come. The political parties, branches of government and diverse interest groups clash fiercely over the relative priority of deficit reduction and spending needs, with the Republican Party ever more identified with balanced budgets and reduced taxes as firm if not necessarily compatible commitments.
Economic downturn, worsening inequity and unravelling social cohesion have contributed to political deterioration. Political institutions of all kinds are increasingly in disrepute: parties, Congress, the presidency, even the courts. Special interest groups and single-issue constituencies press their views unrelentingly. Campaign finance considerations have become an ever-more powerful and pervasive aspect of the US political system, especially since the Supreme Court’s 2010 decision in the Citizens United case that removed limits on what wealthy individuals, labour unions and corporations can spend to support political causes and candidates.
Both media consolidation and the fragmentation of media markets have contributed to intense political polarisation. Millions of Americans are exposed almost entirely to one partisan extreme or another. The bounds of public policy debate, historically mostly limited to broadly centrist alternatives and long pushed toward consensus by the nature of US political institutions, have been widening.
Americans have been moving geographically to live with other like-minded people, forming homogeneous communities of lifestyles, values, beliefs and ultimately politics. In 1976 fewer than 25% of Americans lived in ‘landslide’ counties, those where the margin of victory in presidential election results is 20% or higher; now almost half do.
Economic and political divisions have been exacerbated by cleavages between the coasts and the heartland, rural and urban residents, immigrants and anti-immigrants, homosexual and homophobic Americans, religious and secular, and among the well to do, the middle class and the poor. Civic discourse has descended to the level of confrontational rhetoric and competing bumper stickers.
The once admired political system of the US, with its powerful concepts and institutions designed to provide checks and balances, is increasingly dysfunctional. The core problem today is not, as it was for the country’s founders, limiting the concentration of too much power in the hands of one individual, faction, party or branch of government. Rather it is the inability of the governance system to consistently fashion and implement coherent and effective public policies to confront the country’s major challenges. The spectacle of government shutdown was the most dramatic instance of this gridlock, but the problem has been evident on many other issues, large and small. It has been impossible for President Barack Obama to fill important executive and judicial appointments, for instance, due to historically unprecedented obstructionist manoeuvres in Congress.
All these trends feed a sense of stalemate, breeding public disillusion that is expressed by some as apathy and by others as anger. Nearly 80% of the American public in recent polls have said they are not satisfied with the country’s direction. An even greater share has said that they disapprove of the performance of Congress. The courts, exempt from serious political attack in most previous generations, are now rebuked by vociferous politicians who threaten wholesale impeachment of judges. Increasingly, issues that are eminently political and legislative –such as the provisions of the national health care insurance reforms, voter registration requirements and immigration laws– are challenged in the courts, which are in turn often subject to street demonstrations and counter-demonstrations.
US Decline in Perspective
Even if this summary of American decline is accurate in its specific details, is this perhaps just a snapshot in time, a temporary situation accounted for by the financial crash of 2008 and its immediate consequences? Or is the US experiencing longer term deterioration, likely to endure and perhaps even to accelerate?
Concerns about the supposed decline of the US are by no means new. Samuel P. Huntington published an essay in Foreign Affairs in 1988, pointing out that then-current popular and policy-oriented writings, analysing the loss of American economic hegemony and its consequences, marked the fifth wave of ‘declinism’ since the 1950s, and there have been others since. Each of these waves has been based on some observable data, but each has failed to take into account or to foresee contrary tendencies or potential that have reversed many of the identified negative trends.
The view that the US is in rapid decline and that its international influence is fast waning, fashionable in some international intellectual circles, is tinged by some understandable local triumphalism in China, Brazil and elsewhere, and maybe by a bit of schadenfreude. In part, the perception of American deterioration may derive from some time lag in fully recognising that US dominance in the mid-20th century had already decades ago begun to give way to a more normal position of important regional and global power, without omnipotence or anything close to that.
The stature of the US in the mid-20th century was exceptional; it could not possibly last. This overwhelming primacy owed largely to the fact that all the other significant international powers of the 1920s and 1930s, both the eventual victors and the vanquished in World War II, were severely weakened by that war; only the US emerged stronger than it had been. The international power of the US has inevitably receded from that zenith.
Those who suggest that the international influence of the US is rapidly declining highlight its failure to stabilise Iraq and Afghanistan, its inability to secure other high priority objectives in Iran, North Korea, Syria and in the Israel-Palestine conflict, and the serious tainting of its international reputation arising from a variety of incidents, domestic and international, including human rights abuses and the massive surveillance of private communications. They also emphasise the near-collapse of its financial institutions in 2008 and the consequent weakening of the American (and the world) economy and the absence of effective US leadership on global issues ranging from climate change to trade regimes, the law of the seas to international criminal justice.
These failures do demonstrate serious trouble and perhaps decline, but the idea that they amount to an unprecedented and irreversible deterioration in the global position of the US requires some amnesia. Compare US problems today with those in the 1960s and 1970s, not to mention those of the 1930s or the 1860s. The US president, a presidential candidate and two prominent civil rights leaders were assassinated in the 1960s, as were several others championing social change. Two consecutive US presidents left office in disgrace, Lyndon Johnson hounded out by popular opposition to the Vietnam War and Richard Nixon in the face of impeachment for the Watergate scandal and cover-up. The US was forced to retreat ignominiously from Vietnam and suffered the humiliation of the Iran hostage episode. OPEC enforced a successful petroleum embargo that temporarily disrupted the US economy. The US suffered recurrent economic recessions, sometimes combined with high inflation, which reached 13.5% in 1980.
Throughout these challenging years, the US faced domestic and international problems that were arguably as difficult as today’s, and was also locked in a potentially deadly world-wide rivalry with the Soviet Union, then a major thermonuclear power. Even so, the US still accounted into the 1970s and 1980s and beyond for more than a quarter of the world’s economic production and had overwhelming military superiority over the USSR and any other nation. And during this time of troubles, the US actually began once again to improve its economic productivity and competitiveness, leading to a new period of prosperity in the late 1980s and 1990s.
The US has been more dominant or less so at various points. Emerging countries such as China, India, Brazil and others have begun to increase their shares of world production and power in recent years. It is true that the US is not as overwhelming as it was in 1950, or as it seemed to be in the brief unipolar moment after the collapse of the Soviet Union in the early 1990s, but it is still the world’s most influential nation.
The US does face serious problems, to be sure, but so do other countries. The nations of the EU are trying to stanch the financial losses and relieve high unemployment in Greece, Italy and Spain, to maintain economic integration in the face of increasing national disparities and to preserve social welfare programs that are no longer affordable. Many face rising frictions about the growing presence of non-European immigrants and the return of populist, exclusionary and racist movements. The European nations account for 7% of the world’s population, 25% of global economic production and 50% of social spending, an evidently unsustainable mix.
Russia is regressing toward authoritarian politics, beset by gross corruption and pockets of grotesque affluence, and weakened by low birth rates and population decline. Japan has a long-stagnant economy and a rapidly aging population. China and India are each trying to incorporate hundreds of millions of people mired in rural poverty, and to respond to growing unrest about crime and corruption without losing their system’s political legitimacy.
Brazil, Mexico and other Latin American countries must improve the quality of their primary and secondary education sufficiently to train the many thousands of scientists and engineers as well as skilled workers who will be needed to compete effectively in the global knowledge economy. Latin American countries must also increase significantly their historically low savings and investment rates and develop adequate infrastructures for the 21st century.
Some global redistribution of economic and political power has certainly been occurring over the past 50 years, and especially in the last 20. During these years, the economies and influence of several ‘emerging economies’ have grown remarkably. Global economic dynamism has shifted to a significant extent from the Atlantic to the Pacific. Most of the measurable evidence of this shift, however, shows that it has occurred largely at the expense of Europe, Russia and Japan, not of the US. The US share of global GDP fell slightly from 27.2% in 1970 to 26.3% in 2010, but Europe’s, Russia’s and Japan’s fell more. Compared with these powers, the US share of world production has actually improved.
The US Capacity for renewal
Looking toward the future, the US will maintain major demographic advantages over the EU countries, Russia and Japan. All these countries will likely experience population declines, some of them dramatic, aging of their populations and worsening dependency ratios that call into question the viability of social safety nets. The US, meanwhile, continues to experience population growth primarily due to international immigration, high birth rates among recent immigrants and a national fertility rate greater than that of all other major countries except India. US senior citizens do face a looming crisis of inadequate savings, but modest changes in the Social Security system, mainly by raising the cap on contributions and slightly modifying the age of eligibility, could largely resolve this potentially major problem.
As compared with Russia, China, India, Brazil, Mexico and other emerging countries, the US is likely to rank for the next several decades far ahead on numerous indicators of economic competitiveness and entrepreneurship, as well as on most indices of human development, mass education, participation in social media and on many comparative indicators of good governance.
It is certainly high time for Americans to abandon illusions of omnipotence and arrogant projections of ‘American exceptionalism’. But it is equally important to reject the incipient tendency in some quarters to write off the US as trapped in an accelerating decline. The US still has very considerable assets as well as a frequently demonstrated capacity for adaptation that should not be underestimated.
The financial and economic crisis detonated in 2008 was a major inflection point, the effects of which may still be felt for years, perhaps decades. It was mainly caused by years of reckless practices in the financial services sector, based on a combination of ideology, hubris and technological shortcuts, fuelled by greed, unchecked by adequate regulation and exacerbated by short-term political considerations. But the financial meltdown was not a sign of underlying economic weakness or a fundamental lack of competitiveness of the US economy in the world.
The US remains a nation of continental scope, with vast natural resources and remarkable agricultural productivity. It has a very large domestic market and a huge consuming public. The US has ethnic diversity, and still has considerable intergenerational social mobility, in fact and especially in prevailing popular belief. It has successfully integrated the talents of some 50 million immigrants since 1965, with much less tension and conflict than has been sparked by immigration in Europe. Although its financial institutions were severely compromised by the practices of the 1990s and the early years of this century, their integrity and strength have been largely restored, and the US dollar remains by far the world’s most relied upon reserve currency.
The US has the world’s most impressive institutions of higher learning, boasting eight of the top 10 and 53 of the top 100 best universities worldwide, according to a widely-cited international ranking. At these universities and in rich and abundant industry-university collaborations, the US produces much of the world’s most advanced scientific and technological research that, in turn, stimulates constant innovation. The public-private partnerships of governmental, university, and private sector research institutions facilitate the rapid commercial exploitation of new knowledge. The US will remain a creative, productive and competitive as long as it keeps investing strongly in education and basic research.
The data on international students in the US highlight this competitive advantage. There were nearly 765,000 international students in the US in academic year 2011-12: almost 200,000 from China, more than 100,000 from India, 72,295 from Korea and nearly 50,000 from Latin America and the Caribbean (with the likelihood of many more to come from Brazil in future years under the new Science Without Borders programme). The US retains enormous capacity in computer sciences, communications technologies, biogenetic enterprises, nanotechnologies, clean energy and other areas of innovation.
China and India, Brazil and Mexico are today highly dynamic countries, but the US is far from static. It has moved from an economy dominated by manufacturing to one most prominent and competitive in services, and is now experiencing some resurgence in manufacturing, especially in advanced electronics. Much of its population has moved from the north-east and the Midwest to the south and far west, changing the country’s political constellations and dynamics in the process.
The US has become in many ways a more diverse, creative and efficient nation. Its recent economic restructuring has been impressive. The housing sector is reviving, and various sectors of manufacturing have regained a competitive edge. Vested economic interests have not blocked the emergence of new technologies, new forms of production and marketing and new social media. The recovery of the US automotive industry has been remarkable. Innovative technologies for the exploitation of shale to produce natural gas amount to an energy revolution, with positive implications for the economy and security of the US, although with potentially adverse environmental consequences. The US is expected to reduce its petroleum imports by more than half by 2035, and sooner than that to become a net exporter of natural gas. It is also expected to export more petroleum by 2017 than Saudi Arabia.
The central challenge: fixing the US political system
The core challenge for the US in the first quarter of the 21st century is not the prowess or potential of its economy nor its relative external power and influence. The central question is, rather, the capacity of the US political system to fashion and implement public policies to respond effectively to today’s and tomorrow’s concerns.
During the 1992 presidential election, Governor Bill Clinton had a famous sign in his campaign headquarters: ‘It’s the economy, stupid’; ie, the issue that really mattered to voters was the unsatisfactory state of the economy, and he needed, therefore, to keep a laser focus on that question.
Now it is the political system, not the economy, that requires prime attention. US political institutions –presidentialism, separation of powers and a two-party system with majority-rule electoral procedures– have long worked well together to produce consensual policies by facilitating the compromises necessary to fashion effective measures over time. For the past 35 years, however, a number of changes have undermined effective governance.
One change is the polarisation of US politics and its legislative expression. Voter migration within the US has produced regional polarisation of attitudes. Beliefs in the south contrast sharply with those prevalent in the north-east, the west coast, the Midwest and to a significant degree the mountain states on a variety of social, cultural and political issues ranging from family values to science and the role of government. Gerrymandering –altering boundaries of electoral districts for political advantage– exacerbates the impact of this phenomenon, producing legislators who play to their bases and highlighting primary elections that enhance the national power of local extremists. These trends have been reinforced by changes in communications media, including Internet news sources and blogs, that expose voters systematically to those with similar ideological bents and that greatly reduce fact-checking and the moderating editorial influences that used to be performed by major newspapers and national television networks. All these factors have contributed to the rightward radicalisation of the centre of gravity within the Republican Party, with its political base in the deep south. The most conservative Democratic member of Congress is to the left of the most liberal Republican, an unprecedented situation that makes coalition-building and compromise very difficult, as has been vividly illustrated this month.
A second change, gradual over the last decades but accelerating during the past 20 years, stems from major changes in campaign finance and the much expanded use of political action committees (PACs) on a national basis. Campaign contributions for presidential and congressional elections trebled from 1976 through 2000 (US$2.8 billion to US$6 billion) and then by another 214% in the first 12 years of the 21st century. Contributions from PACs jumped six-fold from 1980 to 2006 (US$55 million in 1980 to US$363 million in 2006) and under 15% by 2012. Special interests consequently have many more resources to support candidates, and they have correspondingly increased influence.
Third, powerful lobbying firms with high budgets and cadres of high-profile former government officials have become central actors in the policy-making process. Companies recruit and pay immense sums to former governmental officials to lobby and on behalf of special interests. Their cases advanced by these well-connected allies, special interests drown out the deliberation and compromise needed to make progress in Congress on such issues as health care and tax reforms, education and immigration policy.
A fourth problem with the US governance system today is precisely that few members of Congress today undertake the kind of interactive deliberation that marked the US legislative system for many decades; they spend their time in perpetual campaign mode rather than in building the basis for cooperative legislation.
None of these problems will be easily resolved. They have not emerged suddenly or very recently, but rather gradually over many years; some were hidden from view for many years by the discipline imposed by the Cold War. They cannot be attributed to just one party or faction, but result from decisions, actions or failures to act by both political parties and by many different interest groups, all operating within the rules of American constitutional practice that were designed for a different era, with far fewer actors, far less money and far less media coverage intruding on policymaking processes.
An underlying problem may derive from deeper aspects of contemporary US culture, particularly the relentless reinforcement of consumerism and immediate gratification. As Nathan Gardels and Nicolas Berggruen have recently observed that ‘All the feedback signals in a consumer democracy –politics, the media and the market– steer behavior toward immediate gratification. In this Diet Coke culture, all too many… have come to expect consumption without savings or education, infrastructure and social security without taxes, just as they expect sweetness without calories in a soft drink’. This pithy summary captures a mix of entrenched attitudes that will not quickly be reversed.
Can the US rise to the challenge?
A number of proposals are being discussed in the US today for dealing with the country’s governance problems, though the path from discussion to adoption and implementation is far from assured. Various electoral reforms, for example, could contribute to diminishing ideological polarisation by expanding the electorate. Modest procedural reforms in Congress could help restore deliberation to Congress. Innovative use of interactive communications technologies could help restore a sense of participation and responsiveness to US politics. Blatant efforts, to the contrary, to constrict participation and hamstring effective policymaking could produce a backlash that finally opens the way for such reforms. It is possible that the Tea Party overreach in October 2013 could ultimately have that effect.
Constructive and potentially consensual approaches are now beginning to be discussed to confront many of the country’s major public policy challenges, though more often and prominently in think tanks and independent policy forums than in Congress, and more effectively in some states, especially California, than at the federal level. Pragmatic centrist approaches are being developed on health care delivery and insurance, equitable and phased reductions in entitlement programmes, comprehensive immigration reform, strategic investment in education, research, development and infrastructure, reshaped military and national security budgets to reallocate some of the vast resources long devoted to these sectors, energy policies that mitigate climate change while providing greater efficiencies and ultimately lower costs, and income and corporate tax reforms to make them more efficient and progressive, better able to generate needed revenues and well-aligned with key policy goals.
Public opinion polls show that considerable public support already exists for practical and centrist approaches on all these issues, ready to be mobilised if and when national political and legislative leaders turn back decisively from hyper-partisan competition towards constructive national policy-making. Whether and when this turn will occur is impossible to know, but opinion shapers in different segments of American society are more frequently and forcefully appealing for such a shift, and broad public opinion is increasingly critical of the destructive extremes and perpetual finger-pointing and are looking for centrist solutions. That tendency has been highlighted by the most recent Congressional showdown.
Conclusion: Whether the US political system can regain its former capacity, evident in past times of war and other crises, to mobilize the country’s resources and energies is the central question for the US in coming years. How it is answered will matter around the world, for this will help determine whether the US can be a reliable partner on important issues ranging from war and peace to trade, finance and investment, from climate change, public health, resource management to international crime, narcotics traffic, terrorism and citizen security. How the US relates with and affects the rest of the world in future years will depend in large measure on whether it can restore strength and effectiveness to its domestic political institutions. This will not be easy, but it should not be impossible.