AMERICA’S ECONOMIC PRIMACY: A THING OF THE PAST?

America’s economic primacy is behind us. And, I don’t believe there is any chance of reversing a trend that began thirty plus years ago. The best case scenario for the nation is to arrest the rate of economic decline – never mind social and cultural  decline, which are probably lodged in irreversible decay.  As Robert Kaplan says in his book, The Revenge of Geography, we might prolong our position of strength by preparing the world for our own obsolescence.  But even this outcome will require the strength of will that has yet to be demonstrated by leaders in business, education, and government.

Economic primacy might be measured along many fronts – income per capita, rate of growth, productivity, among others – but if one looks at Gross Domestic Product (GDP), perhaps the coarsest measure of a nation’s economic well-being, then the United States has lost its economic primacy to China.

China’s GDP on a purchasing power parity (PPP) basis is superior to that of the United States. The PPP approach levels the GDP calculation to each country’s relative price of goods. So, if a television set costs $500 in the United States while the same television costs $250 in China then, theoretically at least, we’re undercounting China’s GDP by $250. Using the PPP rationale, China’s GDP was approximately $21 trillion in 2016 compared to that of the United States which came in at $19 trillion.

Some politicians, economists, and others, like to use a different measure of GDP for perhaps obvious reasons. The nominal GDP, which looks at the total of goods and services produced at current exchange rates yields a substantially different calculation. The nominal GDP of the United States in 2016 came in at $19 trillion. By comparison, China’s nominal GDP came in at $11 trillion. If we only look at nominal GDP, it is clear we are being lulled into a false sense of economic security.

IF WE’RE NOT MAKING STUFF WHAT ARE WE TO DO?

 Let’s face it,  manufacturing was lost to our shores for all intents and purposes many years ago. There are now roughly 12 million workers in the United States engaged in manufacturing down from approximately 18 million in the 1980’s – President Trump, to his credit, is determined to revitalize manufacturing, steel, and coal  but those numbers will continue to slip on a trend line basis.  China, by comparison, has approximately 80 million manufacturing workers. Further, in 2015, China displaced the United States as the top manufacturing nation in the world with a total value added manufacturing output of $3 trillion compared to $2.2 trillion for the United States

Services is the new game in town accounting for roughly 80% of our nation’s GDP. And, as a nation, we better excel in that new cycle reality. But from the way we treat our veterans, clients, patients, students, donors, and citizens – customers, all, to my way of thinking – you would think that we are flush with options on which to fall back. We are not. The United States does run a balance of payments surplus in services of about $250 billion – compared to a goods deficit of approximately $800 billion – but don’t let that fool you. In the all-important Computer and Business Services category, imports are almost on a par with exports.  The nation now imports approximately $139 billion of these vital services while exporting about $178 billion. Moreover, unless we accelerate the rate of growth of exports – the rate of growth is about even for both imports and exports – we might soon be facing a deficit in this sector of the economy so crucial for the good health of the nation in the twenty-first century.

In survey after survey consumers judge excellence in their suppliers to be in the 5% range. Perform any human endeavor at that level of proficiency and you are an abject failure. In the services sector, however, that is par for the course. In the Far East, cultural determinants do not confuse service with servitude. As a rule, suppliers will go the extra mile to please a consumer. In the West, and particularly in the United States, the most that a service worker can muster when asked to perform a personalized service is to utter something like, “no problem.” That kind of indifferent attitude is ingrained and certain to keep our level of excellence from exceeding the aforementioned 5%. In the meantime, off-shore locations feast on our indifference to service and do whatever it takes to secure, and maintain a customer relationship.

The oft-cited explanation for the comparative advantage of off-shore locations, namely, their low cost,  is a facile response to a more complicated dynamic. It is true that off-shore locations enjoy all-in cost advantages vis-a-vis the United States. President Trump, to his credit, has worked hard to enhance our competitiveness on the world stage by reducing the oppressive web of regulation; reducing our world-leading corporate tax rates; by offering a tax holiday for repatriated corporate profits, among other initiatives. But my experience is that, particularly in technical disciplines, services delivered by off-shore locations are superior to ours. The President’s apprenticeship initiative, if it were aggressively expanded to include science, technology, engineering, and mathematics (STEM) occupations, might make us more competitive in this area.  But until and unless we grow a much larger crop of more competent technical workers we will continue to be outperformed by nations more determined, more dedicated, hungrier than we are.

THE NATION FACES SOME VERY STIFF HEADWINDS

The United States economy has structural defects which will not go away simply by holding rallies and mouthing rhetorical flourishes. Decline might be inexorable but we should not stand by as mere spectators. The will and purpose to restore our economic vitality must be marshaled by every American. It must begin, first and foremost, by demanding of our leaders, our institutions, and ourselves to be unafraid to serve. It is the remotest possibility that we can salvage the service economy and consequently our nation unless our standard of performance is nothing less than service excellence in everything we do.

We don’t have a lot going for ourselves. Labor productivity is stalled; education is at third world levels; the rate of household savings is paltry; regulation and taxation still suffocates businesses and individuals despite President Trump’s initiatives; unemployment – not the nominal rate but the U6 rate which measures functional unemployment –  is mired at deep recession levels of 9%; the national debt is in the stratosphere; entitlement spending well exceeds 50% of our budget dollars, and fraud and corruption run rampant among other serious afflictions.

Prior to Mr. Trump’s coming to office, the federal government was  hell-bent on redistributing wealth rather than getting out of the way so that risk capitalists could create wealth. We’ll just have to see if the President’s reforms bring back a full-throated free market approach to the nation’s issues. Meanwhile, in the corporate world, business leaders are fixated on how quarterly earnings affect their pay packages, and when push comes to shove, cutting corners and worse. It is rare to see business leaders get compensated for delivering excellence in service to those from whom they benefit the most: the customer. But don’t expect any changes in this area until there is an all-out shareholder revolt that devolves power back to the rightful owners of these firms.

IS THE UNITED STATES AT END OF EMPIRE?

The former world economic power, the United Kingdom, lost its supremacy because it failed to adapt. Britain’s decline is explained by a long adherence to a variety of rigid policies and practices that kept it from adapting to new world realities – few of them having to do with the nation’s industrial or manufacturing prowess per se. Yes, Britain’s labor unions had a big hand in the demise of the country’s supremacy by stiff-arming productivity improvements on the factory floor but other factors did as well. In a nutshell, these factors had to do with a stubborn unwillingness, a hubris, on the part of British suppliers to get sufficiently close to the customer on the continent of Europe and elsewhere so as to better understand their requirements. As well, British industrialists were late to recognize that the discipline of engineering – the social media phenomenon of the day – was anything more than a trade.

Finally, if the nation has ceded its economic primacy its military primacy is being severely tested. The nation’s principal bulwark protecting our shores is in steep decline. The United States Navy is but a ghost of its former self. The nation now has fewer vessels than it had before World War I. In the Mediterranean, the U.S. Sixth Fleet is a non-entity the result of which is to have created a vacuum that is now filled by the Russians, Syrians, and Iranians. In the South China Sea, where American Navy vessels seem unable to sail without colliding into tankers and containerships, the United States is being challenged by a territorially aggressive and technologically advanced Chinese Navy. In all likelihood, it will take the United States a generation, assuming proper funding and political will, to restore the U.S. Navy so that we can confidently state that the nation can project power and protect seaborne commerce beyond the horizon.

Understanding these historical precedents is instructive because I’m afraid that we are witnessing our own rigidities. And, if we fail to respond forcefully, urgently, and with fresh approaches we will be the ones booted off center stage. Unfortunately, China and other emerging economies are already showing us the door.

 

 

 

Management Advisor

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