IS THE UNITED STATES AT END OF EMPIRE?

America’s economic primacy is pretty much 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 and thus ensuring a graceful exit.  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, foreign exchange reserves, 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 $23 trillion in 2017 compared to that of the United States which came in at $19 trillion.

Some politicians, economists, lobbyists, and others, like to use a different measure of GDP to suit their own purposes. 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 2017 came in at $19 trillion. By comparison, China’s nominal GDP came in at $12 trillion. If we only look at nominal GDP, it is clear we are being lulled into a false sense of economic security.

Diplomatically, China might also have an edge on the United States. In the 1980’s, the then leader of the People’s Republic of China, Deng Xiaoping, enunciated his famous maxim of tao guang yang hui. Interpreted variously, the maxim is meant as a foreign policy directive that regardless how muscular the nation might become economically, geopolitically, and militarily it is always best to keep a “low profile diplomatically.” No more beguiling example of Deng Xiaoping’s maxim is in evidence than in China’s Belt and Road Initiative. Simply put, China plans to build one “road” from China to Europe and thus control all manner of transcontinental commerce. Already, China controls or has a presence in ports that handle about two-thirds of the world’s container traffic. In Greece, the port of Piraeus is mostly in the hands of the Chinese which makes Greece a strategic entry point for China into the heart of Europe.

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 despite gains in these areas total employment 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 an annual 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, as we noted in an earlier essay, imports are within earshot of total exports. 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 the Introduction, we referenced the Accenture survey of 2007 which showed that 41% of respondents described service quality as fair, poor, or terrible. 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 service quality from clambering out of the aforementioned levels of mediocrity. 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. It is also true, that President Trump 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; negotiating better trade deals; 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. In the rarefied world of supercomputers so critical to pushing the frontiers of science and technology, for example, the United States is out-produced by China on the order of two-to-one. So, until and unless we grow a much larger crop of more competent technical workers we will continue to be outperformed by nations more determined, better educated, more dedicated, and 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 in the halls of Congress. 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 growth is stalled at near zero 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 the unemployed, those that are not looking for work, and those who have had to settle for part-time work –  is mired at levels of near 8% (during the Obama years the U6 rate never got below 9.2%); the national debt is in the stratosphere; entitlement spending well exceeds 50% of our budget dollars and is likely to increase with both a growing number of baby boomers reaching retirement and the population’s longer life expectancy; and fraud and corruption run rampant among other serious afflictions. Perhaps the most troubling portent for the nation’s future is its inability to clamber out of a deep and black hole in education. Among the 35 industrialized nations which comprise the Organization of Economic Cooperation and Development (OECD), for example, the United States ranks 31st in mathematics and roughly in the middle on science. Clearly, all of the monetary and fiscal policies in the world will hardly fix this crippling deficiency.

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.

As I argued in a previous essay, The United Kingdom Is Resurgent, the former world economic power, lost its supremacy because it failed to adapt to the winds of change which buffeted its shores long after the economy reached its apex in the early twentieth century.

It is also provocative to think that there might be a “natural” life cycle to nations as there is to human beings that is irreversible. Regardless of one’s view in embracing one or another theory that might explain the demise of nations, there is no reason to remain indolent in resisting such decline even if there is only the remotest possibility of such an outcome. Keep in mind that the demise of Rome was hardly cataclysmic but the result of a long succession of imprudent decisions made by the Empire’s leaders.

CAN THE UNITED STATES GUARANTEE THE PEACE?

If the nation has ceded its economic primacy, its military primacy is being severely tested. United States’ land-based forces are heavily committed to counterinsurgency operations to fend off non-state actors while conventional warfare strategic planning appears to be dead. In Europe, a likely conventional hotspot, NATO and U.S. forces are outgunned and outmanned by a factor of at least ten to one by Russian forces.

Our ocean defenses are in no better shape. 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. Most notably, our aircraft carrier fleet which must number sixteen in order to patrol three separate ocean theaters now numbers ten or barely enough to protect two theaters. 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. Already, an armada of sophisticated dredging vessels is reclaiming land from the sea for the sole purpose of building military airfields and naval port facilities.

Former U.S. Undersecretary of the Navy, Seth Cropsey, in his chilling and sobering account, Mayday the Decline of American Naval Supremacy, reminds us that China was the naval hegemon in the fifteenth century. Under the leadership of Admiral Sheng He, Chinese sailors coursed the oceans from their territorial waters to the Strait of Hormuz. Chinese vessels of the time were of a length and tonnage that were not to be seen in the West until centuries later. China’s naval supremacy only came to an end when civil servants forced severe budget cutbacks on the kingdom. Does our own budget sequestration of 2013, with its mandate to, in effect, disarm the military, ring a bell? The results of each nation’s budget missteps are eerily similar. China, for its part, will probably not repeat its mistake.

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.

Just as troubling as the rickety state of the nation’s military naval forces is the state of the United States Merchant Marine. The Merchant Marine fleet hauls cargo during peacetime and is attached to the Defense Department during wartime to transport troops and supplies into war zones. The United States should hope it does not get into a major conflagration oceans away as it has experienced a dramatic attrition in its Merchant Marine fleet and manpower inventory. In 1960, the United States had nearly 3,000 vessels in the Merchant Marine fleet. Today, the nation has fewer than 175 vessels or less than one-half of 1% of the total vessel count worldwide. Worse, United States-flagged vessels carry a mere pittance of the total volume of goods and materials that transit through the nation’s ports. The consequence of what is obviously a weak flank in the nation’s defense posture is that in the event of a major outbreak of hostilities the United States would be reliant on foreign-flagged vessels to carry troops, armaments, and supplies with all of the attendant security risks.

In sum, if as the great military historian B.H. Liddell Hart suggests, a nation’s Grand Strategy is a composite of its political, military, economic and diplomatic tools in its “arsenal” which can be brought to bear to advance a state’s national interest then the United States appears to be convulsing in its gradual decay.

Management Advisor

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