 | | Kip Beckman
Principal Research Associate,
Economic Services |
Imagine a country locked in a war that went badly wrong with a financial sector that was draining resources from its industrial sector. Observers started writing books and articles claiming that the nation was in decline and was about to lose its status as the number one country in the world. If this sounds like the United States of today you would be wrong because it is, instead, Great Britain in 1905. The war in question was the Second Boer War and the crisis in confidence that gripped the country at the time led to a dramatic election in 1906 that saw the Liberals dethrone the Conservatives in a landslide. While the new government implemented a bold set of reforms, Britain’s decline continued and within four decades a new country across the Atlantic Ocean with greater industrial and military strength supplanted Britain as the most powerful country in the world.
Is the United States of today heading for the same fate that befell Great Britain at the turn of the 20th century? Many feel that it is and point to huge debt levels as the main culprit responsible for the rot slowly engulfing this once great super power. Debt helped engineer the housing crisis that has left around 16 per cent of home owners under water with mortgages larger than the value of their homes. The need to deal with future debt levels will constrain governments as they attempt to deal with a looming Medicare and Social Security crisis resulting from the aging of the population. The historian Niall Ferguson contends that the British Empire was undone by imperial overreach while the U.S. Empire is unraveling because of financial market overreach.
Not so fast. Before writing the U.S. obituary it is important to note that this is certainly not the first time in recent memory that pundits have predicted the downfall of this country. At various times between the mid-1970s and the early 1990s, Europe and Japan were supposed to supplant the United States as the number one power in the world. This never happened as Japan experienced its own housing collapse and then failed to make the necessary adjustments to its banking sector to prevent a decade long battle with deflation. Europe has never been able to match the dynamic nature of the U.S. economy mainly due to the inflexible labour markets.
Unlike Japan, the United States is quickly dealing with the crisis engulfing its financial sector and, while an economic recovery is many months away, the flexible nature of the economy should enable it to eventually emerge largely intact. It is important to remember that the U.S. economy is incredibly resilient as evidenced by its ability to emerge relatively unscathed from terrorist attacks, accounting scandals, wars and a contested presidential election in the early to mid 2000s.
The other point to consider is that the United States could remain the number one power in the world simply by default. Is there another country in the world ready to take over? Some point to Russia due to its vast supply of natural resources. However, if natural resources equaled wealth then the Democratic Republic of Congo and Nigeria would be rich countries today. The rapid decline in oil prices is exposing numerous problems in Russia’s economy. Oil production is set to decline because some of its major oil reserves are depleted due to a lack of investment. Over the long-term, Russia must cope with a declining population that will require a huge influx of immigrants in order to generate strong economic growth – an influx that could easily inflame existing ethnic and religious tensions.
China is the most likely country to unseat the United States but it is decades away from attaining this objective. It remains a developing country with widespread poverty and a financial system that is clearly under stress. The double digit growth of the past decade will not last and China must find a way of attaining more balanced growth going forward. Also, it is not clear that a system combining a measure of free market economics with an authoritarian central government that doesn’t allow dissent can remain viable.
The question posed in the title is, “Will the U.S. Remain Number One”. The answer, unequivocally, is “yes”.