Which way America?

THIS week, we review two books with differing takes on the status of the American economy. Dan Gross' new book "Better, Stronger, Faster" makes the case that America's economy is well-poised for a period of surprisingly strong and innovative growth. Ed Luce, by contrast, argues that if America doesn't soon get its act together a long and steady decline looms. Do read the review, but I think it's worth discussing the broader debate in a bit more detail here.As both authors note, Americans have been fearing for their imminent decline for as long as they've been around. There is always plenty to complain about, and now is no exception. It is important to maintain a perspective about this, however, in two different ways.First, while it is important to try and address flaws in the American economy, one shouldn't overreact to them. It is very easy to tell stories about broken government, sclerotic bureaucracy, and corrupt politicians, and Mr Luce does so quite effectively. It is harder to illustrate that things are dramatically different than they used to be.For much of the country's early history, it was a horribly governed and remarkably unjust place. Neither senators nor the president were directly elected, suffrage was limited to white men, and much of the population was held as property. America slowly addressed these problems, but new ones arose. The end of officially sanctioned discrimination against women and minorities is actually quite a recent phenomenon and one with important and positive economic consequences. At the turn of the century, the regulatory state was miniscule; it was a grand time for free markets. And yet labour and environmental conditions were awful, wealth was becoming extraordinarily and dangerously concentrated, and macroeconomic management was abysmal. At times in its history, America welcomed immigrants with open arms; at others, it threw up impenetrable obstacles to people, goods, and capital from abroad.After the Second World War, things were in many ways worse. Entrepreneurs were saddled with confiscatory marginal tax rates, it was difficult to impossible to move capital around the world, and many of the day's most important industries were regulated within an inch of their lives. I like to point people to Marc Levinson's fantastic history of the shipping container, titled "The Box". He describes in remarkable detail the extent to which the postwar freight industry was awash in costly rigidities that took decades to unwind. Powerful unions controlled the docks. Government regulators strictly limited which firms could run which routes at which prices. It isn't enough to condemn this or that economic policy. To spin a story of decline, one has to demonstrate that policies are considerably worse than they used to be, and that they're unlikely to improve. It's actually quite difficult to do this.Good policy matters. But while lots of current policymaking in Washington is very bad, other sorts of policymaking are considerably better handled than they used to be. One could argue that things are different now, because there is a challenge from abroad. There is always a challenge from abroad. Ever since America ceased to be the challenger, there has been a challenge: the Soviet Union, Western Europe, Japan, the Asian tigers.The nature of that challenge is the second matter on which perspective is important. America is home to just over 300m people. China and India together are home to over 2.5 billion people. Asia as a whole is filled with nearly 4 billion people. Africa accounts for another billion and Latin America a further 500m. America is a tiny country that produces and consumes a vastly disproportionate share of world output. If we weren't observing rapid catch-up growth in the emerging world, if we weren't watching ever more of the world's consumption, investment, and innovation shift to the emerging world, there would be something very, very wrong. When America's share of world output and innovation declines, that is a healthy and wonderful thing. Now, some aspects of this growth may have a depressing effect on American lifestyles. In particular, rising demand for commodities with relatively inflexible supplies raises their price. But America isn't entitled to cheap commodities. And more aspects of emerging-world growth are out-and-out good for America. A larger global market offers more opportunity for specialisation and achievement of gains from trade. And the shift of most of the world's population from an existence in which talented individuals largely make a living on subsistence farms to one in which they go to university and contribute to growth in the stock of knowledge, well, that's very good for America. The rise of India and China is not an emergency that should drive America to panic.In many ways, America is burdened by its legacy as economic hegemon. The dollar's reserve currency status allows America to borrow cheaply. At the same time, however, it allows America to borrow cheaply, encouraging an unhealthy level of borrowing, while also making it difficult for America to adjust its external imbalances. Should the yuan come to play a larger role in global finance (signalling, by some accounts, American "decline") one source of pressure on American exporters will be reduced. We shouldn't mistake change for decline; change will often provide a cushion to an adjusting American economy.But let's not be pollyannish. There are new challenges facing America. Inequality is one, and particularly the aspects of it associated with stagnation in median incomes. Some of this is an American problem; most of it is due to technological change and globalisation and their interaction. It is difficult to see how these trends will play out in coming years; potentially they will grow worse. The trajectory of politics does not lead me to believe that it is a problem that is likely to be ignored. But certainly it is cause for concern. It's worth asking, however, whether inequality is more dangerous than inequality in, say, China or India or Latin America.Polarisation and paralysis in Washington is another new and troubling phenomenon. Politics in Washington has nearly always been nasty and partisan, but there has been a meaningful change in the operation of the Congress. In particular, parties have become more polarised at the same time that party leaders have become more willing to use the tools available to the minority to block Congressional action. This is a problem. Yet at the same time, America's federal political system looks much less brittle than the euro zone's or China's.Contrary to what Mr Luce occasionally implies, these issues, and other worries as well, are not being ignored or greeted with complacency. They are very much on the public's radar; Americans will talk your ear off about underinvestment in infrastructure, big deficits, the struggles of the middle class. Politicians will too. There are also active efforts to fix many of these problems underway. State and local governments are becoming increasingly willing to experiment with creative new funding mechanisms for infrastructure. As Mr Luce details, there is enormous interest in education reform across the country. Results have been mixed so far, but the data-gathering effort is substantial and should eventually yield real progress. Universities are increasingly willing to experiment with online courses. Institutions are responding.There are many things I wish America did better, but one thing that is often underappreciated about the place is its remarkable economic and institutional flexibility. When Michigan's economy implodes, that's bad—but people find it remarkably easy to pack up and move to sunnier climes. When Congress can scarcely keep the money for highway repair flowing, the city of Chicago pioneers new public-private sources of infrastructure finance. America's federal government is often a wreck. Luckily, America's success isn't driven almost entirely by the choices and actions of the federal government. China's success is really remarkable in so many ways, and I don't pretend there is nothing America can learn from its success. As a special report this week indicates, it is in many ways a surprisingly resilient economy. Its institutions are well-equipped to handle a major macroeconomic shock. Yet every government makes mistakes, and an economy built on the assumption that the government won't make too many mistakes is putting itself at risk for eventual stagnation, or perhaps collapse.Meanwhile, American innovation is proving as impressive as ever. The golden age of the Space Race may be long gone, but private firms in America are putting ships into orbit. Apple is the envy of the world, and rightly so. Google is doing pioneering work on autonomous vehicles, which could revolutionise transport. IBM's Watson, and things like it, could change medicine and many other fields besides. Also, this.Again, there is always a risk of serious trouble ahead. Perhaps Congress will fail to raise the debt ceiling, and a collapse from which America never quite recovers is the result. It's perfectly fair to argue that a few other countries just handle policy better—Australia, perhaps, or Sweden. All things considered, America looks remarkably strong. I will be very surprised if another large country is richer and more stable than it two decades from now.