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April 1987

Is the US losing its competitive edge?

1986 was not a good year for the prestige of the United States. The Challenger shuttle disaster pointed out the decline in the once proud NASA space program. The dollar lost 40% of its value against the Japanese yen and nearly as much against other major currencies. Due to a growing trade deficit of $141 billion, the U.S. became the largest debtor nation in the world. Only three years ago the United States had the financial strength of the largest creditor nation. Not since 1924 had America been a net debtor country. The value of the dollar has continued to fall in 1997.

A number of observers have begun to wonder if the Unites States has lost its competitive edge. Some point out that the booming 1950's were a unique time, when the US. had an advantage over the war-destroyed factories of Europe and Japan. They indicate that the 1990's are a more normal time of economic competition. The U.S. is viewed as just one of several major factors in the world marketplace.

Others take a more pessimistic view of the longer term world leadership position of the United States, making comparisons with the decline of Britain or ancient Rome. In this view, the U.S. has already started a decline which was inevitable and from which there is no apparent cure. Which scenario is correct? Is world leadership indeed slipping away from the United States? Can anything be done about it? If a decline is inevitable, how long will it take? What can we learn from history to help answer these questions?

Throughout history there have been communities which seemed more advanced than their neighbors. They were centers of influence in various ways, and their neighbors looked up to them for leadership. It is possible to compare the levels of achievement among regional influence centers and make a case for the top world leadership center at any point in time. Most people would agree that the United States holds that position today. To find out what the future holds for the U.S. it is helpful to look at what has happened to past world leadership powers.

Many historians have analyzed leadership civilizations and drawn varying conclusions. Toynbee believed that each major civilization followed essentially a separate career. McNeill, on the other hand, felt that prominent cultures had significant influence on others. As travel and communication times were reduced, he showed that their circles of influence became progressively greater.

Braudel built on the influence model to develop a sequence of economically dominant cities: starting with Venice in 1390, to Antwerp, to Genoa, to Amsterdam, to London, and finally to New York in 1929. However, he recognized the limitations of this sequence by mentioning Spain's political domination of Europe in the late 16th century and French cultural supremacy in the 19th century. A useful refinement of Braudel's dominance sequence would include Spain and France.

The table in Appendix A includes economic, cultural, and other measures of dominance in identifying a sequence of World Leadership Centers. The civilizations represent mankind's highest overall achievement during each period. The time periods generally correspond to what is considered a civilization's golden age, often with an outpouring of major creative works in the arts and technology. Another way to view the list is to consider the cities that would attract people who could pay for the best medical care available at the time.

An analysis of Appendix A yields some useful insights for the future of the U.S. A major one is that recent civilizations have had shorter periods as World Leadership Centers than in the past. The most recent leading civilizations from 1362 to 1918 have been at the top for an average of only 68 years. On the other hand, the four civilizations with leadership periods of over 200 years all started over 2000 years ago. The middle period of 378 AD to 1362 AD had six civilizations with an average of 164 years in leadership. There has been a clear trend in history toward fewer years that a leadership civilization remains at the top. Perhaps this shorter time span is related to the greater interaction of major world powers since the Renaissance. For some periods, as post 1918, it is difficult to identify one country showing supremacy in a majority of fields.

In the past 500 years, France was the only country to remain a world leader more than 90 years. And France declined substantially after eighty years of leadership, particularly in losing the Seven Years' War to the British in 1763. The French maintained their position more by default, when the British shortly afterwards lost their American colonies. The French Revolution of 1789 started one of the few reversals in history of a country's decline. By eliminating the hereditary ruling class, the Revolution allowed new leaders like Napoleon to revitalize the French military and economy.

Another feature noticeable in Appendix A is that most of the transitions from one leadership center to another are between neighboring civilizations. The flow of knowledge and advanced skills often follows trade routes. People and investment money move to neighboring areas to develop new opportunities. The neighboring area competes with and sometimes surpasses the original civilization from which it got its inspiration.

Many of the less well-known World Leadership Centers had economies based more on trade than on military conquest. Civilizations based on trade were the Phoenician cities around 1000 BC, classic Athens and Alexandria, Renaissance Italian cities, and Amsterdam in the 17th century. These civilizations are particularly worthy of study because of their similarity to today's Japan, a powerful economy based largely on trade.

Leadership centers do not spring up overnight. They are generally the product of several generations of high achievement. To build on past achievements, the core area of a leadership center needs a period of peace. This often is achieved with a strong military organization that keeps away aggressors. Less frequently, a balance of power among strong neighbors provides the peaceful period needed for a small region to achieve world leadership status. Seventeenth century Holland is an example of this kind.

A strong military is often associated with a leadership center for reasons other than peace. First, such regions often have used their military power to expand their territories. Expansion generally brings in increased taxes and other revenues from conquered lands to the capital city. Those additional monies can support new ventures in business or the arts, furthering the center's prestige.

Secondly, military activities encourage the development of technology and organizational methods which will help win battles. The benefits to the ordinary citizen from new military technology are often not immediately apparent, but they do come in time. At the minimum, the best minds of the region are stimulated and supported financially by the needs of the military. Leonardo da Vinci, for example, did much of his scientific thinking on improved war machines and fortifications for his patrons. Many of America's top scientists are supported today doing Star Wars research.

World leadership centers are most often identified by their economic power. Usually through conquest or trade they have built up major cash flows to the central area. If that cash flow is wisely invested in projects that further increase the wealth of an area, that area is more likely to become a World Leadership Center. Thus opportunities for investment are important.

Sixteenth century Spain shows both sides of this important matter of investment. As the re-conquest of the whole Iberian peninsula from the Moors was completed, Queen Isabella felt free to invest in a new venture. Backing Christopher Columbus, she hoped to help Spain find a western route to the Indies and compete for the spice trade. The Spanish didn't find the spices, but located fabulous opportunities for investing in silver mines in the New World. The huge inflow of silver made the Spanish very wealthy. However_, they did not find other profitable opportunities for investing. This lack of opportunity was a major factor in Spain's decline in the late 16th century.

Drawn by the large amounts of cash generally flowing into world leadership centers, many outsiders often move to these areas. Attracted are some of the best minds, adventurers, artists, and vigorous young people of all types looking for better opportunities. Some of the outstanding achievements by great civilizations are made by foreigners who moved there. In the example above, Christopher Columbus came from Italy, and the renowned painter of the Spanish court El Greco "The Greek" was born on Crete.

Like the majority of areas that have been World Leadership Centers, the United States became a major power by military conquest. Native Indian lands and parts of Mexico were conquered by the U.S Army, allowing for the country's westward expansion. As in previous empires, the conquered areas allowed for expanded opportunities for trade and investment. Businesses in post Civil War U.S. had the unprecedented advantage of a continent wide area for selling goods.

Neither the military conquest nor the business opportunities made the U.S. a World Leadership Center. But both of them contributed to a foundation on which major advances could be made. In the late 19th century Americans invented a number of new products like the telephone and electric light. The business system was able to fully develop these inventions into major new industries.

It was the business system more than the inventions themselves that made the greatest impact on the advance of civilization. For example, many of the first cars were made in Europe, but American companies like Ford made these products available for the first time to large numbers of people.

During World War I, the economic power and prestige of the United States came to the forefront. The U.S. entry into the war was the decisive factor in its outcome. American war materials as well as soldiers speeded victory for the Allied powers. At the peace conference, the American President Wilson was acclaimed by the peoples of Europe as the outstanding world leader and visionary. In 1918, the position of World Leadership Center shifted from Great Britain to the United States.

At the end of World War II, there was no question that the United States was the pre-eminent world leader. It alone held the secret to the terrifying atom bomb, placing the U.S. a step above all other powers militarily. Its war-swollen economy had shown an unprecedented ability to turn out weapons and consumer goods. Europe and most other industrial areas of the world, in contrast, had been heavily bombed in the war.

The American economy boomed in the 1950's. Steel and auto plants in the Midwest converted from war to civilian manufacturing, providing products that boosted the U.S. standard of living well beyond that of other countries. Large U.S. companies took American management techniques abroad_, making Coca-Cola and Kodak film international products.

The late 1970's and 1980's have not been as good for the prestige of the U.S. President Carter, fighting a huge increase in inflation, spoke of a "malaise" affecting the American people. The space program has limped along, hurt by a lack of vision and events like the Challenger disaster. Most importantly, the once unstoppable U.S. business might began to run into major competition from abroad.

United States deficits in world trade have moved the country from the world's largest creditor nation to the world's largest debtor in just three years. In 1995, the U.S. for the first time since 1914 moved into a net debtor status, owing the rest of the world $107 billion. This status means that foreigners own more of American assets than Americans own abroad. At the end of 1996, the net debt status for the U.S. increased to $220 billion, far ahead of second place Brazil, which owed $109 billion in net debts to foreigners.

The United States has been the World Leadership Center since 1916, a period of 69 years to date. The average lifespan of Leadership Centers since 1363 AD has only been 68 years, so the U.S. at 69 is probably nearing the end of its reign. It is in a decline that history indicates is probably not reversible. However, the speed and nature of the decline depends on some controllable factors.

Historians agree that leadership civilizations show a pattern of vigorous growth, a cultural flowering, and then gradual decline. They give varying reasons for the declines. Spengler viewed each civilization as an organism with an inherent limit to its lifespan. Gibbon and many others looked to specific events within each civilization such as unwise decisions of rulers or the silting up of harbors. The Durants pointed to the failures of leaders to meet the challenges of change.

None of these explanations provide a useful means for predicting or slowing the decline of the United States. They are primarily descriptive and do not give a mechanism for explaining when decay can be expected. However, growth and decay can be predicted with an economic model, looking at the effects of substantial new monies flowing into a young economy. At first the monies are used for continued investment in the new activities that have brought success to the civilization, such as military conquest or expanded trading operations. When opportunities for internal investment decline, a civilization often is at its peak.

A World Leadership Center that is no longer expanding finds fewer internal opportunities for investment that will provide good returns. Some of the funds not used for immediate spending are invested in foreign projects that promise a higher return than is available within the country. In the 19th century, profits from British textiles and railroads went into building up trade in the British Empire. The English were also major buyers of American railroad securities that helped build the transcontinental rail lines.

Foreign investments can bring higher returns, but they generally help the receiving country more that the lender, because the productive work takes place outside the investing country. Such investments are often accompanied by a sharing of the technology that helped boost the lending nation to prominence. If the receiving country can capitalize on these benefits, it has an opportunity to develop into the next World Leadership Center. Just as the expanding United States benefited greatly from European investment in its railroads, Japan more recently has taken full advantage of American investments there following World War II, developing vigorous new industries.

Foreign investments often do not work out as hoped in the long run. Some of the unproven projects do not provide the hoped for returns; others are nationalized. Great Britain saw its overseas investments lose value as its empire was dismantled. Today the United States wonders if its investments in Latin America will ever be paid back.

Another way leadership civilizations spend their extra money is on a fancy lifestyle, particularly among the ruling classes. They build ornate houses and public buildings, entertain lavishly, and take an interest in the arts. For many civilizations, the new heights they achieve in the arts are what they are most remembered for from their golden eras. But when a country's leading citizens start spending less time on the hard work and basics that built up their economy, the decline has begun.

Many signs point to a continued decline of the United States and the emergence of Japan as a world leader. Unlike the United States, Japan's economy is primarily based on trade. Thus it might be best be compared with the trade civilization of Holland. Japanese culture does not encourage continued infusion of new ideas and people.

Analysis of past world leadership civilizations can provide many insights into the future, particularly for the United States and Japan. The negative aspects of an American decline can be minimized by wise public policies. Similarly, the positive benefits of an expected American cultural golden age can be enhanced by studying past World Leadership Centers.

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