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The Shift in International Economic Power

Populists and protectionists tend to blame the growing apparent United States disadvantage on “unfair” trade practices by other countries. Our political leaders have created the situation and are perpetuating it as a result of their unbridled spending and poorly conceived legislation, regulation, and trade policies.

“America will never be destroyed from the outside. If we falter and lose our freedoms, it will be because we destroyed ourselves.”
Abraham Lincoln
President, 1861 – 1865

In the 1980s, as a nation we were riding high – – we were risk takers; inventing new ways to make money and new things to spend it on. As a nation we were prospering and we felt secure. From 1980 to the financial crash of late 2007, the Dow Jones industrial average continued a rapid climb, hitting 14,165, and median new home prices quadrupled.

With the beginning of the new century we began to hear more about jobs going offshore and the decline of manufacturing. At the same time we were being told by our political leaders and the press that this was all part of the wonders of the twenty-first century global economy, and America was going to benefit from these changes. Many Americans found these benefits difficult to see.

Soon, all was not well for an increasing number of Americans. Factories were closing in all parts of the nation, not just in the “Rust Belt” of the North and Midwest. Unemployment began to rise in certain areas of the nation and in certain industries. The overall unemployment rate was still relatively low, averaging about 5.7 percent for the 1990s, although many thought the situation was worse than this statistic reflected. Employment experts were concerned that many who had lost their jobs were forced into being underemployed (in a job below their skill level), into early retirement, or into the position of finding a job. With the advent of the recession in December 2007, the unemployment rate jumped to over ten percent by the end of 2009. We were in the worst financial downturn since the Great Depression.

The American public and their governments – federal and state – were on a huge spending spree. Americans were financing a lifestyle that they could no longer afford. We had become addicted to borrowed money. Other countries like China and India were taking our jobs and technology, but hey, we were getting cheap TVs, cell phones, and iPods. Interest rates were low, so when we couldn’t afford what we wanted, we borrowed.

By the beginning of the new century the nation’s deficit was rising rapidly, as was the trade deficit. For the first time, median household income began a consistent decline, while inflation continued to rise. In spite of these signs, we were being told we were doing great and many thought we were, because our investments were still riding high and our home values were soaring. We were confident in Wall Street and our political leaders when they explained away the danger signs.

By 2000, we were in the twenty-first century world of globalization. The term “globalization” has become a common buzzword covering a wide range of political, economic, and cultural trends. For our purposes, it describes a process by which national and regional economies and cultures have become integrated through global systems of communication, trade, capital flows, migration and the spread of technology into the international economy. With globalization, words like “outsourcing,” “offshoring,” “downsizing,” and “rightsizing” began to be used more frequently than ever before.

Millions of American workers, not just in manufacturing, lost their jobs and found they were unable to find new jobs. For these Americans, it made no difference what jargon was used – the results for them and their families was the same. But it is not just these workers and their families that were being affected — the nation as a whole began to feel the repercussions of globalization. We didn’t pay much attention, if any attention at all, to the fact that with the turn of the century, the U.S. economy began growing slower than the global economy.

We heard of the wonders of globalization and how rapidly it was advancing in countries like China, India, and Brazil, where hundreds of millions of people were rising from poverty into the middle-class. American families increasingly found that in spite of a flood of low-cost products from offshore, their standard of living was not improving, their incomes were not rising and they were sliding increasingly into debt).

It is important to recognize that the factors leading to America’s economic troubles existed long before the downward spiral of the housing market after its peak in early 2005, the start of the recession in December 2007, or the collapse of the financial markets in 2008. These were the slap in the face the public needed to awaken us from our spending binge. We began to come to the realization that our economy was losing its ability to generate the income necessary to maintain the lifestyle we sought. The American public has since begun to adjust by attempting to decrease its household debt and consumption. However, the federal government continues to borrow, tax, and print money — showing no indication that it is making enough of a similar effort.

Globalization, once promoted as the path to economic growth, is no longer seen the same by populations in advanced nations. In Europe, polls report that two-thirds of the EU citizens see globalization as profitable for large global companies but not for citizens. A 2002 Pew poll showed that in the United States, seventy-eight percent of its citizens thought foreign trade was beneficial to the country; by 2007 (pre-recession), the percentage had dropped to fifty-nine percent. By 2008, a CNN poll showed that a majority of Americans saw trade as a threat, not n opportunity.

For the first time, Americans began to feel a threat to our status as the world’s superpower. Try to imagine what life would be like in America if it were the third-ranked global superpower behind China and India. How would it affect us socially and economically, and from a security perspective? Picture this change reflecting a substantial improvement in the economies and standard of living in China and India, with a commensurate weakening of the United States economy and standard of living. Envision that this will occur in your life, or at least within your children’s lifetimes. Finally, imagine that this situation is, in large part, the result of mismanagement by our political leaders.

The worst part of this scenario is that it does not need to occur. Populists and protectionists tend to blame the growing apparent United States disadvantage on “unfair” trade practices by other countries. Most of our political leaders understand the direction that the nation is traveling, but are not taking the necessary action to make a course correction. Historically, this is not unusual; many great superpowers have been largely responsible for their own demise.

The economic, social, and political implications of America’s mismanaged globalization threaten to shake our society to its foundations. The middle-class is at war, engaged in an international battle to keep its jobs and standard of living — and the battle is not going well. For the first time in our history, the size of the middle-class is diminishing and its income is not rising to keep pace with inflation and this trend began long before the 2007 recession began. Many of the same forces causing the middle-class to shrink are causing Americans with the lowest economic prospects to grow in number.

How did we get to this point? During the housing boom that kicked off the twenty-first century, middle-class Americans who could no longer improve their earning power refinanced their homes, pulling out billions of dollars in equity to protect a lifestyle they could no longer afford. By turning their homes into ATMs and increasing their credit card debt, most middle-class Americans are now paying interest on their groceries, making the possibility of retirement or paying for medical emergencies or college tuition impossible. Never before has the American public and its government been so deeply in debt, and never before has the economic prospects for our children and our children’s children to have a better standard of living than we have been so dismal. For many Americans, their last job was the best job that they will ever have.

Our economy was built on the fact that we as a nation made excellent products and provided exceptional services that were in demand worldwide. We have been rapidly surrendering our position of leadership in these areas where we truly excelled, which were responsible for making the United States a superpower. In the last two decades, we have shifted to a nation who can claim that one of its biggest growth sectors is providing financial services. Thus far in the twenty-first century, we have shown that this is not a business that we are very good at. In fact, we are so bad at it that we triggered a worldwide recession.

Our nation became a superpower because we invested in manufacturing, research, and development. We were innovative and we made things. However, we are rapidly becoming a nation that makes nothing, and we now spend more money on lawsuits than on research and development. The United States now has the largest national and personal debt of any nation. Most important is that this debt has not been caused by financing investments, but rather by government spending and high levels of private consumption of goods produced offshore.

When the public first began to recognize that the nation’s financial industry was beginning to implode in September 2008, the government responded by flooding the industry with $700 billion. This money did not come from a government rainy-day account, but rather was added to the national debt.

The federal government acts like it has a credit card with no spending limit. Credit extended to the government comes through the sale of United States Treasury securities. These securities are backed by the “Full Faith and Credit” of the United States government. Over twenty-five percent of these treasuries are owned by foreign governments – mostly China, Japan, the oil exporting countries, and the United Kingdom.

When as a senator Hillary Clinton was asked why the federal government does not get tougher on trading partners like China, she stated, “How do you get tough on your banker?” She also stated that she sees “a slow erosion of our economic sovereignty”.

It is difficult to comprehend that our political leaders acknowledge that they see our economic sovereignty eroding, and yet they do little or nothing to stop it. Indeed, they have created the situation and are perpetuating it as a result of their unbridled spending and poorly conceived legislation, regulation, and trade policies.

Our government’s policies have led the United States towards a future of diminished economic and political power that leaves us vulnerable to external economic forces.

Geoeconomist Ronald R. Pollina, Ph.D., is the author of Pollina Corporate Top 10 Pro-Business States Study, which is published annually. He is the president and founder of Chicago-based Pollina Corporate Real Estate. The Wall Street Journal, The New York Times, Financial Times, BusinessWeek, Forbes, and Chicago Tribune have quoted his opinion on geoeconomics and corporate location analysis. This article is excerpted from Selling Out a Superpower: Where the U.S. Economy Went Wrong and How We Can Turn It Around with permission of Prometheus Books.

About ronald r. pollina

Geoeconomist Ronald R. Pollina, president and founder of Chicago-based Pollina Corporate Real Estate, is the author of Pollina Corporate Top 10 Pro-Business States Study, which is published annually, and Selling Out a Superpower: Where the U.S. Economy Went Wrong and How We Can Turn It Around (Prometheus Books).