The next American president will have to navigate a treacherous distance between, on the one
hand, American political tradition, and on the other, the reality of the world economy.
American political tradition, I think, is shaped by the heroic moments in memory, so
for the Democrats that means the Great Society programs of the 1960s; maybe for the Republicans
it means the defense buildup in the 1980s that led to a victory in the Cold War.
So, while American political tradition is shaped by that grand ambition, on the other
hand, the reality of the world economy is that American share of output is shrinking,
and America's power is shrinking so there's a kind of grandness in aspirational terms
and something rather different if you look at the actual economic data, and the shrinking
of American power, of course, has already been happening.
If you go back to the Democratic heyday, the signing of Medicare into law in 1965, at that
time, the United States accounted for 37 percent of global output.
Go forward to when Ronald Reagan unveiled his first budget with the big defense buildup,
that was 1981, and by this time U.S. share of global output had shrunk from 37 percent
before now down to 28 percent, so quite a big shift.
And now, if you take just 2010 numbers, we're down to 23 percent for the United States as
a share of global output so it's come down further, and that's a 2010 number.
I think it's come down even further since then.
We'll see when we get the data.
And looking into the future for the next presidency, it's likely to fall even more.
I say that partly because of the financial crisis, which left the mature economies, including
the United States, with enormous debt overhangs, and that debt has to be paid back.
That means belt tightening, that means less consumer demand, and that's going to be a
drag on growth, whereas in fact amazingly, the emerging economies as a group came out
of the financial crisis with a lower ratio of debt to GDP than they had when they went
in.
Why?
Because GDP grew so fast, so debt to GDP fell.
So they've gotten healthier on that metric in terms of their future growth, whereas the
mature economies, including the United States, have gotten more anemic, so that's one factor.
Another factor is simply demography.
The rate at which work force grows is a key driver of your growth rate, and although demographics
in the United States are more healthy than in Japan, which is growing faster and doesn't
really have much immigration, Europe, if you extrapolate the number of Italians into the
future you get to a point hypothetically where there'll only be a couple left, so in Europe
you've got worse demographics but relative to much of the emerging world, China a slight
exception because of the one child policy.
Most of the emerging world has better, younger demographics than the United States, so that's
a second reason to expect why the U.S. will grow less quickly, and then there's simply
the fact of being at the technological frontier.
When you're an advanced economy, by definition you've implemented the right ideas that exist
to make your growth go faster.
The catch-up economies have not implemented them so China, et al., can implement them
and really benefit from the fact that they are absorbing ideas that have been developed
in the mature economies first.
So you put all that together, and you've got an outlook where the U.S. will grow maybe
two or three percent a year but the emerging world will grow at least twice as fast, maybe
as much as three times as fast as the U.S., so the U.S. weight in the world will shrink,
and therefore, despite that political tradition in the United States that drives presidents
to announce bold plans for the U.S. to act on its own and really exert American power,
the name of the game is going to be to form alliances, to work with multilateral institutions,
and to walk more softly because the stick has actually shrunk.
I think one place where this comes up in economic diplomacy specifically is in relation to China
and the currency system.
The game of trying to push China unilaterally to change its exchange rate regime, I think,
has been tried; it hasn't worked, and we need to move toward a much more multilateral approach
of binding China into the International Monetary Fund more, binding them into the system of
international reserve currencies, encouraging the emergence of the Chinese currency as an
alternative reserve asset because that is the way to make them play by the rules, and
we cannot do it unilaterally any longer.