The U.S. is not falling behind

By Michael Elliott

FORTUNE -- Commentary on the state of the U.S. economy has once again turned -- sadly -- to America's supposed failings relative to the rest of the world. In a much-cited follow-up to its 2005 report Rising Above the Gathering Storm, for example, an eminent committee of the National Academies reached the unanimous conclusion that when it comes to the principal ingredients of innovation and competitiveness, "our nation's outlook has worsened."

What's wrong with this picture? Start, first, with the very issue of competitiveness. It is now 16 years since economist Paul Krugman labeled competitiveness a "dangerous obsession" in a famous article in Foreign Affairs, but his arguments ring as true now as they did in 1994. Nations, he noted, are not corporations; they do not have a bottom line, and they do not compete in the way businesses do.

In fact, Krugman wrote, while the major industrial economies sell products that compete with one another, they are also each other's buyers and suppliers. Instead of acknowledging the beneficial interdependence of nations, however, today's pundits treat the global economy with the sophistication usually reserved for a schoolyard game: If Johnny is down, Sally must be up. But I think there's something deeper going on than just muddled analogies between countries and corporations. More fundamentally, in the U.S. today there's an unstated yearning -- even among those too young to remember them -- for the 30 years of sustained economic growth and middle-class prosperity after 1945.

Long ago I wrote a book about those years, and the nostalgia for them is not misplaced: After World War II the U.S. really did build the world's first economy in which opportunity was widely spread and in which most people (though never all) could live in a degree of comfort that would have amazed their parents. But many Americans fail to appreciate that those years were a giant historical fluke.

In 1945 the U.S. accounted for about 50% of total global output, twice what it does now. Why? Because most of the rest of the industrial world was in ruins. Had history taken another turn or two, the U.S. would not have had the monopoly of riches it enjoyed for the next three decades. Consider: At the beginning of the last century, Germany was an industrial and scientific powerhouse, but two world wars and Nazism ended that. Had it not succumbed to militarism in the 1920s and '30s, Japan would have had a modern, technology-based economy by the 1940s, not the 1970s.

In large measure, the loss of American competitiveness is nothing more than an inevitable process of others catching up -- first Western Europe and Japan (as late as 1960, Japan's GDP per head was just 15% that of the U.S.; now it is 71%), then others. In the past 20 years China and India have shed economic systems that diminished potential growth and adopted ones that encourage it. The National Academies breathlessly reports that China is now No. 2 in the world in publication of biomedical research papers. To which the only possible response is, "Duh! Did you think one-fifth of the world's people were all stupid?"

If we could only rid ourselves of the idea that it is somehow a problem that others have followed the success of the U.S. in building middle-class prosperity, we might see our own potential more clearly. Hal Sirkin, a senior partner at the Boston Consulting Group and co-author of the 2008 book Globality, points out, for example, that parts of the U.S. have become relatively low-cost, high-skilled places to invest. If you want to sell into the American market, it makes sense to manufacture here, as car makers from Germany to Japan will tell you. (Chinese companies are here too -- see "American Made ... Chinese Owned")

Does the U.S. face serious challenges: ensuring opportunity for all in an increasingly class-stratified economy; rebuilding the world's first modern infrastructure; improving primary education? Of course. Does it have the resources to meet those challenges: a generous natural endowment; a relatively young population; the best universities in the world; and a long history of business ingenuity? Yes, in abundance. But will the American middle class ever again be massively more prosperous than that in other countries, and will the U.S. have the dominance it once had in scientific and technological discovery? No, and no. Get over it.  To top of page