The Future of American Power

How America Can Survive the Rise of the Rest

Fareed Zakaria

From Foreign Affairs, May/June 2008

Summary:  Despite some eerie parallels between the position of the United States today and that of the British Empire a century ago, there are key differences. Britain's decline was driven by bad economics. The United States, in contrast, has the strength and dynamism to continue shaping the world -- but only if it can overcome its political dysfunction and reorient U.S. policy for a world defined by the rise of other powers.

FAREED ZAKARIA is Editor of Newsweek International. This essay is adapted from his book The Post-American World (W. W. Norton and Company, Inc., © 2008 by Fareed Zakaria).

THE ENTREPRENEURIAL EMPIRE

Britain was undone as a global power not because of bad politics but because of bad economics. Indeed, the impressive skill with which London played its weakening hand despite a 70-year economic decline offers important lessons for the United States. First, however, it is essential to note that the central feature of Britain's decline -- irreversible economic deterioration -- does not really apply to the United States today. Britain's unrivaled economic status lasted for a few decades; the United States' has lasted more than 120 years. The U.S. economy has been the world's largest since the middle of the 1880s, and it remains so today. In fact, the United States has held a surprisingly constant share of global GDP ever since. With the brief exception of the late 1940s and 1950s, when the rest of the industrialized world had been destroyed and its share rose to 50 percent, the United States has accounted for roughly a quarter of world output for over a century (32 percent in 1913, 26 percent in 1960, 22 percent in 1980, 27 percent in 2000, and 26 percent in 2007). It is likely to slip, but not significantly, in the next two decades. Most estimates suggest that in 2025 the United States' economy will still be twice the size of China's in terms of nominal GDP.

This difference between the United States and Britain is reflected in the burden of their military budgets. Britannia ruled the seas but never the land. The British army was sufficiently small that Otto von Bismarck once quipped that were the British ever to invade Germany, he would simply have the local police force arrest them. Meanwhile, London's advantage over the seas -- it had more tonnage than the next two navies put together -- came at ruinous cost. The U.S. military, in contrast, dominates at every level -- land, sea, air, space -- and spends more than the next 14 countries combined, accounting for almost 50 percent of global defense spending. The United States also spends more on defense research and development than the rest of the world put together. And crucially, it does all this without breaking the bank. U.S. defense expenditure as a percent of GDP is now 4.1 percent, lower than it was for most of the Cold War (under Dwight Eisenhower, it rose to ten percent). As U.S. GDP has grown larger and larger, expenditures that would have been backbreaking have become affordable. The Iraq war may be a tragedy or a noble endeavor, but either way, it will not bankrupt the United States. The price tag for Iraq and Afghanistan together -- $125 billion a year -- represents less than one percent of GDP. The war in Vietnam, by comparison, cost the equivalent of 1.6 percent of U.S. GDP in 1970, a large difference. (Neither of these percentages includes second- or third-order costs of war, which allows for a fair comparison even if one disputes the exact figures.)

U.S. military power is not the cause of its strength but the consequence. The fuel is the United States' economic and technological base, which remains extremely strong. The United States does face larger, deeper, and broader challenges than it has ever faced in its history, and it will undoubtedly lose some share of global GDP. But the process will look nothing like Britain's slide in the twentieth century, when the country lost the lead in innovation, energy, and entrepreneurship. The United States will remain a vital, vibrant economy, at the forefront of the next revolutions in science, technology, and industry.

In trying to understand how the United States will fare in the new world, the first thing to do is simply look around: the future is already here. Over the last 20 years, globalization has been gaining breadth and depth. More countries are making goods, communications technology has been leveling the playing field, capital has been free to move across the world -- and the United States has benefited massively from these trends. Its economy has received hundreds of billions of dollars in investment, and its companies have entered new countries and industries with great success. Despite two decades of a very expensive dollar, U.S. exports have held ground, and the World Economic Forum currently ranks the United States as the world's most competitive economy. GDP growth, the bottom line, has averaged just over three percent in the United States for 25 years, significantly higher than in Europe or Japan. Productivity growth, the elixir of modern economics, has been over 2.5 percent for a decade now, a full percentage point higher than the European average. This superior growth trajectory might be petering out, and perhaps U.S. growth will be more typical for an advanced industrialized country for the next few years. But the general point -- that the United States is a highly dynamic economy at the cutting edge, despite its enormous size -- holds.

Consider the industries of the future. Nanotechnology (applied science dealing with the control of matter at the atomic or molecular scale) is likely to lead to fundamental breakthroughs over the next 50 years, and the United States dominates the field. It has more dedicated "nanocenters" than the next three nations (Germany, Britain, and China) combined and has issued more patents for nanotechnology than the rest of the world combined, highlighting its unusual strength in turning abstract theory into practical products. Biotechnology (a broad category that describes the use of biological systems to create medical, agricultural, and industrial products) is also dominated by the United States. Biotech revenues in the United States approached $50 billion in 2005, five times as large as the amount in Europe and representing 76 percent of global biotech revenues.

Manufacturing has, of course, been leaving the country, shifting to the developing world and turning the United States into a service economy. This scares many Americans, who wonder what their country will make if everything is "made in China." But Asian manufacturing must be viewed in the context of a global economy. The Atlantic Monthly's James Fallows spent a year in China watching its manufacturing juggernaut up close, and he provides a persuasive explanation of how outsourcing has strengthened U.S. competitiveness. What it comes down to is that the real money is in designing and distributing products -- which the United States dominates -- rather than manufacturing them. A vivid example of this is the iPod: it is manufactured mostly outside the United States, but most of the added value is captured by Apple, in California.

Many experts and scholars, and even a few politicians, worry about certain statistics that bode ill for the United States. The U.S. savings rate is zero; the current account deficit, the trade deficit, and the budget deficit are high; the median income is flat; and commitments for entitlements are unsustainable. These are all valid concerns that will have to be addressed. But it is important to keep in mind that many frequently cited statistics offer only an approximate or an antiquated measure of an economy. Many of them were developed in the late nineteenth century to describe industrial economies with limited cross-border activity, not modern economies in today's interconnected global market.

For the last two decades, for example, the United States has had unemployment rates well below levels economists thought possible without driving up inflation. Or consider that the United States' current account deficit -- which in 2007 reached $800 billion, or seven percent of GDP -- was supposed to be unsustainable at four percent of GDP. The current account deficit is at a dangerous level, but its magnitude can be explained in part by the fact that there is a worldwide surplus of savings and that the United States remains an unusually stable and attractive place to invest. The decrease in personal savings, as the Harvard economist Richard Cooper has noted, has been largely offset by an increase in corporate savings. The U.S. investment picture also looks much rosier if education and research-and-development spending are considered along with spending on physical capital and housing.

The United States has serious problems. By all calculations, Medicare threatens to blow up the federal budget. The swing from surpluses to deficits between 2000 and 2008 has serious implications. Growing inequality (the result of the knowledge economy, technology, and globalization) has become a signature feature of the new era. Perhaps most worrying, Americans are borrowing 80 percent of the world's surplus savings and using it for consumption: they are selling off their assets to foreigners to buy a couple more lattes a day. But such problems must be considered in the context of an overall economy that remains powerful and dynamic.