Why the U.S. Losing Its Status as a Global Economic Leader

(Photo credit: Karen Bleier/AFP/Getty Images)

Karen Bleier/AFP/Getty Images

The United States has been the world’s premiere economic powerhouse for about a century, and this status alone has made the nation a leader on the world stage. America first picked up the crown shortly after WWI by riding a wave of domestic industrial development into the new age of truly global economics. The U.S. held the crown, white-knuckled, through the Great Depression, but was once again able to capitalize on war in Europe. By the end of WWII, America was almost unquestionably the biggest superpower and naturally jockeyed for position with its then-rival, the U.S.S.R.

America enjoyed generally robust economic growth throughout most of the Cold War and the subsequent 25 years, and has held its position at the head of the economic table with confidence. But today, five years after the financial crisis, that position is being challenged. The Organization for Economic Co-operation and Development (OECD) suggests that the balance of economic power is shifting dramatically, and over the next 50 years many economists believe that China and even India will rise to the top of the pack.

And economists aren’t the only people who think this way. According to a 2013 survey conducted by Pew Research, pluralities or majorities in only 22 out of 39 nations represented say the U.S. is the world’s leading economic power. Already, eight countries think China is the leading power; the U.S. claimed a median 44% of votes to China’s 30%. Perceptions vary greatly by region, but even here in the U.S., a 44% plurality say China is the leading power.

Of course “None of these forecasts are set in stone,” as OECD Secretary-General Angel Gurría is keen to say, there are simply too many unknowns, but the beginnings of this shift are evident.

Over the past few years, for example, the U.S. stock market has done so well that the S&P 500, a benchmark index of stock in most of America’s largest companies, is currently setting fresh record highs on a regular basis. The index is up more than 90% over the past half-decade, outpacing the long-term average rolling five-year increase of about 69%. The S&P 500 did so well last year, in fact, that it actually outperformed the famous money manager Warren Buffett, which has only happened in 10 of the last 49 years.

At a glance, this is great news. The index is as good an indicator of business activity as any, so if the S&P 500 is up, then businesses must be doing well. Case in point, after-tax corporate profit hit a record high of $1.8 trillion in the second quarter of 2014, about 30% higher than peak pre-crisis profits. Gross domestic product (GDP) is also as high as it has ever been at $17.54 trillion (unadjusted annual rate, Q3 2014), up 3.5% annually, suggesting a generally robust recovery in the overall economy.

But these seemingly impressive post-crisis financial gains have been overwhelmingly captured by the already-affluent. According to a paper published by Emmanuel Saez at UC Berkeley, average incomes for the bottom 90% of earners grew just 0.4%. By contrast, the top 1% of incomes grew by 31.4%, capturing 95% of all gains during the recovery. As it stands, the top 10% of income earners in the U.S. claim 50.4% of all income, the highest share since 1917.

This level of economic inequality is both unenviable and unsustainable. Pervasive, outrageous economic inequality is one of the major forces undermining the U.S. economic machine, and if left unchecked, it will continue to erode. This erosion is one of the catalysts behind the apparently inevitable decline of American leadership in the global economy.

Unemployment Cheat Sheet Workbench - Sheet4

Recreated from: “Striking it Richer: The Evolution of Top Incomes in the United States”.

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