Can the U.S. Continue as World Leader? Lecture by Robert M. Coen Emeritus Professor of Economics Northwestern University Alumnae Continuing Education November 9, 2010

United Kingdom: Late 18th to late 19th century Dutch had highest productivity, but little productivity growth Spurs to UK productivity growth: Higher capital investment than Dutch Promotion of free markets, international competition Technical advances: textiles, iron & steel, steam power, railways Application of scientific principles, but why in UK? See R. C. Allen, The British Industrial Revolution in Global Perspective Property rights more secure in France Italy and Germany develop science of steam engine Dutch were highly urbanized, higher literacy rate Military demands of Royal Navy create demand for technology Development of patent system High wages, cheap coal, consumer society

Reasons UK Dethroned Did not explicitly foster education and technology Capital stock grew slowly; savings available, but foreign investment as large as domestic Diffused growth process to follower countries through free trade, foreign investment, exportof technology Currency became overvalued

US: Late 19 th century to ? US advantages: Abundant natural resources High rates of investment (twice UK in ), including public investment in infrastructure and education Large, free domestic market fosters large companies enjoying scale economies, funds for research Protectionist trade policies, slavery Position strengthened by two world wars

Growth Accounting for Leaders Annual Growth Rates (percent) GDP per Capital per laborper labor Tech LeaderPeriod hour hour progress* Dutch na 0 UK UK US Source: Angus Maddison, Phases of Capitalist Development * Author’s estimate assuming 1 percent increase in capital per labor hour increases GDP per labor hour by 0.33 percent.

Lessons from Past Leadership Changes Leadership requires large GDP, not just high GDP/N Leadership in banking and finance, not just production Leader should resist tendency for overvaluation of currency Economy should be open to people, trade, ideas Economy must be conducive to technical progress

Securing US Leadership after World War II Post World War II reconstruction Floating the dollar in 1971 Maturing of the dollar as a world currency Facilitating export-led growth in Asia

International Economic Flows Dollars in: Exports of goods and services Transfers from foreigners Profits received from foreign investments Foreign investments in US Dollars out: Imports of goods and services Transfers to foreigners Profits paid to foreign investors US investments abroad

US Trade Balance by Type of Product, 1967 and 2006 Billions of dollars Change Goods and Services Goods Foods Industrial supplies Petroleum Capital goods Autos Consumer goods Other Services

Why Trust in the Dollar? A large, open economy to run payments deficits large enough to meet world currency needs An independent, responsible central bank -- the Federal Reserve A large, efficient commercial banking system Large, deep, and open capital markets Relatively stable prices A convertible currency A relatively stable exchange rate with other major currencies A track record demonstrating these characteristics

Challengers to US Leadership: Past and Future USSR (Russia) Japan European Union Emerging Asia

Soviet Empire Red states: Communist governments Orange states: Leaning communist

Real GDP per capita, dollars Ten highest in 2007 Country Luxembourg14,94522,90627,35943,65863,39277,783 Austria5,57314,84320,90226,02331,57436,032 Netherlands8,84017,38721,03024,61931,92734,392 Denmark8,57116,22319,05523,93930,46834,292 Belgium7,52914,89420,32724,55929,69233,798 Sweden9,25217,00319,62923,45427,17432,962 Finland5,67413,26617,84522,79426,40232,486 United Kingdom8,85913,99016,68121,74227,03232,181 Spain3,52711,56114,74219,11224,94531,446 Germany15,36420,00024,59929,05131,306 EU average6,36212,47816,37519,59423,55727,275 Euro zone average5,37413,97518,44122,36126,81429,975 US12,99019,74924,53730,99439,24142,887

Real GDP, billion of dollars Ten largest in 2007 Country Germany1,1951,5661,9532,3882,580 United Kingdom ,2501,6091,956 France ,0861,3761,6701,887 Italy ,0381,3151,5671,676 Spain ,272 Netherlands Poland Belgium Sweden Greece EU total1,3875,1697,1209,21211,49813,469 Euro zone total8423,8305,3086,8608,5169,685 US1,9784,0505,5887,75311,07212,921

Real GDP per capita, dollars Country Singapore6,31413,39921,43035,42444,619 Hong Kong8,06215,60525,91832,55043,121 Japan2,63613,85618,82026,38528,34130,585 Taiwan3,1236,65712,43221,51227,005 Korea3,0585,46811,90818,59723,850 Thailand1,2521,9212,98855,1977,0589,406 China7961,1331,9294,4147,868 Indonesia1,2362,2053,2174,1515,186 Philippines1,4812,6213,5363,3863,9554,791 India8071,2331,4292,0022,6873,826 Weighted average1,1641,9052,5654,8235,3747,584 US12,99019,74924,53730,99439,24142,887

Real GDP, billions of dollars Country China6531,1162,2155,60110,401 India ,6782,6984,323 Japan2211,4462,1983,2593,5923,898 Indonesia ,217 Korea ,151 Taiwan Thailand , Philippines Hong Kong Singapore Total5763,2945,38211,97915,24323,173 US1,9784,0505,5887,75311,07212,921

Indicators of International Trade and Finance Foreign Currentexchange Tradeaccountreserves balance + gold $billion% of GDP$billion Asia China ,422 Hong Kong India Indonesia Japan ,024 Korea Malaysia Singapore Taiwan Thailand Europe Austria Denmark France Germany Greece Netherlands Russia Sweden Switzerland UK US

Indicators of Scientific and Engineering Activity ChinaIndiaJapanKoreaUSGermany Researchers in R&D, 2006* ,5684,1874,6633,392 Techinicians in R&D, 2006* ,200 Science & engineering students** R&D exp, % of GDP, High-tech exports, % of manuf. exports, Scientific & technical journal articles, ,71418,19452,89618,467209,69544,408 Patent applications - residents, ,4854,521367,960122,188207,86748,367 Patent applications - non-residents,200580,15567,69638,979187,95712,685 Trademark applications, ,14885,669136,050123,064264,51080,091 Personal computers per 1,000, *per million people; 2000 data for India **% of tertiary level students, , latest year available