1. 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

2. 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

3. 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

4. US: Late 19 th century to ? US advantages: Abundant natural resources High rates of investment (twice UK in 1890-1950), 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

5. Growth Accounting for Leaders Annual Growth Rates (percent) GDP per Capital per laborper labor Tech LeaderPeriod hour hour progress* Dutch1700-1785 -0.1 na 0 UK1785-1820 0.5 0.0 0.5 UK1820-1890 1.4 0.9 1.1 US1890-1979 2.3 2.4 1.5 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.

6. 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

7. 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

8. 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

10. US Trade Balance by Type of Product, 1967 and 2006 Billions of dollars 19672006 Change Goods and Services3.6-769.3-772.9 Goods4.4-860.5-864.9 Foods0.4-8.9-9.3 Industrial supplies0.1-24.1-24.2 Petroleum-2.1-302.4-300.3 Capital goods7.4-16.0-23.4 Autos0.4-149.3-149.7 Consumer goods-2.1-317.0-314.9 Other0.3-42.7-43.0 Services-0.991.292.1

12. 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

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

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

15. Real GDP per capita, dollars Ten highest in 2007 Country195019701980199020002007 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

16. Real GDP, billion of dollars Ten largest in 2007 Country195019701980199020002007 Germany1,1951,5661,9532,3882,580 United Kingdom4447789391,2501,6091,956 France2757691,0861,3761,6701,887 Italy2257231,0381,3151,5671,676 Spain993925537529981,272 Netherlands89227297368508570 Poland184290274419558 Belgium65144200245305351 Sweden65137163202242298 Greece106163172219297 EU total1,3875,1697,1209,21211,49813,469 Euro zone total8423,8305,3086,8608,5169,685 US1,9784,0505,5887,75311,07212,921

17. Real GDP per capita, dollars Country195019701980199020002007 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

18. Real GDP, billions of dollars Country195019701980199020002007 China6531,1162,2155,60110,401 India2996839791,6782,6984,323 Japan2211,4462,1983,2593,5923,898 Indonesia1513325858881,217 Korea992085108711,151 Taiwan45117252476616 Thailand25711403,047437612 Philippines31101180220321451 Hong Kong3279147217301 Singapore133265143203 Total5763,2945,38211,97915,24323,173 US1,9784,0505,5887,75311,07212,921

19. Indicators of International Trade and Finance Foreign Currentexchange Tradeaccountreserves balance + gold $billion% of GDP$billion Asia China182.94.92,422 Hong Kong-41.18.3256 India-123.1-1.7275 Indonesia21.41.266 Japan86.83.31,024 Korea43.53.2270 Malaysia35.414.796 Singapore25.918.4188 Taiwan13.99.3353 Thailand12.75.6138 Europe Austria-4.91.918 Denmark14.53.477 France-67.2-2.0133 Germany208.25.2181 Greece-42.0-5.85 Netherlands51.06.240 Russia149.84.3439 Sweden8.26.547 Switzerland19.811.0135 UK-140.8-1.867 US-621.4-3.3131

20. Indicators of Scientific and Engineering Activity ChinaIndiaJapanKoreaUSGermany Researchers in R&D, 2006*9271115,5684,1874,6633,392 Techinicians in R&D, 2006*865805871,200 Science & engineering students**432521321947 R&D exp, % of GDP, 2007113333 High-tech exports, % of manuf. exports, 200730519332914 Scientific & technical journal articles, 200759,71418,19452,89618,467209,69544,408 Patent applications - residents, 200593,4854,521367,960122,188207,86748,367 Patent applications - non-residents,200580,15567,69638,979187,95712,685 Trademark applications, 2005659,14885,669136,050123,064264,51080,091 Personal computers per 1,000, 200015.94.5315.2237.9585.2336.0 *per million people; 2000 data for India **% of tertiary level students, 1987-1997, latest year available