It is widely conceded and often remarked that in this still young 21st century both the relative and the absolute power of the United States are, by any historical standard, simply remarkable. Some draw comparisons to 19th-century Britain, when its fleet ruled the oceans and the sun never set on its possessions. Others draw parallels to Rome.America’s overt power is most readily appreciated in the military sphere. Even if it cannot seem to wholly master the arts of counterinsurgency, no one doubts that the U.S. military can project massive power anywhere on earth, as no other state can. But the roots of that capacity lie ultimately in America’s wealth, and it is here that questions, anxious or expectant depending on who is doing the asking, have arisen about the likely longevity of U.S. global power. Has there ever been a power as great as the United States that has been a debtor as opposed to a creditor nation? There is no parallel with Britain or Rome here. Indeed, America’s trade and budget deficits have raised doubts about the stability of America’s fundamental economic condition, as has the erosion of the U.S. manufacturing base in the face of foreign challenge. The possible end of the special global reserve currency status of the dollar in the face of the euro, and perhaps a new continent-spanning Asian currency, only magnifies the implications of these trends. Most recently, evidence of the rapid opening up of the international economy’s services sector has raised fears that outsourcing will impoverish whole new areas of the U.S. economy, forcing the ruthless logic of globalization back upon the society that pioneered and promoted globalization itself. Is American unipolarity bound to be short-lived on account of economic vulnerability? The American Interest asked Allen Sinai and Philip Merrill a series of questions about the U.S. economy in relation to America’s global power and role.
How important is the size and nature of the U.S. Economy in defining power in today’s world?Allen Sinai: The size, nature and economic strength of the U.S. economy are extremely important in defining global power relations — political and otherwise. Indeed, throughout history economics has been front-and-center in determining how the fortunes of nations have risen and fallen. It is hard to separate economic strength from military strength in defining power relations. A country’s military dominance over others, or expansion of its regional hegemony, has often contributed to economic power, which, in turn, has reinforced political and military power. The size of the U.S. economy, its growth rate, its economic performance and its attractiveness as a place to invest, work and live are therefore essential ingredients for the United States to remain the global leader among nations. And, as throughout history, that leadership position is essential for maintaining U.S. economic strength. What is different about today’s world is that the setting of contemporary global economics and politics is such that no country is an island. Interdependence with other countries — with economics as a main driving force of that interdependence — is more of a reality than ever before. Philip Merrill: It’s the key. The main threat we face today is the prospect of having to deal with weapons of mass destruction in the hands of mostly non-state crazies in what used to be called the Third World. But the central fact of the 21st century is the enormous size of the U.S. economy compared with everyone else’s. Contrast this with the dominant political fact of the 20th century, which was the growth of huge military forces in the hands of totalitarian states that were willing to use them. It is as though we have lived on two different planets. It’s hard to exaggerate the relative size and dynamism of the U.S. economy. In 2004, the U.S. gross domestic product (GDP) stood at $11.7 trillion, up $700 billion from 2003. Now consider certain points of comparison. The next largest economy to ours is Japan’s — at $4.7 trillion. Germany and France are $2.7 trillion and $2 trillion respectively — but all three of these economies are stagnant and more likely to shrink than to grow over the next decade. Shrinkage is also the likely fate of the economy of our Cold War adversary, Russia. Despite the surge in oil prices in recent years, which has nearly doubled the size of the Russian economy, Russia’s GDP is smaller than $600 billion. That is about 5 percent of U.S. GDP. In round figures, Russia is about the economic equivalent of Holland. And as Russia’s population declines, as all projections predict, and its leaders continue to re-centralize power in the state, its economy will likely decline as well. Other large economies are growing, however. China’s GDP is about $1.6 trillion, India’s about $700 billion. Brazil’s GDP is about the same. Of course, purchasing power parity comparisons would increase significantly the relative size of these emerging economies, but even so, the broad-brush picture remains the same. The gaps are huge by any measure and will take a very long time — and very large investments in infrastructure — to overcome. For example, the Export-Import Bank of the United States recently approved a preliminary $5 billion commitment for Westinghouse and Bechtel to build two large nuclear power plants in China, each one larger than Maryland’s Calvert Cliffs nuclear power station. China plans to build two of these plants each year for the next 30 years. If those plans become a reality, which is likely whether we build them or the French do, nuclear power will increase from its current 1.7 percent of the Chinese national power requirement to about 4 percent. That’s a huge investment for a less than dramatic impact. The fact is that the United States is driving the world economy more definitively than at any time since the 1960s. This is not just because of its size, but because of its innovative capacities in science and technology — the driving force behind modern economic growth — and its innovative means of management and marketing. American wealth, and the manner of its creation, is defining our age. Is the U.S. economy likely to keep growing, or will various factors work against that prospect? Allen Sinai: On average, the U.S. economy is likely to grow relatively strongly over the next few decades, as always with ebbs and flows from the business cycle. There is no reason to expect anything less than 3 percent-or-so growth per year, which approximates historical trends. Indeed, we may expect somewhat better performance depending on the pace of productivity growth. As population growth and thus labor force growth slows, the potential for the U.S. economy to grow will also slow in comparison with the last decade or two. But 3 percent annual growth in real GDP is still relatively strong, especially when compared with the growth rates of other major industrialized countries in the G-8. Of course, there will be periods of slower-than-average growth, in part because the business cycle is now probably a 4-to-7 year recovery-expansion-boom-peak-recession pattern, instead of the 3-year-or-so short-run business fluctuations of the past. The mechanisms of the business cycle and the internal workings of a market-oriented capitalist system will inevitably produce fluctuations within a basic long-run growth trend. But long-run growth of the U.S. economy has outstripped all other developed countries’ long-run performance. For a long time now the United States has averaged about 3 percent growth a year despite all kinds of global and domestic perturbations. We have experienced wars, competitive challenges from emerging global economies, such as Japan in the 1980s and now China, and outsized oil price shocks. We have also endured myriad changes in political and economic orders worldwide — the birth of the World Trade Organization and the end of the Cold War, to mention just two. And through it all — leaving aside the recessions and inflation of the 1970s and 1980s, the mechanics of which are now understood and likely to be averted — the U.S. economy grew. The resiliency of the U.S. economy, the ingenuity of the American people, and the flexibility of policymakers in responding to external and internal shocks are, I believe, advantageous cultural characteristics of the American system that will not go away anytime soon. Philip Merrill: To answer that question, it’s a good idea to look backwards. No one disputes that the U.S. economy today is simply enormous. But not everyone predicted that it would be. Estimates have almost always been wrong, and they’ve almost always been wrong by being far too low. The historic average annual growth rate for the United States over more than 200 years has been about 3 percent. The 30-year bond rate is currently 5 percent. Reasonable people have set the assumption for a pension plan to be actuarially valid at 7.7 percent, and rarely is that assumption disappointed. The average annual growth rate of the U.S. stock market for more than a century has been 11 percent. If we conservatively assume the 3 percent historic growth rate of the economy, and add 2 percent for inflation, ceteris paribus, in 30 years we will have a $50 trillion economy. That’s a lot of money, but this is a conclusion that should not surprise anyone familiar with the basic data of U.S. economic history. In 1962, the U.S. GDP, in today’s dollars, was about $580 billion. In just 40 years, we have created more than $100 trillion in new net worth. Now that’s really a lot of money — a lot of real wealth. This is a level of wealth creation without historic parallel. The Spanish control of Latin America, the Dutch trade with the East Indies, and the British Raj in India all look like marginal investments by comparison. There is no 20-year period in U.S. history — not 1850-70, not 1919-39, not 1940-60 — from which we did not emerge as a far stronger country economically. In the past 40 years, however, we have seen the results of growth that has worked essentially like compound interest. No, we have not repealed the business cycle. But the hills and valleys have been leveled in ways that reduce the lows and emphasize more regular growth. Our growth has had elements of exponential expansion for a long time, but it took until recent decades for the slope of the curve to really head upwards. This has produced a kind of tectonic shift in the world’s economic geology, a shift that has been recognized more clearly by observers in other countries than by Americans, probably because distance affords them a better perspective from which to appreciate the trend. These historical data suggest that the United States continues to show an amazing capacity for productivity growth and economic reinvention. We have an entrepreneurial spirit. And we benefit from a degree of mobility in labor, management and capital that no other economy can match. Most likely, then, the best is yet to come for the U.S. economy. Within the normal business cycle — including savings, surplus and deficit projections — I believe that the United States will continue to experience explosive growth during the 21st century, just as it has over the past two centuries. Even if the U.S. economy does well in the future, won’t the growth of other countries diminish the relative clout of U.S. economic power? In our age, what are the political implications of that diminished economic clout? Allen Sinai: As other countries in the global economy grow, it is inevitable that the relative clout of U.S. economic power will diminish. Assuming there are no major global wars or unexpected conflicts, a wholesale shift in economic power is unlikely. Instead, a more closely integrated global economy will emerge with certain regions driving global growth forward. The U.S. share of global GDP will have to diminish, if only because other countries with low shares now — particularly those in Asia but perhaps also some in Europe and other regions — will grow at a much faster rate than the global average (for reasons related to development and entry into the global economic system). Less unilateral U.S. dominance of the global economy must inevitably result in less U.S. dominance in global politics, and thus more collaborative partnership arrangements. And yet one can still say that none of this is likely to diminish U.S. economic clout, and hence U.S. political influence, in any dramatic way. Philip Merrill: It’s possible that America’s relative economic power will diminish, but it’s a fundamental mistake to see international economic competition as a zero-sum situation. No one would assert that the United States today would be better off if Germany, Japan and other major economies in Europe and Asia were as weak today as they were at the end of World War II. Likewise, the United States won’t be better off if China and India are poor. On the contrary, we’ll all be better off if they’re doing well economically, and that’s mainly because of trade. Most Americans do not understand how important exports have become to the U.S. economy. Exports have risen from $42 billion in 1963 to $1.2 trillion a year today. One way or another, one U.S. job in ten is export-dependent. And with 19 out of every 20 people in the world living outside the United States, that’s where our growing markets lie. That is why the debate about outsourcing is often skewed and leads to misunderstanding. Of course, there is pain in an American losing a job, especially if it’s your job. There is a natural desire to blame someone — and government policy is an obvious target. But if we have outsourced 600,000 to 700,000 U.S. jobs in recent years, we have also insourced at least 6 or 7 million. The German company Siemens employs more than 70,000 people in the United States. Japanese and German automakers employ thousands upon thousands more. So do other French, Dutch and British firms, and the list goes on. When a job is created in the United States, regardless of where the capital comes from or where the corporate management sits, it’s seen as normal. No one gives the U.S. government credit for helping to attract that investment. But government policy gets blamed for outsourced jobs, particularly when a manufacturing job loss can be traced directly to a foreign producer. Nevertheless, Americans have the most to lose in a trade war — 13 million jobs, or about 10 percent of the U.S. workforce. U.S. trade policy must reflect the maintenance of these export-related jobs as well as other jobs, or it would be a very foolish policy indeed. Which countries are most likely to be America’s economic competitors in the years ahead? Allen Sinai: China and India, so long as they manage their economies and foreign policies well, will without a doubt supplant some portion of the U.S. share in the global economy — and thereby gain considerable political influence. History is clear on this — with economic power comes political power and influence, if only because countries’ allegiances change depending on where business is best. This can readily be seen in Asia, where the power lineup has changed immensely because of China’s strong, dynamic growth. China’s influence on business and finance in Asia and, eventually, in the whole of the global economy is clearly going to grow. China is now Japan’s number one trading partner. Japan, previously leery and cautious in dealings with China, now regards China as a “friend.” South Korea also counts China as its largest trading partner. The economic opportunities in China and the huge Chinese market are attracting a tremendous amount of foreign direct investment. Firms and financial institutions of every sort and from nearly every country are seeking entry into China, establishing production plants and regional corporate headquarters there. This represents a huge migration away from Tokyo and Singapore as the economic and financial centers of Asia. Philip Merrill: Europe will continue to be a major player, especially if its integration policies continue, and Japan too. But the most dynamic competitors will probably be China and India. China, which has been concentrating its efforts on expanding its economy, is a country that understands the connection between free market systems and economic growth. Compared, for example, with Russia, the Chinese have been quite successful. China had a $175 billion trade surplus with the United States last year and has Wal-Mart as its distribution agent — with $18 billion in annual sales to that one company alone. In rapid succession during the last two years, China surpassed first Japan, then Mexico, to become the second-largest source of U.S. imports after Canada. China has also become the fourth-largest purchaser of U.S. exports. While it is making fast progress in developing its economy, China nonetheless has a long way to go, including major internal political barriers yet to be overcome. India also has made striking economic progress in recent years. Its real GDP has grown by an average of 6 percent per year during the last 15 years, and its high-tech industries are flourishing. But India starts from a very low baseline and still lags far behind China, which has become almost twice as rich on a per capita basis. With some modification of the “permit raj” system in India, but still far from sufficient infrastructure, India has a remarkable new sense of self-confidence. Indian businessmen find they have a favorable export ratio with China, even in sectors like auto parts, and they revel in their achievements. Every time a story about U.S. outsourcing to India appears in the American press — which is nearly every day — India’s extensive and varied popular press runs large headlines highlighting India’s successes. Indian business leaders lately sound a little like King Kong, pounding their chests and crying out, “Hey, we can compete with the Americans, too!” This is something new. Unlike China, India is a stable, democratic country, though one very different from the United States. With its democratic institutions and English-speaking educational system, India could very well overtake China in a few decades. But whether or not it does, both India and China will continue to lag far behind the United States in all relevant economic categories. Neither will displace us, and the gaps between our wealth may even grow. What happens if China determines to translate its growing wealth into military power? Is that an argument for curtailing U.S. trade with China now, as some argue? Allen Sinai: How China uses its increased economic power and influence in the global political arena is one of the crucial unanswered questions of the future. There is no doubt that China’s growing economic might makes it a powerful global force. China’s ascendancy will not resemble that of Japan in the 1980s, if only for reasons of sheer scale. Nor can the United States expect China to make the mistakes that Japan has made to undermine its political standing and wealth. The motives of countries on the rise are never entirely clear. History is filled with examples of pathologically ambitious leaders and countries. But although history tells us to be cautious, we cannot relate to China based on the empire-seekers of the past. We must begin with the assumption that China will be rational in its economic and political relationships, seeking for its citizens improved security and a rising standard of living. Certainly then, until China proves that expectation wrong, our approach toward it should not be characterized by threats. The curtailing of U.S.-China trade through protectionism would essentially be just that, and this is exactly the wrong approach to take with a country that is just entering the global system. China’s current motivations seem to be mostly economic ones and not, as has been the case so many times in history, dominance over other countries driven by some irrational view of how the world system should line up. Philip Merrill: It would not be unnatural for China to invest more in its military. Nor would it be surprising for many to see that effort as directed ultimately at the United States. But China’s military spending so far is very small compared to ours. In some years our supplemental spending exceeds the entire Chinese military budget. Objectively speaking, our military continues to grow stronger and more advanced each year compared with China’s. That does not mean there are no conditions under which China would challenge the United States, nor does it mean China will be deterred from attacking or intimidating other countries. But there is good reason to keep all this in perspective. More important, our trade deficit with China is “cheap” if it helps China evolve into a market-oriented society rather than a military adversary of the old-fashioned imperialist-mercantilist sort, which would really raise our own military costs. But that old-fashioned imperial path is not likely for China. Visitors to China in recent years, myself included, are invariably struck by the market orientation of Chinese government ministers and staff. They are all members of the Communist Party, true, but so are most bank and company presidents there. They all sound like members of the National Association of Manufacturers, talking in terms of profits, market share and return on capital. If there is nothing particularly communist about China’s contemporary political elite, there is still plenty that is authoritarian. Their legitimacy is based not on any ideology, but on a self-assessed ability to deliver jobs and basic services. For them, it’s like the old college song, “We’re Here Because We’re Here.” Of course, whether their market orientation will eventually curb their military enthusiasm or vice versa remains to be seen. I am cautiously optimistic. How dangerous are the twin deficits we are currently running? Allen Sinai: The so-called twin deficits — trade, or current account, and budget — represent a dangerous and threatening imbalance in the U.S. economy. Trade deficits represent a country’s purchasing more goods and services abroad than it sells abroad. Budget deficits represent the amount by which federal government outlays exceed tax receipts. The debt and potential debt service associated with financing both deficits could exert a huge drag on the performance of the U.S. economy and ultimately Americans’ standard of living. At present, with the trade deficit at a record high relative to GDP, the federal budget deficit also high (but not at record levels) and low interest rates, the twin deficits do not present an imminent problem. A strongly growing economy can finance such deficits and pay the service on the debt. And if the underlying economy is strong and inflation low, there is little reason to fear a wholesale dumping of holdings of U.S. debt and stocks or a run on the dollar. If, however, the deficits were to continue rising in absolute terms and as a percentage of GDP, and if debt and debt service rise relative to the size of the U.S. economy, then the credit worthiness of the United States, the safety and stability of the dollar, and the future of U.S. economic activity could be called into question. In such a situation, foreign investors and lenders might well curtail the new money flows we need to finance ongoing deficits and might even, under stress, sell some of their outstanding U.S. holdings. Financial markets would react negatively as a result: The dollar would fall, interest rates would rise, and the stock market would decline. All of this would in time negatively affect the growth of the U.S. economy, forcing a reduction in consumer spending and an increase in saving, with the result being a lower standard of living for the American people. Currently, the out-year prospects for the trade and budget deficits are daunting. Between 2007 and 2012, the deficits are expected to rise sizably and to generate increased debt relative to GDP. Whether inflation and interest rates are much higher will be key determinants of how burdensome these deficits will be. But there is a significant risk that, during this period or perhaps before, financial markets and the economy might suffer. Preemptive planning must be taken to deal with these out-year deficits and their potential consequences. Controlling the growth of federal spending (both defense and non-defense), rationalizing central government institutions to increase productivity and cost-effectiveness, and instituting a tax system that provides the most economic growth per dollar of tax revenue are important objectives. Unfortunately, societies such as the United States do not typically react to problems before the sky actually falls. Given this historical fact of life, twin deficits represent a distinct danger on the road ahead. Philip Merrill: Insofar as deficits say something about Americans’ spending habits — notably a lack of providence, as it used to be called — it’s nothing to sniff at. But I think the economic problem, more narrowly construed, is vastly exaggerated. So long as the U.S. economy is growing faster than either our trade or budget deficit, they are not critical problems. Currently, U.S. annual growth is greater than the $600 billion trade deficit or the $400 billion budget deficit. So I do not worry overly much about this. Nor should anyone else. Ask yourself this question: If the value of your home increased over time at a rate greater than the interest rate on your mortgage, would you worry about that? Or would you celebrate? Of course you wouldn’t worry, and that’s more or less our situation with the ratio between the growth of our economy and our deficits. I don’t worry either about politically motivated attempts to wreck the U.S. economy by suddenly moving huge amounts of invested dollars out of the United States. There is simply no other economy in the world large enough and reliable enough to house all that investment. Of course, if U.S. growth were to substantially slip, and the twin deficits substantially expand, that would be another matter. We are not powerless before such possibilities, however, and we can and must do what needs to be done to maintain a sensible balance. What about the value of the dollar? Is that something we should worry about? Allen Sinai: The value of the U.S. dollar normally does not play an important role in the behavior of the U.S. economy, but a dollar that kept falling could increase exports at the cost of higher inflation and higher interest rates. A gradually fluctuating dollar, however, and one that declines or increases irregularly but still essentially gradually, should not impact U.S. economic performance very much. Lately the dollar has been doing well, contrary to the views of many who thought that large and rising trade and budget deficits would bring it crashing down. The “crash” view never had much credence, though if the deficit trends continue they could eventually contribute to a much lower dollar. In that case, Americans would be poorer internationally, with higher inflation at home and higher costs for goods and services purchased abroad. But the odds are that most people will have enough advance warning to factor such a risk into the kinds of decisions that depend on the U.S. currency. More important for the dollar are other factors: how the U.S. economy grows, relative interest rates between the United States and its major trading partners, the solidity of the U.S. political system versus those of other trading partners, and the attractiveness of the United States as a place to lend and invest. So long as U.S. growth and low inflation continue apace, however, the dollar and its behavior should not be of any particular concern. Philip Merrill: No. The decline of the dollar makes it increasingly difficult for Europeans to export. Since it is difficult for them to break out of their “social contract” and to compete for foreign markets, the result is to make U.S. exports more competitive. The problem of European exports is not our problem. It’s a problem for Europeans, and I’m not inclined — and neither is President Bush — to solve this particular problem at our expense. What about the low savings rate of Americans? Doesn’t that affect both our deficits and the value of the dollar? Allen Sinai: The low personal savings rate of U.S. households is a puzzle of the U.S. economy. It is part of a set of imbalances, including strong spending and borrowing by households, pervasive now for many years. Ultimately, the U.S. government, and particularly households, will have to save more, correcting the imbalances reflected by low savings and high trade and budget deficits. Hopefully, this will come about through appropriate macroeconomic and structural policies and voluntary modifications of behavior, rather than through the painful marketplace adjustments of a long period of weak economic growth or recession. It should be pointed out that the low personal savings rate of households is somewhat overstated. Its calculation reflects simply the subtraction of consumption and interest payments from income. Not all funds are counted as income, however, and consumption can rise because of increased wealth, for example, or because of capital gains realizations from price appreciation on property or stocks. In the latter case, the gains essentially provide funds equivalent to income but are not fully counted as disposable income. The increased expenditures that come from capital gains realizations get subtracted from income, which results in a distorted, low savings picture that is not really reflective of the financial position of households. Taking account of savings from equity in real estate, stocks and retirement funds gives a better picture of the savings rate for American households. When this is done, the low U.S. savings rate represented in the National Income and Product Account personal savings rate calculation appears much greater and the problem of chronically low savings for households is not nearly so troublesome. Philip Merrill: The savings rate of Americans is only low if we accept the professional economists’ definition of what constitutes savings. I don’t. For example, the equity that people put into their homes is not considered savings in standard professional economic statistics. But in America, which is very much an ownership society in which most people’s main savings is the equity on their home, this is a misleading omission. So is the inability to account adequately for the value of intellectual capital. Americans do save, but not mainly by stashing cash in a bank. I don’t worry about our savings rate any more than I lose sleep about deficits or the dollar. If you were to rank America’s economic vulnerabilities, those most likely to affect the world over the next few decades, what would that ranking look like? Allen Sinai: The picture of America going forward is bright. Its history and ability to flexibly respond to challenges of all sorts suggest optimism is appropriate for the future. There is something about the American people, institutions, leaders, way of life and mixed capitalist economic system that has made America a major, if not the principal, force in economics and global politics for decades. Certainly there are economic vulnerabilities and risks. First among them are the imbalances on the federal budget and current account, which require borrowing and investment from outside the United States on an ongoing basis. So long as inflation and interest rates are low, debt accumulation not too high and the pace of GDP growth outstrips that of the debt and debt service, the deficits are sustainable and American economic vulnerability minimal. But because these conditions may not always hold, these imbalances must be considered as the greatest longer-term risk to the U.S. economy. A second risk, more near-term, is the ever-present danger of inflation, which puts a premium on the ability of the Federal Reserve to maintain price stability and sustainable growth. Historically, the U.S. economy has inherently generated higher and higher inflation, routinely requiring restrictive monetary policy to keep it at controllable levels. This persistent characteristic of the U.S. economy is a continuing danger amid other present concerns. A third concern has to do with geopolitics — specifically, the destabilizing effects of terrorism. While the U.S. economy has absorbed and recovered from the shock of September 11, no economy or system is invulnerable to repetitive, vastly destructive acts of terrorism. Certainly, the economic growth of the United States and other global economies is slower today than would otherwise be the case because of these risks. Finally, the uncertainty surrounding the ascent of China has to be listed as the fourth vulnerability. One must accommodate shifting economic and political power structures, shifts that have occurred throughout history with the rise and fall of nations. We need a coherent international policy that encompasses China’s increasing economic and political clout, recognizes its economic and competitive challenge, and establishes the institutions and relationships that will be necessary to cope with the dominance of Asia by one country. However, while the global power lineup may be shifting, U.S. leadership will be a reality for a long time to come. Philip Merrill: We have a few problems, to be sure. One minor and immediate problem, and one serious and long-term problem, come readily to mind. The minor problem is the current real estate/housing bubble, and the general effects of that bubble throughout our economy. Herb Stein once said that “anything that can’t sustain itself, won’t.” Of course he was right. There is likely to be a 30 percent collapse in U.S. housing prices in the near future, but from a peak that will only be recognized in hindsight. The way to cool the housing bubble would be for interest rates to gradually rise from their current, historic lows to 6, 7 or 8 percent. By mildly raising U.S. interest rates and stimulating U.S. exports, the decline of the dollar could help us have a softer landing rather than a precipitous collapse. The serious problem concerns education. Despite our enormous strengths, the one thing that gives me pause is our failure to invest adequately in education and prepare our young people for technically demanding jobs. While American higher education is still second to none, state university budgets are being cut by Democrats and Republicans alike. This is a mistake. And, as every concerned parent knows, America lacks effective math and science education at the secondary level, as well. Parenthetically, the national evisceration of a core curriculum is no help either. With our huge economy increasingly dominated by knowledge-based industries, ensuring the best education for our children is the smartest long-range investment we can make — and it’s the one likely to produce the highest returns. This is the way to compete with 300 million people each in China and India — people who speak or are about to speak English, are scientifically educated, and are very hard-working. Finally and more generally, it is worth noting that we may face a problem of understanding the new economic reality. The sheer size of the U.S. economy and the rise of a globally networked economy have changed the way investors and their advisors look at the world. As a result, the United States can only do well when other countries do well, and vice versa. We are inextricably linked together in ways and to an extent we have never been linked before. So we don’t have to worry about being displaced. Just as there is no other military power that can overwhelm us, there is no other economic power that can overtake us. But we do need to think more conceptually about how to use our wealth, our economic resources and our communications skills, and perhaps do some unconventional thinking to advance and support our national interests — which are almost entirely consonant with the interests of other nations. This presents a kind of paradox. The more influence we have economically in such an interlinked world, the more cooperation we require diplomatically. We need the support of foreign intelligence services and other agencies in counterterrorism, just as the jobs created by our exports to other countries and their exports here are mutually dependent. Our wealth isn’t in question. Our judgment about how to manage that wealth may be.