How Capitalism Will Save Us (50 page)

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ccording to a 2008 Gallup poll, only 33 percent of Americans still see the United States as the world’s foremost economic power. Four out of ten believe the most economically powerful nation in the world today is China. This is a big change from 2000, when 65 percent of Americans thought the United States led the global economy.

Increasingly, people see a growing threat to the United States, not only from China but also from India—or as some refer to them collectively,
“Chindia.” The rapid economic growth of these nations, their immense populations, and their industrious, well-educated citizens seem to point toward a future where Chindia will prevail and America will decline.

These fears are nothing new. Every ten or twenty years, new “threats” to U.S. economic power emerge. In the 1960s and ‘70s, it was the Germans. Fears of Japan were rampant in the 1980s. People were horrified when the Japanese bought New York’s iconic Rockefeller Center. Worriers cried that we were losing our lead to Tokyo. Few people could have imagined back then that apprehensions about the Germans and the Japanese would seem almost quaint decades later.

However, to some, the 2009 economic crisis seems to offer compelling evidence that the United States really is growing weaker. But China and other nations have a long way to go before they become as economically powerful as the United States. With a gross domestic product of more than $14 trillion, the U.S. economy is in fact more than three times the size of Japan’s. Despite our population being one-fourth the size of China’s, our economy is about four times larger. In other words, China’s per-capita income is barely one-sixteenth that of the United States.

Despite their considerable strides, China and India—and also Japan—still lack many of America’s capabilities and advantages. India, for example, has had a protectionist bent. The country is still working to overcome its vast, stultifying regulatory regime, which severely hampered its economy for decades. Only in 1991 did India begin a sustained push for liberalization. Much of India is still connected by dirt roads. Its infrastructure is only now being developed. Paved highways, although expanding, are few and far between.

Japan hasn’t really recovered from the recession of the nineties. Its conformist culture is not often conducive to entrepreneurship. Failure has a huge social stigma. China, too, has plenty of problems. It’s made some progress. But the rule of law is far from established. It doesn’t have an independent judiciary. It’s hard to resolve disputes; decisions are often made for political reasons. China’s capital markets are also in their infancy. Noted Columbia University economist Jagdish N. Bhagwati has written that China’s problems include

The Chicken Littles who predict our economic decline overlook a key American advantage: our unique entrepreneurial spirit and political traditions. They don’t appreciate the role of America’s system of democratic capitalism—i.e., a government with independent courts that enforce contracts and property rights and a political system that protects private ownership, as well as economic and political freedom.

These traditions set America apart from its competitors and are the foundation of our economic strength. Yet most of us take them for granted and underestimate their importance. Thus, journalist Robert Samuelson acknowledges, many wonder why the U.S. economy “doesn’t do worse when there are so many reasons that it should.”
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Those fearing America’s decline might do well to recall history. Interviewed in
U.S. News & World Report
, Walter Russell Mead, senior fellow at the Council on Foreign Relations, notes that we’ve had many financial meltdowns. However, “those crises haven’t sunk us in 300 years.”
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S
igned into law back in 1993, the North American Free Trade Agreement (NAFTA) continues to be controversial. Barack Obama and
Hillary Clinton both criticized the agreement during the 2008 presidential campaign, going so far as to suggest it should be renegotiated. Critics allege that it has led to a loss of some one million American manufacturing jobs and has not achieved its goal of helping the U.S. economy.

In fact, NAFTA has supercharged trade among the United States, Canada, and Mexico, creating an immense, dynamic market. As historian John Steele Gordon has written on
AmericanHeritage.com
, NAFTA

What about those one million jobs that were supposedly lost? In fact, since the agreement was signed and up until the recession, the nation’s unemployment rate actually
fell
. Wages, on average, rose, too. According to a 2008 report from the National Center for Policy Analysis,

That massive exodus of American jobs and investment to Mexico that many feared simply did not happen. Between 1994 and 2001, American manufacturing companies invested more than $200 billion in new plants and equipment in the United States and invested just $2.2 billion in Mexico.

According to the Cato Institute’s Daniel Griswold, “U.S. investment in
Mexico did increase after NAFTA, along with trade, but those flows are a trickle compared to what we invest domestically.”
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What NAFTA did do was help boost U.S. exports. According to Anil Kumar, a senior economist at the Federal Reserve Bank of Dallas, between 1993 and 2004, U.S. exports to Mexico more than doubled, rising from $42 billion in 1993 to $111 billion. American sales to Canada, meanwhile, nearly doubled—rising from $100 billion to $189 billion.
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Exports from Mexico and Canada to the United States increased substantially. This has meant more economic activity. Remember, trade takes place between parties when both think it is beneficial.