The US economy is looking rather sick. The IMF expects a recession, the Federal Reserve believes the economy is currently contracting, house prices are plummeting, unemployment is rising (although still at a historically low rate of 5.1%), the US dollar is buying 25% less euros than it was two years ago, the US current account deficit – despite the falling dollar – remains at a stubbornly high 5% of GDP, the recently tabled 2009 budget forecasts a deficit in excess of $400bn and Fed Governor Bernanke is doing everything he can to make the already worrying inflation problem worse.
If that’s got you sweating, you can relax. The US will survive and, given enough time, prosper. For all the excess, disasters and unfair distribution of the gains, the system works.
Real economic growth arises through improvements in productivity. You can fiddle with interest rates, money supply and government expenditure all you like, what really matters is increasing the amount of ‘stuff’ produced per person. And, thanks to its devotion to capitalism, increasing the amount of stuff it produces is something the US is better at than any other country in the world.
That’s because the capitalism encourages competition, and competition encourages innovation. The barriers to building something better are small and the potential rewards huge. It's no surprise that the companies leading the technology revolution (think Google, ebay, Facebook and MySpace) are products of the US – it’s hard to imagine building the world’s most popular search engine while attending an Australian university. In fact, think back over the 20th century and it’s hard to think of too many revolutionary technologies that were developed outside the US (fire away in the comments section below). Plenty of the ideas came from elsewhere, they just don't tend to get developed.
In a few (mostly Asian) countries, times are changing – there’s an excellent article in yesterday’s Fin Review about technology and innovation in Korea (page 62 of the hard copy, unfortunately not free online) and, with more than four times the population, China’s economy will overtake that of the US one day. But as long as the US remains the capitalism capital of the world, there’s no need to worry about its obsolescence. It’s been spending much more than is prudent and an adjustment is necessary, but in 10 or 20 years’ time, it will be bigger and stronger than ever.