Lurking in the background of President Bush’s economic conference last week was the most profound question the United States faces: Will the future be like the past?
Throughout our history, children have lived better than their parents, usually by a wide margin. The math is simple. The U.S. economy, despite occasional dips, has grown consistently at 3 percent a year or more. So, at age 48, you will be four times richer then the average American when you were born.
That means a house four times as large, a bank account four times as big (in real dollars, not eroded by inflation), and clothes, food, cars and vacations four times as lush.
There’s reason to worry that the glorious period of Wealth Americana could be coming to an end. “We may be at a point,” writes a perceptive and unbiased analyst I admire, Byron Wein of Morgan Stanley, “where the children born in the 21st century will be the first generation of Americans since the Pilgrims landed to live less well than their parents.”
The real danger is not what you read about in today’s newspapers. Yes, the dollar is weak against the euro and our trade deficit high. But those problems are cyclical and transitory. The budget deficit exceeded $400 billion last year, but our government’s debt is still far from excessive.
The U.S. economy today is far and away the strongest in the world. Our gross domestic product, the output of all goods and services, is greater than that of the five runners-up countries combined. The GDP in the United States has grown 4 percent in the past 12 months — the best performance of all 15 developed economies.
There are three developments, however, that threaten the standard of living of our children in the longer term. All three require far-sighted public-policy solutions of the sort that our political system doesn’t readily devise:
1. We’re developing a science gap. In an article in Foreign Affairs, Adam Segal points out that “38 percent of America’s scientists and engineers with doctorates were born outside this country.” Now, as their own Asian economies strengthen and as we take steps that make work here less attractive, such as accounting changes that force companies to drop their stock-option plans, these U.S.-educated scientists are going back home. Innovation will shift elsewhere as our government skimps on basic research in the hard sciences. In research and development, the United States is already starting to trail countries like Japan and South Korea.
2. We’re discouraging what economist John Maynard Keynes called “animal spirits” — the drive to take business and investing risks that ultimately benefit others as well as ourselves. Proximate cause of the new risk aversion is runaway lawsuits and stultifying regulations like those in the Sarbanes-Oxley law that followed the Enron scandal. But at root is a general attitude of entitlement and irresponsibility spread by politicians who promise constituents wealth without risk or pain.
3. We won’t have enough workers to provide the Social Security and Medicare benefits for retired Americans. Today, there are 3.3 workers per retiree; by 2030, the figure will be just 2.2. If benefits are cut and taxes are raised, then the standard of living of groups will decline.
What’s frightening about these three dangers is that they may ultimately shock the stock and bond markets. For example, if investors believed the United States would have to borrow heavily and depreciate its currency in order to meet the needs of Baby Boomer retirees, then interest rates on 30-year bonds would today be sky-high; instead, they’re just 4.8 percent.
Markets seem to believe that the United States will come out fine in the end, and maybe they’re right. Productive immigrants hold the key to solving all three problems, and at least one threat is being addressed with Mr. Bush’s intention to replace part of Social Security with private accounts, so that Americans own more of their own retirement assets, rather than counting on younger workers who may never show up.
The other two dangers, however, are mainly cultural and social — the result of a decline in striving, a lack of striving, a softness that has afflicted every other great nation in history. Call it American decadence — our own version of what happened to the Roman Empire.
James K. Glassman is a fellow at the American Enterprise Institute.