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Can the U.S. Continue as World Leader?

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. United Kingdom: Late 18th to late 19th century Dutch had highest productivity, but little productivity growth

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Can the U.S. Continue as World Leader?

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  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, export of technology Currency became overvalued

  4. US: Late 19th 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 labor per labor Tech Leader Period hour hour progress* Dutch 1700-1785 -0.1 na 0 UK 1785-1820 0.5 0.0 0.5 UK 1820-1890 1.4 0.9 1.1 US 1890-1979 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. 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 International Economic Flows

  9. 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

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

  11. Soviet EmpireRed states: Communist governmentsOrange states: Leaning communist

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