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Myth #17: We're Number One!

By       Message Larry Butler     Permalink
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We are number one - but who is We?
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"America is the greatest nation on earth" is an oft-quoted refrain we vigorously proclaim all the way up and down the socioeconomic scale. There is good reason for this faith in American exceptionalism - and our faith is deeply rooted in our history and traditions, the power of our institutions, and the generosity of our people. But we have heard it so often that many of us have lost our ability to test its validity and question the direction in which such a concept might lead us.

Let's test the truth of the belief by first establishing criteria by which national greatness can be judged and then examining the available evidence. There are several obvious criteria, including Gross Domestic Product (GDP), standard of living, military might, corporate profitability, and economic opportunity. For these we can find fairly objective measures for comparing our greatness with that of other nations, and sometimes even comparing the trend over time. Other criteria might be a little more obscure, including internal security, equality under the law, the degree of liberty enjoyed by citizens, and the equality of economic opportunity. Measures for these criteria may be a little fuzzy, but they are out there. Finally there is quality of life, perhaps the most elusive of all criteria, but one that actually does have an objective, quantitative measurement. A look at each criterion should be instructive.

Where is the truth?

A look at American history reveals a rich tapestry of innovation and accomplishment. The Declaration of Independence and US Constitution stand today as models for political idealism. The founding fathers were themselves beacons of the Enlightenment, and today citizens who self-identify with every point on the political spectrum trace their ideologies to the words and deeds of these great men. They left us a legacy of personal liberty unmatched in other countries. Even the poorest Americans are free to do almost anything they can afford to do. Support for American exceptionalism can be found in our history and traditions.

America's economy is the largest of any nation, with a 2012 GDP of nearly $17 trillion, about 22% of the global total. The UN estimates that America's share is nearly double that of China, the next largest national economy. Japan, Germany, France, and the United Kingdom follow in order. The combined economies of the European Union only exceed that of the United States by about $1 trillion.

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On a per capita basis, America's GDP [1] ranks twelfth in the world, behind Lichtenstein, Qatar, Luxembourg, Bermuda, Monaco, Singapore, Jersey, the Falkland Islands, Norway, Brunei, and Hong Kong. Among large economies, America is first in per capita GDP, ahead of Canada, Australia, Germany, the United Kingdom, France, and Japan, in that order. Support for exceptionalism can be found in the metrics of the American economy.

America's military might [2] is unrivaled on a global scale. With a budget of $673 billion in 2012, we have an enormous capacity and a surprising willingness to spend money on making it so and keeping it so. If related expenditures for military veterans, intelligence, and the State Department are included, the figure approaches $900 billion. China spends nearly $200 billion, followed by Russia, Saudi Arabia, France, the United Kingdom, Germany, Japan, and India. Only Saudi Arabia spends more on a per capita basis. Combined, these nations spend less than the United States alone. Clearly we are number one in our military might.

America's corporations reflect our greatness as well. The world's ten most valuable corporations [3], as measured by market capitalization, are Exxon Mobil Corporation (XOM), Apple Inc. (AAPL), Google Inc. (GOOG), Microsoft Corporation (MSFT), Berkshire Hathaway Inc. (BRK.B), Wal-Mart Stores Inc. (WMT), Johnson & Johnson (JNJ), General Electric Company (GE), Chevron Corporation (CVX), and Wells Fargo & Company (WFC). All are domiciled in the United States. As recently as 2007, a few Chinese corporations were on the list, but the global financial crisis of 2008-2009 shook up global wealth and value. With a little help from US public policy in the form of the stimulus package, the rescue of domestic financial institutions, and lots of cheap money, American corporations regained their supremacy in the world economy.

America scores well in such aspects of economic opportunity as entrepreneurship. The Organization for Economic Cooperation and Development (OECD) published a 2012 list of countries [4] that are entrepreneur-friendly. Based on such criteria as per-capita national income, a minimum of red tape, and access to capital, the top ten in order were New Zealand, Australia, Canada, the United States, Ireland, the United Kingdom, South Korea, France, Portugal, and Chile. The pride we have in our business startups seems to be well founded.

Employment is another aspect of economic opportunity, and America has some reason for its pride. An unemployment rate of less than 6% compares well with other developed economies. Although a few countries seem more favorable - Russia, Germany, Mexico, and Japan - others seem to struggle, including the United Kingdom, Australia, Canada, and France. Employment metrics vary throughout the world, and under-employment is largely ignored. Even so, there's enough substance in the numbers to validate a faith in the American way for those who are looking for such confirmation.

Where is the lie?

American history includes some ugly truths. The founders were not perfect. Patriots practiced torture and terrorism; democracy was a concept rather than a goal; slavery was endemic; ethnic cleansing was an accepted practice; the rights of property ownership trumped all; wars were fought for the seediest of reasons; and the rights of women were not even a thing. American exceptionalism was a work in progress in 1776 and seems to be even more so today.

A closer look at economic measures reveals some surprises, but to understand them a knowledge of the difference between mean and the median is necessary. Per-capita GDP refers to the mean (the total GDP divided by the number of people). In 2012 America's per-capita GDP stood at about $53,000. However, a different way of measuring can be more enlightening: the median (the point at which half the population is above and half is below). In 2012 America's median personal income [5] was less than $16,000. The contrast between the two numbers is stark. Where did the missing $37,000 a year go? It's an enlightening, if rhetorical, question.

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Consider for a moment that wealth is simply accumulated income. Because it reflects inequality over time, it tends to be more unequally distributed than income. According to the National Bureau of Economic Research, America's 2008 per-capita wealth of over $143,000 ranks third in the world, behind only Hong Kong and Luxembourg. Not bad - an average family had a net worth of nearly $400,000. As recently as 2010 Credit Suisse ranked [6] the US seventh, with an average net worth of $236,000 per adult. But average can be misleading unless you again consider the difference between mean and median. By the latter measure America now ranks 27th [7] among nations at less than $39,000 per adult. Although measurement differences make a direct comparison of these two figures inexact, the contrast is stunning. Our typical family is now worth about $100,000. Where did the missing $300,000 go? It's an enlightening, if rhetorical, question.

The United States has a far more unequal distribution of both income and wealth than nearly all other developed economies. Several simple measures have been developed to describe this economic inequality, and the most frequently used for comparative purposes is the Gini coefficient. A Gini of zero describes a perfectly equal distribution where everybody earns and owns the same amount; a Gini of one describes a distribution where one person earns and owns everything. To provide perspective, let's look at a few of the countries with a relatively equitable income Gini - a score of .32 or less. Denmark, Sweden, Austria, Norway, Ukraine, Australia, Germany, Netherlands, Hungary, and South Korea have the economies with the most equal distribution of income. Now let's look at a few of the countries with a Gini greater than .50. South Africa, Haiti, Bolivia, Guatemala, Columbia, Lesotho, and Panama have the economies with the most unequal distribution of income. America's Gini score is .48 [8], which ranks it as a place with very unequal distribution of income. Among developed economies only that of South Africa is more unequal. What's more, our Gini is becoming even more extreme as time goes by. (A more detailed exploration of this subject can be found in Appendix F.)

The Gini coefficient can be used to measure the distribution of wealth as well as income. With a Gini of .80 the United States ranks fifth most unequal in the world. Among large economies, compare South Africa at .76, France at .73, Russia and the United Kingdom at .70, Germany at .67, Australia at .62, and Japan at .55. This suggests that income inequality has been with us for a long time. And as time passes, our wealth Gini is becoming even more extreme.

To understand why wealth accumulates we must recognize how patterns of income have changed in recent decades. Because wealth is accumulated income, it's enlightening to see who benefits most during periods of economic expansion. Ten such periods have occurred since World War II. Until the 1980s the bottom 90% of the population enjoyed more income growth than the richest 10%, although the percentage differences declined steadily. But beginning with the Reagan years the pattern changed. The richest 10% of the population began to enjoy nearly all of the income increases from phases of economic expansion. This adds to the wealth of the wealthiest at the expense of working Americans.

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Years ago I made a decision to commit to a life of business management. After thirty five years as a small business consultant, CFO, and university educator specializing in quantitative business and economic modeling, everything changed. A (more...)
 

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