Friday, January 13, 2006

The American Century

Economic and media pundit would have you believe that the American economic leadership is increasingly at risk. A figure no less than Warren Buffett has suggested as such in his annual report to investors in 2005. All cite bottoms-up data to support their views including current account deficit, trade deficit, credit bubble, housing bubble, inflation, outsourcing, weak dollar, and the rise of China and India. These bottoms-up data have some utility, but many other metrics of value are not, and cannot, be accounted for in the grand analysis. Lack of visibility into the relationships among these variables further impairs the utility of the analysis.

The top down view is far from dire. Indeed, I could equally make the case that the 21st century will be the American Century. US owns key fundamental advantages: (1) ideally positioned, secure land. (2) its social system is a scale-free network tilted towards merit vs legacy more than any other country in history. Both assets enable freedom: the former by reducing fear and by providing resources.; the latter by reducing fear and creating opportunity. Turns out that freedom is not just a political asset, but a socio-economic, biologic asset that is almost unique to this time and place in history.

Freedom enables the following: (1) intellectual freedom enables plasticity, communication, and independent thinking which promotes new ideas and intellectual capital; (2) social freedom enables mobility and diversity, which promotes intellectual capital and beauty, particularly female beauty; (3) freedom from fear creates courage, ambition, opportunity, optimism, vision, spirit, leadership, and morality. All of these combine to unlock and create value. Value becomes the basis of preferential attachment, predominantly in the form of envy.

No doubt prosperity is rising many places ex-US. Zero-sum gamers would have you believe that this is a bad thing for the US. Hardly. First thing people do as they get more prosperous is care about health and security. Having other superpowers share the burden of international security would reduce a major drag on US prosperity.

Furthermore, the first place many prosperous foreigners invest their wealth is in the US. That is the advantage of being the dominant economic brand. The sophisticated elite of foreign countries invest in US land, US Treasuries, US stock market. They often move here and become citizens and their descendents marry into the melting pot. Not only are they investing their wealth here, they are contributing their superior genes. Allowing the best and brightest foreign nationals to occupy our graduate schools is not a harm to US future, as protectionists would want us to believe. Most of these foreigners don’t go home, but settle here, and their kids end up marrying into the melting pot (I am an example). Indeed, our immigration and education policies are great filters to cherry-pick talent from the rest of the world and concentrate them in our country. The Mexican border is a physical filter that serves the same function that benefits the US in the long run.

The foreigners’ envy of the US remains staggering, even for “prosperous” nations. They envy our freedom, our opportunity, our land, our security, our ease & fearlessness, and our women. Getting a US visa stamp on their passport is a badge of honor and a signature of bachelor eligibility that even money can’t buy in many countries.

Due to globalization, the US is becoming to the rest of the world what NY has become to the US. It’s the hub. The country largely works for NY, then consumes products created by NY. NY creates and captures a lot of that value. Same can be said for LA, SF and other locales. On the global scale, the rest of the world is increasingly manufacturing our goods, then is buying it back at a huge premium. We create and capture most of the value in between. Out-sourcing is further increasing, not decreasing, this asymmetry---as such, outsourcing is a form of hegemony. We can do this because we have first mover advantage, leadership, and dominant economic brand. We also own the media channels to distribute that brand power to the rest of the world.

This is not necessarily a bad thing. We are technically becoming a “debtor” nation in the same way the NY is a “debtor” to the rest of the US --- they are both attractors of investment by others. Since the US creates more value per asset (ROE, ROA, ROIC) than any other country, this is an efficient model for global prosperity. My expectation is that we will lead the world to greater prosperity, but the benefits will preferentially accrue to the US.

One final comment: so many in the US are worried that our education system is falling behind the rest of the world. This statement is based on qualifying exams. Like most measurements, there is an inherent flaw in the analysis. Asian kids can outscore us throughout their childhood, but American kids create far more value as adults. How is that possible? American education system provides a more balance education of moral education, emotional education, and analytic education. This is ultimately what unlocks value, not whether you learn calculus by 7th grade. Unfortunately, America is increasingly falling prey to competitive education and test-taking-based education, but our education remains far more liberal than any other and is a source of fundamental advantage for our kids. The key asset once again is freedom. In the US, kids are allowed to think and speak freely. This translates into greater plasticity, and greater intellectual capital. It’s that freedom-based education of the US (compared to the inflexible oppressive systems in Asia) that has allowed the US to remain the best innovators even though Asia has been scoring higher on tests for decades. Tell me: who invented the internet and the tools that empowered this blog?

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