These days, stories about major global challenges confronting the United States are everywhere. The coronavirus pandemic and economic crisis/recovery. Democratic backsliding at home and abroad. Russia’s invasion of Ukraine and Western democracies’ rapid response with coordinated financial sanctions and military aid.
The choices our government makes to address these challenges will affect us here in Wisconsin and across the country.
Problems like great power rivalries, shocks to the global economy and threats to international security are large and complex. It’s difficult for many of us to understand what is at stake and how they might affect our daily lives. Yet these issues unquestionably matter here at home.
The rise of China as a major rival, and a potential threat to our close democratic allies in the Pacific like Japan and Australia, forces American investors and businesses to contemplate whether political instability and potential conflict make it too risky to invest in the Asia-Pacific.
Likewise, problems with global supply chains, combined with a U.S.-China trade war placing tariffs on $450 billion in Chinese imports, have raised prices sharply at home for consumers. Cars, electronics and food all cost more. And China’s retaliatory tariffs on American agricultural exports like soybeans and ginseng have imperiled the exports and income of Wisconsin farmers.
As a professor at the University of Wisconsin-Madison’s La Follette School of Public Affairs, I spend my days teaching students about these global issues, helping them prepare for careers in public policy.
And in my research, I wrestle with questions like these about our country’s prosperity and power:
• How do economic crises — and government policy responses to them — affect inflation, unemployment, income and public opinion about these issues?
• How does American financial power in the world economy affect our country’s ability to sustain debt and deficits so we can make much-needed public investments at home?
• How do we measure a country’s level of power in international relations, and to what extent is China really catching up or surpassing us?
One of the La Follette School’s guiding principles is data-driven, evidence-based analysis. Looking at the numbers helps to break down problems that would otherwise seem overwhelming, bringing possible solutions into focus.
Fortunately, we have a lot of data about these issues.
For example, despite polls showing that the American public is worried about inflation and deeply pessimistic about the country’s direction, abundant data indicates that the U.S. economy is booming. The numbers show that the government’s economic response to the pandemic has been incredibly successful.
By nearly every metric — unemployment, income, consumption, investment, growth — the country and the average household are materially better off today than they were two years ago. The U.S. economy grew by 5.7% in 2021. Unemployment, after surging to 14.7%, the highest rate since the Great Depression, has fallen back below pre-pandemic levels to 3.9%. Business investment has returned to pre-pandemic levels, rising over 18% since June 2020.
To be sure, inflation is now at its highest point in 40 years, at about 7%. But even this is low compared with the 1950s or 1970s, when inflation reached 10% to 15%. And the lion’s share of inflation is driven by a handful of products (primarily energy and cars) that have seen large price increases because of global supply shocks — not because of U.S. fiscal policy. This has occurred across the industrialized world, even in countries that did not spend nearly as much on stimulus during the pandemic as the U.S.
Thanks to government relief spending during the pandemic, average U.S. household income actually increased last year by about $3,450. These income gains were much larger than the costs of inflation, leaving most Americans better off now than at the start of the pandemic.
One example: Rising gas prices in 2021 added only about $600 to the average household’s expenses. Retail sales surged last month by 3.8%, more evidence that Americans are spending and consuming more despite inflation.
What about rising debt and deficits? Even with them, the U.S. government remains able to borrow at the lowest interest rates in over 80 years. Governments borrow money by selling bonds, and the nominal rate on 30-year U.S. bonds is 2.37%, while the real (inflation-adjusted) rate is 0.17%. This means investors are basically willing to give us their money for free, for three decades, to spend on whatever we choose.
It is important to remember that countries are not households: Unlike you or me, the U.S. government issues its own currency and has been able to borrow at single-digit inflation-adjusted interest rates (and often at negative real interest) for over 150 years. Indeed, the U.S. has also run budget deficits, financed by issuing debt, in all but a handful of the last 100 years, and it has never once had a problem borrowing in whatever quantity it desires.
It’s also important to remember that the U.S. government “lives” forever: Decades from now, we will still be able to issue new debt, in our own currency, against future national income. The idea that we will need to repay our national debt all at once, or that investors will cut the U.S. off from borrowing as they might a debt-ridden household, is simply not accurate. One can see this by looking at Japan — a country whose debt to gross domestic product ratio, at nearly 250%, is twice our own, yet which still borrows at an interest rate of only 0.87% for 30-year bonds.
Our ability to borrow money essentially for free, combined with the dollar’s continued dominance as the world’s primary reserve currency (the currency held by governments and major financial institutions to use for international transactions), puts America in a stronger financial position than it has ever been in our long history. No country is remotely close in terms of its global financial power. Consequently, our ability to finance our debt and deficits is unequaled by any other country, including China.
In fact, China’s borrowing costs are much higher than ours (3.37% for a 30-year bond). And China’s currency, the renminbi, plays a tiny global role compared with the dollar: Its share of global reserves is just over 2%, while the dollar comprises nearly 60%. Around 90% of global foreign exchange trading and about 50% of international trade and financial flows take place in dollars.
This American dominance in global finance is likely to continue for decades, and it gives the U.S. an unprecedented ability to invest in the things we need to succeed in the decades ahead: infrastructure, education, clean energy, health care, national security and more.
It’s important to remember, too, that China is still a middle-income country, facing the sorts of development challenges the U.S. wrestled with in the early 20th century when large portions of America were still rural and underdeveloped.
In short, despite the last two years of the pandemic crisis and the long list of global challenges we face, the U.S. in 2022 enjoys nearly unprecedented prosperity and power. This is not the narrative we hear most often in the media, where the specter of economic malaise and China’s inevitable rise to dominance have become conventional wisdom.
The data suggest otherwise, and there are good reasons to be optimistic about our future.
Mark Copelovitch is a professor in the UW-Madison’s La Follette School of Public Affairs and Department of Political Science. He is also the director of UW’s Center for European Studies and chair of the La Follette School’s May 4 forum on American power, prosperity and democracy.
LaFollette School forum
What: UW-Madison La Follette School’s 2022 forum, "American Power, Prosperity, and Democracy"
When: May 4
Where: Monona Terrace, 1 John Nolan Drive, Madison, or virtually
Why you should go: The 2022 forum will bring together leading journalists and experts from academia and business to discuss the most serious problems confronting the United States in decades: the COVID-19 pandemic and its attendant international economic crisis; the rise of China and the challenge it poses to the world order and the future of American global power and leadership; and the rise of authoritarianism and the threat it poses to American democracy.
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This article originally appeared on Milwaukee Journal Sentinel: War in Ukraine, world crises haven't diminished U.S. power in world