Chapter 21/Is U.S. Economic Leadership Threatened?
CHAPTER 21
IS U.S. ECONOMIC LEADERSHIP
THREATENED?
Chapter 21 recognizes that is some respects, the United States has fallen significantly behind
other nations. It analyzes key economic factors, like innovation, education, health care, and the
budget deficit, identifying important areas in which the United States is still strong and noting
others where improvement is urgently needed.
CHAPTER OUTLINE
ISSUE: IS AMERICA PAST ITS PRIME? TWO ECONOMICSTS DEBATE
Professor Brynjolfsson argues that innovation and technology will spur future growth.
Professor Gordon stresses four serious challenges: demographics, education, debt and
inequality.
ENTREPRENUERSHIP
Entrepreneurship has been a major ingredient for America’s unprecedented growth in the
past. Entrepreneurship is promoted through the establishment of private property rights
including intellectual property rights and the enforcement and protection of these rights
INNOVATION
The United States innovative achievements to date have been unsurpassed in part because of
its commitment to R&D. But, this commitment to R&D is being challenged by China and
THE BUDGET DEFICIT AND PUBLIC DEBT
Rising U.S. budget deficits and accompanying debt remain a concern. When government
expenditures outstrip tax collections these deficits have to be financed by borrowing driving
up U.S. debt. It is not just government debt that poses a challenge but ordinary consumer
Chapter 21/Is U.S. Economic Leadership Threatened?
THE TRADE DEFICIT
A trade deficit occurs when imports exceed exports. Many Americans are concerned with low
wages in other countries that may threaten America’s ability to compete and to provide for
good paying jobs at home that could lead to downward pressure on U.S. wages. A growing
HEALTH CARE
The 3 goals of any healthcare delivery system are containing costs, increasing public health
outcomes and increasing accessibility. On all three fronts the United States falls behind other
OECD nations. The Affordable Care Act in 2010 attempts to control costs and make
EDUCATION
Education costs have also risen rapidly. The common influence underlying the rising costs of
both health care and education in the United States, and the accompanying deterioration in
service quality, has been called the cost disease of the personal services. The phenomenon is
especially apparent in American higher education, where cost increases dwarf those of health
care and student debt is now measured in trillions of dollars.
POVERTY AND INEQUALITY
President Lyndon Johnson’s “War on Poverty” (1963-1973) cut the percentage of people
living in poverty below the poverty line from 20 percent to 11 percent. But slower economic
growth and welfare cuts reversed that progress by the early 1980s. Since then, the poverty
rate has increased and decreased with no clear trend before increasing sharply during the
2007-2009 recession and holding steadily at approximately 15 percent.
Chapter 21/Is U.S. Economic Leadership Threatened?
CONCLUSIONS: MIXED PROSPECTS FOR FUTURE U.S. GROWTH
The admirable economic performance of the United States is not guaranteed for the future.
There is much that can be done to support future prosperity and economic growth. America’s
economic fate is by no means sealed; this is the time for action.
MARGIN DEFINITIONS
Cost Disease of the Personal Services: the tendency for the costs and prices of personal
services to rise persistently faster than those of the average output in the economy.
Poverty Line: an amount of income below which a family is considered “poor.”
MAJOR IDEAS
1. The United States remains the world’s economic leader, according to some measures. But in
many respects, America has fallen significantly behind other nations of the world.
2. The output per hour of the American labor force has been rising slowly, so even if overall
labor hours increase, those hours will produce fewer goods and services that the public demands.
3. Entrepreneurs have been an indispensable ingredient in America’s unprecedented growth
performance and its success over the centuries.
Chapter 21/Is U.S. Economic Leadership Threatened?
ON TEACHING THE CHAPTER
Chapter 21 can be related closely to the material in Chapters 18, 19 and 20. These three previous
chapters discussed the principles governing the distribution of income to the factors of
production in a market system. Chapter 20 focused on some consequences of that distribution as
well as whether and how public policy should change the distribution. Chapter 21 picks up where
Chapter 20 left off.
Chapter 21 addresses whether the apparent decline of the United States in some regards is
inevitable. The answer is most certainly not. Steps can be taken to ensure continued growth and
PROBLEMS
1. What are the ingredients for economic growth?
Solution: Investments in health, education and training to enhance the productivity of the
labor force is a key ingredient to economic growth and prosperity. Investments in private
and social capital (infrastructure), as well as investments in basic and applied technology
2. What are some of the problems with a growing fiscal deficit and a growing national debt?
Solution: The larger fiscal deficit has to be financed by the government borrowing which
increases interest rates and thereby may crowd out domestic investment and consumption
3. How could a larger fiscal deficit create a larger trade deficit?
Chapter 21/Is U.S. Economic Leadership Threatened?
Solution: A larger U.S. fiscal deficit will increase interest rates in the United States.
Foreigners will respond by buying dollars in order to place their funds in the U.S. where
DISCUSSION QUESTIONS
1. What do you think American workers should do to regain the share of productivity gains
and income they once enjoyed?
Suggested Answer: Student answers will vary. However, many argue that the demise of
2. What suggestions do you have to promote innovation and entrepreneurialism in the
United States?
Suggested Answer: Student answers will vary. But note that those nations who are
market–oriented and have politically stable democracies with a firm commitment to the
protection of private property rights (including intellectual property rights) appear to be
3. What change in government policy would you suggest to help reduce poverty and
increase income equality in the United States?
Suggested Answer: Student responses to this question will vary. Each response should be