Sputnik Scare, Updated
Americans are having another Sputnik moment: one of those periodic alarms about some foreign technological and economic menace. It was the Soviets in the 1950s and early 1960s, the Germans and the Japanese in the 1970s and 1980s, and now it's the Chinese and the Indians. To anyone old enough, there's no forgetting Oct. 4, 1957, when the Soviets orbited the first space satellite. It terrified us. We'd taken our scientific superiority for granted. Foolish us. Soon there were warnings of a "missile gap" with the Soviets. One senator admonished that Americans should "be less concerned with . . . the height of the tail fin on the new car and . . . be more prepared to shed blood, sweat and tears if this country and the free world are to survive."
The missile gap turned out to be a myth, as did many later theories explaining why the Germans and the Japanese would inevitably surpass us. They were said to have better managers, better workers and better schools. They outsaved and outinvested us. It was just a matter of time. Let's see. In 2004, Americans' per capita incomes averaged $38,324, reports the Conference Board. The figures for Germany and Japan were $26,937 and $29,193.
One puzzle about the U.S. economy is why it doesn't do worse when there are so many reasons that it should. Our students do fare poorly on international comparisons. In a recent study of math skills of 15-year-olds in 29 countries, done by the Organization for Economic Cooperation and Development, Americans ranked 24th. We do depend heavily on immigrants to fill science and engineering jobs. In 2000, immigrants accounted for 17 percent of U.S. scientists and engineers with bachelor's degrees, 29 percent with master's degrees and 38 percent with doctorates. And our savings and investment rates are low. In 2001, the U.S. savings rate ranked 22nd out of 25 OECD countries.
The explanation is this: Every complex economy is more (or less) than the sum of its parts. What matters is not just how much we save -- but how well we invest. The Japanese have squandered much of their higher savings on unproductive investments. Similarly, many work skills are learned on the job. Perhaps 70 percent of the gap in average incomes between the United States and Western Europe reflects the fact that Europeans work less than Americans. The Europeans are entitled to their preferences (longer vacations, earlier retirement), but their higher unemployment and lower labor-force participation rates mean that fewer people acquire real job skills -- and that some people with skills don't use them.
The apparent American deficit in scientists and engineers is also exaggerated. Only about a third of our science and engineering graduates take science and engineering jobs. The rest often work as managers, salespeople, analysts or something else. If there were a shortage, the pay would go up, especially for doctorates. In 1999, the median salary of U.S. scientists and engineers was $60,000 -- solid but not spectacular pay. Someone with a PhD typically earned only 15 percent more than someone with a bachelor's degree, a modest premium. As for immigrants, they come for the opportunities.
The Sputnik syndrome is an illusion. It transforms a few selective economic happenings -- a satellite here, a Toyota there, poor test scores everywhere -- into a full-blown theory of economic inferiority or superiority. As often as not, the result is misleading. We are now going through this process with China and India. Their entry into the global economy is a big deal, with some obvious pluses and minuses for us. As they get richer, some of their talent that once came our way may stay home (especially if we make getting U.S. visas harder). On the other hand, good ideas that originate in Bangalore or Shanghai will soon benefit people everywhere -- just as good American or Japanese ideas have before.
Do China and India threaten us economically? Possibly, though not in the usually imagined way. Their low wages and rising skills will continue to cost us some jobs, especially in an easily interconnected world. But if global trade were reasonably balanced, we should roughly gain what we lose. Countries that export would spend their earnings on imports.
Unfortunately, trade isn't well balanced. China and many Asian countries (though not India) run huge surpluses; they sell more than they buy. That's why the Bush administration is rightly pressuring China to revalue its currency, which would make Chinese exports more expensive and its imports less expensive. The danger is that the China bloc destabilizes the world economy -- not that it soon overtakes us.
On being overtaken, history teaches another lesson. America's economic strengths lie in qualities that are hard to distill into simple statistics or trends. We've maintained beliefs and practices that compensate for our weaknesses, including ambitiousness; openness to change (even unpleasant change); competition; hard work; and a willingness to take and reward risks. If we lose this magic combination, it won't be China's fault.