Although the scope for sustained hyper-competitiveness is limited, there could still be an increase in economic power if foreign capital or scarce scientific and managerial talent were disproportionately drawn to the United States. During the economic boom of the mid-1990s this appeared to be the case. The external deficit of the United States was easily financed by the inflow of private foreign investment, in both direct and portfolio forms, and the purchase of US government debt by foreigners. Since the stock market bubble burst, private flows have dropped and in the first half of 2004, foreigners were net sellers in US companies.

In the battle for experienced managerial talent, it is clear that the salaries and bonus packages available in the United States far exceed those paid to top executives in most European companies. If pay were truly related to performance, then such a differential might imply that US companies had better managers. That argument would be hard to sustain in the face of the corporate scandals of the past few years—from Tyco to Hollinger—and the weaknesses in US corporate governance that they exposed. The evidence remains that many European executives prefer living and working in Europe for non-monetary reasons. That brings me to the final, and undoubtedly most difficult, aspect of economic power to measure: its soft side.

Soft Economic Power

Joseph Nye of Harvard University, who originally developed the concept, defines soft power as “the ability to attract others by the legitimacy of [a country’s] policies and the values that underlie them.” Nye applies this concept predominantly to a country’s military and foreign policy objectives, but it is also relevant to economic aims. Nye claims that soft power enables a country to “achieve its goals without resorting to coercion or payment.” The first two types of economic power discussed above represent hard power: “buying more might” relies on threats, “carrots and sticks” on payments. Regulatory tilt is coercive if it succeeds, but its success depends on persuading other countries that the US model is best, which in turn draws on soft power. Hyper-competitiveness is clearly dependent on soft power because international capital and the most valuable human talent are highly mobile and can choose to settle where they like.

The amount of soft economic power the United States has, therefore, depends on the attractiveness of the US economic model and its values. The defining characteristics of that model include relatively low taxes, relatively little income redistribution, relatively low public provision of health, social security, and public transport, and relatively little regulation. The first three aspects are obviously inter-related: if more income redistribution and public provision of services were desired, then taxes would have to be higher. At the risk of over-simplifying, that is essentially the European economic model. The role of regulation is also a significant difference. Regulation is an alternative to taxation; one acts upon the quantity of production, the other upon the price. The salient point is that the US model has a smaller influencing role for the state—through either taxation or regulation—whereas the European model has a larger one.

Foreigners assess the attractiveness of the US economic model in terms of both its efficacy in delivering economic rewards to its citizens and its non-economic outcomes. On the economic scorecard, there is less to set the United States apart from Europe than most US citizens realize. The discussion above on productivity showed that most of the apparent 30 percent wealth advantage held by the United States over Europe was the result of more people working longer hours. This same factor skews comparisons of economic growth. Over the past ten years, which included the bubble period of the mid-1990s in the United States, GDP growth averaged three percent per year in the United States and only 2.1 percent in Euroland. However, population growth in the United States averaged 1.2 percent per year, compared with 0.5 percent in Euroland. Thus, GDP per capita in the United States grew by 1.8 percent per year, only marginally faster than Euroland’s 1.7 percent per year.

Non-economic measures are harder to compare and impossible to aggregate into a single, objective index. General health measures such as life expectancy show little difference between the United States and Europe. The most pervasive difference between Europeans and US citizens seems to be in their attitudes toward risk and reward. US citizens are less risk-averse; Europeans place a higher value on security. US citizens see change as bringing new opportunities; Europeans see change as bringing new threats to established patterns. Both are right, of course; they simply choose different points on the trade-off curve. Europeans elect to transfer more of their income and freedom of action from the private realm to the political realm in exchange for a higher degree of security against economic mishap, chronic disease, or the unwanted infringement of others’ behavior on their choices. Their higher taxes are channelled into universal healthcare, subsidized university education, and extensive railway and urban transport networks.

Europeans recognize that there is an economic cost to these non-economic gains. And there is a side to the political debate in most European countries that argues for lower taxes, more flexible labor markets, and mixing more private funding with state spending on health and education. But this is less in pursuit of the US model than in recognition that the European model needs pruning around the edges.

In the developing world, the high-water mark for the “Washington consensus” of US-style deregulation was probably in the mid-1990s, following the collapse of the socialist model from Soviet days. That model was found wanting when the Asian crises of 1996-97 exposed the fragility of booming Asian markets to the changed perceptions of international investors. The subsequent critiques by former World Bank Chief Economist Joseph Stiglitz and by former International Monetary Fund (IMF) Chief Economist Michael Mussa of the IMF’s advice to Indonesia and Argentina, respectively, hastened the demise of the “Washington consensus.” The success story of China since its 1978 reforms created its own unique cocktail of state-led capitalism and provides an alternative model for development.