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How to Get America Back on Track

Without actively re-skilling the population and meaningfully redirecting capital towards constructive investment rather than parasitic consumption, America will remain on a perilous path of long-term economic decline.
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NEW YORK -- Americans who once believed they owned the future now look warily across the Pacific to an emerging China that is building the world's largest network of high-speed trains, taking over the solar industry and producing the highest-scoring students on international tests. Of course, China still has massive poverty and a per-capita income less than a tenth of that in the U.S. But as China gains rapidly, America will continue to fade slowly unless it sheds the habits, policies and practices of recent decades.

What can America do to get back on track?

Economists largely confine themselves to three key factors -- capital, labor and productivity -- when explaining how and why a country grows. A snapshot of the U.S. economy guided by this three-point framework is suitably revealing.

With regard to capital, in the aftermath of the financial crisis, the U.S. remains characterized by large debt burdens (hovering around 70 percent of GDP), and a fiscal deficit that many fear is unsustainable -- at around 10 percent of GDP. Aside from the fact that institutions like the IMF project that America's indebtedness will rise, there is a respectable literature on how such degrees of indebtedness could act as a drag on economic growth in the foreseeable future.

Then there is labor. Many Americans are familiar with the shifts that are changing the demographic makeup of the economy. These changes are leading to an older population, as the number of people 65 years old or older across the industrialized West is expected to increase by 250 percent, significantly raising pensions and health-care costs between 2010 and 2050.

Finally, there is the matter of productivity, which economists believe explains at least 60 percent of why one country grows while another does not. The Bureau of Labor Statistics shows that U.S. productivity across most economic sectors has remained on a steady path of growth over recent decades. However, looking ahead, and if nothing else changes, there is a real risk that the U.S. will see her productivity decline, particularly in the key innovation and technological sectors. Already, according to the OECD PISA rankings, U.S. students are globally lagging behind in mathematics and sciences, the very subjects needed for her to remain competitive in these economically important sectors.

Yet America has a more fundamental weakness: Attempts to remedy its economic malaise tend to focus on short-term tactical problems, with relatively little policymaking devoted to the more long-term, structural considerations. To be sure, short-term management of debts and deficits matters enormously in planning for future sustained economic prosperity. And, of course, there has been tacit acknowledgment of the multitude of risks that America faces over the longer horizon; President Obama's State of the Union address was a recent example of this. However, real concerns remain about America's exploding pension liabilities and dilapidated infrastructure.

We generally know the problems, but where are the aggressive policies to ensure, for example, that the U.S. does not falter under the weight of the looming health-care crisis it will face over the next few decades?

It is estimated that between 2010 and 2050 there will be a 164 percent increase in people with diabetes, with the largest increase in type 2 diabetes. And as if that were not enough, over the next five years, 60 percent of diabetes sufferers across developed economies will have more than one long-term condition, including (but not limited to) chronic heart disease, chest maladies, muscular ailments, vascular problems or neurological complications. The U.S. Alzheimer's Association estimates that over the same period, the associated costs of Alzheimer's could top $1 trillion (roughly 7 percent of the country's annual GDP in today's terms for just that one disease).

So, against this backdrop, how can the U.S. win?

Of course, the U.S. must remain globally competitive and, to achieve this, devote a significant amount of political capital and economic resources to addressing the seemingly more intractable structural constraints. These are the perennially niggling policy questions that politicians prefer to kick into the future, and leave for the next policymaker in line, such as education, infrastructure and energy sufficiency. But if there is to be a real chance for a sustained economic turnaround for the U.S., these structural constraints must take precedence on already-crowded policy agendas.

The very construct of Western society, where the rights, choices and freedoms of the individual are sacrosanct and take precedence over the society overall, means that government solutions to structural problems must necessarily employ some form of incentives. Successful policymaking must induce individuals to make the (right) choices that will benefit the whole economy over the long term.

Taxes to deter certain behavior should, in theory, also work, but these taxes (think of a food tax for eating hamburgers) could again be seen as impinging on individual freedoms. Of course, herein lies one of the differences with the state-led approaches such as in China, where government doesn't have this constraint.

Countries such as Mexico and Brazil (as well as trials being undertaken by Mayor Bloomberg in New York City) are experimenting with incentive-driven policy strategies. These conditional transfers, as they are termed, pay, reward and even subsidize individuals to "do the right thing." For example, citizens are "rewarded" in cash for everything from children meeting school attendance thresholds to receiving immunizations. In the context of the U.S. economy, for example, this would look like special payments made to people who choose to study mathematics or the sciences, or who simply meet certain health-related targets in reducing cholesterol or weight, etc. (noting that the increase in type 2 diabetes is primarily linked to lifestyle factors such as obesity and food intake).

The notion that the state should pay people to do the things that they should do anyway will, no doubt, seem radical or even unfair to some. But the bottom line is this: Without actively re-skilling the population and meaningfully redirecting capital towards constructive investment rather than parasitic consumption, America will remain on a perilous path of long-term economic decline.

Dambisa Moyo is the author of "How the West Was Lost: Fifty Years of Economic Folly and the Stark Choices Ahead," published by Farrar, Straus and Giroux.

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