- Sign up for a free subscription at larrykotlikoff.substack.com. *I’ll immediately make it a free lifetime subscription.
According to [Wikipedia](http://The Thucydides Trap is a term popularized by American political scientist Graham Allison to describe an apparent tendency towards war when an emerging power threatens to displace an existing great power as a regional or international hegemon.), the Thucydides Trap is a term popularized by American political scientist Graham Allison to describe an apparent tendency towards war when an emerging power threatens to displace an existing great power as a regional or international hegemon. Professor Allison was referencing this line of Thucydides, “It was the rise of Athens and the fear that this inspired in Sparta that made war inevitable.”
In the recent summit between Presidents Trump and Xi, President Xi asked whether China and the US can “overcome the ‘Thucydides Trap’ and establish a new paradigm for relations between great powers.” President Trump later tweeted, “… President Xi very elegantly referred to the United States as perhaps being a declining nation … “
Earth to President Trump — there is no perhaps here.
Nations that don’t save, don’t invest. And nations that don’t invest reduce their growth rate. They also watch as foreigners invest in their place. The table below documents a colossal decline in the US net national saving rate — from 15% and 16% in the fifties and sixties to 2% in this decade.
Nerd Time: Net national saving is measured by subtracting consumption by households and government from net national income, with all variables measured at producer prices. Net national income is our total labor and asset income, whether earned at home or abroad, net of wear and tear (depreciation) on capital (plant, equipment, residential structures, etc.). The net national saving rate is net national saving divided by net national income.
Imagine only Americans, including Uncle Sam, invested in America. Then net domestic investment — *net domestic investment divided by net national income *— would equal net national saving. I.e., every dollar invested in our country would reflect a dollar saved by we the people and our government. But foreigners also invest in the US. That’s why the net national domestic investment rate in the table differs from the net national saving rate.
Between 1950 and 1979, we saved more than enough to cover investment in our country. So, we invested the overage abroad in what’s called net foreign investment. Net foreign investment is also called the current account surplus — when the number is positive. When it’s negative, it’s called the current account deficit. In the 50’s and 60’s we ran a current account surplus, equivalently, a negative current account deficit.
But starting in the 1980s and continuing year after year thereafter, we’ve saved less than the amount invested in our country. Foreigners have looked at this and effectively said, “Gee, there are great investment opportunities in the US. But Americans are saving next to nothing and, thus, are investing next to nothing in their own country. Let’s seize the opportunities they’re missing, invest there, and reap the rewards.”
Consider Jamaica whose population is extremely poor. The country’s GDP per capita is only $8K. But its 1,732 hotels and resorts accommodate roughly 50,000 tourists every day of the year. The pic below is of The Secrets St. James Montego Bay Resort. Guess who owns it? It’s not Jamaicans, half of whom have an annual income below $6K. It’s the founders of Hyatt and the millions of global owners of Hyatt stock.
Yes, Hyatt shareholders include a handful of rich Jamaicans. But the value to typical Jamaicans of this massive foreign investment in Jamaica is the opportunity to cook, clean, and otherwise serve the resort’s foreign guests. Your average Jamaican certainly earns more thanks to this and the island’s other 1,731 vacation establishments. (And Jamaicans will be happy to see The Secrets finally reopen after its long Hurricane Melissa closure.) But, let’s be clear, Jamaica is a servant economy that’s politely called a service economy.
During the last five years, we saved only 2.2% of our net national income (NNI). During this period, foreign net investment in the US was 4.6% of our NNI. In other words, for every dollar we invested in our country, foreigners invested two dollars. Last year — the year America was made great again, our saving rate was just 1.5% whereas the foreign investment-in-the-US rate was 5.0%. Thus, foreigners invested $3 in our country for every $1 we invested.
Trump is anti-immigrant when it comes to labor, but pro-immigrant when it comes to capital. We need both types of immigration to keep our economy (GDP) growing. But to be clear, US GDP isn’t all accruing to Americans, including Uncle Sam. Foreigners get their share of our pie as returns on their investments.
The table has two awful messages. The first is the implosion to almost zero of US saving. The second is the 50 percent reduction in the US rate of net domestic investment. Yes, foreigners have kicked in to keep our investment rate above our saving rate. But they haven’t invested enough in the US to keep investment at the 13.6% rate posted, on average, from 1950 through 1969. Were that the case last year, foreigners would have had to invest 9 dollars for every dollar invested by we Americans. Had our net national saving rate averaged, through the entire postwar, 15.6% — the average 1950-1969 rate — rather than fall to 1.5%, US domestic investment would have almost surely been twice as high. And our capital stock, output, wage rates, productivity, and share of world GDP would have been day-and-night higher.
Less investment means less capital with which American workers have to work. This makes them less productive than would otherwise be the case. President Xi has surely considered our saving/investment debacle in alluding, in his reference to Thucydides, to our relative, if not absolute economic decline. He’s also surely looked at the next chart showing median real weekly earnings of full-time employed males.
As the chart shows, the real pay of typical American male workers is no higher today than it was almost a half century ago. Our miserable net domestic investment rate is a major part of the story. Thus, I need to amend what I wrote above.
Countries that Don’t Save, Don’t Invest on their Own, and Countries that Don’t Invest on their Own, Don’t Receive Enough Foreign Investment to Make Up the Difference. Hence, Countries that Don’t Save Decline on All Economic Metrics Relative to those that Do.
Anyone who doubts what investment means to a country’s productive capacity needs to spend time in China and simply look at its infrastructure — its roads, electric grid, high-speed rail, solar arrays, forests of modern skyscrapers, and … .
Trump’s most virulent anti-China advisor, Peter Navarro, has built his entire career writing books like Death by China and *The Coming China Wars. *But he’s only spent a few days in China out of the 27,740 days he’s been on this planet actually learning about the country he’s made a living hating. He’s now banned from entering the country. Stephen Miller, Trump’s other rabid anti-China “expert,” has clocked 3 days in China — one less than Navarro. What about Vice President Vance who says “China is the biggest threat to our country.” He has yet to step foot in the county.
But back to our miserable net domestic investment rate. It’s not the sole reason US workers haven’t received a real pay raise since 1977. Our ever worsening education system bears considerable responsibility. Today, half of high school seniors can’t do basic math and a third would fail an English proficiency test. Only one in three high school grads is prepared for college. Yet 60% attend. Of these, one in three drop out. Technology hasn’t come to the rescue. Indeed, AI is projected to eliminate up to half of white collar jobs — this according to Anthropic CEO Dario Amodei.
While real wages have stagnated, US per capita GDP has, as the chart below shows, continued to grow. Clearly, someone is doing better each year, but it’s not typical US workers. The chart tells a story about rising wage and income inequality. High-skilled workers and rich investors, foreign and domestic (think Elon), are the primary beneficiaries of our per capita output gains — not our army of service workers/servants, which has risen from 62% of the workforce in 1950 to 86% today.
Here’s President Trump’s full response to Xi.
When President Xi very elegantly referred to the United States as perhaps being a declining nation, he was referring to the tremendous damage we suffered during the four years of Sleepy Joe Biden and the Biden Administration, and on that score, he was 100% correct.
No one knows what drugs our President is ingesting at 3 AM every night. But the declines in the US saving and investment rates started decades ago. And the stagnation in US wages is a half-century-long phenomenon. Yes, median real wages are rising, albeit slowly, of late, but, so far, no faster under Trump II than Biden.
The US has spent the postwar passing the generational bucket. It has done so by borrowing on the books, but primarily off the books. As discussed here, our underfunded official and unofficial obligations to younger generations have reduced US to a position of complete fiscal insolvency. Indeed, we’re now in far worse fiscal shape than is Italy. Yes, Italy’s ratio of official debt to GDP is still higher than that of the US. But its off-the-books liabilities are far smaller as a share of GDP.
The only way to provide an honest assessment of our fiscal condition is via fiscal gap accounting, which puts all our debts, whether called official or unofficial, on the books. The European Union does fiscal gap accounting every three years in presenting their S2 indicator as part of their Fiscal Sustainability Report. The US government, whether the reds or the blues are in control, has refused to do fundamental long-term fiscal-gap accounting or generational accounting. When it comes to fiscal policy, we prefer to fly blind to keep mum about what we’re doing to our kids and our country.
I’m not sure which is worse — ripping off our children to our benefit or concealing our generational theft. Regardless, we’ve now reached the point where leaving the fiscal gap for future Americans is simply infeasible. Doing so would require taxing them 104 percent of every penny they earn!
Our policy of taking from young savers — those saving for retirement — and giving to old spenders — those spending until they drop — while promising the young their turn at expropriating their children, started with Eisenhower. This intergenerational Ponzi-scheme (chain letter) has continued under every President since. Its terrible impact on our national saving rate is documented in detail here. But the next chart, showing the dramatic postwar increase in the average consumption of the elderly relative to that of the middle aged and young, pretty much tells it all. In 1960, 70-year-olds consumed, on average, about 70 percent of what 40 year olds consumed. Today they consume about 140 percent!
The next chart shows China’s catch up to the US starting, dear Donald, years before President Biden’s administration. Depending on the measure (constant dollars or PPP), the ratio of China’s per capita GDP to that of the US is now 20% or 32% compared with 2% or 4% in 1990, respectively. As this paper, “The Future of Global Economic Power,” published last year in The Oxford Review of Economic Policy shows, China is projected to have 27% of world GDP at the turn of the century compared to the US’s 12%.
President Trump’s main measure of economic success is the stock market. The stock market has certainly gone gangbusters in his second admin. But 45% of its valuation is traceable to AI, which, as far as I know, neither the President, nor Stephen Miller, nor J.D., nor Peter Navarro, nor Howard Lutnick invented. And when the value of stocks rises, it doesn’t increase GDP. It benefits those who own stock, but harms those who don’t — who now need to pay more for the same amount of capital. This is yet another, if extremely subtle, redistribution from the young, who are in the process of saving and buying stock, to the old, who are in the process of spending and selling stock.
Let me close with the last part of the President’s tweet in response to Xi and a final chart.
President Xi was not referring to the incredible rise that the United States has displayed to the world during the 16 spectacular months of the Trump Administration, which includes all-time high stock markets and 401K's, military victory and thriving relationship in Venezuela, the military decimation of Iran (to be continued!) — Strongest military on earth by far, economic powerhouse again, with a record 18 trillion dollars being invested into the United States by others, best US job market in history, with more people working in the United States right now than ever before, ending country destroying DEI, and so many other things that it would be impossible to readily list.
Unfortunately, the US isn’t enjoying the best job market in history. As the chart below shows, total US employment is barely growing and manufacturing employment is still falling. Indeed, manufacturing employment was higher and total employment growth faster under Biden.
Mr. President, Rather than make up alternative economic realities, read this book. I wrote it for you. It shows you how to fundamentally reform our fiscal and financial institutions and truly make America great again. Doing so won’t keep China from surpassing us economically. But it will keep us from going the way of Argentina.