Illustration by Phil Couzens
Why do I think so? Four reasons: First of all, America remains—by far—the world’s leading innovation powerhouse. Second, America continues to attract the world’s best and brightest. Third, America has one of the most efficient tax systems, which means that the fiscal deficit woes are a cyclical, not a structural problem. And last, but not least, the U.S. dollar is unchallenged as the world’s anchor reserve currency.
Innovation Powerhouse—Part One
The facts speak for themselves: Last year, U.S. companies filed 45,790 patents according to the world intellectual property organization. That’s about one-third of the global total and a significant step-up from runner-up Japan (29,827 patents), Germany (16,736 patents), Korea (8,066 patents), or China (7,946 patents).
While the absolute number is impressive, even more impressive is the tremendous diversity and spread. That’s where America really shines: The top 30 U.S. companies (by number of patents filed) together accounted for barely 20 percent of the total. In contrast, Japan’s top 30 companies account for almost 50 percent of the total. For Germany, 12 companies account for 40 percent, for Korea four companies claimed one-third of the total, and for China, one company alone accounted for one quarter of all of China’s patents. In contrast, the U.S. top company made up barely 3 percent.
Clearspeak: America’s entrepreneurial capital innovation model is alive and well. There are plenty of small and medium-sized companies out there being innovative and creative, filing patents, inventing new products, business models, and designs. If ever there is a basis for future economic growth, it lies in the tremendous diversity and widespread base of innovation in America.
Of course, this also means that it is much more difficult to read and predict where the next growth companies are going to be coming from—a “new America” is bubbling up in peoples’ garages. Unlike Japan, Germany, China or Korea, corporate America is poised to continue to re-invent itself—new players continue to enter the fray. Ten years ago, nobody had heard of Google, and in the next ten years there are bound to be at least three or four new big companies that nobody has heard of today.
Innovation Powerhouse—Part Two
Innovation power always comes from people, and in this area America outshines every other country on earth in her ability to attract the best and brightest. The number of international students studying in America has continued to rise. It is up 30 percent over the last decade, with now about 630,000 students from all over the globe studying at an American university. There is no question that U.S. universities offer the most advanced and exciting learning prospects in the world, as well as unparalleled networking opportunities.
Following on from this powerful base in learning, U.S. corporations offer the most transparent, most equal opportunity career options for global citizens. If you are a top-class graduate from, say, MIT and you get a job offer from an American company, it is often very clear that those companies offer the best career track opportunities. America’s corporate culture is still basically a straightforward, transparent meritocracy that is, in most cases, globally best-in-class in terms of rewarding talent and hard work regardless of national background, gender, etc. The combination of excellent universities and performance-based career opportunities lays a most powerful foundation for future innovative power—and thus the power to grow the economy.
Fiscal Deficit—Cyclical, not structural
What about the U.S. fiscal deficit? Sure, the deficit has surged over the past three years, and now stands at about 85 percent of GDP. First of all, America is still very wealthy on a net basis: If all public debt had to be paid off tomorrow with U.S. household wealth, U.S. households still would have almost 60 percent of all their assets.
Yes, that’s right—U.S. households’ net financial assets are about 200 percent of GDP, while public debt is 85 percent. Net-net, America is positive.
More important than this stock-of-wealth argument is the flow of money dynamics enabled by the U.S. tax system. Much to taxpayers’ chagrin, America actually has one of the most efficient tax systems in the world. Yes, it is possible for the U.S. to grow itself out of its fiscal problem because the tax multiple is higher than 1: For every 1 percent of national income growth, tax revenues grow by about 1.2 percent.
Remember how President Clinton got lucky and found himself with a budget surplus after the U.S. economy took off in the 1990s? It came as a big surprise to most forecasters and was largely due to a very dynamic tax system at work. To be sure, the large-scale defense spending cuts did significantly compound the positive budget dynamics at the time, it was the combination of the “cold war peace dividend” plus the powerful tax system dynamics that saved the U.S. fiscal position. But the basic fact remains the same: The current U.S. fiscal deficit dynamics are largely cyclical in nature, not structural, in my view.
And a final reason for optimism on the U.S.—yes, the U.S. dollar remains unchallenged in its position as a global reserve and anchor currency. Here we have a beauty contest, where, unfortunately perhaps, the Euro has begun to discredit itself recently, with stress and strain and lack of policy coordination giving the dollar a significant credibility boost. Make no mistake—while the dollar may not always be strong, it still remains, by far, the most coordinated and consistently credible choice for a global anchor reserve currency.
Global leader in intellectual property, global leader in attracting and retaining talent, a fiscal deficit that is cyclical, not structural, and an unchallenged global reserve currency position. What’s not
to like?
Jesper Koll is a Managing Director and Head of Research at JPMorgan Japan Securities Inc. He has been analyzing and investing in Japan since becoming a resident in 1986.
