On December 19th, Federal Reserve Chairman Ben Bernanke announced the decision to begin tapering monthly bond purchases indicating that “downside risks to growth have diminished.” However, as the United States appears to slowly recover from its worst recession since the Great Depression, many are questioning their level of confidence in American Capitalism. In fact, some emerging markets are beginning to view a Chinese-like model of state capitalism as favorable.

Over the first three quarters of 2013, U.S. real gross domestic product improved, rising from 1.1 to 2.5 to 4.1 percent, respectively. Although this is good news, the trend is not a certainty. The United States also experienced GDP growth of 4.9 and 3.7 percent in 4Q 2011 and 1Q 2012, before falling to 1.2 percent the next quarter, according to the Bureau of Economic Analysis. What’s more, although the November unemployment level dropped to 7 percent, there are actually fewer people in the labor force than a year ago, the U.S. Department of Labor reports.

According to The Wall Street Journal, in the week prior to the 2012 elections, by a ratio of five to one, survey results indicated that Americans expected the economy to improve during the following year. According to various surveys released in December, “that burst of optimism has evaporated, with as many people expecting decline as improvement.”

Is the American Capitalist system the problem?

For generations, the U.S. free market system significantly has raised standards of living. In fact, the American can-do entrepreneurial spirit, capital markets, and acceptance of immigrants, combined with the brilliance of the U.S. Constitution, have created a system unlike any other.

The framers of the Constitution understood the importance of transparency, rule of law, separation of church and state, and balance of power. They also understood that these factors would promote political stability and opportunity regardless of individual differences.

In The Spotlight

Why do foreigners flock here? America continues to be the primary destination of those seeking a better life, including the world’s brightest entrepreneurs, engineers and scientists. This strength and determination continue to be reflected in all that is American.

Although not flawless, American free market capitalism, which has been adopted by countries around the world, has created the greatest economic growth the world has ever seen. It has empowered people to achieve their dreams and has unleashed their innovative and creative abilities that paved the way for tremendous gains in efficiency and productivity.

That’s why U.S. innovation is so strong. In fact, according to the U.S. Patent and Trademark Office, American utility patent applications in 2012 numbered 268,782, which represented half of all utility patent applications. What’s more, the future drivers of America growth are tremendous, and include green industries, clouds, tablets, smart phones, hydraulic fracturing, 3D printing, nano technology, and biotechnology.

When discussing the benefits of capitalism, Michael Novak, the author of more than 25 books on the philosophy and theology of culture, said “No other system so rapidly raises up the living standards of the poor, so thoroughly improves the conditions of life, or generates greater social wealth and distributes it more broadly. In the long competition of the last 100 years, neither socialist nor third-world experiments have performed as well in improving the lot of common people, paid higher wages, and more broadly multiplied liberties and opportunities.”

Novak also indicated that a free society requires economic liberty. He stressed that checks and balances are to the political order what competition is to capitalism. Unlike many other countries, America is fortunate to have a strong system of checks and balances, as well as one that promotes competition.

Since the Great Recession began in the United States, analysts say some emerging market governments are beginning to view a Chinese-like model of state capitalism as favorable over an American system focused on free markets and private enterprise. This direction, although it appears sound based on strong growth created by China in recent decades, is deceiving.

China’s brand of authoritarian capitalism likely will undergo severe difficulties in the years ahead.

China does not possess the American system of checks and balances that, among other things, prevents any one group from permanently imposing its will on others. As a result, China’s brand of authoritarian capitalism, often referred to as “socialism with Chinese characteristics,” likely will undergo severe difficulties in the years ahead.

And if history is an indicator, every country that has opened its economy has been forced to open its political system. Although today the Chinese Communist Party is deeply rooted in every level of Chinese society, this inevitable future reality, which may be messy, will continue to impact China’s economic trajectory that continues to decline.

Stated by McKinsey Global Institute, a division of a leading global management consulting firm, since the start of the world financial crisis, “the longest downturn in U.S. postwar history has given way to a lackluster recovery. Deleveraging, a fragile housing market, restructuring in the financial system, and fiscal austerity have posed formidable headwinds to U.S. growth.”

There is no doubt that the United States will continue to experience economic difficulties in the years ahead. And although this may have caused the American dream to take a temporary respite, or American Capitalism to underperform, both the dream and system will continue well into the future. In short, part of being American is accepting that failure is sometimes part of a successful process.

This article appeared in International Insights, a Fifth Third Bank publication, January 2014.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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