Growth is key – the necessity of dollar hegemony, technological innovation, and competitive industrial policy prove.

Maintain Dollar Dominance amid Challenges from China and New Technology: The dollar’s status as the reserve currency is the backbone of US global hegemony, and it makes it easier for the United States to finance deficit spending, monitor crossborder financial transactions, and implement financial sanctions. The United States might constitute only a quarter of global GDP, but the dollar is 60 percent of global reserve currencies—an advantage amplified by the fact that the United States is open, retains deep and liquid financial markets, and possesses a large and diversified economy. The dollar’s success has brought complications: the United States suffers from a dollar-driven variant of “Dutch Disease,” where reliance on a particular export can cause deindustrialization if institutions cannot properly manage the windfall. In this respect the United States is “the Saudi Arabia of money,” with much of its manufacturing capacity atrophying while its assets skyrocket in price.58 Currency has driven Dutch Disease in other countries in the past—colonial Spain benefited from a windfall of gold from the Americas, for example—but the end of that gold supply brought a disastrous geopolitical fall. Although the dollar’s position is strong, two trends now threaten it, and relatedly, US hegemony. The first is the overuse of financial sanctions, which has already driven some allies and adversaries to unite in (so far unsuccessful) efforts to bypass the dollar system. Second, and more important, China is rolling out a digital RMB to compete with the US dollar that completely bypasses US payments infrastructure. Chinese officials have long worried about the potential of a US-led digital currency that would bolster the US dollar system, and so they have raced for first-mover advantage. Wang Xin, director of the People’s Bank of China’s research bureau, stated that “if the digital currency is closely associated with the U.S. dollar . . . there would be in essence one boss, that is the U.S. dollar and the United States,” which would have geopolitical consequences.59 The United States should carefully study and then consider rolling out a digital currency that preserves its financial advantages and brings about precisely the world Wang Xin was concerned about—a digital currency that complements and is anchored to the US dollar system. Finally, as Mike O’Hanlon notes, maintaining these strengths provides a nonkinetic and nonlethal way of deterring or responding to small Chinese territorial provocations.60

Bring Existing Institutions into Global Infrastructure Investment and Build New Ones to Extend US Economic Influence: Washington should strongly push existing development institutions, especially the World Bank, to play a higher-profile role in global infrastructure investment despite reluctance to do so. At the same time, the United States should consider new vehicles for supporting global infrastructure, particularly in the low-cost and high-impact digital realm. For example, because China’s investments in information infrastructure are heavily subsidized and often lack competitors, the United States could create a digital development bank with allies and partners to compete for those projects, which may induce developing countries to pick infrastructure providers and operators more in line with liberal or democratic values.

Create an Entity to Audit the US Supply Chain: China has demonstrated a willingness to use its nodal position in modern supply chains as leverage against other countries. The United States presently has a poor understanding of these connections. Indeed, the pandemic has revealed that no government agency was aware of how dependent the United States was on China for medicine, and similar dependencies from rare earths to microelectronics persist. To secure itself and position its allies and partners to resist China’s coercive economic diplomacy, the United States should launch a permanent effort institutionalized in a federal government agency and bolstered through mandatory reporting requirements to audit supply chains across most industries. The office would also run stress tests of the US supply chain.61

Reinvest in the Talent Base for US Innovation: American innovativeness has several foundations, many of which are presently eroding. The United States needs to attract and retain the world’s best talent in STEM. In fields like electrical engineering, roughly 80 percent of graduate students are foreign nationals, the vast majority prefer to stay in the United States, and most of them do so when provided the opportunity.62 Similar data holds for other fields. To sustain this advantage, the United States should raise H1-B visa caps for STEM fields and grant green cards to postgraduate STEM degree holders, among other reforms.63

Reinvest in Basic Science Research for US Innovation: As a percentage of GDP, the US federal government spends only 0.61 percent of GDP on R&D—a percentage that is one of the lowest in seventy years, lower than ten other science powers, and lower even than pre-Sputnik funding, with half of this limited amount going to life sciences alone.64 Business contributes to US R&D spending, but mostly in applied research, while basic research generally comes from the federal government and has historically formed the foundation for major breakthroughs—including radar, computing, and nuclear power.65 For example, Congress spent $3 billion in the 1980s to map the human genome when industry was reluctant to do so; this in turn helped create the genomics industry that employs 280,000 people in the United States and generates taxes of $6 billion annually.66 Increasing such spending, and diversifying it beyond life sciences, should be a priority.

Reform Financial Markets and Tax Policy to Incentivize Longer-Term Corporate Planning: The shareholder revolution of the 1980s helped usher in a focus on returns on capital at the expense of longer-term planning. Most shares of stock are held for less than a year now, compared to eight years in the 1950s; CEO tenure is now near a historic low of roughly five years; and the pressure to generate financial returns often disincentivizes manufacturing relative to other more lucrative business activities—and sometimes even encourages companies to transfer technology to China for short-term payoffs. Efforts to adjust the institutionalized “short-termism” of US capital markets are supported by some prominent executives, like JPMorgan Chase CEO Jaimie Dimon and Berkshire Hathaway CEO Warren Buffet. Efforts could include new benchmark metrics that include longer timeframes, as well as tax policy that encourages holding equity positions for longer periods, among others.67

Build a Competitive Industrial Policy Architecture to Sustain Key US Industries and Innovation: To compete with Chinese industrial policy approaches in advanced industries, the United States may need to adopt its own industrial policy. Doing so will require more than subsidies: it will require strategies to educate and attract talent in key fields; to incentivize foreign manufacturers and US companies alike to return to the United States through a mixture of credits and localization requirements; to use state power to restructure supply chains; to break up monopolies that reduce innovation and are so large they reduce US economic resilience; and to provide a degree of protection against unfair competing trade practices. These approaches should seek to support industries rather than individual firms. This is particularly critical at the technology frontier, where firms frequently must make bets about the progress of future technology that may or may not be valid (e.g., investment in supercomputing vs. personal computing). When only one state champion exists in a given industry, the price of making the wrong bet can be devastating for the wider economy and for the country’s technological leadership. In contrast, when there are multiple companies operating in a critical industry, the odds that one will make the right bet and sustain the country’s leadership in that industry are far greater. When market structure sometimes complicates efforts at ensuring competition, Congress can assist weaker competitors, a policy approach it has used in the past to ensure a competitive defense industrial base.68 Then, as now, competition between leading firms in these essential industries is more likely to produce lower prices, higher-quality products, industrial resilience, and greater innovation—advantaging the United States relative to outright mercantilist competitors with one leading state champion.