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Fareed Zakaria: Restoring the American Dream

Aired March 6, 2011 - 20:00   ET


FAREED ZAKARIA, HOST: This is a GPS special -- "Restoring the American Dream, Getting Back to Number One."

Welcome to all of you in the United States and around the world. I'm Fareed Zakaria.

I'm going to begin with a cliche. We face new challenges in a new world. Now that much is obvious. But it seems very difficult to get the American system to recognize that this means fundamental change, radical change.

Both political parties play the usual political games. No one seems ready for big compromises, big sacrifices. It is as if we can afford to tinker, because in the end we're so rich and strong and it always works out.

After all, we're number one. Right? The most exceptional country in the history of the world.


BARACK OBAMA, PRESIDENT OF THE UNITED STATES: I believe in American exceptionalism.

GEORGE W. BUSH, FORMER U.S. PRESIDENT: The exceptional character of the nation we serve.

SARAH PALIN (R), FORMER ALASKA GOVERNOR: This belief in American exceptionalism is something that every new generation has got to make its own.

RUDY GIULIANI (R), FORMER NEW YORK CITY MAYOR: This is the greatest country in the world.

HILLARY CLINTON, SECRETARY OF STATE: I think this is the greatest country in the world.

OBAMA: The greatest nation on earth.


ZAKARIA: Now I'm an immigrant. I'm not an American by accident or birth but by choice. I voted with my feet and came to this country. So of course I do believe that America is exceptional. But I think it's important to examine the facts carefully to figure out just where we stand in today's world. America is indisputably number one by some key measures. We have the world's largest economy, military, scientific establishment, the biggest technology companies. We are just as indisputably falling behind in many other key areas, well behind other countries.

Let's take a look at some recent rankings. The United States is the fourth most competitive country in the world economically. Good. We're only the fifth best country in which to run a business.

America's enrollment rate for elementary school, however, ranks 79th in the world. We're only 12th in the percentage of college graduates among rich countries. America's 15-year-olds are ranked 19th in science and 24th in math. Our infrastructure ranks 23rd. We're 41st in the world on infant mortality, 49th on life expectancy.

Perhaps most worrying -- America is no longer a place where anyone can make it. Last year the OECD issued a study of social mobility across generations. Basically that's how likely is it you'll jump out of your parents' income group.

The U.S. did surprisingly poorly coming in behind Denmark, Norway, Sweden, Germany, France, Canada. Two other such studies confirmed this reality.

Now I know what my perception is about America. Anyone can make it here. And there are lots of high-profile examples of that. But those are anecdotes. The facts say that for the average Joe in recent years, social mobility has slowed and other countries have moved ahead.

Similarly, among rich countries over the last 25 years, our growth rate per person has not been the strongest. Now there are clearly places where we are still number one. The number of guns we own far exceeds any other country. We account for 50 percent of the world's annual production of weapons.

We are number one in our terms of our total debt to other countries. But there are really many positive places where we are still number one. That's what I began by listing.

But my point is the picture today is a lot more mixed than boastful rhetoric about America is number one suggests. The question I have really is, what would it take to keep America clearly and comfortably at the top and to restore it to that place in areas in which it has slipped.

That is what we will be looking at in this hour. That's also what I look at in "TIME" magazine this week. Check out the cover at your newsstands or go to

We've got a great cast of characters to help us understand what's going on here.


HANS ROSLING, GAPMINDER.ORG: If you look at the replay you'll see this --


ZAKARIA: They are Hans Rosling, who will explain why we seem less exceptional these days. Harvard professors Niall Ferguson --


NIALL FERGUSON, HARVARD UNIVERSITY: Well, in some ways America stands on a cliff. Because great paths don't gently decline.


ZAKARIA: And Joe Nye.


JOSEPH NYE, HARVARD UNIVERSITY: United States is the most powerful country in the world but we have to rethink what we mean by "power."


ZAKARIA: The economist Dambisa Moyo.


DAMBISA MOYO, INTERNATIONAL ECONOMIST: Look, this is America we're talking about. If we're talking about other countries I'd be a bit more skeptical.


ZAKARIA: And Jeffrey Sachs of Columbia University.


JEFFREY SACHS, COLUMBIA UNIVERSITY: Basically American society is incredibly divided and there is a small, very rich part of society. It really runs the show.


ZAKARIA: And if innovation is one of the places where we're still number one, how do we get that spirit into the rest of the nation? We'll talk to the guys behind one of America's most innovative companies, Foursquare.


DENNIS CROWLEY, CO-FOUNDER, FOURSQUARE: I think there are different ways to measure success. I mean for me personally it's seeing, you know, really everyone in the world start to use the stuff that we're thinking about.


ZAKARIA: So let's get started.

So why is it that America seems less dominant in so many areas that its lead has evaporate, that it's falling behind in other countries. Well, instead of telling you what's happening, I want to show it to you in a way that you will probably never forget.

So I've asked my friend Hans Rosling to come and do his magic. Rosling is a professor at Sweden's Karolinska Institute, and he has an amazing way of showing how the world has progressed in the last 150 years.

The story Hans will tell you highlights the central idea we need to understand, which is that this is all less about America falling behind than the rest of the world catching up.


ROSLING: Thank you. This is the world in 1860. Each bubble is a country. And this axis down here shows wealth, income per person, $500, $5,000 and $50,000. And this axis is health here. The length of life from 20 years all the way to 80 years.

And the size of the bubbles here shows the size of the population and the color marks the continent. The Americas blue, Europe yellow, Asia red and Africa green.

And in 1860 almost all countries were down in the poor and sick corner there. But the industrial revolution had started to pull western countries out of poverty. United Kingdom and Australia was leading. And U.S. was in third place.

And look what happened when I start the world here? As year passed by, the population in western countries got better education, new discoveries helped to control infectious disease, hygiene improved and the life span increased, and the west got healthy and wealthy on the same time while the rest remained in poor and sick down there.

And from 1900, look, United States is taking the lead and becomes the engine of progress in the world through the First World War. That was the Spanish flu. And through the 1920s, U.S. is leading. It's only during the Great Depression that the U.S. falls back temporarily, and gets the lead again through the Second World War, into the Cold War and we stop here 1954 at the end of the Korean War.

And this time United States was on top. Europe had fallen behind and Japan was trying to catch up here. And interestingly, a small country on the equator, Singapore, was just behind. Latin America was in between and China and India were still down here with low life expectancy and with low incomes, but they had gained their independence.

And look what happened after 1954. Here, U.S. continuing to lead but Europe is closing in. Europe is closing in. And Japan there. They make this amazing catch-up together with Singapore and all the tiger economies in Asia. And here China and India got education, more family and health before they start this amazing economic growth where they catch in together with more and more emerging economies and they keep up the speed through the last economic crisis and here we are today, 2010.

And what is most interesting here is if you look at the replay, you see this very clear how the west took off first, and then how the rest is following and catching up.

And how will this continue? Let's make a projection into the future by going backwards first.

This is where China was, 1980. They had very low income over there. No? And U.S. was all over here in the other end. We never thought this would happen -- that China in 30 years would move so much faster than the United States.

Now if both countries would keep the same speed in economic growth in the coming 30 years, where would U.S. end up? It would end up there. And where would China end up? They would end up here, the same spot.

But this is not so probable. Because when a country gets richer, the population gets older, and it is very difficult to keep the same economic growth. We can see that on Japan.

So more intelligent way of looking at China is to see what has already happened today. I will split China here into its provinces. It's a huge country and it's better to look at the provinces, because they are so different.

Look, Shanghai is already here. The catch-up is done. And the coastal provinces are in between and the inland provinces are just like other countries in Asia or Middle East or Latin America.

Now, Singapore and Japan were trailblazers, and the others are coming closer. And very soon, China and India will come to a place near to you.

ZAKARIA: This is fascinating. And it highlights the central idea that it's not that we're falling behind, it's that the whole rest of the world has begun to catch up. And it -- and what it suggests is that it's not so much the people are overtaking us, it's that everybody is moving into the same space, that there's a whole set of advanced countries -- European and Asian -- that are all converging in one space.

ROSLING: Yes. It's the healthy, wealthy corner. That where people want to live. I live there myself. It's a nice place.

ZAKARIA: But can -- can so many countries live there? Can the United States prosper with so much competition?

ROSLING: Yes. I mean it's more competition but it's also more customers.

ZAKARIA: So you're an optimist? ROSLING: No, I'm not an optimist because that's an emotional state. I'm a possiblyist. I say that it's possible if we keep peace and free trade and protect human rights, we can all live up in the healthy, wealthy corner because in the end that's where people want to go.

ZAKARIA: That's an optimist for me. Hans Rosling, thank you very much.

ROSLING: Thank you.


FERGUSON: My guess is that this moment when China overtakes the United States will happen this decade, in the next 10 years.



ZAKARIA: As Professor Rosling just showed us, it is not that the United States is falling. It's that others are rising. In my book "The post American World," I call it the rise of the rest. But what does it mean for the long-term fortunes of the United States?

After all, there have been other leading powers that face new competition, and these stories all end in decline.

Harvard's economic historian Niall Ferguson.


ZAKARIA: When you look at America in a world in which China is rising, India is rising, what's your sense of where America stands in this new economic order?

FERGUSON: Well, in some ways America stands on a cliff because great paths don't gently decline. They don't sort of fade away over decades. History shows that they very often collapse quite suddenly. They lose power quite dramatically.

That was the experience most recently of the Soviet Union. When one looks at the fiscal position of the United States with the vast explosion of debt before but particularly after the financial crisis, it's clear that there's a major risk there.


ZAKARIA: If Ferguson could be accused of seeing the glass half-empty, his Harvard colleague Joseph Nye could be accused of seeing it half- full.


ZAKARIA: If I could ask you a simple question, is the United States the most powerful country in the world, is there a simple answer? NYE: Well, yes. The United States is the most powerful country in the world but we have to rethink what we mean by power. You know, the classical American narrative of the cowboy gunslinger, to put it in street terms, that's no longer an adequate way to think about power.

But if you think about military power, yes, we'll be number one for quite some time. Think about economic power. We'll be ahead, but others are catching up. And if you think about soft power, the ability to get what you want through attraction and persuasion, we're well ahead.

ZAKARIA: Let's talk about economic power for a bit. Because even there you tend to think that the rumors of American decline are exaggerated.

NYE: Well, I think there is a great tendency to think that China has passed us. I mean public opinion polls showed that the majority of Americans in some polls show China is ahead of the United States. I mean this is simply not the numbers. I mean we're three times the size of China in purchasing power per diem than even more if you just do exchange rates.

Goldman Sachs has predicted that China's economy will equal the U.S. in size sometime in the 2020s. That's probably right if you're $1.3 billion growing at 10 percent a year, that's bound to happen.


ZAKARIA: Ferguson says those estimates were done before the financial crisis. But the reality is now even worse.


FERGUSON: Everything that has happened since then leads me to expect that it will be even sooner than that because the financial crisis really slowed the United States down and China, although it slowed somewhat, scarcely missed a beat and continued to grow strongly at rates of close to 10 percent.

So my guess is that this moment when China overtakes the United States will happen this decade, in the next 10 years.


ZAKARIA: So, is the problem China? Or is the problem the United States?

Dambisa Moyo is a Zambian born economist and author who was once an investment banker at Goldman Sachs.


ZAKARIA: If you were to look at the big picture which you're arguing in your book, it seems to me is you're saying that the United States created incentives for people not to invest in productive enterprises, work hard, move to the right kinds of jobs that are productive. MOYO: Correct.

ZAKARIA: Right? That we've created a kind of set of incentives for -- that are not about economic growth and productivity.

MOYO: That's exactly right. That is exactly right. And actually when you look at places like China or India, what they have learned is that create an environment where people want to invest and are motivated and encouraged to do the right thing -- go to school, get mathematics or science degrees. Those types of things, save your money, or if you're going to -- you know invest, don't consume, invest in productive GDP enhancing projects.

Those types of things, they've actually learned from the success of the west but somehow in the past few decades the west has been derailed.


ZAKARIA: One of the first suspects Moyo would look at in that derailment is America's presence on the world stage. Especially its vast military.


MOYO: Some people would argue we need the military to keep people employed. The question is, what is America's role in the world? And should America be underwriting global public goods at the expense of her own economic survival?

ZAKARIA: A lot of Americans must wonder that and I think would agree with you if you would say stop spending the money and, you know, protecting the ceilings of Southeast Asia and building schools in Afghanistan.

MOYO: I'm quite sympathetic to that. I mean I come from the emerging world, and so, on the one hand I do love the idea of somebody, you know, under the umbrella of justice and freedom for all, policing the ceilings. But if I were American, I may have a very different view.

I may take the view, look, we've got serious problems that will mean in the longer term we may not even be able to police the ceilings anyway so why don't we really fix what's going on here and get back on track and then we can do a better job internationally.


ZAKARIA: Harvard's Niall Ferguson says military spending does have something to do with it, but of course he brings it right back to the debt.


FERGUSON: There's a kind of magic moment in the history of all empires when suddenly they find themselves spending more on paying the interest on the debt than they pay on national security. They pay more on the treasury securities than on the national security, if you like.

This was true for Spain in the 17th century. It happened to France in the 18th century. It happens to the Ottoman Empire in the 19th century, and happened of course to the British Empire in the 20th.

And it's happening to the United States now. And I would say at the risk of overreaching a little bit, there is a law of history here that once a great power or empire or -- call it yourself what you like -- once you are spending more on servicing that debt than you're spending on your army, and your Navy and your air force, it's probably the end of the line.


ZAKARIA: Will the United States meet the same fate as the British Empire? We'll find out when we come back.


ZAKARIA: The scholar Samuel Huntington once noted that a common mistake Americans make is to assume that the rest of the world is fascinated and impressed by America because of its values. They're truly fascinated by us, he claimed, because of our wealth.

That's what makes our value seem so special, that they help to produce a rich and powerful civilization. That's why the world was fascinated by Britain at its peak, France when it was the center of the world, Rome during its period of hegemony.

Every great empire seems invincible for decades. And then it falls.

Does the same fate lie ahead of the United States? Or are we, well, exceptional?


ZAKARIA: Let's talk about Britain because we tend to think ourselves as exceptional, having a real entrepreneurial culture, having this extraordinarily advanced economy. But of course Britain thought all that about itself. It saw itself as the inventor of the industrial revolution, the workshop of the world, the place where all these fascinating new scientific discoveries, inventions were being created but it didn't stop it from declining.

FERGUSON: The British of course had their own story of exceptionalism. It must be said that most countries do. And the British had the good reason to believe that they were exceptional because they really had invented the industrial revolution. So there was a sense, if you went to London in the 1850s of tremendous superiority.

Of course the British were the best in everything. Not only were they the best at industry, they were also the best at agriculture, they were also the best at sailing, they were the best at sport, they were the best at entertainment, they were the best of course at empire because they're the world's biggest empire. And yet as early as the late 19th century people began to feel that it was slipping away. Germany and the United States both overtook Britain in the late 19th century in terms of economic size. And from then on really in the 20th century British history felt like the history of decline and fall.

Now one reason for that was that Britain had to fight two world wars against one of those rivals -- Germany. And that was an extremely expensive business that event already more or less bankrupted Britain.

So one has to remember that decline can be accelerated by major strategic miscalculations or confrontations with rivals. And I think there's an important lesson for the United States there. It's not just about economic decline, it's not just that sense of the Chinese catching up and maybe overtaking the United States really soon.

There's also a strategic question. Do you end up on a collision course the way the British did with the Germans?


ZAKARIA: Once again our two Harvard professors see things through different lenses. Here's Joseph Nye.


ZAKARIA: Do you think that there is a historical pattern here, the British Empire once ruled the world and over time declined? Is America in Britain's place?

NYE: No. I think that's over simplified. As one historian put it, Britain ruling the world from a little island off the coast of Europe was like an oak tree in a potted palm container. It was unnatural.

The United States is basically in demographic terms very, very different from Britain and in an economic scale different, in total continental size, different. So I think the analogies with Britain are a bit oversimplified.

In addition, there's a social structural change which is as the British got rich -- the British elite wanted their young people not to become entrepreneurs but to become landed gentry. In the United States it's very different. You want your child to go out and start up a new Silicon Valley company.

You know our best and brightest, and many of them see their path to the future as entrepreneurship. That's a source of great creativity in the American economy.


ZAKARIA: So will America's entrepreneurial spirit save us? When we come back you'll meet the guys behind one of America's most innovative entrepreneurial companies. What lessons can we as a nation take from the successes of Foursquare.



FERGUSON: I think if you ask the question, what is it that Americans do best, the answer is, it's still the best country in the world to have a really good idea and turn it into a really profitable business. I still think the United States wins in that particular contest.


ZAKARIA: I think Niall's right. Rather than have you meet a famous CEO of an American company with a long legacy I thought we should meet with people who had a cool idea and are hoping to be able to turn it into a really profitable business.

And the two guys you are about to meet, the founders of Foursquare, have the idea and it just might be on its way to success. Their company, which will celebrate its second birthday this month, has been valued at one quarter of a billion dollars.

Foursquare reportedly grew by 3,400 percent in 2010. Its founders are Dennis Crowley and Naveen Selvadurai.


ZAKARIA: So what is Foursquare?

CROWLEY: So with Foursquare, what we're trying to do is build applications for mobile phones that help make the world easier to explore for people. And people use Foursquare to check in in all sorts of places. I mean you can open up Foursquare pretty much anywhere you were in the world and it'll give you little tidbits of things that you should be doing nearby.

So it will check in at bars or coffee shops whenever they go out to eat or at parks. And when they check in, we'll let their friends where they can find them.

And if I want to check in at Foursquare headquarters, I can find Foursquare on the list and broadcast out to all my friends I'm at Foursquare headquarters with CNN.

ZAKARIA: So what makes you think, you know what, I'm going to start a company?

CROWLEY: You look at all the things that are out there and no one is exactly building the things that you want to use. And so the only thing you can do is just build those things yourself.

ZAKARIA: How easy was it to get financing once you had the idea for your company?

CROWLEY: It is pretty hard to get -- to get financing. So, you know, we started working on the stuff in January of 2009 and launched it in March of 2009. And we didn't pick up financing until September. And that was, you know, six months of going out and knocking on doors and hustling. And you know it's just a matter of figuring out what the right story to tell about the product and the company is.

ZAKARIA: So if you were to -- if someone were to say to you -- the president or the secretary of treasury were to call you in and say, we need a lot more entrepreneurship in America, we need a lot more innovation, we need a particular technology, what should we do to have lots more of this kind of thing, these kinds of companies?

NAVEEN SELVADURAI, CO-FOUNDER, FOURSQUARE: Yes, we've actually -- we've actually been called for advice on similar things. And I think a lot of it is -- it's two parts. One is to educate students, youngsters, about this path in life, that you can go do something on your own. You know and if you fail you just start over again. Or if you fail, the steady job is waiting to pick you up and bring you back to where you could be.

ZAKARIA: That strikes me as very important. In America it seems as though there is no real cost and no social stigma to failure. Do you find that --

SELVADURAI: I totally agree, yes. And I think the notion of failure is seen differently here in the U.S. than in many other countries, even countries in Europe, for instance. And -- I mean I was traveling in Italy recently and we heard a lot about like, well, how do you guys start companies so easily in the U.S.?

And in Japan, too, was the same thing, where they all have smart engineers and really great guys working on interesting projects. But they just don't have this spark of going to start something because there's this stigma that if you fail everyone is going to look down on you or your family is not going to welcome you back into the house or something like that.

ZAKARIA: And what happens if you fail here?

CROWLEY: You just pick yourself up and try again, you know? I feel like even -- you know, in my career so far, like I've been laid off and I went almost a year without working, and worked on some side projects. So I went to grad school, and then had another year I didn't do anything, and then had another project that failed.

And you know it took us six months to get financing with Foursquare.


CROWLEY: And you know people say you've had all these successes so far. And I think they're -- you know we haven't had it yet. Like we're still working towards it.

ZAKARIA: What do you think were the features or the factors that help make Foursquare possible?

CROWLEY: You know there's a bunch of them. Like there's incubation labs, basically like shared spaces where companies are getting together, five or six different companies, and they're trading resources, they're trading skill sets, and are able to make things happen. And in New York we're seeing a lot of that as funded by the city. Like the space might be paid for. Some of the office furniture might be paid for. And you know start-ups that normally we'd have to raise capital just to get something off the ground can come to these spaces for minimal costs and start building something.


ZAKARIA: So you think government investment is helpful here?

CROWLEY: I think you're seeing it in New York that it already works.

ZAKARIA: Do you think that there's something about technology particularly in America? I mean why is it that I look at Germany, lots of engineers, amazing technical manpower. But, you know, other than SAP, there's really no great computer company to have come out of Germany.

SELVADURAI: Yes. A lot of software grew up in the U.S., right? Because of the old projects like -- you know, DARFA and all these other things that brought the Internet to life and that brought big companies like IBM and everything to what it is now.

So that culture and that history lends itself naturally to producing even more of that kind of talent and that kind of thinking. You're always around those kinds of people so you're more likely to want to do something like them.

ZAKARIA: It's interesting, guys, even you talk about DARFA, which is Defense Department's venture capital fund. Here you guys are on the kind of complete commercial edge in New York, yet you trace your lineage back to stuff that was done by the federal government.

SELVADURAI: So some degree we owe a lot to what happened back then. Yes, it's a government-funded thing that actually brought all this, right? I mean the entire Internet is that story.

ZAKARIA: What's next for Foursquare? What would be success? What would be -- so, you know, you've had this nifty idea and you want to make it a really profitable business. How do you do that?

CROWLEY: I think there are different ways to measure success. Like we -- you know, we started out last year with 100,000 users. And now we're at seven million users. So that's one measure of success. You know? The company hasn't gone down that road of monetizing yet but I think once we figure out how to monetize the business, that'll be another measure of success.

I mean for me personally it's seeing, you know, really everyone in the world start to use the stuff that we're thinking about.


ZAKARIA: And honestly, is that more important than the money?

CROWLEY: Oh, without a doubt. Like I feel like -- I don't know. It's all about just trying to build things that people use and like get -- you know like we have this vision and we're trying to push it out on people and get people to see the world that we do. And that's why we do this.


ZAKARIA: Naveen, Dennis, thanks so much.

CROWLEY: Thanks for having us.


ZAKARIA: Next up, solutions. How our experts would fix the problem and get America back to number one.


DON LEMON, CNN ANCHOR: Hi, everyone. I'm Don Lemon live at the CNN world headquarters in Atlanta. Here are your headlines.

A fierce battle today in the Libyan city of Misrata. The opposition forces say pro-Gadhafi troops tried to retake the town but we're beaten back. More than 40 people died in the fighting. Anti-Gadhafi rebels also say they now control the towns of Ras Lanuf which they say they captured on Saturday.

Yemen has been another Middle Eastern country with unrest but today a massive pro-government rally was held in support of the country's president. Violence is an ongoing threat and the U.S. State Department says Americans should avoid traveling there. There are also reports that al Qaeda militants killed four Yemeni soldiers.

Those are your headlines right now. "RESTORING THE AMERICAN DREAM" returns right after this.


ZAKARIA: Welcome back to a special edition of FAREED ZAKARIA GPS, "Restoring the American Dream, Getting Back to Number One."

So what needs to be tackled first to get us on our way back to the top?

Each of our guests has an important answer to the question, and you're going to want to hear all of them. Let's start with Columbia University economist Jeffrey Sachs who emphasizes investments for the future. But he explains how to pay for them.


ZAKARIA: What would you do to get America back to where it was?

SACHS: The first thing I would do is ask the rich to pay their way, because everything that we need, whether it's helping our kids to start out life with a safe daycare, proper nutrition and a decent school, or whether it's increasing the quality of our infrastructure, whether it's being able to sustain the science and the technology that brought us to where we are today, whether it's the creating a new energy system, requires some public funding.

And we don't have that right now because the taxes on the top have been cut, the corporate tax rates have been gutted by tax havens and secret agreements of the IRS with the U.S. companies to allow them to keep all their money abroad through transfer payments, schemes and many, many things that have really gutted our tax system.

All for the top and now we have a large budget deficit and what we're being told is, oh, the only thing we can do is slash the most basic public services.

Ron Paul wants to end the Education Department. That would be great for America's competitive future. We could have a whole country where our kids, except for the richest, can't get a university degree. That's a real clever strategy. But that's what's happening right now.


ZAKARIA: The economist Dambisa Moyo says for the country to get back to number one, politicians in Washington need to stop worrying about -- number one -- themselves and their reelection and look long-term.


MOYO: My perspective is, is that governments and policymakers are very rational. And they are basically myopic. And that -- by that I mean, they're driven by political cycles. And political cycles, by their very nature, in the United States every two years if you include midterms, force or encourage or even reward policymakers for focusing on short-term factors, what we would call tactical short-term factors.

Things like debts and deficits which are important, they absolutely are. But a lot of what I'm talking about, these things about capital investment, labor investments and education and investing in innovative technologies are things that are many would argue intractable longer term issues that need to be dealt with.

FERGUSON: I think the first thing is to get serious about fiscal reform. Nothing in history is absolutely unalterably written in the stars. The United States is capable of addressing its fiscal problems and with radical reform turning itself around. And I really passionately hope that it does that.

ZAKARIA: But it has to be radical.

FERGUSON: It has to be radical. The Congressional Budget Office said just the other day that if you United States was going to stabilize the ratio of debt to Gross Domestic Product, it would either have to increase taxes, all federal taxes, by 11 percent of cut all the entitlements, all the payments the federal government makes by about the same amount, by about 12 percent actually.

Now that's politically regarded as beyond the pale. Unimaginably suicidally difficult to do, and yet that's what the CBO says has to be done.


ZAKARIA: Radical politics are not part of Harvard professor Joseph Nye's prescription. Just rational politics. He says America needs to remember some of the things that made it a great power in the first place.


ZAKARIA: What will you do to keep America number one?

NYE: I think the most important thing we need to do is keep our openness, our ability to essentially be open to the whole world.

ZAKARIA: Why is that so important?

NYE: Because if you shut yourself off behind protected barriers, you are not competing, and when you're not competing you're not going to be as efficient. When we can attract the talent of the whole world, that's going to keep us in our position in a way that we couldn't if we tried to shut ourselves off.

But the third thing I think that I would mention is that we need to keep the values that we stand for. We need to be standing for democracy and human rights and freedom and openness because that appeals to others.

It's a wonderful story of how this worked back in the Vietnam era. American policies were enormously unpopular in Vietnam. There were marches in the streets throughout the world. But you ask what were the marchers singing? It wasn't the communist internationale. It was Martin Luther King's "We Shall Overcome."

That's the deeper soft power of the United States, of what we stand for. And if we keep that openness both in the economy and in politics, in immigration, and in our value system, I think it's going to be hard for others to equal us.


ZAKARIA: When we come back, my prescription for getting this country back to number one.


ZAKARIA: Many Americans believe we've heard all this talk of decline before. Japan was going to overtake the United States and it never happened. But if you step back and look at the trends we're talking about historically, you will understand that the rest of the world has been playing catch-up with the west and with America for the last 100 years.

Japan just began the trend but over the last decade dozens of countries have started playing our game and playing to win.


FERGUSON: If you take a 500-year time frame, the story of world history is quite simple. For 500 years the west -- it wasn't just the United States, it started in Western Europe. The west patented six- killer applications that set it apart from the rest and left of the rest essentially stagnating for half a millennium.

And those six-killer applications were in fact open sores. They were available to be downloaded by any non-western society that wanted to. The first to do it was Japan. Beginning in the late 19th century.

And so what we're seeing actually is the fulfillment of a roughly century-long process whereby one Asian country after another has downloaded the killer applications of competition, of modern science, of the rule of law and private property rights, of modern medicine, of the consumer society, and the work ethic.

Those six things together are secrets source of western civilization.


ZAKARIA: So countries around the world copied the west's secret source of success. That's great for global growth but what lessons account United States learn? How can it flourish in a world where trade and technology are accelerating every day and there are new competitors everywhere?

Jeffrey Sachs points to a set of countries that have been surprisingly competitive while this new world has been emerging.


ZAKARIA: Most Americans would be surprised to learn that most northern European countries on a per capita GDP basis have grown as fast or faster than the United States over the last 25 years.

SACHS: If you're lucky enough to have the chance to see what life is like in Stockholm, Sweden, or in Oslo, Norway, or Copenhagen, Denmark, and you're lucky to see it with your own eyes, you see really remarkable flourishing society with essentially a very broad middle class that has seen a dramatic rise of quality of life and on every indicator that we would want to look at, how long people are living, life expectancy, the health of the population, the education levels of the population, the leisure time that people have, the ability to watch for the children, the quality of education.

These are flourishing societies. I enormously admire these places and I think they found the right balance of society. Work, of leisure, of being able to support the family at the same time to be able to compete internationally. I have a high technology economy. But at the same time, not leave people behind. It's a wonderful balance and I only wish that more parts of the world could find that balance, including in the United States.

(END OF VIDEO CLIP) ZAKARIA: Northern European countries in general follow a similar set of policies. Their economies are surprisingly free, totally open to trade and investment. Their regulations are highly competitive. Yet they have higher tax rates than the U.S. and that money is used for large investments in infrastructure, education and technology. It's also used to create a less unequal society.

Now the United States cannot and should not copy blindly from any set of countries. Americans are more comfortable with greater levels of inequality than Europeans and attempts to create a European social democracy won't work at all. They will erode the entrepreneurial and dynamic flavor of American society.

Plus tax rates in the west are just not competitive in a world where Singapore now has a maximum rate of 20 percent and almost none of the major competitors, the emerging markets have any capital gains taxes.

But the example of Northern Europe shows that there are ways to stay competitive and yet have a significant safety net which is inevitable and proper in any rich country. The key is that you have to be efficient and flexible.

The problem for the U.S. is not that its government is too big or too small. In fact among rich countries our government takes up a smaller share of the economy. It's that it is highly inefficient.

We spend lots of money on the wrong things and too little on the right things. The problem of the U.S. health care system, for example, is not that the government pays for health care, actually our government pays the least as a percent of the total for health care of any rich country.

The problem is that it is totally inefficient, subsidizing the overconsumption of procedures and technology that don't actually improve our health.

Similarly, our huge subsidies for housing, agriculture, might be good politics but they are bad economics. Distorting the market, creating false booms and fake industries.

Much federal spending outside of defense and interest payments on the debt goes to subsidize consumption rather than investment. And most of this consumption is for the elderly.

The federal government of the United States spends about four times as much money on old people than it does on children under 18 years olds.

That is surely a sign of a society that is not building for the future but subsidizing the present.

We need to invest in science, technology, infrastructure and education. But we can't do it unless we stop the massive wasteful subsidies. We don't need less government or more government, we need different government. We need to be efficient and we need to be flexible.

But to be flexible we need a political system that is flexible and in fact we have one that is highly inflexible.

Now the aspect of America that everyone praises as being truly exceptional is our political system. American democracy is rightly seen as a back-breaking exercise in democracy, blazing a trail that the rest of the world followed.

But that was in the 18th century. Right now we are burdened by that same system with an antiquated electoral college that no one understands, a Senate that doesn't work, with bizarre laws that make it possible for one senator to block the will of the majority without him even explaining why, a crazy quilt patchwork of tens of thousands of municipalities that create massive overlaps and multiple bureaucracies and total waste.

And electoral system that is geared towards constant fundraising and pandering to interest groups.

Now remember, interest groups represent the present. They lock in the existing structure, the existing mechanisms. There are no interest groups for our children's issues, there are no lobbying groups for the industries of the future.

But it is heresy to suggest that we might need to do something about a political system that's totally unable to plan for the future, invest in the future and build for the future.

But I will say it nonetheless. I don't worry about the American economy. It's amazingly dynamic and companies will find ways to be competitive in this country.

I don't worry about American society which is the most open, innovative and amazingly broadminded in the world.

I do worry about American politics which is antique, sclerotic, and unsuited for challenges of the 21st century. If we want to fix America we will need to fix its politics.

Remember, you can read more of my thoughts on this in my cover story in "TIME" magazine and on

Thanks for tuning in. You can catch us next Sunday in our normal time slot, 10:00 a.m. Eastern and Pacific.