This is a bit off topic, but I recently came across a Goldman Sachs research report entitled Take Stock of America that deserves wider attention than your standard market analysis piece. The report is all about why the smart money’s riding on the U.S. Over the next 20 years China will (hopefully) continue to grow and prosper, but that growth won’t come at our expense.

Warren Buffett’s been beating this drum for years, first in a 2008 NYT’s op ed piece, then in his very public 2009 deal to buy a U.S. railroad. “It’s an all-in wager on the economic future of the United States,” said Buffett. “I love these bets.”

What I love about the Goldman Sachs report is its focus on the hard facts underlying Buffett’s sunny optimism. This isn’t empty-headed jingoism. Consider the following excerpts from Take Stock of America.

[1] Economic Strength
At $14.3 trillion as of December 2009, the US accounts for 24.9% of world GDP. Its economy is 2.8 times larger than the next largest economy, Japan; 3 times larger than the third-largest economy, China; and 4.4 times larger than the fourth-largest economy, Germany. To put these numbers in perspective, the United States has a higher GDP than the next three largest economies combined. The only entity to come close to the US is Euroland, a union of 16 countries with a common currency and monetary policy. A reminder that Euroland includes countries that have their own significant economic challenges will quickly dispel any notion that it will challenge US’s economic preeminence anytime soon.

[2] Military Strength
While the gap between total GDP and GDP per capita of the US and that of other countries is quite significant, the gap in military power is even greater. As Josef Joffe has pointed out, “the United States plays in a league of its own.” Based on 2008 data from the Stockholm International Peace Research Institute, the US spends $616 billion or about 4.2% of its GDP annually on its military, accounting for close to half of the world’s total military spending. Even the sum total of the next 14 countries (including Australia as the 14th) does not add up to the US’s annual outlay.

[3] Prosperity
Let’s now turn to the softer factors that contribute to US’s preeminent status. Since its inception over 200 years ago, the US has had an extremely resilient and dynamic economy and a stable political system. It is an open society and an open economy with immigration as a core principle of its existence. Its technological achievements, in aggregate, outpace those of any other country. The question is how can one measure the factors that account for such resilience, dynamism and stability and use them to make comparisons between the US and other countries. The Legatum Prosperity Index attempts to capture some of these factors. This index is comprised of 79 different variables, which are distilled into nine different sub-indexes; each country’s score is an equal weight of the sub-indexes. The nine sub-indexes are economic fundamentals, entrepreneurship and innovation, democratic institutions, education, health, safety and security, governance, personal freedom, and social capital.

Among major countries, the US ranks number one. Overall, it is ranked ninth out of 104 countries after Finland, Switzerland, Sweden, Denmark, Norway, Australia, Canada and the Netherlands. The only country with a GDP of greater than $1 trillion in the top nine is Canada at $1.3 trillion. Japan, the world’s second largest economy, is ranked 16th. Brazil is ranked 41st, India 45th, Russia 69th and China 75th.

[4] Taxes
[T]here is scope for a rising tax base. Federal tax revenues stand at the lowest level relative to GDP since 1950. A reversion to more typical postwar levels would equate to several percentage points of deficit reduction. Moreover, the total tax base of the US relative to GDP stands well below the level in any other developed country and the OECD average. Thus, there is capacity for the US to increase taxes without jeopardizing its comparative position in the global economy.

Lastly, it’s worth remembering that both personal and corporate tax rates are low by historical standards. While there is raging debate about the impact of such increases on prospective growth, three points bear mentioning. First, higher tax rates have not historically been an impediment to economic growth, as many of the faster-growing periods in American history occurred with tax rates much higher than today’s levels. Second, levels matter. If the federal marginal tax rate on the highest income bracket were to revert to its pre-Bush level of 39.5%, it would still stand below the 50% threshold that some experts consider highly detrimental to growth. Third, timing matters. The mistake of both the US as it was exiting the Great Depression and Japan early in their “Lost Decade” was raising tax rates during the nascent phases of economic recovery. Given the approaching mid-term elections, any broad tax hikes are unlikely to come until 2011, a point at which the economy should be on strong enough footing to absorb them. In short, while undoubtedly not welcome news for individual tax payers, the near certainty of tax hikes should benefit deficit levels going forward.

By the way, in my opinion these stat’s are the byproduct of American exceptionalism, not its root cause. What has set us apart over our relatively short history is the ability to adapt to changing circumstances. This point was captured beautifully in a Alexis de Tocqueville quote the authors of Take Stock of America began their report with:

The greatness of America lies not in being more enlightened than any other nation, but rather in her ability to repair her faults.