Economists and politicians are debating whether we are in a recession or a depression, and how many months or years it will take to recover from the downturn. But what is now happening to the economy is not typical or normal. I would call it a "retrenchment" rather than a recession.
In that sense, it is a permanent correction, and will result in a substantial and long-term contraction of GDP, the standard of living and the stock market. It will take many years to return to where we were. The problem is that the U.S. government and consumer have both been living on borrowed money for a generation, so that most of the gains of that period are illusory. We were never really that wealthy, and now we have to start paying for that extravagance.
A similar argument is made in an interesting article entitled "Will There Be A Recovery?" by Paul Craig Roberts, a former Assistant Secretary of the Treasury in the Reagan administration. He also sees the current situation as different from past recessions. Recovery in the past could be stimulated by cuts in interest rates, allowing consumers to spend more against rising real wages. This would lead the economy to rebound.
Now it is different though. For one thing, for most workers, real wages have remained stagnant for almost twenty years. Consumers have maxed out their credit and can no longer borrow so freely. And interest rates are already at rock bottom levels.
In my book The End of the American Century, I point to China as one of America’s new rivals, but also as a major factor in U.S. profligacy and in U.S. economic decline. To a large extent, the false U.S. affluence of the last decade has been underwritten by China, in two ways: the country has supplied American consumers with cheap toys, gadgets and clothes; and has been bailing out the federal government by purchasing U.S. debt.
The rapid growth of foreign ownership of U.S. debt is yet another dimension of the unraveling of the U.S. economy. In 1970, only 4 percent of U.S. debt was held by foreigners; now almost half is. In recent years, foreigners have financed about 80 percent of the increase in public debt. The two biggest holders of U.S. debt are Japan and China, with China alone owning about $1 trillion in U.S. debt. Senator Hilary Clinton raised concerns about foreign ownership of U.S. debt in early 2007, when she sent a letter to Secretary of the Treasury Henry Paulson and Fed Chairman Ben Bernanke. “In essence,” she observed,
"16% of our entire economy is being loaned to us by the Central Banks of other nations."
An important element of the loss of U.S. global prestige and influence has been this country’s snubbing and flouting of international law and conventions.The latest example of this is the Cluster Munitions Treaty, which was signed in Oslo, Norway earlier this month by 94 countries, not including the United States. One of the 94 signatories was Afghanistan, which agreed to the treaty at the last minute in the face of intense pressure from Washington.
The election of Barack Obama sends a signal to the rest of the world that the U.S. can behave differently.
In the last chapter of my book The End of the American Century, I write that “a best-case scenario for the future of the United States would have to begin with new political leadership” and that the first thing a new president could do “would be to mend American relations with the rest of the world and to temper the unilateralism, hubris and militarism that have made it so difficult for the United States to work with other countries in solving pressing global issues.”
The election of Barack Obama is a big first step for the United States in changing our orientation to the rest of the world, and the way the world sees the U.S.
As Britain’s Economist magazine put it, in its endorsement of Obama as “the next leader of the free world”—“Merely by becoming president, he would dispel many of the myths built up about America: it would be far harder for the spreaders of hate in the Islamic world to denounce the Great Satan if it were led by a black man whose middle name is Hussein; and far harder for autocrats around the world to claim that American democracy is a sham.”
He is widely seen as a leader who is open to the views of others, and willing to work with other countries. France’s President Nicolas Sarkozy, in a handwritten letter of congratulations to the U.S. President-elect, said “your election raises immense hope” in Europe and beyond, “of an open America. . .that will once again lead the way, with its partners, through the power of its example and the adherence to its principles.”
I argue in The End of the American Century that the U.S. has already lost its global supremacy. But can it recover it? In
a globalized and interdependent world, both the country and the world are better off without a superpower.
There is, first of all, both a descriptive (factual) and prescriptive (value judgment) aspect to this question. Will the U.S. regain its superpower status? And should it do so? I believe the answer is negative to both questions, but the reasoning behind them are similar.
Some scholars have argued that the world needs a powerful and stabilizing force, and that the United States is the only country in a position to play this role. The British historian Niall Ferguson has made this case in his book Colossus, as has the U.S. political scientist Michael Mandelbaum in The Case for Goliath. And through much of history, there has been a big single power that has played this role in great swaths of the planet—Rome, Britain, Spain, the Ottomans, etc. All of those are now gone.
The 21st century world is different in several important respects. First, power and influence are more diffuse. There are numerous “rising powers”—China, India, Brazil, Iran, Russia, South Africa—and they are spread all over the globe. None of them want or need a super powerful country encroaching on their turf, or telling them how to behave.
Second, the world is more interdependent, particularly in economic terms—“flat” in Thomas Friedman’s evocative phrase. Prosperity and security are being built on trade, cooperation and compromise. Some countries are bigger and wealthier than others and will naturally play a more substantial role in this globalized community. A “superpower”—economic or military—distorts and destabilizes such a system.
Fareed Zakaria is everywhere these days, articulating a message similar to those in my own book The End of the American Century. But I think he underestimates the seriousness of the situation facing the United States.
His was the lead article last summer (May/June) in Foreign Affairs issue on “Is America in Decline?” His book The Post-American World appeared shortly thereafter, and soon became a best seller. As an editor of Newsweek, his columns appear there regularly, and the October 20th issue of the magazine featured him on the front cover, with the title “The Bright Side” against a cheery yellow background. He even has his own television show, “Fareed Zakaria’s GPS,” where last week he endorsed Barack Obama as the best hope for America’s future.
Zakaria argues that it is not so much that the U.S. is in decline, but that other powers have risen, requiring the U.S. to deal with them with more consultation and compromise. He believes that the U.S. “has the strength and dynamism to continue shaping the world” (Foreign Affairs) and that “the world is moving our way” (The Post-American World). He sees a “silver lining” in the current economic crisis, in that the country will be forced “to confront the bad habits it has developed over the last few decades” (Newsweek).
These bad habits include spending and consuming more than we produce, leading to record levels of household debt, which has grown from $680 billion in 1974 to $14 trillion today. Spiraling consumer debt has been matched by the government. “The whole country has been complicit in a great fraud,” he writes in Newsweek. He quotes the economist Jeffrey Sachs: “We’ve wanted lots of government, but we haven’t wanted to pay for it.”
For most of the 20th Century, the U.S. was the world leader in science, technology, and innovation, with the best scientists, the best universities and the most advanced research and development programs. But all of that has begun to change as other countries and regions have become more advanced and more competitive and increasingly challenge U.S. dominance “
A recent article in the New York Times addressed the U.S. technological decline, and the ways Senators Obama and McCain have approached the issue. This story includes some eye-opening statistics about the loss of U.S. primacy in technology, innovation and R&D. At the top of the story, the Times points out the importance of this sector for America’s economy and role in the world:
For decades the United States dominated the technological revolution sweeping the globe. The nation’s science and engineering skills produced vast gains in productivity and wealth, powered its military and made it the de facto world leader. Today, the dominance is eroding.
One sees this in multiple indicators, but perhaps the most important is the country’s high-technology balance of trade. Until 2002, the U.S. always exported more high-tech products than it imported. In that year, the trend reversed, and the technology trade balance has steadily declined, with the annual gap exceeding $50 billion in 2007.
The U.S. has also fallen behind in spending on research and development, which drives high-tech innovation and development.
One chapter of The End of the American Century focuses on the relatively poor levels of health care in the U.S., and how badly it fares in comparison to other wealthy countries. As I point out there, this is surprising in many ways “because the United States indeed does have available the best medical care in the world and spends more on health care than any other country.” But “because there are so many poor people in the United States and so many people without access to health care, the average level of health and medical care in the United States is among the worst in the developed world.” In the late 1990s, the World Health Organization ranked the U.S. at 37th in the world in the overall performance of the health system. This was the lowest ranking of any country in the OECD. “
New data reported in the New York Times confirms these disturbing trends. The United States now ranks 29th in the world on infant mortality rates which, as the Times points out, is “one of the most important indicators of the health of a nation and the quality of its medical system.” The U.S. ranking has declined sharply since 1960, when its ranking was 12th in the world.
This international gap has widened even though the U.S. spends far more on health care than most other wealthy countries, on both a per capita basis and as a percentage of GDP. In 2006, according to the Times, “Americans spent $6714 per capita on health—more than twice the average of other industrialized countries.”
Grace Marie Turner, president of the Galen Institute, a conservative research organization, told the Times “infant mortality and our comparison with the rest of the world continue to be an embarrassment to the United States.”
Both Obama and McCain have promised to cut taxes, but in the face of record deficits and debt, huge bailouts, and pressing social needs, taxes have to go up, not down.
In the presidential debates the two candidates have bickered over who would cut the most taxes. “Let’s not raise anybody’s taxes,” says McCain, while Obama promises a tax cut for 95% of Americans. These pledges may be music to the ears of American taxpayers, but they make no sense in a time of soaring budget deficits and huge new government expenditures, including probably a trillion dollars for the financial bailout. When the federal budget is so out of whack, and with so many pressing needs, taxes have to go up, not down.
Even before the bailout, the Bush administration was handing over to its successor a $550 billion budget deficit for the 2009 fiscal year. With the costs of the financial bailout, that is more likely to grow to $750 billion. This would be the largest ever annual deficit in absolute terms and the largest as a percent of GDP—5%—since 1983. The federal debt has now topped ten trillion dollars, and last week Congress raised the debt “ceiling” to $11.3 trillion.
In the face of these huge deficits and new obligations—not to mention the looming problems of funding Social Security and Medicare—the only solution is to increase federal revenue. The only real source for that is personal and corporate taxes. Taxes will have to be raised, and probably for almost everyone. This need was true even before the current crisis.