Are CEOs Paid Too Much?

Jessica Williams-Gibson interviewed me on the issue of CEO pay for The Indianapolis Recorder, a newspaper founded in 1895 with a mission "to support and empower African-Americans." Her story is at this link.

For my earlier post on this subject, see "CEO Pay and the Bailout."

U.S. Rejects Cluster Bomb Treaty

The Cluster Munitions Treaty was signed in Oslo, Norway earlier this month by 94 countries, not including the United States. The government of Afghanistan did sign, in a last minute shift, and in the face of intense diplomatic pressure from the Bush White House. This story illustrates several themes of The End of the American Century.

Cluster bombs are munitions dropped from the air or ground-launched that eject smaller submunitions or bomblets over a wide area. They are most commonly employed to kill enemy personnel or destroy vehicles. At least fifteen countries have used cluster munitions, including the U.S.in Iraq and Afghanistan, and both Russia and Georgia in their conflict earlier this year. The most extensive use, however, was by U.S. bombers over the Ho Chi Minh trail in Laos during the Vietnam War. It is estimated that at least 9 million unexploded bomblets remain in Laos.

These unexploded bomblets are the biggest problem with these weapons. Like landmines (which are also banned under an international convention), the unexploded munitions remain a deadly hazard for civilians long after a conflict ends. Often they are brightly colored and look like baseballs, attracting children and with deadly results. A third of cluster bomb casualties are children.

Like the international treaty that banned land mines, the impetus for a cluster bomb ban grew out of an international grass roots movement. The Cluster Munition Coalition brought together some 300 "civil society organizations" from 80 countries, including Amnesty International, Human Rights Watch, and Handicap International. The coalition also includes the International Campaign to Ban Landmines, an organization that won the 1997 Nobel Peace Prize.

The convention banning cluster bombs was signed in Oslo by 94 countries, including U.S. allies like Britain, Germany, France and Japan, but not including the U.S. Other non-signatories include Russia, China, India, Pakistan, Iran and Israel. Unexpectedly, Afghan President Hamid Karzai ended up signing the treaty that bans the weapons that have devastated his country. According to the New York Times, Karzai's change of heart was particularly affected by testimony from cluster-bomb victims, including Soraj Ghulam Habib, a 17 year old from the city of Herat who lost both legs when he accidentally stepped on a cluster remnant seven years ago. The Bush administration had urged Karzai not to sign it, so his decision, according to The Times, "appeared to reflect Mr. Karzai's growing independence from the Bush administration."

The U.S. has begun to bend to international pressure on the issue, and has not actually employed cluster bombs since 2003. A State Department official told the Times that cluster bombs were sometimes more humane than conventional ones. "As an example, he said that antennas on a roof could be taken out efficiently with a cluster bomb, without bringing the building down."

Some expect President-Elect Obama to support the treaty, and his team has said it will "carefully review" the treaty. However, as London's The Economist points out,

"Mr. Obama will find it hard to change American policy once he realizes that cluster munitions make up more than half of the country's bomb stockpile."

The U.S. refusal to sign this treaty is part of a larger pattern and long-term trend of the U.S. disengaging from international law and the global community--a theme I develop in a chapter on "Abandoning International Order" in The End of the American Century. There is a long list of international treaties that the U.S. has not ratified. These include the UN convention prohibiting discrimination against women; the UN Convention on the Rights of the Child; the treaty banning land mines (signed by 122 nations), the Kyoto Treaty on global warming; and the treaty establishing the International Criminal Court, to try individuals for war crimes, crimes against humanity, and genocide. All of these treaties have been signed by the vast majority of the world's nations. The only other country besides the U.S. to reject the Rights of the Child convention is Somalia, which has no functioning government.

For each of these treaties, the U.S. has its reasons for non-participation. But the very fact of the U.S. not participating in these international conventions sends a bad signal to the rest of the world. It is a sorry sign of U.S. "exceptionalism" and is an important factor in the declining popularity of the U.S. around the world, even before the extremely unpopular Bush administration. The U.S. shift away from international law is particularly tragic because no country was more important in establishing international law and institutions (like the U.N.) in the years after World War II.

The about-face of the Afghan government is also telling in several ways. On the one hand, the Bush administration pressure on the Afghan government to reject the treaty is also part of a pattern. While other administrations have failed to participate in important international treaties, the Bush White House has gone out of its way to keep other countries from doing so. The most egregious example of this is the International Criminal Court. Shortly after President Bush "unsigned" the ICC statute, he urged Congress to pass the American Servicemembers Protection Act. This legislation gives immunity to U.S. personnel from the court. It also provides for punitive actions against countries that are parties to the ICC, but which refuse to confer immunity to Americans. For many people around the globe, it seemed as if the U.S. was asserting that Americans were above the law when it comes to war crimes and crimes against humanity.

On the other hand, Karzai's rejection of pressure from his protector and benefactor, shows just how weak the U.S. has become in the international arena. The United States, and particularly its current president, has become so marginalized that it can not even influence a country that is utterly dependent on the U.S. Washington has lost an enormous amount of face in the global community, and has little left in its arsenal of "soft power." It will take a major and sustained effort by the Obama administration to repair the damage. But it is unlikely that U.S. reputation, power and influence will ever return to where it was.

The Iraq War Fiasco

On Sunday, the New York Times reported on an unpublished draft of a U.S. government history of the Iraq reconstruction effort. Titled "Hard Lessons: The Iraq Reconstruction Experience," the government report concludes that after five years, "the United States government has in place neither the policies and technical capacity nor the organizational structure" needed to accomplish the goals. The report finds that

"the rebuilding effort never did much more than restore what was destroyed during the invasion and the convulsive looting that followed."

The Iraq War has mostly disappeared from news headlines, replaced by the U.S. economic crisis and due to the somewhat lessened incidence of violence in Iraq in the last year. But the fiasco of the war remains, and is an important factor in the decline of the U.S. both domestically and internationally--the subject of Chapter 7 of The End of the American Century. The decision to invade Iraq was based on false information and taken without international support. It has claimed the lives of more than 4000 American soldiers and at least 90,000 Iraqi civilians. It has cost the U.S., so far, more than $500 billion. The war triggered economic and social collapse, sectarian animosity, political fragmentation, civil war, and regional instability. It has also inflamed anti-Americanism and stimulated terrorism both in the Middle East and worldwide.

President-elect Obama intends to withdraw most troops from Iraq by the summer of 2010. This will help the United States, but it is not at all clear if it will help Iraq. The country has been devastated, and it will take years to rebuild and reestablish stability. Probably U.S. support for this effort will diminish--though as "Hard Lessons" has shown, there has been negligible progress even with the efforts of the last five years. There are disturbing signs of the growth of fundamentalism in Iraq (including in school curricula). And almost certainly sectarian violence will continue, and probably escalate with the removal of American forces.

The same day that the draft of "Hard Lessons" was leaked, an Iraqi journalist hurled two size-ten shoes at President Bush at a press conference in Baghdad. "This is from the widows, the orphans and those who were killed in Iraq," he shouted. It was a discouraging sign that even among Iraqis, there is much resentment toward the U.S. for its efforts.

I.O.U.S.A. Video On the Toxic Mix of U.S. Debts

The Peter G. Peterson Foundation has produced a documentary video about the roots of the financial crisis in the U.S., entitled "I.O.U.S.A.: One Nation, Under Stress, in Debt". This link takes you to a 30-minute "bite sized" version of the documentary for viewing online.

Pete Peterson, former Republican Secretary of Commerce, published the book Running on Empty in 2004, which pointed out the toxic nature of the unprecedented "triple deficits" bedeviling the U.S. economy: the budget, trade and household deficits. This film dramatically and powerfully illustrated these deficits and shows how much worse they have gotten in the last eight years. The budget deficits, as a share of the economy, are nearing levels not seen since World War II. The U.S. trade deficit (importing more than we export) is at record levels, and is the largest in the world. And household debts are the worst since the Depression.

As the moderator of the show says at the beginning, the most serious threat to the U.S. is not terrorism, but "our own fiscal irresponsibility."

As I have pointed out on this site, and in my book, these economic problems are the starting point of The End of the American Century, but they are only part of a much bigger set of problems. Pete Peterson and his video say that we have to raise taxes and cut spending. This is probably true. But how do we do this during an economic crisis, and when we face monumental problems--with education, health care, the environment, infrastructure, poverty--that require more resources, not less?

The video is worth watching, and very sobering.

"Global Trends 2025" and "The End of the American Century" Radio Interview

I was interviewed about the National Intelligence Council's report Global Trends 2025 and my book, The End of the American Century, on WIBC Radio's "Indianapolis Tonight" with Steve Simpson. The interview, broadcast on November 26, can be heard on the "Indianapolis Tonight" audio archives.

Fukuyama: From "The End of History" to "The Fall of America"

Francis Fukuyama, Professor at the Johns Hopkins School of Advanced International Studies (my own alma mater), had a high profile essay in Newsweek in October, boldly titled “The Fall of America, Inc.” Professor Fukuyama addresses the declining global appeal of America’s “brand.” Two “fundamentally American ideas have dominated global thinking since the early 1980s,” he contends. The first of these was “a certain vision of capitalism” accompanied by “pared-back government.” The second idea was “America as a promoter of liberal democracy around the world.”

Fukuyama sees both of these ideas now tarnished and discredited. The U.S. economy “has gone off the rails and threatens to drag the rest of the world down with it. Even worse,

“the culprit is the American model itself: under the mantra of less government, Washington failed to adequately regulate the financial sector, and allowed it to do tremendous harm to the rest of society.”

The idea of American democracy was “tarnished even earlier,” with the freedom agenda of the Iraq War widely perceived around the world as “an excuse for furthering U.S. hegemony.”

In my book The End of the American Century, I make similar arguments about the decline of brand U.S, but I show that this decline started long before the recent financial collapse, and even before the Iraq War. Global public opinion surveys in recent years have shown little enthusiasm for “American-style democracy” and even less support for the American ways of doing business. And while Fukuyama uses the term “brand” as a metaphor, there actually have been marketing surveys of the popularity of “nation brands” among consumers around the world. In one such study, the United States ranked eleventh out of twenty-five countries.

Fukuyama’s Newsweek essay is interesting both for its perceptive insights, but also because of who he is and what he has written and argued in the past. He gained national prominence in 1989 with the publication of an influential and controversial article titled “The End of History?” In that essay, and a following book, he argued that the collapse of European communism and the end of the Cold War marked “the end point of mankind’s ideological evolution and the universalization of Western liberal democracy as the final form of human government.” Later he became a key figure in the neoconservative movement and its Project for the New American Century which, among other initiatives, strongly encouraged the removal from power of Saddam Hussein, even before September 11. By 2002, though, he had turned away from the neoconservatives, and became critical of the Bush administration and the Iraq War.

Much has changed in the world since the Western triumphalism following the collapse of communism. It has become painfully clear, for one, that many people around the world—perhaps even most people—are not so convinced that Western liberal democracy is—or should be—“the final form of human government.” Even so, it is quite startling to see one of the intellectual fathers of the neoconservative movement so frankly recognizing the failure of the American model to take hold in the rest of the world. As Fukuyama concludes his essay,

“the ultimate test for the American model will be its capacity to reinvent itself once again. Good branding is not, to quote a presidential candidate, a matter of putting lipstick on a pig. It’s about having the right product to sell in the first place. American democracy has its work cut out for it.”

The End of Affluence

Increasingly, even economists and bankers are coming to understand that we are in the midst of a global economic shift. The core of this change is the inevitable decline in American consumption, which for a generation has been fueled by borrowing and debt. The bill now has to be paid, so the trend of steadily growing U.S. affluence can not continue. Because consumer spending constitutes almost three-quarters of the U.S. economy, a decline in consumption will cause a general and long-term economic decline in this country. A slowdown in the world’s biggest economy will, of course, affect the whole globe.

The centrality and toxic nature of U.S. consumerism is highlighted in an op-ed piece in this week’s New York Times by Stanley Roach entitled “Dying of Consumption.” “It’s game over for the American consumer,” writes Roach, who is the chairman of Morgan Stanley Asia. His argument and many of the statistics he uses are similar to those I marshal in my chapter on “The End of Affluence” in The End of the American Century. Roach points out that for over a decade, “vigorous growth in American consumption has consistently outstripped subpar gains in household incomes.” The consequence has been a long-term decline in household savings and a huge increase in household debt. From 1950 to 1985, American consumers saved roughly 9% of their disposable income. Beginning in the 1990s, that rate steadily declined, dipping below zero in 2005—for the first time since the Depression. At the same time, consumer and mortgage debts rose from 77% of disposable income in 1990 to a record 127% in 2008.

According to Roach, this

“decade of excess consumption pushed consumer spending in the United States up to 72 percent of gross domestic product in 2007, a record for any large economy in the modern history of the world. With such a huge portion of the economy now shrinking, a deep and protracted recession can hardly be ruled out.”

The problem is that the whole American economy is built on consumption. The U.S. doesn’t actually produce much any more. Manufacturing has steadily declined as the linchpin of the American economy, and now constitutes less than a fifth of GDP. The imminent bankruptcy of the U.S. auto companies is simply another (albeit big) element of this downward trend. Meanwhile financial services—primarily banks and mortgage companies—have steadily grown, mostly by providing loans to consumers to finance purchases their incomes will not allow. So when both consumption and financial services decline, on top of the previous decline in manufacturing production, there is not much left. It will take a long time to rebuild the U.S. economy. There will be much belt-tightening for the middle class, growing unemployment, and more suffering by the poor.

Roach is opposed to “tax cuts aimed at increasing already excessive consumption.” I make a similar argument in my previous post on “Tax Cuts Will Make Things Worse.” Such cuts will decrease federal revenues, which are desperately needed to allay the new and mushrooming costs of unemployment insurance and mortgage foreclosures, not to mention the preexisting problems of health care, education, the environment, Social Security, and Medicare, all of which have been under funded for a generation.

Meanwhile, both the Bush administration and the incoming Obama team seem to feel that the best way to alleviate the economic crisis is to promote even more deficit spending, by both government and consumers. The federal deficit, already at record high levels, will balloon even higher with a trillion dollars or more of bailout money. Much of this money is being thrown at banks, mortgage companies and financial institutions to enable them to lend even more money to consumers who are already deeply in debt. This may (possibly) help stimulate the economy in the short run. But in the long run, we all have to stop spending and buying so much, and learn to save and invest. As Roach sums it up:

"Crises are the ultimate in painful learning experiences. The United States cannot afford to squander this opportunity. Runaway consumption must now give way to a renewal of savings and investment. That’s the best hope for economic recovery and for America’s longer-term economic prosperity.”

This shift, from consumption to savings, will be wrenching and painful for America, and for much of the rest of the world. As Britain’s Economist magazine notes (in "The End of the Affair"), America’s “return to thrift” presages a recession that will be both “long and deep.” It marks a fundamental shift in global economics, and in America’s role in the world.

Obama Set To Rebuild Our International Reputation

A revised version of my 11/13 post on "America's New Face to the World" was published last Sunday in the Indianapolis Star with the title "Obama Set to Rebuild Our International Reputation."

U.S. Intelligence Report Predicts Declining U.S. Influence

The National Intelligence Council has released its report Global Trends 2025: A Transformed World which forecasts that the relative strength of the U.S. "even in the military realm--will decline and U.S. leverage will become more constrained."

I posted a blog here in September about the preview of this report delivered in a speech by C. Thomas Fingar, the Chairman of the N.I.C. The full 120-page report, like Fingar's earlier remarks, sees the U.S. remaining the single most powerful global actor, but with reduced influence and leverage in the face of the growing clout of China, India, Russia and other countries.

The current report, however, seems less sweeping in its assessment of U.S. decline than Fingar made earlier. In September, he spoke of U.S. leadership eroding "at an accelerating pace" in "political, economic and arguably, cultural arenas." The Global Trends report does not have such language, and focuses more on the rise of other countries than on the decline of the U.S.

The report does, however, call attention to the importance of leadership in managing this transition to a transformed world. "Leadership matters," the first-page summary says. "No trends are immutable," and "timely and well-informed intervention can decrease the likelihood and severity of negative developments and increase the likelihood of positive ones."

Wise leadership, in Washington and elsewhere, is crucial because the scale of global changes are immense. "The international system...will be almost unrecognizable by 2025 owing to the rise of emerging powers, a globalizing economy, and historic transfer of relative wealth and economic power from West to East, and the growing influence of nonstate actors." Indeed, this transfer of global wealth and economic power from West to East "is without precedent in modern history."

The report forecasts a more diffuse distribution of global power, the transformation of current international organizations (like the U.N.), the growing influence of nonstate actors (especially NGOs--non governmental organizations), and "a more complex international system."

In this system, the U.S. will be a "less dominant power" with "less room for the US to call the shots without the support of strong partnerships." Even in the military realm, changes in science and technology and the rise of non-state actors "will construct US freedom of action."

These arguments are similar to those I raise in the last chapter of The End of the American Century, entitled "America and the World After the American Century." A key difference between my book and Global Trends is that most of my book is about trends that have already occurred. Only my last chapter projects into the future, as the NIC report does. In my view, the decline of the U.S. is a fait accompli. As I write on page 1 of my book:

"In the past decade, and particularly since September 11, every aspect of this American predominance has begun to wane. The U.S. economy is riddled with debt [this was written well before the current financial collapse] and unsustainable obligations--by both governments and households--presaging at least long-term economic decline if not general collapse. The educational system, once considered the world's best, now ranks near the bottom among developed countries, and a sizable portion of U.S. citizens is now functionally illiterate. American corporations, once models of dynamism, innovation and efficiency, are hampered by bureaucracy, corruption, and bloated executive payrolls, and few are generating either innovation or growth. Even science is marginalized and beleaguered under the gun of politics qnd religion. While American consumer goods and popular culture remain fashionable in much of the world, there is at the same time increasing resistance in many countries to the erosion of national culture and traditions in the face of U.S.-led globalization."

So a good deal of the decline of U.S. global influence is due to changes within the U.S.--changes that have been accelerating for the last two decades. These internal developments are as much responsible for "global trends" as are the dynamic changes elsewhere in the world.

"Rise of the Rest" Youtube Video

A cute and striking 5-minute Youtube video, "The Rise of the Rest," is produced by the Futures Group, and based on the phrase and data from Fareed Zakaria's The Post-American World.

The video illustrates some of the global trends favoring the emergence of China, India and other countries as major economic and political forces in the world. Much of this information is also in my own book The End of the American Century, though there are two important differences in my approach and the one in this video.

First, the video often uses projections of trends into the next decade or two--for example seeing the Chinese economy eventually surpassing that of the U.S. While this may turn out to be true, projections into the future are, of course, highly speculative. The recent financial collapse in the U.S., which has become a global crisis as well, illustrates how quickly such projections can turn sour. My book mostly uses trend data up to the present, to demonstrate changes that have already taken place.

A second difference (between this video and me; and between Zakaria and me) is that I focus much more attention on the declining fortunes of the U.S. Zakaria says his book is not about the decline of the U.S., but about the "rise of the rest." My book is about both. Over the last two decades, the U.S. has declined in many ways--the economy, education, health care, infrastructure, equality, and others. It is the combination of U.S. decline and the rise of the rest that is so quickly and dramatically changing the face of the globe.

David Mason Interview on Canadian Television

Television interview about The End of the American Century and the global financial crisis; Thursday on Canada's CTV Newsnet television, viewable here.

America's New Face to the World

In the last chapter of 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 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."

David Cameron, the leader of Britain's opposition (Conservative)party, said Obama's victory has restored America's status as a "beacon of hope."

Obama enjoys amazing level of support all around the globe. Last summer in Berlin, 200,000 Germans turned out to cheer him—reminiscent of the celebration of President Kennedy during his 1963 “ich bin ein Berliner” speech. A BBC poll of 22,000 people in 22 countries in September found 49% favoring Obama to win, compared to just 12% for McCain. In every single country, more people supported Obama than McCain.

The Economist conducted their own (unscientific) online poll of some 53,000 readers around the world, with Obama winning by a margin of more than five to one. His global victory was even more lopsided if you allocate those votes by country according to size (the way the Electoral College does for states). In this global “electoral college” Obama collected 9115 votes, compared to a paltry 203 for John McCain. In 56 countries, at least 90% backed Obama.

In the Arab and Muslim world, deep skepticism of U.S. intentions remains. But there were voices of hope even in those countries, and marvel at the election of a black man whose father was from a Muslim family. The Saudi-owned pan-Arab newspaper Al Hayat saw Obama’s victory as “a message” repudiating the policies of the Bush administration.

“Obama’s election was a message against such destruction, against unjustified wars, wars that are fought with ignorance and rashness, without knowledge of their arenas or the shape of their surroundings. . . .It was a message against the pattern that became a burden on the U.S. and transformed the U.S. into a burden on the world.” (Reported in the New York Times).

This language is, to say the least, a back-handed compliment to the U.S. It is also emblematic of the way people in many countries—and not just the Arab world—feel about the U.S. and the global role it has come to play. So the U.S. has a lot of global PR work ahead of it.

Fortunately, President-elect Obama is aware of these problems and committed to redressing them. In his book The Audacity of Hope, he acknowledges that in foreign policy “our record is mixed.” At times, he writes, American policies

“have been misguided, based on false assumptions that ignore the legitimate aspirations of other peoples, undermine our own credibility, and make for a more dangerous world.” (p.280).

He writes there of the need for the U.S. to be more cooperative and multilateral in dealing with other countries, and to rely more on persuasion than intimidation: “No person, in any country, likes to be bullied.” He favors U.S. policies that “move the international system in the direction of greater equity, justice and prosperity” and observing the “international rules of the road.”

“When the world’s sole superpower willingly restrains its power and abides by internationally agreed-upon standards of conduct, it sends a message that these are rules worth following, and robs terrorists and dictators of the argument that these rules are simply tools of American imperialism.” (p.309).

In an article last year on “Renewing American Leadership” in the prestigious journal Foreign Affairs, Obama acknowledged that “in the wake of Iraq and Abu Ghraib, the world has lost trust in our purposes and our principles.” But the U.S. could regain that trust by “understanding that the world shares a common security and a common humanity.” If we want to lead the world, he argues, we must do so “by deed and by example.”

Barack Obama often invokes the names, the language, and the ideas of Franklin Roosevelt and John F. Kennedy. These two men, more than any other presidents in this century, inspired citizens of the United States as well as those of many other countries. FDR’s ideals and policies, in particular, helped launch the American Century. Perhaps Barack Obama can begin the process of rebuilding the United States. As he wrote in Foreign Affairs,

“it is time for a new generation to tell the next great American story.”

This new story, however, is unlikely to look much like the previous one.

Can the US Regain Supremacy? Should It?

In my CBC Radio interview yesterday (see previous blog post) with Anna Maria Tremonti, there was one question she asked that gave me pause. She had first asked if I thought the U.S. is losing its superpower status. When I answered in the affirmative, she followed up with “Can it regain it?” I said I thought not, and went on to say that in a globalized and interdependent world, both the country and the world are better off without a superpower. But I think this needs some elaboration.

There is, first of all, both a descriptive (factual) and normative (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 empires 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.

Third, the most important issues facing the globe now require cooperation, consultation, compromise and diplomacy rather than brute strength or intimidation. Global warming, environmental deterioration, epidemics, famine, and drought are the most pressing threats to humanity. All of them require the participation of all states, regardless of their wealth, power and ideology. A superpower, with its tendency to unilateralism and arrogance, can only hinder such cooperation.

For all of these reasons, the U.S. will not, and should not, play the dominant and directing global role that it did through most of the 20th Century.

In addition to these global factors are domestic U.S. ones. In the American Century, the U.S. had the world’s biggest economy, its richest citizens, the best schools, the finest system of medical care, and the most successful democracy. It can no longer make such claims, both because of our own decline in the past two decades, and because other countries have been catching up. Most developed countries now surpass the U.S. in the quality of life, health care delivery, and education, and have much lower levels of poverty, inequality and violence. The vaunted U.S. economy (which for so long was a house of cards built on multiple levels of debt) has now begun an inevitable decline. Until the encouraging results of last week’s election, even the U.S. political system was rickety, with low levels of voting and participation, very unequal representation, erosion of fundamental rights, and questionable electoral outcomes.

So whereas in the 20th Century, the U.S. carried global influence because of its own domestic model of success (in addition to its military strength), it can no longer make those claims of exceptionalism. The rest of the world has caught up.

The U.S. has already lost the status of sole superpower. Even if we wanted it, other countries don’t recognize or accept it. And both the U.S. and the rest of the world will be better off if we don’t regain it.

The End of the American Century and the Post-American World

David Mason and Fareed Zakaria were interviewed this morning (Thursday) on Canada's CBC Radio program "The Currents" with Anna Maria Tremonti. We each discussed themes of our books, The End of the American Century and The Post-American World and how those related to the tasks facing the Obama presidency. You can hear the half-hour program at the program's website a this link.

An Historic Day, for Indiana and the World

I went to vote this morning at 6am. It was dark, and there was already a long line outside the polling place at St. Thomas Aquinas elementary school. My daughters went to that school, and as the line snaked through the main hallway, I studied the pictures of the (graduating) 8th grade classes from over the years, and saw their faces--young, innocent, happy and hopeful.

I have never seen such a line for an election in this country. By 7am, I had filled out my ballot and fed it into the optical scanner--it showed that I was the 89th voter in that precinct. My friend Mike, an election official, observed that this was more than one vote per minute since the polls opened.

This is an historic day, for many reasons, but first and foremost because Americans have reclaimed their democracy. After years of embarrassingly low voter turnout levels--far lower than most other democracies--record numbers of people are voting today. This in itself is good for America, and a sign of hope.

In the past, poor people, young people, and minorities were far less likely to vote than rich, older White people. This skewed the political system and made it unrepresentative. This was one reason Chapter 5 of The End of the American Century is titled "Ailing American Democracy." Today, all those groups are voting, probably in record numbers, restoring a truly representative democracy.

But it is momentous as well because of the person that has moved them to turn out today--a young, vibrant, biracial man with an unusual name, who speaks of "community" and says that change must come from the grassroots. When the United States elects this man as their President, it will send a message around the world that the U.S. has rejoined the global community.

Indianapolis Star Neutral on Presidential Endorsement

The Indianapolis Star decided to withhold endorsing either Obama or McCain for President this year. This was the first time since 1964 (Lyndon Johnson) that the Star had not endorsed the Republican candidate for President. Dennis Ryerson, the editor of the newspaper, wrote that the editorial board was not able to reach consensus, so they simply "decided to agree to disagree" and to withhold an endorsement.

Indiana is one of "swing states" in the electoral campaign, with polls in the state showing the Obama-McCain contest to be a tossup. The latest statewide poll conducted by the Star shows Obama with 45.9% and McCain with 45.3% support among Hoosiers. If Indiana votes for Obama, it will be the first time the state's electoral votes have gone for a Democrat since Lyndon Johnson's landside victory of 1964.

Zakaria's Optimism

Fareed Zakaria is everywhere these days, articulating a message similar to mine in The End of the American Century. But I think he underestimates the seriousness of the situation facing the United States.

Zakaria had the lead article last summer 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.”

He believes the current crisis will force greater fiscal “discipline” by both families and government, recognizing that “this discipline will be painful for a country that has gotten used to having it all.” It will also be good for our country’s foreign policy. Being the only superpower “has made Washington arrogant, lazy and careless.” Perhaps we could get away with this arrogance when we were on top of the world. But things have now changed.

“We cannot keep preaching to the world about democracy and capitalism while our own house is so wildly out of order.”

My book, and this blog, make similar arguments, and I agree with all of this, but especially that last sentence, which appears near the end of Zakaria’s Newsweek essay. However, I think Zakaria understates just “how wildly out of order” our system has become. Record consumer and government debts and a bankrupt financial system and foreign policy, as bad as those are, constitute only parts of the problem. At the same time that we have been madly spending on consumer goods, wars and debt servicing, we have let languish education, health care, infrastructure, science and technology. We have shuffled to the side the hugely expensive fixes required for Social Security and Medicare. Poverty and inequality are higher in this country than a generation ago, and among the highest in the developed world. Even our vaunted democracy, eroded by money and abuse of executive power, is no longer such a beacon for other countries. A major part of my book shows how all these interrelated problems result in a much more serious situation than Zakaria recognizes.

While we seem prepared to spend a trillion dollars bailing out a financial system led by incompetent billionaires, we need at least that much to fix the health care system, not to mention these many other neglected issues. It is difficult to see where the resources will come from to mend our society, once the banks are taken care of. It will require many years to restore the United States, and a change in America’s mindset, as well as its priorities.

Zakaria concludes his essay by suggesting that

“if we can learn the right lessons from this crisis, the United States will once more be playing by its own rules.”

I am not quite sure what “the right lessons” are, or what our “own rules” are. I think the needed lessons may be deeper and broader than he suggests, and that we may even have to change the rules. I am not as optimistic as Zakaria, but even without optimism, one can always hope. And this election week offers much hope.

The Post American World, by Fareed Zakaria

The Post American World by Fareed Zakaria (Norton, 2008)

Newsweek editor and columnist Fareed Zakaria has written a thoughtful and thought-provoking book about America’s relative decline in the world, and “the rise of the rest”—especially China and India. These emerging powers are following a “third way,” not always the path or model of the United States, and in the process reshaping the international system. They are gaining regional and global influence not with military muscle or political power, but by the force of example, and by sheer economic bulk. Meanwhile, much of the world is moving “from anger to indifference” about the United States—from anti-Americanism to “post-Americanism.”

Zakaria compares this global shift to previous epochal changes, with the rise of the Western world, and the rise of the U.S. He sees the main challenge for the U.S. to get beyond our “dysfunctional” political system that has us debating trivia instead of coming to terms with globalization and a more diffuse international system that requires consultation, cooperation and compromise.

Curiously, though, he still refers to the U.S. as “the single superpower” in a unipolar world, and sees U.S. continued strength based on the dynamism of the U.S. economy. Recent events, however, suggest that even the vaunted U.S. economy may be pretty “dysfunctional.” The trends Zakaria describes may be faster and more dramatic than he expected.

(More on Zakaria coming soon to this blog)

U.S. Loses High-Tech Dominance

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. As a percent of GDP, total R&D expenditures have remained flat since the 1960s, while federal government spending on R&D has declined steadily. The U.S. has fallen to 8th place worldwide on R&D spending as a share of GDP, behind Israel, Sweden, Finland, Japan, South Korea, Switzerland and Iceland (Popular Science 11/08).

China is not yet on that top-ten list, but may not be far behind. The country is ramping up support for high tech innovation and R&D, and President Hu Jintao this year called on Chinese scientists to challenge other countries in this area: "We are ready for a fight,” he said, “to control the scientific high ground and earn a seat on the world’s high technology board.” ("China's Industrial Ambition")

The U.S. is also slipping, relative to other countries, in the creation of patents, scientific inventions, the publication of science and engineering articles, and the number of students focusing on science, math and engineering. In international comparisons of scientific and mathematical literacy, and in international competitions in those fields, American students fare poorly, often ranking near the bottom of the group of wealthy countries. Increasingly the top science and engineering students in this country are citizens of other countries, who then return home. Science magazine (7/11/08) recently reported that the most likely undergraduate alma maters for those who earned a U.S. Ph.D. were—get this--Tsinghua University and Peking University—both in Beijing.

These worrisome developments prompted a major study recently, “Rising Above the Gathering Storm,” from the National Academies, the nation’s most eminent scientific and engineering organization, calling for the U.S. to strengthen its international competitiveness. The authors of the report were “deeply concerned that the scientific and technological building blocks critical to our economic leadership are eroding at a time when many other nations are gathering strength” and were “worried about the future prosperity of the United States. A review of high tech by the magazine Popular Science (11/08) puts it a but more bluntly: “The technological dominance of the United States may soon go the way of the dollar.”

Fortunately, the man who will probably take over as President next January, Barack Obama, is on top of these issues, often speaks about them, and has aggressively promoted efforts to remedy them. In his book The Audacity of Hope, he called for a doubling of federal funding for basic research and the training of 100,000 more engineers and scientists over the next four years. He co-sponsored a bill in Congress based on the recommendations of “The Gathering Storm” and called for increased federal support of science education, especially for women and minorities. The Senate passed the bill 88 to 8 ( Senator McCain abstained), but has not yet funded the programs. It will be an expensive proposition—about $43 billion for the first three years—which will be all that much more difficult to manage in this time of economic crisis. But these long-term investments are critical to recovering America’s economic dynamism

Obama in Indianapolis

Today I went to Barack Obama's campaign rally in downtown Indianapolis, with my daughter and her daughter, 16 month old Katie, to whom The End of the American Century is dedicated. The rally was on the American Legion mall, which was jam-packed with tens of thousands of people--perhaps 50,000? (who can estimate these things?) Under crisp blue skies, a typical lovely Indiana autumn day, Obama stirred and inspired us all.

I have tried to keep this blog, and my book, nonpartisan, in the belief that the problems I address transcend parties, politics or particular leaders. There is no doubt that the Bush administration has made almost all our problems worse, but the domestic and international problems facing the U.S. precede Bush, and will dog his successors as well.

But it is hard to resist the appeal of Obama, and his speech today addressed both the problems we face, and the things we need to do to address them. He called for new attention and new investments in education, infrastructure, and research and development--all of which are critical to revitalizing the American economy and standard of living. Even more importantly, in my view, he spoke of the need for unity in diversity, for hope in the face of adversity, and for sacrifice in the cause of patriotism. He sees the future in our children, and in volunteerism and service. And he recognizes that some belt-tightening will be necessary, at least in the short term. These are all themes of my book, particularly in my last chapter on "America and the World After the American Century."

Katie was as cute as the button she was wearing, for Michelle Obama as First Lady. I also sported an Obama button. Writing my book was not exactly an exercise in hope, given the overwhelming number of problems I document there. And this blog has not exactly been full of cheerful news. But this afternoon, waiting for Obama amidst that huge, diverse audience, hearing the PA system booming the country-music song "I'm Alright" (Joe Dee Messina), and then seeing and hearing this smart, young, concerned, thoughtful multiracial candidate for President--even I had hope.

"It's a beautiful day not a cloud in sight so I guess I'm doin' alright."

Downplaying and Misrepresenting the Debt

It is bad enough that our political leaders make light of the unprecedented levels of government deficits and debt, as pointed out in a New York Times covers story October 20: "Deficit Rises, And Consensus Is to Let it Grow." The problem is compounded when The Times’ story on the subject totally misrepresents the scale of the problem.

The reporters use a strange method of calculating the burden of the debt, contending that it constitutes “a relatively modest 40.8 percent of the nation’s national income.” In fact, the current federal debt is about two-thirds of gross domestic product, according to official budget figures. The story asserts that the current debt burden is much less than during the 1990s. In fact, The Fiscal Year 2009 Budget estimates the debt at 69.3% of GDP, which is the highest figure since 1955.

The story also misrepresents the size of the current debt when it states that the federal government increased the national debt “to the present $5.8 trillion.” In fact, the current debt is over $10 trillion, and with the bailout bill, Congress raised the ceiling on the debt to $11.3 trillion.

The Times' story does a disservice to its readers with this misinformation, and contributes to the national problem of discounting the gravity of the situation, which could well lead the country into bankruptcy

U.S. Ranks Low on Health Care

Chapter 3 of The End of the American Century, titled "Torn Social Fabric," focuses especially 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" (bold added). 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."

The dismal state of health care in the U.S. reflects broader trends of social and economic decline in the U.S.--compared both to our own past and to other countries in the world. It is the major theme of The End of the American Century: that the U.S. has lost ground as other countries have gained; and that we can no longer claim special privilege as the richest, or the most successful, or the most powerful--on almost any dimension.

The poor state of health care, and education, and infrastructure in the U.S. result from inadequate attention and resources to these areas of our domestic health. They pose the second horn of the U.S. dilemma: our economy is collapsing at the very time when we most need resources to rebuild the country at home, and reestablish our reputation abroad.

(See also my 9/23/09 post "U.S. Health Care Compares Badly to Others")

BBC wonders if this is The End of "The American Century"

BBC "Newsnight" recently had a 10 minute segment entitled "The End of the American Century?" inadvertently (I think) employing the title of my book. The segment begins with a reference (as my book does) to Henry Luce's 1941 "American Century" essay. The opening segment, by Paul Mason (no relation), wonders if the recent financial crisis is "the start of a wider American decline." The broadcast includes commentary by economists Joseph Stiglitz (winner of the 2001 Nobel prize) and Irwin Stelzer, and Gillian Tett of London's Financial Times. The link here is to the youtube posting of the BBC segment, in two parts.

Facing Reality

Rosa Brooks, columnist for the Los Angeles Times, sees the U.S. economy in the same situation as The Titanic bearing down on the iceberg (Obama's, and Our, Iceberg). She faults both McCain and Obama for underestimating the seriousness of the economic situation and the long term prospects for recovery from the crisis. Addressing the October 7 debate, she writes:

And when asked by Brokaw if the economy will get "much worse before it gets better," Obama's response was quick: "No. I'm confident about the American economy."

Really? I'm not.

The main problem, as I see it, is the inability or refusal of our political leaders to recognize what all this means for the United States and for its citizens. We have reached the end of a long period of prosperity--but it was a prosperity built on debt. The current crisis signals the end of the line. As Rosa Brooks astutely points out, nobody "yet" knows how to solve these problems. But the first step in solving a problem is recognizing it. Only then can we begin to fix it.

(Thanks to Vivian Deno for sending this column to me).

A Power That May Not Stay So Super

New York Times economist David Leonhardt, who is one of the few economists to raise alarms about the long-term structural problems of the U.S. economy, had a column on Oct. 11 that compares the decline of the British empire to the current situation of the U.S. His story raises many of the issues I address in The End of the American Century, including the long-term growth of deficits, debts and excessive consumption, as well as the pressing needs for spending on infrastructure, health, Social Security and Medicare.

Is the bartender finally presenting us the bill?

Washington Post columnist Eugene Robinson has a column today in the Indianapolis Star entitled "A Rude awakening from the American dream." He, like most of us, is bewildered by the economic upheavals and wonders if this means that the U.S. will become poorer and if the "next generation of Americans [will] lead lives of less affluence and comfort."

"I want to know if this is some kind of financial reckoning for the way we've been living so far beyond our means. Is the bartender finally presenting us the bill for our tab?"

He worries, as we all do, that this economic crisis "may be more than just an episode."

"I'm worried that what's at stake is not just a few years of lost economic growth, but our traditional notion of the American dream."

He wants straight talk from Obama and McCain.

"Don't give me empty words about American exceptionalism. Tell me in plain language what our new place is in the world and how we're going to give our children the good life that we've enjoyed."

I second all of these sentiments by Mr. Robinson, but I fear the answers are not what he would like to hear. We do need straight talk and truthtelling from our leaders, but it will mean facing up to the reality that the U.S. place in the world will be diminished, and our children will not have the affluence that we have enjoyed--mostly on borrowed money. But a good life can be built on other things than consumerism and instant gratification.

Reality and Hope

Last spring, I delivered the annual "Last Lecture" at Butler University, in which I reflected on the challenges of remaining hopeful in the face of relentless, dismal news. The transcript of that talk appears here.

America Loses Global Economic Leadership

Over the last decade, the U.S. has lost political, military and international influence in the world; now it has lost its economic clout as well. The collapse of the financial system in the United States, the very linchpin of both the American and global economies, has evoked comments of gleeful retribution from some countries, and worrisome concern from others. But everywhere, now, there is a recognition that the U.S. economy is weak and vulnerable, and hardly a model for emulation by others. The collapse of this final pillar of U.S. global leadership is also encouraging other countries to assume a more assertive role.

Some of the sharpest criticism, and even sarcasm, came from the usual suspects. Venezuela’s Hugo Chavez mocked Lehman Brothers

“They were always producing negative reports about Venezuela. . . .They forgot about themselves ... and 'boom!' they were bankrupt." (Toronto Star, 9/16/08)

and then skipped the opening of the UN General Assembly to visit China instead, saying that Beijing was now much more relevant than New York.

At a meeting of the Nonaligned Movement in Tehran, Iranian President Mahmoud Ahmadinejad proclaimed that

“the big powers are going down. . . .They have come to the end of their power, and the world is on the verge of entering a new promising era.” (NYT 7/30/08).

But even more moderate leaders have echoed such sentiments. The president of Argentina, Christina Fernandez de Kirchner declared that

“We are witnessing the First World, which at one point had been painted as a mecca we should strive to reach, popping like a bubble.” (NYT 10/3/08)

In Latin America, according to the New York Times (10/3/08), governments “have been working for the past decade to reduce their dependence on the American economy,” have “diversified trade with the rest of the world,” and have set aside funds “for times when international conditions turn sour.”

In Moscow, both former President (now Premier) Putin and his successor, Dmitri Medvedev, have been flexing Russia’s diplomatic and military muscles for several years. The Kremlin has repeatedly rejected U.S. global dominance in a “unipolar” world, and with its landmark conflict with Georgia in August, asserted its own “privileged” sphere of influence in the world, “just like other countries in the world.”(NYT 8/31/08). With the U.S. economic crisis, Medvedev, like Kirchner, has called into question even U.S. economic leadership. He asserted last week that U.S. global economic leadership was drawing to a close. “The times when one economy and one country dominated are gone for good.” (NYT 10/3/08).

While the U.S. financial crisis has accelerated these moves away from the U.S. economy, the trend had begun years before, and is an integral part of the decline of U.S global influence more generally. Surveys in recent years by the Pew Global Attitudes Project found surprisingly little support in other countries for “the American ways of doing business.” Antipathy to the U.S. business model is particularly widespread and strong in Latin America and western Europe. In the 2007 Pew survey, in only a third of the 46 countries surveyed did a majority of respondents like the American ways of doing business. Most of those were in Africa.

For most of the postwar era, the United States has been both a political and economic model for countries and peoples around the world. This began to wane in recent years, especially in the face of the belligerent and unilateralist policies of the Bush administration. The financial collapse of the U.S. is one more nail in the coffin of U.S. supremacy and global dominance.

The Book is Out!

My book, The End of the American Century, has been published! It is available now from the publisher (Rowman & Littlefield) and online booksellers (see links above) and should soon be in bookstores as well.

U.S. Economic Future Looks Bleak, Even With Bailout

A slightly revised version of my previous blog ("This sucker could go down") has been published in The Indianapolis Star (9/30/08), the day after the biggest stock market decline in U.S. history.

This Sucker Could Go Down

"This sucker could go down,” declared President Bush, after the White House leadership summit failed to reach agreement on a bailout plan for the financial services sector. The President is one of the last to recognize how bad the economic situation really is. But the U.S. economy has been tiptoeing on quicksand for years, and the current problems will not be solved quickly, even with an infusion of $700 billion, as the President proposes.

The root of the problem is this: the U.S. has been living on borrowed money for an entire generation; this debt has been serviced internally by a mushrooming but shaky financial services sector, and externally by foreign governments (especially the Chinese); and now both of these sources are evaporating. Whether or not the bailout package is approved, the U.S. economy and American consumers are going to take a bit hit.

First--the borrowed money. Both government and consumers have been spending beyond their means, almost continuously, for two decades. The federal government has had huge budget deficits every year since 1980, except for a few years during the Clinton presidency. The deficits have built the federal debt up to some $10 trillion, accounting for two-thirds of GDP, compared to only one-third in the 1970s. Next year’s budget deficit will add almost $500 billion to that debt. The bailout package will probably add another trillion dollars. Just the interest on the federal debt is one of the largest items in the federal budget, draining over $400 billion annually.

Government profligacy is matched by consumers: the household savings rate in the U.S. has been declining for two decades, is the lowest among all developed countries, and in 2005 fell below zero for the first time ever. Credit card and mortgage debt are both at record levels, as are bankruptcies and mortgage foreclosures. Most Americans, even those near retirement age, have almost no retirement savings. The Social Security and Medicare “trust funds” are actually unfunded, to the tune of some $41 trillion. The government is unlikely to find resources to meet these liabilities, which will put further strains on seniors.

Consumer spending now accounts for two-thirds of all economic activity in the U.S. This growth in spending has been possible only by borrowing. The consumer spending and borrowing binge has been fueled by the growth of the financial services industry, which has increasingly replaced manufacturing as the mainstay of the U.S. economy. Banks, mortgage companies, loan agencies and credit card companies make their money by making loans, and they are constantly seeking new customers and encouraging existing ones to borrow more. It is this symbiotic relationship between binging consumers and profit seeking financial companies that has created the piles of consumer debt and subprime mortgages.

All of this is starting to unravel now. People borrowed more than they could afford; the mortgage crisis undercut their ability to repay loans and mortgages; the banks and loan agencies faced mounting defaults and declining profits and stock prices. Banks are increasingly unable or unwilling to extend loans to businesses or individuals, which will crimp both consumer spending and economic growth, accelerating the economic downturn.

The U.S. government is not really in a position to rescue bankrupt companies, because it is itself bankrupt. And just as the financial industry has been an enabler of consumer deficit spending, foreign governments have enabled the U.S. government to spend more than it brings in, by buying up U.S. debt. Over half of U.S. debt is now owned by foreigners—compared to just 5 percent that was owned by foreigners twenty years ago. The biggest outside holder of U.S. debt is the government of China. Holding such debt only makes sense if you are sure you can redeem the funds when you need to. As you can imagine, foreign governments and banks are increasingly worried about this, and have already started shifting such investments to other countries, and other currencies, especially the euro. This is one of the reasons for the sharp drop in the value of the dollar, to record low levels against the euro and other currencies.

So this $700 billion bailout, as large as it is, will only scratch the surface of these multiple dimensions of debt and economic weakness. We cannot continue to grow, based on borrowing against the future. The domestic financial pot is empty, and our foreign enablers are wising up. The economy will contract, our standard of living will decline, and more people will join the ranks of the poor and unemployed. This sucker could go down. The U.S. is in for tough times.

CEO Pay and the Bailout

Even in Congress, a lot of people are concerned that President Bush’s proposed $700 billion bailout for the financial sector will unduly benefit the superrich CEOs who contributed so much to this mess in the first place. Most Americans are appalled by the bloated CEO compensations that we occasionally hear about.

But maybe you didn’t hear about the CEO pay for the very firms that are most in the news these days.Last year, for example, AIG’s Martin Sullivan received compensation of $13.9 million, including a performance based bonus of $5.6 million. And this was after a 50% cut in his compensation from 2006! Who topped the list of CEO compensation in 2007? John Thain of Merrill Lynch, another failed enterprise. His compensation in 2007 was $83.1 million.

These amounts are breathtaking, but most people don’t realize, I think, how much this has changed over the last twenty years, and how out of line US CEO salaries are with those in other countries. I raise this in my book, in Chapter 2 on “The End of Affluence and Equality,” which I excerpt here:

In the 1950s, big-company CEOs in the U.S. earned about fifty times the pay of an average worker. Even then, that ratio was very high compared to other countries. But since then, CEO pay in the U.S. has skyrocketed in comparison to average salaries. By 1990, average CEO pay was about 100 times the average worker’s salary, and by 2000, it was more than 500 times that of the average worker.

These benefit packages are far out of line with those in other wealthy countries.

In 2004, the New York Times reported comparative ratios of CEO pay to employee averages. In Japan, CEOs earned about ten times that of the average employee. In Germany, the ratio was 11 to 1, in the UK 25 to 1, and in the United States, 531 to 1! It is difficult to see how American companies can justify these huge executive compensations when these other countries, which much smaller CEO pay, have generally managed faster economic growth, greater productivity increases, and greater gains in their stock markets.

CEO pay is another glaring example of how far out of kilter the U.S. economy is, how eroded is the sense of fairness in this country, and how out of sync the U.S. is with the rest of the world. It is yet another example of The End of the American Century.

Are We Smart Enough to Manage These Problems? An Engineer's Perspective

My friend Charlie Yokomoto, a Professor Electrical and Computer Engineering, and a savvy observer of the political scene, has read this blog and offered the following thoughts on the difficulties of managing complex systems. Maybe we human beings aren't smart enough to deal with these devilishly complicated systems (think financial markets!) that we have created!

Here are some thoughts in engineering terms about the difficulty of decision making in modern society. One of the things that engineers do is to model a system with mathematics so that they can predict behavior to different inputs and find ways to control the system. The system can be a rocket to the moon, a car's transmission, a car's engine, etc. These are fairly basic systems to model because they can be treated as systems whose parameters don't change, or if they change, they change in easily describable ways.

When the system is more complex, like the stock market, the human mind, the atmosphere, a tornado, etc, the modeling becomes far more complicated. When society was much simpler (all white, mostly all middle class, mostly traditional families, mostly church going, low crime, low poverty), then the modeling becomes simpler, and making rules to control the society was simpler than today.

Now for complex systems. A semi-trailer truck sliding on an icy road can also be modeled, but it is more difficult. Mathematics profs are now modeling economic systems, where parameters are always changing. Probabilistic methods have to be used, and time varying dynamic equations have to be used. The atmosphere has been modeled with time varying parameters for years. These equations are more difficult to solve, making it more difficult to use them to predict things, and to control it.

OK, now about controls. Then a system can be accurately modeled, then mathematical methods can be used to determine if the system is observable from the outside (can you observe all of the changes, or will some changes be hidden from the observer?). Methods can be used to determine if the system is controllable (are there ways to push the system in a direction you want it to go?) Sometimes, you find out that you can't--the system will go where it wants to go.

As systems become more complex, you then find out that your mathematics is not equal to the task of modeling it--you need more complexity. Example. If you have a groups of points on a graph, and they all line up in a straight line, you can easily model it with a straight line. If there is a slight curvature, you can try modeling it with a second order equation. But if it is fluctuating wildly, then you need a very high order equation to model it.

I believe that society is getting to the point where it is getting so complex that the human brain cannot intuitively, through experience, fully understand develop a heuristic model of society--how creation of jobs, curbing crime, helping the needy, paying for roads and schools, keeping the food supply safe, etc.--can be done using the same decision making processes that were used successfully when the system was much simpler (fewer parameters, slower changing, and more homogeneous). If the system become more highly complex at rates faster than the human mind becomes smarter (not necessarily in IQ, but in terms of ability, tools, and know-how), how can they solve problems in a system whose complexity if more that their brains can handle?

Take crime. If you have 100 cops and 1 person breaking the law, they can handle it. If you have two people breaking the law, they can handle it. What if there are 10 people breaking the law? Twenty? At what point, will the system of people breaking the law become too complex for 100 cops to handle? Some say that you can't have a perfect law enforcement system and that you have to tolerate a certain level of crime going on at any time. Well, people in charge were ok with that as long as the crime was kept in particular neighborhoods.

Anyway, that's how an engineer looks a society, which is just another system--a very complex one at that, that becomes more and more difficult to model and influenced as the complexity increases, possibly to levels that cannot be understood or influence with legislation and rules.

Niall Ferguson Sees American Century Continuing

Niall Ferguson, the British historian and author of Colossus: The Rise and Fall of the American Empire (2005), has written a column for The Washington Post, "Rough Week, But America's Era Goes On," in which he contends that despite the country's economic weaknesses, "it is much too early to conclude that the American century is over."

As usual with Professor Ferguson's writings, his ideas are well-informed and thought-provoking. (In Colossus, for example, he argued that the U.S. should be an empire, but doesn't have the rights mental stuff for it--we are "an empire in denial.") However, as might be expected from the title of my book, I can't agree with his assessment.

He rightly calls attention to the economic weakness of the United States, and our dependence on others, especially the Chinese, for the underwriting of our huge debts. But he underestimates the broad-based nature of U.S. decline, which stretches far beyond the economic realm. He cites the British journalist who wonders why the U.S. should now be the world's model for economic development, and indeed, polls around the world show that America has already lost that reputation. Furthermore, even the U.S. political system and its very political ideals are being questioned around the world, as revealed in polls by the Pew Center, among others.

The U.S. no longer compares favorably with other developed countries on measures of health care, education, poverty, inequality, violence, corruption, and political participation. We have lost not only lost our ability to dictate global politics, but lost the "soft power" influence that led other countries to admire and emulate us.

Overview and interview about my book

Marc Allan of Butler University's public relations department taped an interview with me about The End of the American Century. An overview of the book, and the transcript of the interview, appear on the Butler website. Click here to see the whole thing.

Is The U.S. Becoming Third World?

Rosa Brooks, writing in the Los Angeles Times, has a clever but sobering column entitled "Hey, U.S., Welcome to the Third World!":

It's not every day that a superpower makes a bid to transform itself into a Third World nation, and we here at the World Bank and the International Monetary Fund want to be among the first to welcome you to the community of states in desperate need of international economic assistance.

She also points out the many aspects of domestic decline in the U.S.:

Now you are facing the consequences. Income inequality has increased, as the rich have gotten windfalls while the middle class has seen incomes stagnate. Fewer and fewer of your citizens have access to affordable housing, healthcare or security in retirement. Even life expectancy has dropped.

Partly tongue-in-cheek, she offers World Bank and IMF assistance to help bail out the U.S. economy.

But this is not so far-fetched after all. In fact, in 2004, the International Monetary Fund issued a report (see p. 17 of my book) raising concern, even then, about the consequences of the U.S. debt for the stability of the world economy. It fretted about the potential insolvency of the U.S., warning that "large U.S. fiscal deficits posed a significant risk for the rest of the world." The IMF economists calculated that closing the deficit gap in the U.S. would require a permanent 60 percent hike in taxes, or a 50 percent cut in Social Security and Medicare benefits.

So while the U.S. is far from Third World status, it's fiscal and economic problems pose serious problems for the whole world.

(Thanks to my Butler colleague Vivian Deno for calling my attention to the column by Rosa Brooks).

The Unraveling of the U.S. Economy

Since I posted “Bankrupt America” here ten days ago, major pillars of America’s financial edifice have come crashing down. First, the federal government had to take control of Fannie Mae and Freddie Mac, the nation’s two largest mortgage finance companies. Then the prominent securities firm Lehman Brothers declared bankruptcy, and the even more venerable Wall Street firm, Merrill Lynch avoided the same by selling itself to Bank of America. Today the Federal Reserve announced that it was taking over the insurance giant, A.I.G., in a bailout that will cost taxpayers $85 billion.

These are all huge companies—mainstays of the U.S. economy. It is difficult to make much sense of Senator John McCain’s assertion that “the fundamentals of our economy are strong.” These companies were the fundamentals, and they are all bankrupt. Most people, even most financial analysts, I think, do not quite grasp how elemental these developments are. They signal a shift that is as fundamental for the United States as global warming is for the planet.

The collapse of these financial institutions are part of the bigger picture of economic weakness that I describe in The End of the American Century. The United States has been overspending and under saving for a generation or more, and this has led to borrowing, deficit spending, and debt inside and outside the government. As I write near the end of Chapter One of the book, “where the U.S. once drove the world economy through economic growth, invention, and productivity, now it is doing so almost entirely by consumption but at levels it cannot pay for.”

The consumer spending and borrowing binge has been fueled by the growth of the financial services industry, which has increasingly replaced manufacturing as the mainstay of the U.S. economy. The shrinking manufacturing sector now accounts for only about 10 percent of corporate profits in the U.S., compared to 44% of such profits from the financial sector. Banks, mortgage companies, loan agencies and credit card companies make their money by making loans, and they are constantly seeking new customers and encouraging existing ones to borrow more.

It is this symbiotic relationship between binging consumers and profit seeking financial companies that has created the piles of consumer debt—the largest in U.S. history. All of this is starting to unravel now. People borrowed more than they could afford; the mortgage crisis undercut their ability to repay loans and mortgages; the banks and loan agencies faced mounting defaults and declining profits and stock prices. And as goes the financial sector, so goes the rest of the economy.

This is not some episodic financial downturn. The chickens are coming home to roost, and they have nowhere to land. The U.S. government has record budget deficits and is deeply in debt; Social Security is unfunded; households have zero savings (literally); the dollar is at record lows; energy at record highs; and now the stock market is taking a bashing. Former Fed chief Alan Greenspan told ABC that this is a “once-in-a-century type of event.” And former Commerce Secretary Peter Peterson, who I invoke in my “Bankrupt America” post, admitted that “these are the most extraordinary events I’ve ever seen.” (NYT 9/15/08).

In The End of the American Century, first written a year ago, and appearing next month, I wrote this at the conclusion of my Chapter One on “Imperial Overstretch and Economic Decline”:

A serious recession, perhaps even a depression, is the probable outcome. Such a recession will actually be necessary, however, for the long-term viability of the American economy. It will cause unemployment in the short run and declining wages and incomes in the long run, but this is inevitable if balance is to be restored. The U.S. economy will shrink, as will the country’s standard of living. This will simply reflect the actual economic situation in the U.S., which for so many years has been obscured by mortgaging the future with deficits and debt. The U.S. will no longer be the dominant economic power in the world, and with economic decline will come military, diplomatic, and political decline.”

What does all this mean for us? Stay tuned. (And your comments and thoughts are welcomed).

Rising Powers Website

The Stanley Foundation has a useful website on Rising Powers: The New Global Reality, which notes that the global order is changing "and will be marked by many competing sources of global power." It explores the rise of the European Union, China, India, Brazil and others, and the implications for the U.S.

U.S. Intelligence Predicts Reduced U.S. Dominance

A Washington Post article this week (9/10/08) reports on a forthcoming U.S. intelligence agencies report that “envisions a steady decline in U.S. dominance in the coming decades.” Thomas Finger, a top analyst for the U.S. intelligence community, delivered the preview in a speech in which he saw U.S. global leadership rapidly eroding in “political, economic and arguably, cultural arenas.” The one area of continued U.S. dominance—military power—was becoming increasingly irrelevant as an asset in global power and influence.

These are all themes of The End of the American Century, so should not be terribly surprising, except for the source—the U.S. government itself—and the sweep of the conclusions. It is not just U.S. diplomatic influence that is on the wane, but political, economic, cultural and military leadership as well. The multidimensional and interrelated aspects of U.S. decline are the central theme of my book, but it is startling to hear it expressed so bluntly from the top intelligence analysts of the federal government.

The intelligence report, however, misses a key element of the declining global influence of the U.S.: its domestic weakening. Fingar’s speech saw the decline in U.S. dominance coming from exclusively global trends: globalization, climate change, resource shortages. All of these are important, of course, but the root of America’s declining global influence is here at home. Just as at the global level, the domestic decay is multidimensional—it is political, social and (especially) economic; and affects education, health care, infrastructure, and competitiveness.

The United States has become the world’s largest debtor, and the governments of other countries are increasingly worried about the scope and scale of U.S. debt and fiscal weaknesses. Even the International Monetary Fund, normally concerned about debt and insolvency in Third World countries, has warned that the continuing large budget deficits of the U.S pose “a significant threat for the rest of the world.” Other countries are beginning to turn away from the United States, both for investments and for global economic leadership, and are increasingly abandoning the dollar as the favored international currency. This is one reason for the sharp and steady decline of the dollar compared to the euro and other international currencies.

In many other respects, as well, the United States is no longer seen as the standard for emulation by other countries. The U.S. has among the highest rates of both poverty and inequality in the developed world. This poverty and inequality contribute to highly uneven access to health care, so the U.S. ranks near the bottom of developed countries in most measures of health and medical care. Even our vaunted democracy, the “beacon on the hill” for centuries, is now so dominated by money and special interests that it is rarely cited by other countries as a model for political development. Global public opinion polls in the past showed foreign populations skeptical and wary of the U.S. government; increasingly now they reveal negativity toward the U.S. population, and even to U.S. ideals. All aspects of American “soft power” are withering away.

The Fingar report, like Fareed Zakaria’s new book The Post-American World, sees this global shift coming because of “the rise of the rest”—global powerhouses like China, India and Brazil that increasingly cut into the U.S. lead on the world stage. Zakaria asserts, indeed, that the shift is not about the decline of America, and writes about the many elements of this country’s continuing strength. Solidly within the U.S. establishment, both of these analyses ignore the sand shifting beneath their own feet. Only by confronting and addressing our own domestic weaknesses and problems can we begin to solve our international ones.