Der Spiegel on "A Superpower in Decline"

Sometimes the most clear-eyed analysis of the United States comes from outside the country, and this may be especially true in these times when so many Americans are frightened and angry about the way things are going. Germany's weekly newsmagazine Der Spiegel has published a long and thoughtful piece about the United States, entitled "A Superpower in Decline: Is the American Dream Over?" which reflects and updates many of the themes I raised in The End of the American Century.

For those who would dismiss Spiegel's analysis as biased, left-wing, or "socialist," I should point out that the magazine is generally considered to have a conservative (and capitalist!) slant. It is enlightening, and a little sobering, to read an intelligent analysis of our problems from outside the cauldron of contemporary U.S. politics.

Below are a few excerpts from the Spiegel article, though I would encourage everyone to read the whole thing.

• America has long been a country of limitless possibility. But the dream has now become a nightmare for many. The US is now realizing just how fragile its success has become -- and how bitter its reality. Should the superpower not find a way out of crisis, it could spell trouble ahead for the global economy.

• Americans have lived beyond their means for decades. It was a culture long defined by a mantra of entitlement, one that promised opportunities for all while ignoring the risks.

• The country is reacting strangely irrationally to the loss of its importance -- it is a reaction characterized primarily by rage. Significant portions of America simply want to return to a supposedly idyllic past.

• The rich keep getting richer, with the top 0.1 percent of income earners making more money than the 120 million people at the bottom of the income scale.

• Since the beginning of the millennium, no new jobs are being created on balance, because the US economy has undergone structural change. Companies are dominated by investors interested only in the kinds of quick and large profits that can be achieved by reducing the workforce.

• In 1978, the average income for men in the United States was $45,879. In 2007, it was $45,113, adjusted for inflation.

• How strong is the cement holding together a society that manically declares any social thinking to be socialist?

• The United States of 2010 is a country that has become paralyzed and inhibited by allowing itself to be distracted by things that are, in reality, not a threat: homosexuality, Mexicans, Democratic Majority Leader Nancy Pelosi, health care reform and Obama.

Global Debt Comparison

Britain's Economist magazine online has a very interesting and useful interactive map on global debt, showing the public debt levels of most countries in the world. One can slide the tabs to look at past years, or projections for future years. Pop up graphics also show public debt per capita and as a percentage of GDP.

A striking feature of the global map is that it is mostly the wealthy countries (North America, Europe and Japan) that have the highest debt levels worldwide. Some of the online commentary on this phenomenon point out that many of these countries are actually in worse shape than the U.S., in terms of government debt levels.

My friend and colleague Jeff Payne (who this semester is teaching a course using The End of the American Century as one of the texts), called my attention to this Economist site, and made the following observation:

It seems the US is indeed taking out extreme debt over the recession, but not in the same level of GDP as many other developed countries. So, among the most developed nations, we are not the worst - do not know if that is anything to celebrate. Yet, in relation to your research program I wonder what this means...is the American experiment exhausted, or is the entire Western world in that same situation?

My response would be that yes, most of the Western world has government debt problems. I see the U.S. situation as far more dire, though, for the following reason. Most of those other countries accumulated their debts while financing government programs that supported health care, social welfare, education, infrastructure and the environment. Most other wealthy countries are far ahead of the U.S. in all those dimensions, as I point out in my book. The U.S., in contrast, accumulated our huge debts largely by financing consumption and military spending. All the while, U.S. health care and education languished, poverty and inequality increased, the environment and infrastructure deteriorated. So at the starting gate of the new global order, the U.S. is way behind the rest of the developed world, and too broke to catch up.

The Bankruptcy of American Economics

It is not just the American economy that is bankrupt, but the profession of economics as well. It is partly the interaction of these two that has led to the collapse of the American economy and the huge economic hole we find ourselves in.


Paul Krugman provides a devastating critique of his own profession in the Sept. 6 New York Times Magazine , in an essay entitled “How Did Economists Get it So Wrong?” Krugman, a Princeton economist, New York Times columnist and Nobel prize winner, believes that

American economics, as a field “got in trouble because economists were seduced by the vision of a perfect, frictionless market system.”

The profession was blind to the possibility of catastrophic failures in a market economy, he asserts.

In a June lecture at the London School of Economics, Krugman argued that most

macroeconomics of the past 30 years was “spectacularly useless at best, and positively harmful at worst.”

Others besides Krugman are dissecting the economics field, and finding serious problems with it. Britain’s influential Economist magazine had a cover story (7/18) on “Modern Economic Theory: Where it Went wrong—and how the crisis is changing it.” They quote the LSE’s Willem Buiter saying that a training in modern macroeconomics was “a severe handicap” at the onset of the financial crisis. The main problem was that in many macroeconomic models, insolvencies simply cannot occur.
So much for those models.

The problem of economics is even worse, I think, because the discipline has been so intolerant of dissenting views. Modern economic theory is as much an ideology as anything else, with a faith in the market that ignores both reality and those who challenge the dominant paradigm. As the New York Times put it in a story last March:

“For years, economists who have challenged free market theory have been the Rodney Dangerfields of the profession. Often ignored or belittled because they questioned the orthodoxy, they say, they have been shut out of many economics departments and the most prestigious economics journals. They got no respect.”

I saw this firsthand at my university a decade ago, when we were attempting to create a department of economics within the college of liberal arts and sciences. I was on the search committee to hire an economics professor to begin building that program. But it soon became clear that there was a basic inconsistency between the goals of the liberal arts curriculum—free inquiry, critical thinking, competing ideas—and that of the economics profession. The candidates we considered most interesting , with provocative ideas and wide-ranging interests, were largely outcasts in their own discipline, which favored narrow specialties, and strict adherence to the free market ideology. “They got no respect” from the economics discipline, so didn’t have the necessary credentials, and couldn’t be hired. Eventually, the university gave up on trying to create an economics department in the liberal arts college.

Not only is the narrow ideology of modern American economics inconsistent with the traditions of critical thinking, it has proved totally incompetent at predicting the crisis, or figuring out how to get out of it. There are a few exceptions, like Paul Krugman, Yale’s Robert Schiller, and Columbia’s Joseph Stiglitz—all Nobel laureates—and some economics writers like the New York Times’ David Leonhardt. But until now, most of them have been voices in the wilderness, trying unsuccessfully to point out the problems of mounting debt, growing inequality, and neglect of economic and social infrastructure.

President Obama , I believe, recognizes the problems and is trying to remedy them, but he is caught in a vise between huge accumulated needs of the U.S.—for example in health care and education—and the unprecedented level of government and consumer debt.

From an outsider’s perspective—that of a non-economist—it seems to me that the problem is pretty obvious and simple, and the solution is equally obvious and simple, but horribly painful. The problem is that for a generation, American government and citizens have both been living well beyond their means, borrowing to pay for the plethora of consumer goods most of us enjoy. But in the meantime, we have neglected the poor, the schools, the health care system, infrastructure, the environment, and most of the rest of the world. We have lots of goodies, but the society is ailing, and we have passed the buck to the next generation.

The painful solution is that Americans will have to spend and consume less, pay more in taxes, and be prepared for a long-term contraction in the economy. There is evidence of this already, with people finally beginning to save, and to practice “consumer thrift.” But more saving and less spending simply contributes to a contraction of the economy. Banks, retailers, the service and entertainment industry have all depended on people borrowing to spend. As this changes, all these industries will decline, and the economy will decline.

Most American economists, including those with the President, are predicting an imminent end to the recession, and a relatively quick economic recovery. So far, virtually all such predictions have proved overly optimistic and wrong. I think those predictions are based on flawed economic models, and do not account for the depths of the hole we have dug ourselves into. We are in for a very long slog.

While I agree with President Obama and Professor Krugman on most things, I disagree with them that the solution is more spending, by government and consumers, to prime the economy. What we need now is belt-tightening, and a return to a more modest standard of living—perhaps comparable to what we had in the 1970s. This will entail a continuing and severe contraction of the U.S. economy, to return to equilibrium. In the long run, though, it will be best for both the U.S. and the rest of the world.

But you won’t hear this from many economists

Federal Debt Approaches 100% of GDP

Even when The End of the American Century went to press in early 2008, the U.S. federal debt was reaching alarming levels, and was a central element of my forecasts of U.S. economic decline. At that point, the White House's Office of Management and Budget projected the gross federal debt to expand to $10.6 trillion by 2009, constituting 72% of GDP.

Since then, the federal red ink has become a tidal wave. The OMB now expects the debt at the end of this year to be $12.7 trillion, and to expand to over $15 trillion by 2011, which would then be (at 97% of GDP) almost as large as the entire economy (see chart).



David Leonhardt of the New York Times, one of the few economists to have been tracking and raising concerns about the deficits, writes that erasing the deficits "will be one of the great political issues of the coming decade." In his article "Sea of Red Ink" in the June 10 issue, he reports on a New York Times analysis of the composition of the debt accumulation over the last decade, "with the aim of understanding how the federal government came to be far deeper in debt than it has been since the years just after World War II."

The analysis finds that the growth in the federal debt since 2001 comes from four main sources. The first, the business cycle (especially the 2001 recession and the current downturn) is the largest component, accounting for 37%. Another 33% of the recent debt comes from legislation signed by President Bush, including his tax cuts. Another 20% derives from President Obama's continuation of several Bush policies, including spending on the Iraq War and the Wall Street bailouts. Only about 10% comes from new Obama policies, including the stimulus bill, and news spending on health care, education, energy and other areas.

Leonhardt sees little hope that the Obama administration can reduce or eliminate the deficits with "pay-as-you-go" government spending plans. The solution, he writes, "is no mystery" and involves inevitable tax increases and government spending cuts. These are political tinderboxes, of course, and pose a huge challenge to President Obama's leadership skills.

Immobility Furthering Decline

Caleb Hamman

chamman@butler.edu

In a time of financial turmoil and drastic inequality, one would hope the American Dream to be functioning well. This notion, that hard work will bring success to anyone in the United States, has always been central to America’s ideological fabric. Despite such tradition, recent research suggests a need to reevaluate the accuracy of the American Dream.

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Ongoing work at the Economic Mobility Project (EMP) has been attempting to do just that. A nonpartisan effort funded by the Pew Charitable Trusts, EMP has been conducting the most detailed research of U.S. economic mobility to date. Its findings, thoroughly concerning, strongly reinforce the arguments of The End of the American Century.

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Using longitudinal income data, EMP researchers find the United States to be a more class stratified society than commonly believed. Despite the popularity of “rags to riches” notions, the EMP finds that, on average, children born into the poorest fifth of households have only a 6 percent chance of making it to the top income quintile. Conversely, 42 percent will remain in the poorest group. More than six in ten of these impoverished children never become even middleclass.

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Similar mobility barriers exist at the top. While 39 percent of children born into the richest income quintile will remain there, only 9 percent will fall to the bottom. EMP finds remnants of mobility remains in the middleclass, although even these children are more likely to fall into poverty than they are to rise to wealth.

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The project’s findings are particularly disturbing in the areas of gender and race. Women, already suffering multifaceted disparity with men, are also less mobile than their male counterparts. Compared to these, it is considerably harder for women born into poor families to become wealthy. Similarly, it is also easier for wealthy women to become poor.

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The racial contrast is even starker. Black children are half as likely as their white counterparts to move from extreme poverty to extreme wealth. Simultaneously, black children born into the bottom income bracket are almost twice as likely as white children to remain there. Incredibly, EMP finds that nearly three in four middleclass black children will fall into poverty—a condition tremendously difficult for them to escape.

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As such findings suggest, the American Dream is not as dynamic as many believe it to be. In fact, U.S. mobility levels are actually lower than those of many developed countries. As the EMP reports, the two major international comparisons to date have placed U.S. mobility levels either last or second-to-last among nations analyzed (which have included mostly Western Europe and Scandinavia). As EMP’s authors put, “the view that America is ‘the land of opportunity’ doesn’t entirely square with the facts.”

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In light of the numerous economic, political, and social issues contributing to U.S. decline, the discovery of immobility is particularly troubling. As Americans become more economically and politically unequal, the stakes of socioeconomic outcomes continue to rise. That these outcomes are out of the hands of many is more than a contributor to The End of the American Century—it is an issue of fundamental fairness and a contradiction of one of America’s most cherished ideals.

Bartels Finds Declining Equality and Influence

Caleb Hamman

chamman@butler.edu

Economic and political inequality are among the most significant aspects of U.S. decline. Both topics are the focus of the most recent work of Princeton Political Scientist Larry Bartels, Unequal Democracy: The Political Economy of the New Gilded Age. In his book, Bartels sets out to analyze the political causes and consequences of economic inequality, arguing that these are both substantial and urgently relevant to alleviating injustice.

Naturally, Bartels begins by assessing the extent to which economic inequality exists in the United States. After detailed review of current literature and government data, Bartels offers findings very much in line with those of The End of the American Century, essentially that “current levels of inequality rival those of the Roaring Twenties,” making it fitting to speak of a “New Gilded Age” or a “retrogression of historic scope.” As Mason points out, this sort of inequality can lead to monstrous disparities, such as CEOs making more than 500 times their average employee, and has effectively caused the United States to become more unequal than “any advanced industrialized country.”

Like The End of the American Century, Bartels finds that current inequality is not a recent phenomenon, but has been growing sharply since the 1970s. Although this observation is generally accepted, Bartels then goes on to make a less mainstream claim—that increasing economic inequality is a largely a result of public policy. While Bartels readily concedes that economic factors like globalization and technology have contributed to inequality, he staunchly refuses to attribute the entire dynamic to arcane “market forces” or inculpable “economic realities.” Rather, a significant role is played by political intervention, an idea Mason also highlights by discussing issues like the “elimination of the federal welfare system” and the “stagnation of the minimum wage.”

Bartels goes one step further. He argues that U.S. economic inequality is “profoundly shaped by partisan politics”—specifically that “middleclass and poor families” have “fared much worse under Republican presidents than they have under Democratic presidents.” This is not necessarily a novel notion, but rarely has it been supported by such detailed analysis. Using exclusively Census Bureau data and controlling for non-partisan variables such as international crisis, Bartels conclusively demonstrates that the incomes of most have grown at substantially higher rates under Democratic presidents than under their Republican counterparts.

After illustrating his findings with three chapter-length case studies, Bartels turns to his second major point—the political consequences of inequality. Here, his research is particularly disturbing. In calculating the recent responsiveness of U.S. Senators to their constituents, Bartels finds that:

Senators’ roll call votes were quite responsive to the ideological views of their middle- and  high-income constituents. In contrast, the views of low-income constituents had no discernible impact on the voting behavior of the senators…the statistical results are quite consistent in suggesting that the opinions of constituents in the bottom third of the income distribution were utterly irrelevant.

Examining the potential causes of this mass political exclusion, Bartels finds that “biases” in “senators’ responsiveness to rich and poor constituents are not primarily due to differences between rich and poor constituents in turnout, political knowledge, or contacting.” Rather, “the data are consistent with the hypothesis that senators represented their campaign contributors to the exclusion of other constituents.” As Mason puts it, “When people do not…contribute to political campaigns, they are less likely to be listened to by legislators or policymakers, and their interests are less likely to be taken into account in the political process.”

In analyzing the totality of his findings, Bartels delivers a particularly sobering assessment:

In Aristotle’s terms, our political system seems to be functioning not as a 'democracy,' but as an 'oligarchy.' If we insist on flattering ourselves by referring to is as a democracy, we should be clear that is a starkly unequal democracy.

Despite such foreboding, Bartels attempts to end with a more hopeful thought: Since inequality has been largely been brought about by conscious political action, there seems to be potential for prescriptive change. As Bartels puts it, “We can make these choices.” But as Mason points out, we are quickly running out of time.

The "Brainiacs" and "Talent" at AIG

Washington is finally catching on to why people are so upset with these million dollar bonuses for executives who drove their companies into the ground and swindled American taxpayers. But Wall Street apparently still doesn't quite understand the fuss, and the folks there continue to make the argument that these bonuses are necessary to "attract and retain talent." This "talent" are the greedy, immoral,short-sighted scoundrels who bankrupt their own companies, stole the retirement funds of million of Americans and drove the global economy to the brink of depression. Some talent.

The most stupefying assertion of this ridiculous argument about talent comes in the form of a New York Times column by Andrew Ross Sorkin, entitled "The Case for Bonuses at A.I.G."

Sorkin writes that "as unpalatable as it seems, taxpayers need to keep some of these braniacs in their seats" so they can help fix the mess they made and "to prevent them from turning against the company."

Braniacs at A.I.G.?????? These "braniacs" are colossal blunderers and incompetents, just like most of the CEOs at the other companies that went bankrupt based on hugely risky and irresponsibly stupid investment decisions.

Edward M. Liddy, the new (supposedly improved) CEO of A.I.G., perpetuates this shibboleth:

"We cannot attract and retain the best and brightest talent to lead and staff" the company "if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury."

This argument about attracting and retaining talent has two major problems. First, it is clear by now that such a strategy did not work. Big money didn't attract talent, but greed. And selfish greed doesn't benefit much of anybody except those few who practice it.

Second, if multimillion dollar payouts are necessary to attract "talent," then how do you explain the influx of very talented, dedicated, public-spirited people into the federal government, especially with the new Obama administration? Washington is inundated by people, young and not-so-young, wanting to hitch their stars to a noble vision and public service. How many of them are being offered million dollar salaries? None.

So let THEM take over administration of these discredited and disgraced financial institutions.

The US Economy Will Shrink (A Lot), and It Should

The U.S. economic stimulus plan passed by Congress aims to regenerate economic growth, spending and consumption. But it is almost certainly bound to fail, and not for the reasons given by partisans on both sides of the Congressional aisle. In spite of the stimulus, the economy will continue to contract. This is inevitable; it is necessary; and it is even desirable. The main task of the government should be protecting those who are displaced and impoverished during this contraction and retrenchment.

The U.S. economy must contract because it is way too large, in numerous respects. It is too large given the U.S. levels of production and exports. It is built largely on consumption and debt, not output. And it is too large for the rest of the world, even given the size and wealth of the country.

The U.S. economy is big—about 28% of global GDP. But the U.S. accounts for only about 8% of global exports; 16% of manufacturing value-added output, and 5% of the world’s population.

The main contributor to the outsized US GDP is consumption, where the U.S. is indeed the world’s leader. Consumption accounts for about 72% of US GDP, which is a record for any large economy in modern history. As we are now learning, this consumption has been built on a mountain of consumer and household debt, which now totals some $13 trillion—approximately the size of the entire U.S. economy. This is unsustainable.

Furthermore, much of U.S. debt is owed to other countries. About half of the federal debt and a quarter of corporate bond debt is held by foreigners. As former Senator Hillary Clinton pointed out in 2007, "16% of our entire economy is being loaned to us by the Central Banks of other nations."

These huge levels of consumption are a drain on the planet, its resources and its people. The U.S. has only 1 in 20 of the globe’s people, but we consume a quarter of the world’s fossil fuels; 29% of “materials” (including minerals, metals and synthetics); 19% of forestry products; and 14% of its water. The U.S. is also the world’s biggest contributor to environmental pollution, greenhouse gas emissions (a quarter of the world’s total) and global warming. At 5% of the globe, we leave a huge carbon footprint.

In the 1970s Yale historian Paul Kennedy, writing in The Rise and Fall of the Great Powers, suggested that eventually the U.S. would have to decline to its “natural” share of the world’s wealth and power, which he estimated should be in the 16-18% range, rather than the 30-40% held by the U.S. at that time. This would indicate a cutting of the U.S. economy by half.. But so would many of the economic indicators I mention above. Consumption, debt, and borrowing all need to be reduced by about that amount, as should petroleum and energy use.

Given the hugely bloated size of the U.S. economy, and of U.S. consumption, and of consumer and government debt, it is hard to see how the economic stimulus package will make much of a dent in things. The economy is bound to decline, and needs to.

This contraction has already begun. The country’s GDP shrunk last quarter at an annualized rate of 3.8 %. If this continues, it will be the largest yearly decline in the US economy since 1946. But a much larger decline will be necessary to bring the economy back to a more natural, balanced and sustainable level. The contraction of GDP is likely to continue for several years, at the very least. This would be unprecedented for the postwar period, when only once (1974-75) did the economy contract two years in a row.

Such a decline could be on a scale of that of the 1930s. The main problem then, as now, will be the reduction in employment, and the consequent growth in poverty. It is hopeless throwing good money after bad in an effort to revive growth, consumption and debt. Instead, the federal and state governments should focus on alleviating the suffering that this contraction will entail, by increasing funds for unemployment compensation, Medicaid, welfare, job retraining and education.

Many people will suffer in this transition, and they should be helped. For most people, though, this economic retrenchment will simply mean belt-tightening. Our standard of living will decline, in ways most of us have not experienced before. But we are still a highly developed wealthy country, and will remain so. Once the U.S. economy has stabilized at a more natural size, it will grow again. And this time, it can happen in a way that is not so destructive of the planet, other peoples, and our souls.

More Evidence That Taxes Must Go Up

David Leonhardt, the prescient and hard-headed New York Times economics columnist, states flatly that "your taxes are going up" in his column of Feb. 25. Leonhardt's data and arguments reinforce those I have made in The End of the American Century, in my Op-Ed for the Christian Science Monitor ("This is not the time to cut taxes"); and in other posts here.

Leonhardt argues that if we want the government services that we have come to expect and rely on (like national security, infrastructure, Medicare, education), we need more federal revenues, because at the moment "we are not paying nearly enough taxes to maintain those programs." He sees taxes going up soon, "and the increase will be permanent."



On the upside, Leonhardt argues, there is room for such an increase, and it will probably not hurt economic growth. As he points out, for a half century federal taxes have remained fairly constant relative to the size of the economy--at about 18% of GDP. "But the 18 percent era has to end soon."

In The End of the American Century, I show that US tax rates are low in global comparisons.

"Compared to other wealthy countries, the United States has among the lowest rates of both individual and corporate income taxes, and total tax revenues in the U.S. (as a percentage of GDP) are lower than those in most of the affluent democracies that are members of the OECD [see OECD data here]. Thus, not only is the U.S. spending and consuming more than most countries, but it is not paying for the relatively few benefits that the government provides. This is the crux of the problem of the deficit and the debt."

Leonhardt argues (as I do in my CSM Op-Ed), the "despite all the scary stories you've heard, the evidence that higher taxes necessarily cripple an economy is somewhere between thin and nonexistent." He points out that the fastest postwar economic growth occurred in the 1950s and 1960s, "when the top marginal tax rate was a now-unthinkable 90 percent."

He also points out that it will not be sufficient to simply raise taxes on the very wealthy, as President Obama has proposed. The incomes and wealth of that group have soared in the last decade, as their federal tax rates have declined. So their higher tax rates should be restored.

But, as Leonhardt says, "the problem can't be solved just by taxing the rich." That top 1% pays only about one quarter of federal taxes. So the tax increases will have to spread more widely.

This will be a very difficult task politically. No politician wants to raise taxes. But not to do so will simply pass the problem onto our children, and burden them with an even bigger mountain of debt. We need to start paying for what we get. And especially now, as we launch huge new spending programs for health care, education, infrastructure and banks, we need to shell out for what we are getting.

This Is Not the Time To Cut Taxes

My op-ed piece, "This is not the time to cut taxes: To increase federal revenue, taxes must go up, not down," appears in the 1/13/09 issue of The Christian Science Monitor, accessed at the link above. There I write that

"talk of tax cuts may be music to the ears of American taxpayers and a nod to satisfy Republicans but they make no sense in a time of soaring budget deficits and huge new government expenditures, including the probability of $1 trillion for Obama's proposed economic stimulus plan."

I conclude the article with these thoughts:

"Obama should allow the Bush tax cuts to expire at the end of next year, for everyone except the very needy. He should also raise the marginal tax rates for the very wealthy. These rates are very low by both historical and international standards. Increased taxes will be unwelcome and painful, but the US is in a situation as unprecedented and dangerous as that of the Great Depression. Obama himself has called on Americans for sacrifice. And after two decades of bingeing, we can afford a little sacrifice."

After the American Century

David Nye, a Professor of American History in Denmark, is the co-author (with Thomas Johansen) of a book entitled The American Century: A Chronology and Orientation, and has a blog of his own called After the American Century. Both his book and his blog have some similar themes to The End of the American Century. The blog, especially, provides an interesting perspective on some of these issues from outside the United States.

China, U.S. Debt, and the Economy

In 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 Hillary 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."

This was a major reason why both the American consumer and the federal government could spend so far beyond their means in the last twenty years, and why the U.S. economy has gotten so severely out of whack. The large-scale purchases of U.S. debt by foreigners helped keep interest rates low, encouraging consumers to borrow more than they could afford for the purchase of cars and houses and other consumer goods. It was a kind of giant international Ponzi scheme. The Chinese lent us money so we could purchase their products. But when the bottom fell out, the economies of both countries began to fall apart.

It is astonishing that so few public officials and economists recognized this enormous looming problem. It is not so surprising, perhaps, that the Bush administration missed the boat on this, because they were either oblivious or willfully ignorant on just about every major issue facing the United States, economic or otherwise. As the New York Times observes in a long and helpful overview of the situation, former Fed Chairman Alan Greenspan and the Bush administration “treated the record American trade deficit and heavy foreign borrowing as an abstract threat, not an urgent problem.”

Ben Bernanke, an esteemed economist if there ever was one, acknowledges that “a better balance of international capital flows early on could have significantly reduced the risks to the financial system.” But “this could only have been done through international cooperation, not by the United States alone.” Bernanke’s view of the problem, according to the Times, “fit the prevailing hands-off, pro-market ideology of recent years.”

This illustrates, in two ways, why the U.S. has fallen so far, so fast. The problem, as Bernanke correctly noted, required international cooperation. This has been a serious weak spot for the U.S. of course, particularly in the last eight years. The U.S. has ignored, denigrated or flouted international laws, conventions and institutions—especially during the Bush administration but before that as well. Because we did not welcome international cooperation in the past—on global warming, the Iraq War, the International Criminal Court, etc.—other countries were increasingly disinclined to look for the U.S. for leadership. This is now being played out in the international economic realm as well as the political.

The second telling aspect of the Bush/Greenspan/Bernanke approach is the “pro-market ideology of recent years.” Under Bush, the “hands off” approach to economic and social problems in the U.S. has indeed taken on the rigidity of an “ideology.” It is no longer simply a policy advocated by policy-makers, but a set of ideas promoted by ideologues. We see this in a whole array of hugely important issues facing the U.S., which have all been ignored or marginalized for eight years. The lack of regulation of financial markets is the most obvious example, but one also sees the “hands off” approach causing tremendous deterioration of U.S. schools, health care, welfare, infrastructure, and the environment, to say nothing of the elephants in the room—Social Security and Medicare.

Treasury Secretary Paulson told the Times “you don’t get dramatic change, or reform or action, unless there is a crisis.” This seems a strange way to run the ship of state. But the crisis is here, Mr. Secretary. Now what do we do?

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.

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.

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.

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.

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.

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.