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?

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.”