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.