Archive for May 28th, 2008

America in Decline

The US emerged as a super power after WWII, as the former powers in Europe and Japan had been devastated by war. During the Cold War the international system appeared bi-polar, but inherent weaknesses in the Soviet economy meant that while the Soviets could exert raw military power over satellite states and match us with nuclear weaponry, they were in no condition to truly rival American power. As the economy started to displace military power as a primary measure of leadership, the Soviets simply collapsed.

However, looking at historical trends, it’s clear that the US cannot be expected to enjoy true dominance for a long period of time. Rivals always emerge, as evident in the rise of the EU, Japan and more recently China and India. But what does this mean for the United States? For some, especially those whose fetish is to focus on military power, they look at our huge military machine and, despite obvious problems demonstrated in places like Iraq and Kosovo (or even Vietnam farther back), still see us as dominant. Our economy is still the largest in the world, and to many, talk of ‘decline’ is just hyperbolic alarmism reflecting either unnecessary pessimism or perhaps latent anti-Americanism.

However, a broad view of history suggests that not only is relative decline inevitable, but it need not be seen as a danger. In fact, recognizing the reality of a shift away from what Charles Krauthammer called a unipolar moment to one where the US needs to act in concert with others to try to solve global problems is important. Up until now our policy has been primarily to cooperate with others by setting broad policy parameters and building coalitions to go along with our policies. We’ve been less willing to compromise on policy goals and principles, or give up the notion that we are the “leader” of the West, or some kind of guarantor of world stability. Changing that will take swallowing some nationalist pride, but the good news within globalization is that such cooperative ventures are actually good for a country.

So are we in decline? I’ll offer the following argument, you be the judge:

1) Public and private debt started increasing at a massive rate around 1980, with private debt growing quickly from 1990 on. During that time the US went from being the world’s largest creditor nation to being the world’s largest debtor. The US economy shifted from industrialization to service economy, with emerging markets like China and India growing fast, and competing for oil. US Debt went from 30% of GDP in 1980, quickly to 70% of GDP. By some estimates private debt nears 50 trillion;

2) From 1980 to the present the US managed to hide some of the structural problems by enjoying some of the lowest oil prices in history. The private debt increase was due to a credit boom, which fueled two bubbles: the stock bubble and the housing bubble. The latter led to even more debt as people kept the economy going through consumer spending through home equity loans. Those have dried up.

3) The current accounts deficit is unsustainable at 5% of GDP. That means the dollar is overvalued. While the bubbles existed we pulled in enough foreign capital to keep the capital account high, financing the current accounts deficit. Now that the bubbles have collapsed the credit crisis is causing the dollar to lose value fast.

4) The capital account “boom” meant that countries like Japan, China and Saudi Arabia purchased large amounts of American currency, as well as portfolio investment. That gives them a chunk of the economy that is unprecedented — and if the dollar keeps falling, they could add to the woes by pulling out and shifting their investments elsewhere. Or they could hold on to their investments, owning a good chunk of the American economy. This creates an obvious conclusion: the US is in economic decline. Not a radical collapse, just a fall from dominance, and more dependent on others than before.

5) Militarily the us spends half the world’s military budget and has troops stationed all over the globe. This has created a kind of empire, where direct influence has replaced actual control of territory. This unipolarity naturally creates competitors for power, and fosters insecurity in others. China, Russia and others have been working to undercut US influence, and supporting countries like Iran. The EU recognizes that the future is not dependent on the US, and their interest lie in forging closer ties with other states as well. The US is still important, but relative to other states, not as important. Again, a decline in relative power.

6) The US in Iraq has shown that even as a “hyperpower,” the US military cannot easily shape a weak, decimated country to its demands. Instead, after bluster and bravado, we’ve been forced to define down goals to try to just find a way to have stability, as Iran and Syria each have expanded power.

7) the rise of non-state actors like Hezbollah, al qaeda and others provide threats not easily dealt with by our traditional military. Moreover, the importance of economic factors over military ones make it possible for states or non-state actors to respond to American military power by using oil as a weapon or other economic tools, which can be extremely effective, perhaps doing more damage than bombs. Iran is emboldened by the fact we’ve had such horrific problems with Iraq, and only could find some stability after essentially giving up the desire to “win,” in the manner originally intended.

8 ) The US, by ignoring the UN and other international efforts, pushed the EU and allies towards anti-Americanism in their publics, and distrust of American policy. While the Bush administration has altered its “with us or against us” tone by reaching out and compromising (thanks especially to Rice), it’s clear that the US is no longer the leader of the western alliance, and the Europeans and others will ignore us or work against us if they decide they don’t like our policies.

9) The Iraq war’s cost also demonstrates classic imperial overstretch, and the fact that the globalized world system isn’t easily shaped by raw military power. It is unlikely that American military might is all that useful; economics seem to matter more.

So we’re at a crucial juncture in American history, the post-war period is over and it’s clear there are limits to our economic and political power that Americans are not used to. I think Iraq has been a wake up call, to show us that rhetoric and military power aren’t enough to alter the reality of a globalized and increasing multi-polar world.