[Marxism] No so super

[Louis Proyect <lnp3@xxxxxxxxx>]

NY Times, October 12, 2008
A Power That May Not Stay So Super
By DAVID LEONHARDT

AT the turn of the 20th century, toward the end of a brutal and 
surprisingly difficult victory in the Second Boer War, the people of 
Britain began to contemplate the possibility that theirs was a nation 
in decline. They worried that London's big financial sector was 
draining resources from the industrial economy and wondered whether 
Britain's schools were inadequate. In 1905, a new book ? a fictional 
history, set in the year 2005 ? appeared under the title, "The 
Decline and Fall of the British Empire."

The crisis of confidence led to a sharp political reaction. In the 
1906 election, the Liberals ousted the Conservatives in a landslide 
and ushered in an era of reform. But it did not stave off a slide 
from economic or political prominence. Within four decades, a much 
larger country, across an ocean to the west, would clearly supplant 
Britain as the world's dominant power.

The United States of today and Britain of 1905 are certainly more 
different than they are similar. Yet the financial shocks of the past 
several weeks ? coming on top of an already weak economy and an 
unpopular war ? have created their own crisis of national confidence.

On Friday, as the stock market finished one of its worst weeks by 
falling yet again, to roughly half of its level just one year ago, 
the Gallup Poll reported that Americans were substantially more 
pessimistic about the economy than they have been in more than two 
decades of polling. Nearly 60 percent say the economy is in poor 
shape, and 90 percent say it's still getting worse.

"One thing seems probable to me," Peer Steinbrück, the German finance 
minister, said recently. "The U.S. will lose its status as the 
superpower of the global financial system." At another time, that 
remark might have sounded like mere nationalist bluster. Right now, 
it doesn't seem so ridiculous to ask whether 2008 will come to be 
seen as the first year of a distinctly non-American century.

At the heart of the troubles, both short term and long term, is debt. 
Debt helped create the housing bubble and has now left almost one of 
every six homeowners with a mortgage larger than the value of their 
home. Debt built up, and then laid low, modern Wall Street, where 
firms borrowed $30 for every $1 they owned. And in the coming years, 
debt will constrain the United States government, as it copes with 
the combined deficits created by the Bush administration's policies, 
the ever-more expensive financial rescue and the biggest item of all, 
Medicare for the baby boomers.

In essence, households, banks and the government have already spent 
some of their future earnings. The current crisis marks the point at 
which the bills begin to get paid. Whereas Britain lumbered under the 
weight of imperial overreach, as the historian Niall Ferguson has 
written, the United States will be shackled primarily by its 
financial overreach.

"Given the burden of debt that has accumulated, it's hard to see the 
U.S. economy growing as fast as it did over the past few decades," 
Mr. Ferguson said. "There is a profound mood shift occurring."

But he added two caveats. The political language of both presidential 
campaigns makes clear that many voters, for all the current 
pessimism, still believe in the idea of American pre-eminence. So, 
apparently, do many of the world's investors.

In recent weeks, the dollar has held its own. Stocks in every other 
major country are down about as much over the last year as they are 
in the United States, if not much more. America may not be a safe 
haven anymore, but it does seem to be safer haven.

Robert Zoellick, the president of the World Bank, said that he was 
recently speaking to a senior Chinese economist, who said that people 
in his home country ? today's rising economic power ? don't see the 
sky falling on the American economy. "They know its ability to turn 
around problems is really unmatched, historically," Mr. Zoellick 
said, quoting the economist about the United States. "At the same 
time, they ask themselves, Will the United States get at some of the 
root causes that could determine its real strength over the next 10 
or 20 or 30 years?"

This is not the first time in recent history that the economic 
position of the United States has appeared precarious. At various 
points between the mid-1970s and early 1990s, Europe and Japan each 
looked like the next great power. Neither turned out to be.

Japan suffered through its own burst bubble and spent years denying 
the depth of its problems. Europe proved unable to create engines of 
growth that could match the software, biotechnology or entertainment 
industries in the United States.

Taken to its extreme, the American preference for a faster, riskier 
capitalism led directly to the current crisis. But that preference 
also helps explain why America is weathering the crisis at least as 
well as other countries.

Compared with many banks elsewhere, American banks uncovered their 
problems fairly quickly. Consider the case of Mr. Steinbrück, the 
German finance minister. Only two weeks ago, around the time that he 
was predicting the end of American financial dominance, he rejected 
calls for a Europe-wide bailout. The crisis, he said, was largely 
American. Last Sunday, Mr. Steinbrück and Chancellor Angela Merkel 
had to go before television cameras to assure Germans that their 
government was guaranteeing their savings.

(On Friday, Paul Volcker, the former Federal Reserve chairman, seemed 
to deliver a message to the Germans in an op-ed article in The Wall 
Street Journal: "The days of finger pointing and schadenfreude are over.")

Policy makers in this country have also seemed behind the curve for 
much of the last year. On Friday, only a week after Ben S. Bernanke, 
the current Fed chairman, and Henry M. Paulson Jr., the Treasury 
secretary, dismissed the idea as unwise, Mr. Paulson said the 
government would buy stock in financial firms. The British government 
announced a similar plan on Tuesday.

On the whole, though, American officials have been more aggressive 
than their overseas counterparts, and that has served as a reminder 
of the American economy's durable flexibility.

It is possible, then, that the main legacy of the crisis will be some 
form of corrective to the country's recent excesses. The economy 
looks to be heading into a period of more regulated, but still 
American-style, capitalism, more along the lines of how it operated 
in the 1950s, 1960s and 1990s. Those three decades happen to have 
produced the biggest and most widely shared economic gains since World War II.

But if that outcome is possible, it's not inevitable, and many 
economists say it isn't even likely. The debts run up in recent years 
are particularly unfortunate, because they stole resources from the 
future without laying the groundwork for future growth. "If you told 
me we were spending like crazy to build schools and send everyone to 
college, that would have infinitely different implications than 
borrowing like crazy to finance current consumption," said Christina 
Romer, an economist at the University of California at Berkeley.

Schools, roads, airports and the medical system, as well as the 
country's energy policy, all appear to need significant fixing, and 
yet there will be less money to fix them than there was 5 or 10 years 
ago. With the coming explosion in Medicare costs, the federal budget 
deficit could eventually get so large that foreign investors would 
get spooked. They might then decide that other economies were safer 
bets and shift more of their lending there. Were that to happen, and 
the United States struggled to attract financing, the country would 
face a whole new crisis.

As it is, the Chinese economy has grown so quickly in recent years 
that it could overtake the American economy as the world's largest by 
2027, according to Goldman Sachs. Just three years ago, Goldman 
predicted that China was unlikely to become No. 1 until at least 2040.

Some of this catch-up is inevitable. As in the British Empire's day, 
poorer countries are able to attract investment thanks to their low 
wages and also copy the successes of their richer rivals, notes 
Benjamin Polak, an economic historian at Yale. China still seems 
considerably less advanced, relative to its rivals, than the United 
States was in 1905. China remains a politically insecure, deeply 
unequal country.

But it is indeed making enormous progress, and that progress has 
consequences. Economic might translates quite directly into political 
and military might.

Will that prospect be enough to galvanize a serious response to the 
long-term economic problems in the United States? Or are there still 
more crises to come?

"The political system does not deal well with gradual, long-term 
problems," Peter Orszag, the director of the Congressional Budget 
Office, said. "It deals with crises, often imperfectly, but it does 
deal with them. The current experience makes the case."


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