Books & Arts

Want to send this page or a link to a friend? Click on mail at the top of this window.

More Books and Arts

Posted October 16, 2008

A Power That May Not Stay So Super

CENTRAL PRESS/GETTY IMAGES

DECLINE Even as the future King Edward VIII shot a tiger in India in 1921, Britain's empire was overstretched.

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.”

Copyright 2008 The New York Times Company Reprinted from The New York Times, Week in Review, of Sunday, October 13, 208.

Wehaitians.com, the scholarly journal of democracy and human rights

More from wehaitians.com

Main / Columns / Books And Arts / Miscellaneous