Cross-Posted from The End of the American Century

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 Hilary 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?

Cross -Posted from The End of the American Century

An important element of the loss of U.S. global prestige and influence has been this country's snubbing and flouting of international law and conventions.  The latest example of this is the Cluster Munitions Treaty, which was signed  in Oslo, Norway earlier this month by 94 countries, not including the United States.  One of the 94 signatories was Afghanistan, which agreed to the treaty at the last minute in the face of intense pressure from Washington.

Global souring on the U.S. began even before George W. Bush took over, with the U.S. refusal to ratify a number of important and popular international treaties.  President Bush, though, has done more to damage the U.S. reputation than any previous president, with his arrogant dissing of the United Nations, the Geneva Conventions, the International Criminal Court, and international law generally.  This pattern continues with the cluster bomb treaty.

Cluster bombs are munitions dropped from the air or launched from the ground 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 bombs 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 weapon 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 the treaty, 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 Barack 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.  There is a long list of high-profile 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 treat establishing the International Criminal Court, which was constituted 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, for example, 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 the seamy side of U.S. "exceptionalism" that sees the U.S. as above and beyond international moral and legal standards.  This attitude has been 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 ironic 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. The Bush administration pressure on the Afghan government to reject the treaty is another unfortunate pattern. While other administrations have failed to ratify international treaties, the Bush White House has gone out of its way to keep other countries from doing so. 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 country, 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. The U.S. 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.

 

Cross Posted From:  The End of the American Century 

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 book 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." Such cuts would also 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, infrastructure,  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 might 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. Roach sees a bit of a silver lining in all this:

"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.

Cross-Posted from The End of the American Century

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."

In September, a preview of this report was 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, is 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 my book 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.

Cross-Posted From: The End of the American Century 

The election of Barack Obama sends a signal to the rest of the world that the U.S. will rejoin the global community.  Global leaders and citizens alike seem prepared to welcome back the U.S. with President Obama leading the way--both because of who he is and what he says.

If we surprised ourselves by electing a black man as our President, the rest of the world was even more impressed.  Even our adversaries are likely to take notice of the change.
As Britain's Economist magazine put it, in its endorsement of 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."

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."

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.  The U.S. has changed, but so has the rest of the world.

Cross-Posted FromThe End of the American Century.

I argue in The End of the American Century that the U.S. has already lost its global supremacy. But can it recover it? In a globalized and interdependent world, both the country and the world are better off without a superpower.  President-elect Obama seems to understand this, but it will take inspired leadership to lead the country into this new, diminished, global role.

There is, first of all, both a descriptive (factual) and prescriptive (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.

Yesterday, Fareed Zakaria and I were both interviewed on Canada's CBC Radio program "The Current" by the show's host, Anna Maria Tremonti.  She was exploring the task facing President-elect Obama in dealing with a world where the U.S. is no longer the sole superpower. 

Zakaria is the author of The Post-American World, which Senator Obama has apparently been reading.  I was on the show because of my recently published book The End of the American Century.  The interview can be heard at this link.

Ms. Tremonti asked Mr. Zakaria if he had written the book specifically for Obama.  Zakaria said no, but said that he had favored Obama from the very beginning of the primary campaign, and thought that Obama, more than any of the other candidates, understood the situation the U.S. is facing. 

Zakaria's book has the look of a foreign policy blueprint for the new administration, and concludes with a section on "New Rules for a New Age" which lists "six simple guidelines" for how the U.S. should deal with the rest of the world.

Zakaria himself is smart, articulate, and sees the big picture.  Like Obama, he is a symbol of a new global era.  He was born in India, came to the U.S. as a young man, and has flourished here.

Could he be a candidate for Secretary of State?

Cross Posted from The End of the American Century

I went to vote this morning at 6am. It was dark, and there was already a long line outside the polling place at St. Thomas Aquinas elementary school. My daughters went to that school, and as the line snaked through the main hallway, I studied the pictures of the (graduating) 8th grade classes from over the years, and saw their faces--young, innocent, happy and hopeful.

I have never seen such a line for an election in this country. By 7am, I had filled out my ballot and fed it into the optical scanner--it showed that I was the 89th voter in that precinct. My friend Mike, an election official, observed that this was more than one vote per minute since the polls opened.

This is an historic day, for many reasons, but first and foremost because Americans have reclaimed their democracy. After years of embarrassingly low voter turnout levels--far lower than most other democracies--record numbers of people are voting today. This in itself is good for America, and a sign of hope.

In the past, poor people, young people, and minorities were far less likely to vote than rich, older White people. This skewed the political system and made it unrepresentative. This was one reason Chapter 5 of my book The End of the American Century is titled "Ailing American Democracy." Today, all those groups are voting, probably in record numbers, restoring a truly representative democracy.

But it is momentous as well because of the person that has moved them to turn out today--a young, vibrant, biracial man with an unusual name, who speaks of "community" and says that change must come from the grassroots. When the United States elects this man as their President, it will send a message around the world that the U.S. has rejoined the global community.

The Indianapolis Star decided to withhold endorsing either Obama or McCain for President this year. This was the first time since 1964 (Lyndon Johnson) that the Star had not endorsed the Republican candidate for President. Dennis Ryerson, the editor of the newspaper, wrote that the editorial board was not able to reach consensus, so they simply "decided to agree to disagree" and to withhold an endorsement.

Indiana is one of "swing states" in the electoral campaign, with polls in the state showing the Obama-McCain contest to be a tossup. The latest statewide poll conducted by the Star shows Obama with 45.9% and McCain with 45.3% support among Hoosiers. If Indiana votes for Obama, it will be the first time the state's electoral votes have gone for a Democrat since Lyndon Johnson's landside victory of 1964.

Cross Posted from The End of the American Century

Fareed Zakaria is everywhere these days, articulating a message similar to those in my own book The End of the American Century.  But I think he underestimates the seriousness of the situation facing the United States.  His was the lead article last summer in Foreign Affairs' issue on "Is America in Decline?" His book The Post-American World appeared shortly thereafter, and soon became a best seller.  As an editor of Newsweek, his columns appear there regularly, and the October 20^th issue of the magazine featured him on the front cover, with the title "The Bright Side" against a cheery yellow background.  He even has his own television show, "Fareed Zakaria's GPS," where last week he endorsed Barack Obama as the best hope for America's future.

Zakaria argues that it is not so much that the U.S. is in decline, but that other powers have risen, requiring the U.S. to deal with them with more consultation and compromise.  He believes that the U.S. "has the strength and dynamism to continue shaping the world" (Foreign Affairs) and that "the world is moving our way" (The Post-American World). He sees a "silver lining" in the current economic crisis, in that the country will be forced "to confront the bad habits it has developed over the last few decades" (Newsweek).

These bad habits include spending and consuming more than we produce, leading to record levels of household debt, which has grown from $680 billion in 1974 to $14 trillion today.  Spiraling consumer debt has been matched by the government.  "The whole country has been complicit in a great fraud," he writes in Newsweek.  He quotes the economist Jeffrey Sachs: "We've wanted lots of government, but we haven't wanted to pay for it." 

He believes the current crisis will force greater fiscal "discipline" by both families and government, recognizing that "this discipline will be painful for a country that has gotten used to having it all."  It will also be good for our country's foreign policy.  Being the only superpower "has made Washington arrogant, lazy and careless." Perhaps we could get away with this arrogance when we were on top of the world.  But things have now changed.  "We cannot keep preaching to the world about democracy and capitalism while our own house is so wildly out of order."

I make similar arguments in my book and I agree with all of this, but especially that last sentence, which appears near the end of Zakaria's Newsweek essay.  However, I think Zakaria understates just  "how wildly out of order" our system has become.  Record consumer and government debts and a bankrupt financial system and foreign policy, as bad as those are, constitute only parts of the problem.  At the same time that we have been madly spending on consumer goods, wars and debt servicing, we have let languish education, health care, infrastructure, science and technology.  We have shuffled to the side the hugely expensive fixes required for Social Security and Medicare.  Poverty and inequality are higher in this country than a generation ago, and among the highest in the developed world.  Even our vaunted democracy, eroded by money and abuse of executive power, is no longer such a beacon for other countries.  A major part of my book shows how all these interrelated problems result in a much more serious situation than Zakaria recognizes.

While we seem prepared to spend a trillion dollars bailing out a financial system led by incompetent multimillionaires, we need at least that much to fix the health care system, not to mention these many other neglected issues.  It is difficult to see where the resources will come from to mend our society, once the banks are taken care of.  It will require many years to restore the United States, and a change in America's mindset, as well as its priorities.

Zakaria concludes his essay by suggesting that "if we can learn the right lessons from this crisis, the United States will once more be playing by its own rules."  I am not quite sure what "the right lessons" are, or what our "own rules" are.  I think the needed lessons may be deeper and broader than he suggests, and that we may even have to change the rules.  I am not as optimistic as Zakaria, but even without optimism, one can always hope.  And this election week offers much hope.

Cross-Posted from: The End of the American Century   

For most of the 20th Century, the U.S. was the world leader in science, technology, and innovation, with the best scientists, the best universities and the most advanced research and development programs. But all of that has begun to change as other countries and regions have become more advanced and more competitive and increasingly challenge U.S. dominance.

A recent article in the New York Times addressed the U.S. technological decline, and the ways Senators Obama and McCain have approached the issue. This story includes some eye-opening statistics about the loss of U.S. primacy in technology, innovation and R&D. At the top of the story, the Times points out the importance of this sector for America's economy and role in the world:

For decades the United States dominated the technological revolution sweeping the globe. The nation's science and engineering skills produced vast gains in productivity and wealth, powered its military and made it the de facto world leader. Today, the dominance is eroding.

One sees this in multiple indicators, but perhaps the most important is the country's high-technology balance of trade. Until 2002, the U.S. always exported more high-tech products than it imported. In that year, the trend reversed, and the technology trade balance has steadily declined, with the annual gap exceeding $50 billion in 2007.

The U.S. has also fallen behind in spending on research and development, which drives high-tech innovation and development. As a percent of GDP, total R&D expenditures have remained flat since the 1960s, while federal government spending on R&D has declined steadily. The U.S. has fallen to 8th place worldwide on R&D spending as a share of GDP, behind Israel, Sweden, Finland, Japan, South Korea, Switzerland and Iceland (Popular Science 11/08).

China is not yet on that top-ten list, but may not be far behind. The country is ramping up support for high tech innovation and R&D, and President Hu Jintao this year called on Chinese scientists to challenge other countries in this area: "We are ready for a fight," he said, "to control the scientific high ground and earn a seat on the world's high technology board." (China's Industrial Ambition).

The U.S. is also slipping, relative to other countries, in the creation of patents, scientific inventions, the publication of science and engineering articles, and the number of students focusing on science, math and engineering. In international comparisons of scientific and mathematical literacy, and in international competitions in those fields, American students fare poorly, often ranking near the bottom of the group of wealthy countries. Increasingly the top science and engineering students in this country are citizens of other countries, who then return home. Science magazine (7/11/08) recently reported that the most likely undergraduate alma maters for those who earned a U.S. Ph.D. were--get this--Tsinghua University and Peking University--both in Beijing.

These worrisome developments prompted a major study recently, "Rising Above the Gathering Storm," from the National Academies, the nation's most eminent scientific and engineering organization, calling for the U.S. to strengthen its international competitiveness. The authors of the report were "deeply concerned that the scientific and technological building blocks critical to our economic leadership are eroding at a time when many other nations are gathering strength" and were "worried about the future prosperity of the United States. A review of high tech by the magazine Popular Science (11/08) puts it a but more bluntly:

The technological dominance of the United States may soon go the way of the dollar.

Fortunately, the man who will probably take over as President next January, Barack Obama, is on top of these issues, often speaks about them, and has aggressively promoted efforts to remedy them. In his book The Audacity of Hope, he called for a doubling of federal funding for basic research and the training of 100,000 more engineers and scientists over the next four years. He co-sponsored a bill in Congress based on the recommendations of "The Gathering Storm" and called for increased federal support of science education, especially for women and minorities. The Senate passed the bill 88 to 8 ( Senator McCain abstained), but has not yet funded the programs. It will be an expensive proposition--about $43 billion for the first three years--which will be all that much more difficult to manage in this time of economic crisis. But these long-term investments are critical to recovering America's economic dynamism

In the presidential debate Tuesday night, the two candidates vied for who could cut the most taxes. “Let’s not raise anybody’s taxes,” proclaimed McCain, while Obama promised a tax cut for 95% of Americans. These pledges may be music to the ears of American taxpayers, but they make no sense in a time of soaring budget deficits and huge new government expenditures, including probably a trillion dollars for the financial bailout. When the federal budget is so out of whack, as The New York Times' David Leonhardt points out, “taxes will have to rise or government spending will have to fall, if not both.” Leonhardt's sobering but sensible column is aptly titled "Ignoring Reality Has a Price."

Even before the bailout, the Bush administration was handing over to its successor a $550 billion budget deficit. With the costs of the financial bailout, Leonhardt estimates, that is more likely to be $750 billion. This is the largest ever annual deficit in absolute terms and the largest as a percent of GDP—5%--since 1983. The federal debt has now topped ten trillion dollars, and last week Congress raised the debt “ceiling” to $11.3 trillion.

In the face of these huge deficits and new obligations—not to mention the looming problems of funding Social Security and Medicare—the only solution is to increase federal revenue. The only real source for that is personal and corporate taxes. Taxes will have to be raised, and probably for almost everyone. This need was true even before the current crisis. In 2004, the International Monetary Fund, normally concerned with debts and insolvency in poor countries, raised the alarm about U.S. fiscal deficits and the “significant risk” these posed for the rest of the world. The IMF estimated then that to close the long-term structural deficit in the U.S. would require “an immediate and permanent 60 percent hike in the federal income tax yield, or a 50 percent cut in Social Security and Medicare benefits.”

The Bush administration has compounded these long term problems by combining record spending with cuts in taxes—causing these unprecedented deficits and debts. It is difficult to see how we can avoid increases in federal spending (in the short run, at least) to stop the bleeding of the current financial mess. So tax cuts, by reducing federal revenue, will simply compound the long term problems.

Some politicians and economists (especially “supply-siders”) argue that tax cuts can be made up for by increased consumer spending and economic growth, which will in turn generate more tax revenue. But there is virtually no historical or economic analysis that supports this assumption. Even Fed Chairman Ben Bernanke admits that tax cuts “usually do not pay for themselves.” (New York Times, 11/9/07). And former Secretary of Commerce Paul Peterson observed in his book Running on Empty that the tax cuts of the Bush administration were “an obligation driven by faith, not a policy guided by evidence.” The same is true now, even more.

The problem is that Americans are thoroughly accustomed to not paying for the benefits we enjoy. Compared to other wealthy countries, the U.S. has among the lowest rate of both individual and corporate income taxes. Total tax revenues in the U.S. (as a percent of GDP) are substantially lower than all of the affluent democracies that are members of the OECD. The only OECD countries that have lower taxes on this scale are Mexico and Korea—the two least developed countries among the thirty. Furthermore, in the U.S. federal tax revenues as a percent of GDP have actually declined since the year 2000.

In the presidential debate last Tuesday, there was some recognition, by Senator Obama at least, that the current crisis was going to require belt-tightening by American citizens. “All of us are going to make sacrifices,” Obama said. This is not an easy message for a politician to convey, and even more difficult to carry out. It will require wise leadership to do so.

“This sucker could go down,” declared  President Bush, after the White House leadership summit failed to reach agreement on a bailout plan for the financial services sector.  The President is one of the last to recognize how bad the economic situation really is.  But the U.S. economy has been tiptoeing on quicksand for years, and the current problems will not be solved quickly, even with an infusion of $700 billion, as the President proposes.

            The root of the problem is this: the U.S. has been living on borrowed money for an entire generation; this debt has been serviced internally by a mushrooming but shaky financial services sector, and externally by foreign governments (especially the Chinese); and now both of these sources are evaporating.  Whether or not the bailout package is approved, the U.S. economy and American consumers are going to take a bit hit. 

First, the borrowed money.  Both government and consumers have been spending beyond their means, almost continuously, for two decades.  The federal government has had huge budget deficits every year since 1980, except for a few years during the Clinton presidency.  The deficits have built the federal debt up to some $10 trillion, accounting for two-thirds of GDP, compared to only one-third in the 1970s.  Next year’s budget deficit will add almost $500 billion to that debt.  The bailout package will probably add another trillion dollars.  Just the interest on the federal debt is one of the largest items in the federal budget, draining over $400 billion annually.

  Government profligacy is matched by consumers: the household savings rate in the U.S. has been declining for two decades, is the lowest among all developed countries, and in 2005 fell below zero for the first time ever. Credit card and mortgage debt are both at record levels, as are bankruptcies and mortgage foreclosures.  Most Americans, even those near retirement age, have almost no retirement savings.  The Social Security and Medicare “trust funds” are actually unfunded, to the tune of some $41 trillion.  The government is unlikely to find resources to meet these liabilities, which will put further strains on seniors.

Consumer spending now accounts for two-thirds of all economic activity in the U.S.  This growth in spending has been possible only by borrowing.  The consumer spending and borrowing binge has been fueled by the growth of the financial services industry, which has increasingly replaced manufacturing as the mainstay of the U.S. economy.  Banks, mortgage companies, loan agencies and credit card companies make their money by making loans, and they are constantly seeking new customers and encouraging existing ones to borrow more.  It is this symbiotic relationship between binging consumers and profit seeking financial companies that has created the piles of consumer debt and subprime mortgages. 

All of this is starting to unravel now.  People borrowed more than they could afford; the mortgage crisis undercut their ability to repay loans and mortgages; the banks and loan agencies faced mounting defaults and declining profits and stock prices. Banks are increasingly unable or unwilling to extend loans to businesses or individuals, which will crimp both consumer spending and economic growth, accelerating the economic downturn.

The U.S. government is not really in a position to rescue bankrupt companies, because it is itself bankrupt.  And just as the financial industry has been an enabler of consumer deficit spending, foreign governments have enabled the U.S. government to spend more than it brings in, by buying up U.S. debt. Over half of U.S. debt is now owned by foreigners—compared to just 5 percent that was owned by foreigners twenty years ago.  The biggest outside holder of U.S. debt is the government of China.  Holding such debt only makes sense if you are sure you can redeem the funds when you need to.  As you can imagine, foreign governments and banks are increasingly worried about this, and have already started shifting such investments to other countries, and other currencies, especially the euro.  This is one of the reasons for the sharp drop in the value of the dollar, to record low levels against the euro and other currencies.

So this $700 billion bailout, as large as it is, will only scratch the surface of these multiple dimensions of U.S. debt.  We cannot continue to grow, based on borrowing against the future. The domestic financial pot is empty, and our foreign enablers are wising up. The economy will contract, our standard of living will decline, and more people will join the ranks of the poor and unemployed.  This sucker could go down.  The U.S. is in for tough times.

(for more, see my blog on "The End of the American Century" at www.endoftheamericancentury.blogspot.com)

Even in Congress, a lot of people are concerned that President Bush’s proposed $700 billion bailout for the financial sector will unduly benefit the superrich CEOs who contributed so much to this mess in the first place.  Most Americans are appalled by the bloated CEO compensations that we occasionally hear about. 

But maybe you didn’t hear about the CEO pay for the very firms that are most in the news these days.  Last year, for example, AIG’s Martin Sullivan received compensation of $13.9 million, including a performance based bonus of $5.6 million.  And this was after a 50% cut in his compensation from 2006!  Who topped the list of CEO compensation in 2007?  John Thain of Merrill Lynch, another failed enterprise.  His compensation in 2007 was $83.1 million.

     These amounts are breathtaking, but most people don’t realize, I think, how much this has changed over the last twenty years, and how out of line US CEO salaries are with those in other countries.

     In the 1950s, big-company CEOs in the U.S. earned about fifty times the pay of an average worker.  Even then, that ratio was very high compared to other countries.  But since then, CEO pay in the U.S. has skyrocketed in comparison to average salaries.  By 1990, average CEO pay was about 100 times the average worker’s salary, and by 2000, it was more than 500 times that of the average worker.

            These benefit packages are far out of line with those in other wealthy countries. In 2004, for example, Japanese CEOs earned about ten times that of the average employee.  In Germany, the ratio was 11 to 1, in the UK 25 to 1, and in the United States, 531 to 1! 

            CEO pay is another glaring example of how far out of kilter the U.S. economy is, how eroded is the sense of fairness in this country, and how out of sync the U.S. is with the rest of the world.  It is yet another example of The End of the American Century