New Castle News

Community News Network

December 26, 2012

Will 2013 mark the beginning of American decline?

"A modest man," Winston Churchill supposedly quipped about Clement Attlee, his successor as prime minister, "but then he has so much to be modest about." We should say the same about economists, particularly their ability to forecast anything in a useful and timely manner.

Those predicting an imminent American economic decline have usually been no exception. This time, though, they may be on to something.

Prevailing arguments about when the era of U.S. dominance would end, and which country would supplant it, have been wildly and consistently wrong for half a century. In the 1950s, Soviet leader Nikita Khrushchev was taken seriously when he told Western ambassadors "We will bury you." Today, his country no longer exists. In the 1980s, Japan was supposedly going to be No. 1; now the question is whether the precipitous decline in its working-age population will generate a fiscal crisis.

The Germans - or Europeans more broadly - were thought to be on the brink of elbowing aside the United States several times, including in the run-up to the global financial crisis in 2008, when the euro seemed to threaten the dollar's role as the pre- eminent reserve currency. Remember when Brazilian model Gisele Bundchen was quoted as saying she preferred to be paid in euros? Now the euro-area economy looks very sick indeed, and Bundchen is apparently long American icons (she married football player Tom Brady).

Becoming the world's top economic dog isn't easy. That's because any contender - China or anyone else - needs to answer three tough questions.

First, do they have secure property rights for individuals? Who would trust their rainy-day funds or their most innovative ideas in a country where, when the going gets tough, the state gets your stuff? China has a big current-account surplus and lots of foreign-exchange reserves. They also have a 2,000-year tradition of putting the government before the individual. Think about all the ways this went wrong for the Soviet Union.

Second, is the financial system viable in its current form? Japan had a great economic-transformation story - and an even greater debt-fueled asset-price bubble when its banks went mad in the mid-1980s. How confident are you that China, Brazil or other emerging markets aren't headed down the same road?

Third, is debt - both public and private - on an unsustainable path? Mismanaged debt has brought Europe to its current low point, both in the form of direct public borrowing (see Greece) and in the equally painful form of private-sector borrowing that goes bad, with nasty implications for the government's balance sheet (ask the Irish and Spanish about this).

Even so, the U.S. has serious economic, social and political problems. Just look at the current budget debacle. Democrats and Republicans are at each other's throats, struggling theatrically, rather like Holmes and Moriarty above Reichenbach Falls. If they get a fiscal deal done in the next few weeks, do you really think it will result in a sensible tax system, or bring long-term health-care spending under control? Are we going to invest more in education? Will we really have a frank discussion about what kind of social-insurance programs we want, and how to pay for them?

I'm also well aware that incentives to take excessive risk remain at the heart of Wall Street. The Dodd-Frank financial reforms contain some useful measures but do too little to significantly alter the balance of power between global megabanks and the rest of us. The Federal Reserve seems to be edging in the right direction on regulation but it is moving too slowly to make any difference for the next cycle.

And the U.S. is now entering perhaps the most dangerous phase of its long-standing tax revolt, in which Republicans insist on holding down federal revenue while the population is aging, but they won't propose specific cuts in social programs, precisely because they know that Medicare and Social Security remain immensely popular.

As a result, the political logic of the moment leads to continued increases in U.S. government borrowing, about half of which is financed, for now, by international savings at low interest rates. Our post-crisis monetary policy is contriving to keep those rates very low for a long time, presumably setting the table for a further round of mismanaged risk taking in the financial sector (just as it did after 2001).

 So while no country will rise up to take America's place as the world's leading economy, its global position is indeed threatened - by its own reluctance to have an honest conversation about the federal budget and by the unwillingness of its political leadership to confront powerful interests on Wall Street.

Sooner or later, it will be America's turn to fall out of favor with investors and to see its own interest rates rise. It is hard to know when that day will come, or precisely what pressures the country will face.

Let me only venture one forecast: We will not be ready.

             

Simon Johnson is a professor at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He is co-author of "White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You."

 

1
Text Only | Photo Reprints
Community News Network
  • Screen Shot 2014-04-22 at 4.42.47 PM.png VIDEO: Leopard attacks crowd in India

    A leopard caused panic in the city of Chandrapur when it sprung from the roof of a house and charged at rescue workers.

    April 22, 2014 1 Photo

  • The top 12 government programs ever

    Which federal programs and policies succeed in being cost-effective and targeting those who need them most? These two tests are obvious: After all, why would we spend taxpayers' money on a program that isn't worth what it costs or helps those who do not need help?

    April 22, 2014

  • In cuffs... 'Warlock' in West Virginia accused of sexual assault

    Police in West Virginia say a man claiming to be a “warlock” used promises of magical spells to lure children into committing sexual acts with him.

    April 22, 2014 1 Photo

  • Cats outsmart the researchers

    I knew a lot had been written about dogs, and I assumed there must be at least a handful of studies on cats. But after weeks of scouring the scientific world for someone - anyone - who studied how cats think, all I was left with was this statement, laughed over the phone to me by one of the world's top animal cognition experts, a Hungarian scientist named Ádám Miklósi.

    April 22, 2014

  • McCain 1 House Republicans are more active on Twitter than Democrats

    Your representative in the House is almost certainly on Twitter. Your senator definitely is. But how are they using the social network? Are Democrats more active than Republicans, or vice versa? Who has the most followers on the Hill?

    April 22, 2014 1 Photo

  • Do your genes make you procrastinate?

    Procrastinators, in my experience, like nothing better than explaining away their procrastination: General busyness, fear of failure, and simple laziness are just a handful of the excuses and theories often tossed around. Now researchers from the University of Colorado Boulder have added another option to the list: genetics.

    April 21, 2014

  • Do White Castle prices tell us anything about the minimum wage?

    The paper looked at how many delicious steamed sliders the minimum wage has been able to purchase over time. The point is that as it notes, in 1981, the $3.35 minimum could buy a whole dozen. Today, at $7.25, it could purchase just 10.

    April 21, 2014

  • VIDEO: Moose charges snowmobile, flees after warning shot

    While snowmobiling in New England, Bob and Janis Powell of Maine were charged by a moose and caught the entire attack on camera.

    April 21, 2014

  • Can Hillary Clinton rock the cradle and the world?

    What's most interesting to contemplate is the effect becoming a grandmother will have on Hillary's ambition. It's one of life's unfairnesses that a woman's peak career years often coincide with her peak childbearing years.

    April 21, 2014

  • Smartphone kill switches are coming

    Smartphones need kill switches. It's a relatively easy solution to the pricey (and irritating) problem of smartphone theft. But who would have thought that the big carriers would team up with Apple, Google, Microsoft, Nokia, Samsung and lots of other manufacturers to voluntarily begin adding the technology by July 2015? The cooperative spirit! It makes so much sense!

    April 18, 2014

House Ads
Poll

Milwaukee catcher Martin Maldonado has been suspended five games for sucker punching Pittsburgh’s Travis Snider during a bench clearing brawl on Sunday. You OK with that suspension?

Yes. Seems fair.
No. Baseball NEVER gets it right in these situations. Should have been at least 20 games for his sucker punch into a pile of players.
Not sure, but I’d love to see baseball be like hockey and allow two guys to fight for a while before breaking it up. Let’s see how tough Maldonado is then.
     View Results