FT: America must manage its decline

Published as a column on www.ft.com on October 17, 2011 at 8:35 pm

By Gideon Rachman

Original source link here.

Recently I met a retired British diplomat who claimed with some pride that he was the man who had invented the phrase, “the management of decline”, to describe the central task of British foreign policy after 1945. “I got criticised,” he said, “but I think it was an accurate description of our task and I think we did it pretty well.”

No modern American diplomat – let alone politician – could ever risk making a similar statement. That is a shame. If America were able openly to acknowledge that its global power is in decline, it would be much easier to have a rational debate about what to do about it. Denial is not a strategy.

President Barack Obama has said that his goal is to ensure that America remains number one. Even so, he has been excoriated by his opponents for “declinism”. Charles Krauthammer, a conservative columnist, has accused the president of embracing American weakness: “Decline is not a condition,” he declared. “Decline is a choice.” The stern rejection of “declinism” is not confined to the rabid right. Joseph Nye, a Harvard professor and doyen of US foreign policy analysts, regards talk of American decline as an intellectual fad – comparable to earlier paranoia about the US being overtaken by Japan. Thomas Friedman, a New York Times columnist, has just published a book that is subtitled, “What went wrong with America – and how it can come back”.

What is not permissible, in mainstream debate, is to suggest that there may be no “coming back” – and that the decline of American power is neither a fad nor a choice but a fact.

Admittedly, America’s relative decline is likely to be much less abrupt than the falling-off experienced by Britain after 1945. The US is still the world’s largest economy and is easily its pre-eminent military and diplomatic power. However, the moment at which China becomes the world’s largest economy is coming into view – the end of the decade seems a likely passing point. Of course, it is true that China has its own grave political and economic problems. Yet the fact that there are roughly four times as many Chinese as Americans means that – even allowing for a sharp slowdown in Chinese growth – at some point, China will become “number one”.

Even after the US has ceded its economic dominance, America’s military, diplomatic, cultural and technological prowess will ensure that the US remains the world’s dominant political power – for a while. But although economic and political power are not the same thing, they are surely closely related. As China and other powers rise economically, they will inevitably constrain America’s ability to get its way in the world.

That is why America needs to have a rational debate about what “relative decline” means – and why the British experience, although very different, may still hold some valuable lessons.

What the UK discovered after 1945 is that a decline in national power is perfectly compatible with an improvement in living standards for ordinary people, and with the maintenance of national security. Decline need not mean the end of peace and prosperity. But it does mean making choices and forging alliances. In an era of massive budget deficits, and rising Chinese power, the US will have to think harder about its priorities. Last week, Hillary Clinton insisted that America will remain a major power in Asia – with all the military expenditure that this implies. Very well. But what does that mean for spending at home? Few politicians are prepared to have that discussion. Instead, particularly among Republicans, they fall back on feel-good slogans about American “greatness”.

Those who refuse to entertain any discussion of decline actually risk accelerating the process. A realistic acknowledgement that America’s position in the world is under threat should be a spur to determined action on everything from educational reform to the budget deficit. The endless politicking in Washington reflects a certain complacency – a belief that America’s position as number one is so impregnable that it can afford self-indulgent episodes such as the summer’s near-debt default.

The failure to have a proper discussion of relative decline also risks leaving American public opinion unprepared for a new era. As a result, the public reaction to setbacks at home and abroad is less likely to be calm and determined and more likely to be angry and irrational – feeding what the historian Richard Hofstadter famously called “the paranoid style in American politics”.

For the fact is that management of decline is as much to do with psychology, as to do with politics and economics. In 1945, the British task was made much easier by the afterglow of victory in the second world war. Britain’s adjustment was also helped by the fact that the new global hegemon was the US – a country tied to Britain by language, blood and shared political ideas. It will be tougher for America to cede power to China – although the transition will also be much less stark than the one faced by Britain.

These days the British have learnt almost to revel in failure. They buy volumes with titles like the “Book of Heroic Failures” in large numbers. It is quite common for the supporters of a losing English soccer team to chant, “We’re shit and we know we are.” This is not a habit I can see catching on in the US. When it comes to managing decline, self-abasement is optional.

Krugman on American healthcare and the unfair TeaParty movement

OP-ED COLUMNIST
Credibility, Chutzpah and Debt
By PAUL KRUGMAN
Publishedin the NY Times: August 7, 2011
Source

To understand the furor over the decision by Standard & Poor’s, the rating agency, to downgrade U.S. government debt, you have to hold in your mind two seemingly (but not actually) contradictory ideas. The first is that America is indeed no longer the stable, reliable country it once was. The second is that S.& P. itself has even lower credibility; it’s the last place anyone should turn for judgments about our nation’s prospects.

Let’s start with S.& P.’s lack of credibility. If there’s a single word that best describes the rating agency’s decision to downgrade America, it’s chutzpah — traditionally defined by the example of the young man who kills his parents, then pleads for mercy because he’s an orphan.

America’s large budget deficit is, after all, primarily the result of the economic slump that followed the 2008 financial crisis. And S.& P., along with its sister rating agencies, played a major role in causing that crisis, by giving AAA ratings to mortgage-backed assets that have since turned into toxic waste.

Nor did the bad judgment stop there. Notoriously, S.& P. gave Lehman Brothers, whose collapse triggered a global panic, an A rating right up to the month of its demise. And how did the rating agency react after this A-rated firm went bankrupt? By issuing a report denying that it had done anything wrong.

So these people are now pronouncing on the creditworthiness of the United States of America?

Wait, it gets better. Before downgrading U.S. debt, S.& P. sent a preliminary draft of its press release to the U.S. Treasury. Officials there quickly spotted a $2 trillion error in S.& P.’s calculations. And the error was the kind of thing any budget expert should have gotten right. After discussion, S.& P. conceded that it was wrong — and downgraded America anyway, after removing some of the economic analysis from its report.

As I’ll explain in a minute, such budget estimates shouldn’t be given much weight in any case. But the episode hardly inspires confidence in S.& P.’s judgment.

More broadly, the rating agencies have never given us any reason to take their judgments about national solvency seriously. It’s true that defaulting nations were generally downgraded before the event. But in such cases the rating agencies were just following the markets, which had already turned on these problem debtors.

And in those rare cases where rating agencies have downgraded countries that, like America now, still had the confidence of investors, they have consistently been wrong. Consider, in particular, the case of Japan, which S.& P. downgraded back in 2002. Well, nine years later Japan is still able to borrow freely and cheaply. As of Friday, in fact, the interest rate on Japanese 10-year bonds was just 1 percent.

So there is no reason to take Friday’s downgrade of America seriously. These are the last people whose judgment we should trust.

And yet America does have big problems.

These problems have very little to do with short-term or even medium-term budget arithmetic. The U.S. government is having no trouble borrowing to cover its current deficit. It’s true that we’re building up debt, on which we’ll eventually have to pay interest. But if you actually do the math, instead of intoning big numbers in your best Dr. Evil voice, you discover that even very large deficits over the next few years will have remarkably little impact on U.S. fiscal sustainability.

No, what makes America look unreliable isn’t budget math, it’s politics. And please, let’s not have the usual declarations that both sides are at fault. Our problems are almost entirely one-sided — specifically, they’re caused by the rise of an extremist right that is prepared to create repeated crises rather than give an inch on its demands.

The truth is that as far as the straight economics goes, America’s long-run fiscal problems shouldn’t be all that hard to fix. It’s true that an aging population and rising health care costs will, under current policies, push spending up faster than tax receipts. But the United States has far higher health costs than any other advanced country, and very low taxes by international standards. If we could move even part way toward international norms on both these fronts, our budget problems would be solved.

So why can’t we do that? Because we have a powerful political movement in this country that screamed “death panels” in the face of modest efforts to use Medicare funds more effectively, and preferred to risk financial catastrophe rather than agree to even a penny in additional revenues.

The real question facing America, even in purely fiscal terms, isn’t whether we’ll trim a trillion here or a trillion there from deficits. It is whether the extremists now blocking any kind of responsible policy can be defeated and marginalized.

A version of this op-ed appeared in print on August 8, 2011, on page A19 of the New York edition with the headline: Credibility, Chutzpah And Debt.