Predicting the decline of the United States has been in vogue since the birth of American hegemony. Sputnik, Vietnam, stagflation, budget deficits, trade deficits and even the end of the Cold War all triggered predictions of the end of America. With the 2008 financial crisis, however, there seemed to be a sense that this time was different. Tomes with titles like The Post-American World and The End of Influence began to appear on bookshelves. Germany’s finance minister confidently predicted that the United States was entering its last days as a financial superpower. Serious commentators spoke about how a ‘Beijing consensus’ would supplant the ‘Washington consensus’. America looked as if it would disappear in a vortex of debt.
Fast forward to this year, and a funny thing has happened to American influence — it’s unbowed. The very suggestion that America may be strong enough not to need quantitative easing sent global financial markets into spasm last week. If America was coming off life support, then the subsidies for all kinds of financial packages would end. As one financial strategist told the New York Times, ‘The Fed isn’t just the US’s central bank. It’s the world’s central bank.’ This point was not lost in Britain, where government borrowing costs surged. It’s said that when America sneezes, Britain catches a cold. But even as America gets better, Britain can remain ill.
For those in Britain who are constantly told that the crisis ‘started in America’, this must all look rather strange. If the crash was an American disease, then shouldn’t Uncle Sam be worst affected? How come the US is now free of bailed-out banks, having sold them at a tidy $25 billion profit, when Britain looks like it will be saddled with zombie banks for another decade? And given that the Obama administration has spent the last few years deadlocked with a bickering Congress, how have the obstacles to growth been removed so quickly?
Well, for one thing, there are some constants to American power. Its healthy demographics fuelled by immigration, geographic security, a syncretic, dynamic popular culture, and excellence in higher education and innovation are unchanged. As in previous slumps, private sector and public sector adjustments have triggered a revival in American capabilities. And this can be traced to the fact that it responded to the shock of the 2008 financial crisis more adroitly than its rivals.
Contrary to conventional wisdom, the United States has actually been deleveraging from the bubble years of the past decade. Yes, millions of households were in foreclosure in America three years ago — but taking the pain then has allowed recovery now. While commentators have focused on rising government debt, US households and companies have been tackling their own. According to the OECD, the debt-to-income ratio for American households has fallen from a pre-crisis 137 per cent to 116 per cent by the end of last year. That figure is now lower than European household indebtedness. Britain is at 160 per cent.
It is true that government debt has soared under Barack Obama — but that is consistent with the successful path that Scandinavian countries pursued in the early 1990s in response to their own credit bubbles. State spending propped up these economies while voters paid off their debt, and then the resurgence in private-sector demand allowed governments to balance the books. This appears to be happening now in the United States. The US federal budget deficit has declined more dramatically in the past three years than at any time in postwar history. The Congressional Budget Office projects the federal budget deficit to fall to 2.1 per cent of economic output by 2015 — an astonishing turnaround from the 10.1 per cent figure four years ago. By the same year, Britain’s deficit will still be at 6 per cent of GDP — the highest in the western world.
American manufacturing is also on a roll. Contrary to perceptions, US factory output has been robust and productive — the problem was that it had been haemorrhaging jobs over the past few decades. No longer. Manufacturing might never be the jobs engine that it was a century ago — but it will not be a drag on job creation either. Durable goods manufacturing has added more than half a million jobs over the past three years. The intriguing question is whether this trend can continue. A 2011 Boston Consulting Group study argues it can, given that China is not quite the cheap workshop it once was (with rising wages and an appreciating yuan). The ‘rebalancing’ that Brits hear about is happening in the US, with up to three million jobs expected to be created in the next few years.
The optimism felt by American factories is easy to explain. Energy costs have plunged. The development of hydraulic fracturing, or ‘hydro-fracking’, has sent gas prices to less than a third the level charged in Europe — quite some factor if you’re an energy-hungry manufacturer wondering where in the world to locate. Time after time, the answer to this question is: America. There has long been talk in the US about ‘reshoring’, where US companies decide to create jobs in the rustbelt states that need them most. But all sorts of companies are coming to America. Voestalpine, an Austrian steel company, declared in March that it would build a €550 million plant in Texas, having rejected 16 other sites in seven other countries.
With an economic recovery comes geopolitical clout. Late last year the International Energy Agency projected that by 2020 the United States would supplant Saudi Arabia as the world’s largest oil producer. By 2030, the United States would realise its longstanding dream of energy self-sufficiency. And while the US government can hardly be credited with the fracking revolution, the Obama administration did not bar its progress — more than can be said for many European governments, some of which are so wedded to the renewables agenda that they don’t want to accept the good news.
In fact, the drama on Capitol Hill has diverted attention from the recovery underway in an America which is not connected to political wrangling. As Larry Summers once put it, ‘The great mistake of the gridlock theorists is to suppose that all progress comes from legislation and that more legislation consistently represents more progress.’
Even so, the US system of government has been surprisingly nimble despite its perceived political paralysis. In the five years since the financial crisis, Congress has passed legislation that saved the US financial system, rescued the car-making sector, enacted the largest fiscal stimulus programme in the world (which contained substantial tax cuts), overhauled its financial regulation, passed ambitious health-care legislation, and then took steps to control spending. This week, the House and Senate are moving forward on comprehensive immigration reform. Compared with Britain — or anywhere in Europe — the US has been a hive of productive political activity.
By contrast, the emerging Brics, who were supposed to take over the world, have seen better days. Brazil is confronting massive protests from citizens angry that so much money is being spent to prepare for the World Cup. Russia’s energy boom is tapering off; Moscow finds itself starved of foreign capital due to the caprice of President Putin. China’s economic growth during the Great Recession has far outstripped the United States; and yet its new leadership is rejecting the ‘Beijing consensus’ as quickly as it can. Indeed China may be heading for its own credit crunch: in recent weeks, its bank lending rates have surged and one bank briefly defaulted. The country’s attempts to clamp down on the misallocation of cheap credit may well have triggered its latest bout of financial turmoil.
There is no denying that the relative power of the United States is less now than it was a decade ago. And yet, five years after the start of the Great Recession, US power does not appear to be on the wane. If anything, the trendlines suggest the opposite. Even Arvind Subramanian, the author of Eclipse: Living in the Shadow of China’s Economic Dominance, has changed his tune a bit. In a recent paper he paraphrased Mark Twain, concluding: ‘Reports of the decline in American economic power appeared to have been exaggerated.’
Plenty of dangers lie ahead. The United States could get trapped into another draining war in the Middle East. Partisan bickering in Washington could block any structural budget reforms and cripple America’s long-term finances. A premature end to quantitative easing, or another eurozone crisis, could induce another setback. But the United States has a remarkable ability to right its own ship. That ability, in and of itself, is one of the sources of its enduring power.
Daniel W. Drezner is professor of international politics at Tufts University’s Fletcher School, and blogs for Foreign Policy magazine.
This article first appeared in the print edition of The Spectator magazine, dated 29 June 2013Tags: America, Beijing, bubble, deleveraging, Quantitative Easing, Recession, recovery