Thursday, August 11, 2011

From the WSJ (08.11.2011)

America as Less Than No. 1

So this is a taste of what it will be like when the American superpower starts shrinking. Enjoying it yet?

After the humiliation of the United States losing its AAA credit rating; after watching the American stock market descend into chaos; after living for two years in a $15 trillion economy unable to grow beyond 2%, with unemployment rates rarely experienced in the U.S., Americans have their first whiff of inhabiting an empire in decline.

You could divide the country between those who think that it wouldn't be the worst thing for the U.S. to enter the long, falling autumn of its life, as has Western Europe; and those who refuse to go down, who'd do whatever they must to hold the world's No. 1 ranking.

Daniel Hennniger discusses that this is what being a shrinking superpower will feel like-enjoying it yet?

The U.S. is far from finished. The private economy—from the biggest corporations to innumerable dreamers launching start-ups—is fit and eager. But make no mistake: The U.S. has taken a hard hit to its 65-year status as the world's pre-eminent nation.

Uncle Sam at the moment is seated in his corner of the global ring, gasping for breath, and no doubt he'll come off the stool. But the cynical men in other capitals—Beijing, Tehran, Moscow, Paris, elsewhere—will be watching now to see just how much fight the old boy has left in him.

The Standard and Poor's downgrade is nothing more than bloodless analysts looking at the grim mathematical reality of this country's long-term social commitments and its ability to pay for them. Something has to give, and what they see bending is the long-term growth rate that since about 1876 raised the U.S. to its current pre-eminence. If growth goes, your status goes. It's not complicated. Ask Britain, once glorious but now burning.

In his magisterial study of world growth since the year 1000, the late economist Angus Maddison noted that the "golden age" for growth lasted from 1950 to 1973, with world per-capita GDP growing at 3%. Then in 1973 growth slowed in the U.S.'s "follower" countries of Western Europe and Japan: "Some slowdown in these countries was warranted, but policy failings [my emphasis] made it bigger than it need have been."

The gauntlet thrown down by the S&P downgrade is whether the U.S. will now commit "policy failings" that change it into a follower country. We'll get a first answer shortly from the 12 solons on Congress's debt-deal super committee.

It's good that S&P made so much of the political stand-off in Washington. This implicitly recognizes there is probably no middle way between the Democratic and GOP answers to the social and economic questions raised by the downgrade.

Going back at least to the Clinton presidency, Democratic policy analysts have promoted, as a middle way, various Western European "mixed-economy" models for the U.S.—generous national systems for health and welfare, with the economy kept going by tax-supported "investments" (spending) in infrastructure, education, research and the like. This of course is what Barack Obama has sought from day one.

M.E. Cohen

The Democratic argument has been that the country could maintain its remarkable economic success while performing all these social goals, though with cutbacks in defense spending. But there has never been any sort of coherent economic argument for how we could spend all this money and maintain the U.S.'s long-term growth trend. The S&P downgrade is at bottom a repudiation of 50 years of Democratic economic theory, or its absence.

What they've offered is essentially a dream, often described by them as such. But if the dream requires that Washington must somehow manage spending on the scale now, then clearly the middle-way dream isn't working.

The U.S. is not Germany or Denmark. Follower nations can afford to do no more than maintain contented populations. The U.S. bears inescapable global responsibilities. President Obama's explicit intention—Libya is Exhibit A— has been to back off America's No. 1 footprint in the world to free resources for the domestic dream.

What we're going to learn from this crisis is that American exceptionalism means something more than a vague claim to special status. More substantively, it means the necessity to find peculiarly American solutions to American problems.

A central attribute of our exceptionalism has been flexibility. U.S. economic success is a story of adaptive, efficient responses to history's headwinds and speed-bumps—until now. A national infrastructure bank would be the opposite of that tradition. It'd be too big and too slow. The Obama health-care plan, run through the 46-year-old turbines of Medicare, is wholly at odds with the needs now of a huge, complex country.

Washington is not America, and so optimism is possible. Out in the country, some states are showing with their public-pension reforms that government flexibility in the face of economic crisis is possible. A Washington able to recognize the immediate needs of the downgraded superpower would lift every identifiable burden from the states and the private economy.

Here are two headlines from one day this dreadful week: "U.S. Productivity Falls" and "Truck Makers Face Fuel-Efficiency Rules." That is the path to being less than No. 1. It doesn't taste right.

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