B005HFI0X2 EBOK (53 page)

BEYOND THE PAX AMERICANA: POSTHEGEMONIC AMERICA IN A MULTIPOLAR WORLD

By the early twenty-first century, the American consumer market, even though it was still the world’s largest, was not big enough to serve as the engine of growth for the rest of the world. And even before the crash of 2008, the American public had wearied of the wars in Iraq and Afghanistan and the costs of commitments to protect the interests of other countries, allowing them to focus on economic growth instead of military spending.

Predictions that China will replace the United States as the hegemonic global power, based on straight-line extrapolations, may prove to be as premature as predictions in the 1980s that Japan would soon be “number one.” By shoveling state-controlled credit at its export-manufacturing sector on the basis of political rather than economic logic, China has saddled its banks with bad debts, while by hoarding surpluses in order to keep its currency undervalued, it has set off a domestic real-estate bubble and inflation. The deflation of China’s investment-led bubble economy, the corollary of America’s debt-led bubble economy, may condemn China to Japanese-style stagnation, or worse. On the other hand, the sheer scale of China, along with the vast numbers of rural Chinese yet to be brought into the modern economy as workers and consumers, may allow China to transition successfully to domestic demand-led growth, an option not available for Japan, with its aging population, low fertility, and low immigration.

Whatever happens, at some point in the next few decades, the size of the Chinese economy is likely to surpass that of the US economy, which has been the world’s largest since the 1870s. The average Chinese will continue to be poorer than the average American for generations. But a world economy in which America is number two will require a radical rethinking of American economic engagement with the rest of the world.

To begin with, the Pax Americana strategy will no longer serve American interests. It was one thing for the United States, as the largest economy and the greatest military power in the global system, to provide its dependent allies with military protection, unreciprocated access to American markets, and the use of the dollar as the global reserve currency. But why should the number two economy sacrifice its taxes and the blood of its soldiers to protect the overseas interests of the number one economy? China, which borders on Afghanistan and Pakistan, has far more vital interests in the region than does the United States. Likewise, China, Japan, and Europe are far more dependent on Middle Eastern oil than the United States. Should American soldiers continue to protect their interests in the Middle East, when the United States is merely one of several great powers in a multipolar world?

The use of the dollar as a reserve currency has allowed the United States to operate without the budgetary constraints imposed on other countries. It has used that privilege unwisely. The eventual replacement of the dollar’s reserve currency status by several currencies or a synthetic global currency would bring some painful but perhaps necessary discipline to the posthegemonic United States.

A posthegemonic America can no longer serve as the sole engine of the world’s growth. The China-centered model that preceded the Great Recession, in which industrial countries like Japan and Germany and South Korea sent components, while developing countries like Brazil sent resources, to China to be assembled into manufactured goods for American consumers is shattered beyond repair. Along with China and India, which will soon surpass China in population, the United States will be one of the three most populous countries in the world. All three continental states, along with Europe and second-tier countries like Brazil, must consume as well as produce and import as well as export.

The vision of a rule-governed global economy with free flows of goods, labor, and capital across borders will remain a fantasy in a world of sovereign states with conflicting national interests. However, the tradition of developmental capitalism, in which the government promotes growth in strategic industries, can take forms other than zero-sum trade wars. Just as countries can coordinate their exchange rate and stimulus policies, so in theory they could coordinate their industrial policies, by means such as market-share agreements or mutually agreed upon domestic content rules. In contrast, beggar-thy-neighbor mercantilist policies on the part of every country can only result in mutual impoverishment.

TOWARD THE NEXT AMERICAN SYSTEM

While particular economic interests have used the rhetoric of free markets when it served their purposes, laissez-faire economic policy has never been the American tradition. As we have seen, once the southern planter class was crushed in the Civil War, the United States successfully carried out a version of Henry Clay’s American System, which built on Alexander Hamilton’s vision of national economic development. On becoming the global economic hegemon, the United States shifted toward opening foreign markets for its exports and investments, as Britain had done when it briefly enjoyed industrial supremacy in the mid-nineteenth century. Today, as a former hegemon in relative decline, the United States is no longer served well by a simple-minded strategy of liberalizing trade and deregulating the economy. It needs a sophisticated, long-term national economic strategy—a new American System.

What would a twenty-first-century American System look like? Clay’s American System rested on three elements: infant-industry protection for American manufacturing; federal funding of internal improvements, or infrastructure; and a sound national financial system anchored by the Bank of the United States. At the time, the United States was catching up to Britain and Western Europe by borrowing or stealing science and technology. During World War II and the Cold War, the United States created its own government-funded research-industrial complex along the lines pioneered earlier by Imperial Germany. A twenty-first-century American System needs to have four elements: innovation policy; manufacturing policy; infrastructure policy; and financial policy.

THE NEXT AMERICAN SYSTEM: INNOVATION

In terms of real per capita income, Americans today are seven times richer than they were a century ago.
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However, this measure understates progress, because it does not factor in revolutionary inventions. While a middle-class American household spent 4 percent of its income on illumination in 1800, today it spends less than 1 percent of its income and enjoys one hundred times as much light—not from candles that are one hundred times larger than candles, but from electric lightbulbs.
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Economic growth is a miracle—but it is not a mystery. The observation of Adam Smith in the eighteenth century remains valid in the twenty-first: “The annual produce of the land and labour of any nation can be increased in its value by no other means, but by increasing either the number of its productive labourers, or the productive powers of those labourers who had before been employed.”
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Economic growth has two sources: increases in the quantity of inputs (resources and labor) or innovation, which may take the form of new technologies or new processes and techniques. According to the Office of Technology Assessment, from the Great Depression to the present between 60 and 80 percent of productivity growth has resulted from innovation.
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Between 1870 and 1992, the average US rate of growth in productivity was 1.8 percent a year.
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Since the middle of the twentieth century, in the United States per capita GDP rose the most during two periods of high productivity growth, 1949 to 1973 and 1996 to 1999, and the least during two periods of slower productivity growth, 1974 to 1979 and 1980 to 1995.
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In the early 1970s, US productivity growth, which had averaged 2.88 percent per year from 1949 to 1973, dropped to a mere 1.3 percent a year from 1973 to 1975. As a result, Americans in 1995 were only 70 percent as productive as they would have been if US productivity had continued to grow as rapidly as it had during the 1950s and 1960s. In the second half of the 1990s, however, US productivity growth returned to its earlier levels, growing at an annual rate of 2.8 percent from 1995 to March 2001 and remaining high.
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Some economists, however, argue that the federal government has overstated productivity growth, by counting the low prices of ingredients from China and elsewhere as improvements in productivity in the United States.
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Productivity growth is driven by innovation. Beginning in World War II under Vannevar Bush and his colleagues, the United States has assembled the world’s most successful system of innovation, based on federal funding, university-based research, and development of new technologies by entrepreneurs with the help of private and public venture capital. But the system that produced nuclear energy, computers, satellites, and the Internet depended heavily on military spending, which is likely to decline as the United States shifts from a role as global hegemon to a new role as one of several great powers. Federal civilian spending on research is inadequate and heavily skewed toward attempts to cure particular diseases like cancer. Like other discretionary spending, federal spending on R&D is likely to be among the first programs to be sacrificed during attempts to reduce deficits and the debt.

Most state and local governments use taxation to finance ordinary expenditures, while borrowing money to pay for capital investments like roads and school buildings with large up-front costs but benefits spread over many decades, and there is no reason why the federal government should not do the same. R&D is exactly the kind of productivity-enhancing investment that should be financed by borrowing. As I have proposed elsewhere, the United States should consider creating a federal R&D bank, which issues bonds in order to raise funding for basic R&D that individual companies will not fund because they cannot monopolize the benefits of breakthroughs.
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Some of the projects could be self-financing, by means of royalties on patented discoveries or inventions, but others need not be. Because breakthroughs in science and technology benefit the economy as a whole, it is legitimate for bondholders to be repaid out of general revenues. The R&D bank could partly replace the historic role of the military in funding American innovation.

THE NEXT AMERICAN SYSTEM: MANUFACTURING

The United States should not adopt across-the-board protectionism or pursue a mercantilist trade policy except in retaliation. But a posthegemonic America needs to rebuild some of the manufacturing capability that it allowed to be lost to East Asian and European mercantilism during the latter decades of the Pax Americana. Even if, as a result of automation, domestic manufacturing in the future were to directly employ as few people as are employed today in industrialized agriculture, the United States needs to preserve its domestic manufacturing base. If the dollar ceases to be the reserve currency, the United States will have to pay for imports with exports, rather than with low-cost debt.

The most important reason for maintaining a world-class industrial base is national security. Even Adam Smith admitted the need to protect militarily relevant industries, on the grounds that “defense, however, is much more important than opulence.”
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When the United States was by far the dominant military-industrial power, it could afford to cede some of its industries to its allies as bribes, in the interest of maintaining the Cold War alliance against the Soviet bloc. But in a multipolar world with other independent centers of power, the United States must resume the concern with military and industrial independence that dates back to George Washington and Alexander Hamilton and Henry Clay. While enjoying the benefits of trade with other great powers, it must ensure that it does not become overly dependent on them for essential manufactured goods or raw materials. In the decades ahead, American defense strategists should devote more attention to ensuring that the United States has adequate manufacturing capacity in the event that one or more other great powers becomes a military rival.

Since the industrial revolution began, no empire or nation has been able to be a major military power without being a major manufacturing power. That will be as true in the twenty-first century as it was in the nineteenth and twentieth. If the United States allows itself to be deindustrialized, as a result of the mercantilist policies of other countries or the offshoring decisions of its own corporations, it will cease to be a military power of the first rank. The architects of the Confederate States of America were content to project a future in which their country would forever be a second-rank military power, specializing in the export of cotton, food, and other commodities to industrial countries—a sort of large, English-speaking Brazil or Argentina. The majority in the United States rejected that option in the 1860s, and should always reject it. Americans should look for guidance in trade policy not to Jefferson Davis but to George Washington, who, in his first annual address to Congress in January 1790, declared that “a free people ought not only to be armed but disciplined” and that “their safety and interest required that they should promote such manufactories as tend to render them independent of others for essential, particularly military, supplies.”

GOVERNMENT AND BUSINESS: PARTNERS, NOT ADVERSARIES

Rethinking American manufacturing policy means rethinking the relationship between the American nation-state and the multinational corporation. There are two possible options. The United States can select certain US-based multinationals as “national champions” and favor them over foreign corporations. Or it can treat all multinational enterprises, no matter where they are chartered, as American to the extent that they carry out production and employ people in the United States, and foreign to the extent that they have activities elsewhere. In a multipolar world, America’s decisions about how to treat corporations must be influenced by the policies of other countries. If other nations rely on state-owned enterprises or national champions, the United States may have no choice but to compete by using similar methods.