The American Moment
A thought experiment: A child is born somewhere, anywhere, on the earth in the past decade. The family of that child wishes or needs to leave its home—to escape tyranny, war, the possibility of war, or simply to find a better life. Now, assume the family has access to every conceivable bit of information it can gather through Google about the relative conditions of the nations of the world. Where would the family of that child wish to go?
The family would know that the United States is going through its most worrisome time since the late 1970s. Its labor force has shrunk by 5 million workers since 2009. If those 5 million were still counted as part of the labor force, the unemployment rate would be 11 percent, more than two years after the conclusion of the Great Recession. A few more minutes with the browser and they would learn the U.S. has battled simply to restore itself to its condition in 2007, when the gross domestic product was $13.3 trillion. At the end of 2011, the GDP was $13.4 trillion—meaning that the U.S. economy was basically the same size at the beginning of 2012 it had been four years earlier. And while the stock market appears to have returned to the level it reached just before the meltdown of 2008, housing values nationwide have yet to return even to the halcyon days of 2006.
As for the future, the family would read of “fiscal cliffs” over which we will fall at the end of the year, of a health-care system sorely in need of fundamental reform even if ObamaCare is rescinded (and threatened with internal collapse if it isn’t), of an entitlement crisis beginning a decade from now that will make the present troubles look like a walk in the park.
Since our family has presumably been paying attention for the past decade, they would know about the rise of China and India and the coming of the “post-American world.” They would have read that the United States will surrender its position as the world’s largest economy at some point in the near future to China. They would also have heard that the world’s tallest building is now in Dubai rather than in New York or Chicago, a fact many cite to suggest that the United States no longer has the drive it once had to be the biggest, the most, the best.
And if they had followed the rhetoric of the past few years, they would know the president of the United States himself views the role of the United States in a manner almost unheard-of for a national leader. He has sought to explain a vision in which the United States is one player, a major player to be sure, but still one of many, woven into an international system. To some extent, he believes the system’s interests trump the American national interest.
This is not an idea our family would get from reading about the leaders of China or India or Japan or almost any other nation. Certainly not from the words and conduct of Russia’s Vladimir Putin, who defines his country’s national interest so broadly that it has allowed him to assist Iran’s nuclear program and to stymie United Nations action against Syria, whose dictatorial first family was a client of the Soviet Union’s during the long-ago days in which there was a great-power chess match in the Middle East between the USSR and the United States.
Putin’s imperial view of his country’s interests is a wild distortion of its power and place in 2012, but still it conforms to a classic understanding. Leaders of other countries speak today as they have always spoken, of pursuing their national interests and seeking to limit the power and authority of countries—or international systems—that might threaten their freedom of action in the future. Obama has articulated a different sense of what is best for the United States and the world (a sense his actions have, to be sure, been at variance with at times). And it is a view that has echoes of the most far-reaching experiment in integration the world has ever seen—in Old Europe, whose nations chose to compromise their sovereignty over the past 20 years in the quest for greater political, social, and fiscal unity.
Our family would know that this unprecedented experiment in transnational integration was designed to create an economic union that as a whole would be competitive in size with the United States and China. But does pursuing such integration, even as a matter of theory, still make sense in the wake of the rolling, slow-motion collapse in Europe—a collapse that is compelling the more productive and industrious citizens of the European Union to pay the bills of those who work less and consume more, simply because if they fail to do so they will be in worse shape than if they don’t? Obviously not. And yet that idea remains at the core of the worldview, however sketchy that worldview might be, of the president of the United States and those who follow and advise him.
So as they contemplated the world around them, they would see a United States that is in a condition (thus far) of mild decline. Some of that is the result of the financial crisis, but some of it is the result of a shift in the country’s own consciousness and sense of itself. The United States no longer conducts itself as though it is in a race against other nations to prove something—a race that characterized the national character for close to two centuries. The quest to be the biggest, the best, the wealthiest, the most powerful is no longer the primary national goal. The United States seems, rather, to be a place where, culturally and politically, the primary concern is the protection of gains already made, and the search for a greater degree of safety from the unexpected bumps and perils that characterize human existence.
It is now China that moves ceaselessly forward to be the wealthiest, followed by India. Russia, Iran, North Korea, and Venezuela—hegemonies and tyrannies with ambitious leaders—are the nations pursuing strategies to enhance their power in hopes of attaining national glory. Like Chicago seeking to overcome its second-city status by putting up the Sears Tower, it is striving Dubai that seeks to put itself on the map with massive skyscrapers. These are, for good and ill, nations with their eyes on the future, hungry to own it. The political discussion in the United States is mired in the present, with journeys to the recent past (“can we afford to return to the policies…”), and the future looks bleak at best—with the possibility of continued economic stagnation, political stasis, and an entitlement crisis we approach as inexorably as the Titanic approached the iceberg.
Assume, again, that our family has the ability to go anywhere to set itself up anew—and that it would be welcomed anywhere. Even with this litany, when all is said and done, can there be any doubt which nation our ambitious family would select as the only conceivable place in which to seek a better future? Their choice would be the United States, and they would be making the right choice.
For this time, perhaps more than any other since the close of World War II, may well be the American Moment.
When we look back at the glowing period of American economic growth and dominance, we need to take account of the role played by the desperate condition of other countries, other continents, and other systems at the time. The American Century was not simply the result of changes and developments inside America, but also a byproduct of the state of the world outside America. This country was in the unique position of being the only heavily industrialized nation not to have suffered massive infrastructure destruction and loss of population in World War II.
And we were blessed, in an odd sense, by the Marxist-Leninist nihilism of our primary rival, the Soviet Union, whose ideology served as a means of immiserating its own people and those of its client states and therefore posed no threat to us in the world markets. That same ideology served as a straitjacket on the energies and productivity of mainland Chinese until the straps were loosened by Deng Xiaoping in the early 1980s.
The glories of the postwar period were all but invisible to the analysts and pundits of the era. They were consumed with what they perceived to be America’s national shortcomings—conformism, careerism, consumerism, neurosis, delinquency, the vast wasteland of popular culture, the barrenness of the suburbs, the rise of the military-industrial complex. It is only in retrospect, in other words, that the inestimable advantages of the postwar period for the United States became unmistakable.
In some ways, we find ourselves in the same situation. What we see—what everyone now sees because there is no way not to see it—is the fragility of the American economy, the overhang of the past five years, the looming problems down the road. What we find difficult to see, in the midst of the present economic doldrums and given the sense of national drift, are the conditions outside the United States that are making America the most attractive port in a global storm, developments inside the United States that might be priming the pump for growth down the road, and the perpetual advantages provided to the United States by the genius of its own system.
In August 2011, Standard & Poor’s made the stunning decision to downgrade the United States for the first time since the country received S&P’s highest rating in 1917. S&P justified its move as follows: “The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective and less predictable.”
The downgrade was, in other words, a reflection of the kinds of opinions our family would have become very familiar with through its Google searches. It followed a fractious debate in Washington over raising the national debt limit that seemed to many to represent a low moment in American governance. Washington was broken, it was said. The inability to cope with the debt ceiling suggested the impossibility of facing up to the structural dangers to the U.S. economy in the form of entitlements. This in turn suggested to S&P the hint of a possibility that the United States would, at some point, be unable to meet its obligations to its lenders.
Just as lenders will compel you to pay more in interest when your credit score declines, so too should the United States have found it more expensive to borrow money in the form of sales of its Treasuries. That was the logic, and the potential real-world consequence, of the downgrade. That is why the prospect of it was nothing less than terrifying, and why the nation reacted with shock and dismay when it happened.
After receiving a draft of the analysis three days before S&P announced the downgrade, Timothy Geithner, the U.S. Treasury Secretary, aggressively challenged its logic and assumptions. Once the downgrade happened, Geithner publicly denounced the agency. “The judgment by S&P changed nothing,” he said. “It added nothing to what people know about this country.”
The logic of the downgrade would appear to be intact today, a year later. After all, little has changed since, and the United States faces another looming dark deadline in the form of automatic tax increases and an across-the-board budget sequester at the end of this year. It should be a bad time for the United States to be going out into the markets looking for money to borrow.
But it isn’t. Over the past year, the United States has not found it more costly to borrow money in the markets; doing so has become far less expensive. The day of the downgrade, the interest rate on 10-year Treasuries was 2.56 percent. One year later, on August 5, 2012, the interest rate on the 10-year was 1.56 percent.
In other words, the downgraded United States now finds itself in the astounding position of being able to borrow money at a rate 40 percent lower than the rate available to it before the downgrade. Even more remarkable, given that 1.56 percent is well below inflation, countries and institutions buying U.S. bonds are effectively paying a fee for the privilege of doing so.
They are not looking for any kind of return, and they are not getting one; these are 10-year bonds, remember. These investors are looking for something else—a safe harbor. They are looking around the world for the most stable, least risky place to park money they fear they will otherwise lose.
This is a highly significant fact, and the most salient piece of evidence for my contention that we might be on the cusp of an American Moment for the 21st century. But how can this be, after the downgrade, and the debt-limit standoff, and the ugliness between the two political parties, and the Great Recession and its aftermath, and the coming fiscal cliff, and the looming entitlement crisis?
Look around, as our family would, and you will see the answer.
Forty years ago, during the last crisis decade for the U.S. economy, an investor looking for a safe harbor would have been more likely to consider parking his money in the Deutschmark or the Franc. They were stronger currencies at the time than the dollar, which was being ravaged by inflation and its complete decoupling from any independent valuation in 1971.
Today, of course, these national currencies have been replaced by the euro, as the wealthy nations of Western Europe have joined their fiscal and monetary fates together with the poorer. The European Union now threatens mortal damage to the very countries—France and Germany in particular—that might have stood to gain from the financial crisis in the United States under other circumstances.
They are sinking into fiscal quicksand, slowly being pulled under by the poorer, less industrious, and more profligate nations of their Union. They need to grow, and grow quickly, to save themselves; but given the challenges posed by the implosions of Greece and Portugal—and possibly the collapses of Spain and Italy afterward—it is difficult to see how they can do so.
So, in a much different way from 1945, the United States again finds itself in a position of comparative advantage when it comes to Europe, while bearing far less responsibility for helping to save it. One could conceive of a circumstance in which the United States found it unavoidable not to take extraordinary measures to intervene to prevent a worldwide financial collapse—a kind of Marshall Plan for the euro. But if that were to happen, such a rescue would only fix in cement the relative positions of the United States and Europe.
However, Europe is not the focus of concern for those who believe the nation is in decline. The focus is, obviously, China, the nation that began three decades ago to build the fastest-rising economy the world has seen since the transformation of the United States from an agrarian backwater at the time of the Revolution to an industrial powerhouse with the world’s largest economy at the end of the 19th century.
The comparison between America in the 19th century and China in the late 20th and early 21st centuries is suggestive—especially when considering not only the benefits, but also the consequences, of extraordinarily rapid growth. The history of the United States in the 19th century was not only one of incessant building but also one of wild swings. The country grappled with the difficulties of establishing a sound and workable currency, and with rules to ensure markets were not simply vehicles for outright theft. Speculative bubbles and fraudulent schemes arose constantly.
Regulation was sparse and inefficient and mostly a means of enforcing existing monopolies (thus hindering innovation) and providing graft to corrupt officials. There were major bank panics in almost every decade, and in at least five cases, those panics led to outright depressions—in 1819, in 1837, in 1857, in 1873, and in 1893. They all had different causes and different effects, but in every case the economic dislocations were the result of the country’s inability to manage the complexities of its own unprecedented expansion. And, of course, there were the battles over slavery, which created huge geographic and social divisions and political unrest that finally erupted into the Civil War.
And what of China? Its official statistics are astonishingly impressive, but, of course, they come from a central Communist source that uses them for propaganda purposes. We know that its currency is as questionable in its way in the 21st century as the dollar was for most of the 19th, though in China’s case it’s not the result of too little central control but too much—the nation so thoroughly manipulates its currency to keep its exports cheap that it cannot be independently valued.
We know that just as establishing an atmosphere in which contracts were scrupulously observed rather than breached at will took decades to happen in the United States, the rule of law still bows before the rule of the Communist party or the rule of the military in China. We know that in the first decade of China’s colossal expansion, its economy overheated, generating an inflation rate above 20 percent. We know that in the second decade, in order to forestall a potentially catastrophic meltdown during the Asian crisis of 1998, China embarked on a huge program of government spending. That program has been central to its continued double-digit growth. “State-directed spending is the real engine,” Ian Bremmer wrote in 2011. “Capital invested in infrastructure like factories, heavy industry, roadways, and high speed trains continues to power annual double digit growth in GDP…. China has spent its time and money building up control over the broad direction of its entire economy.”
Such a program is not sustainable. China cannot buy its way into perpetual growth if that growth is not organic. As Bremmer noted, the “fatal flaw with state capitalism” is that it “works, and it will continue to work, until the day that it doesn’t.” The basis of America’s 19th-century growth was the plentitude of land; China’s in the 21st is the plentitude of labor. It may have an economy approaching ours in size, but the reported per-capita income is one-tenth of ours—with hundreds of millions of Chinese still living on incomes of $1.50 a day or less. Its labor costs are rising more rapidly than its overall economic growth, thus reducing the same comparative advantage that made China such an attractive place for outsourcing jobs.
And due to its 30-year experiment in eugenics with its one-child policy, its population is aging quickly. With more than 120 million people over the age of 65, a number slated to rise to more than 250 million in 20 years, China is going to have costs and social problems associated with retirement and medical care that in absolute terms will make ours seem like child’s play. As Nicholas Eberstadt has written: “The trajectory of population aging that China can expect to experience over the next two decades is virtually unprecedented in human history to date…. China will confront pervasive population aging on much lower income levels than Western economies, or newly industrialized Asian economies like Taiwan and South Korea, have relied upon in meeting those challenges.” Nor has China begun making real provisions for this demographic crisis.
And then, of course, there is the matter of China’s unfreedom. Its population has been liberated to work and make deals, but not to speak or worship or read freely. The discrepancy between a more freewheeling economic life and a suppressed intellectual and spiritual life is, we are told (and we know in our marrow), getting harder for the Chinese to bear. There are reports of thousands of uprisings every year on the mainland, far away from the cities in which Western businessmen and journalists ply their wares. The United States also had an unfreedom problem in the 19th century—one hat could not be resolved through the good working order of the system, but which had to be resolved by a great and terrible war.
I do not imagine such a thing will happen in China. This is only to say that the country’s rapid growth and industrialization will have fiscal, social, and political consequences that grow more dramatic as the economy matures. (There are a great many more males than females as a result of the one-child policy; a totalitarian fiat that renders it impossible for men to find mates is not a recipe for social stability.) China has not suspended the laws of gravity, as its recent dramatic slowdown attests. Nor has it found a secret formula for the prevention of recessions and depressions and political and social unrest. All of this is surely coming, though when and how and with what result we cannot even begin to know.
This uncertainty about China’s future—even inside China—is yet another reason those U.S. Treasuries are selling effectively at par value. Considering the implosion of Europe, 600 million Indians recovering from the largest and most extensive power outage in the history of the world, civil war in Syria, a dance between Islamists and the military in Egypt, a growing nuclear confrontation between Israel and Iran, and the fractious gamesmanship of Vladimir Putin in Russia, the condition of the United States does not seem quite so horrific. Think of it as the world according to Erasmus. “In the land of the blind,” the philosopher said, “the one-eyed man is king.”
One-eyed we are. But we are poised, perhaps, for a restoration of full binocular vision in the decade to come. Just as there are costs related to rapid growth, there are benefits to be gained from the undeniable agony of recessions and slow recoveries—enormous increases in productivity, extraordinarily low interest rates that will take some time to rise even if the economy takes off, a renewed national acceptance of the virtue of thrift to protect against the next rainy day.
Most promising, though, is the new revolution in energy in the form of natural gas brought up from the earth through the process known as “fracking.” As Walter Russell Mead has written: “The energy bonanza changes the American outlook far more dramatically than most people yet realize. This is a Big One, a game changer, and it will likely be a major factor in propelling the United States to the next (and still unknown) stage of development.” The United States may be in the position of becoming a net exporter of gas by the year 2020, having gained the technological ability to extract the stuff from shale deposits. It is likely that the U.S. has more natural gas in these deposits than the entire known oil reserves on the globe.
The forces arrayed against a full-scale American commitment to the natural-gas revolution are powerful ones, but it is likely they can only slow it down. They will not be able to keep it from happening—if only because the longer it takes the country to harvest this bounty at a time of economic uncertainty, the more desirable the prospect of the employment it will provide and the wealth it will generate will become.
But even if this providential source of cleaner and more valuable energy had not been found, we would still find ourselves where we are. The American Moment is here, as it was in 1945, not because we are uniquely strong, but because the world is uniquely weak. And this presents us with an opportunity even as it imposes upon us a responsibility.
The opportunity is obvious. We can choose this moment to right ourselves politically, to jettison policies that have not worked and approaches that threaten to lengthen our time in the doldrums by enriching the public sector at the expense of the private. We can work to eliminate the rent-seeking through which industry manages to marshal the power of government to reward itself and punish its rivals—to protect itself from changes that would benefit the economy and country as a whole. And we can begin the slow and arduous and necessary process of steering the ship of state away from the iceberg.
The responsibility imposed upon us is once again to accept, openly and without reservation, the nation’s role as leader of the Free World. Barack Obama was not wrong to think that his election in 2008 provided him with a mandate to pull the country back from that role—that many Americans had come to think it was not worth the effort, at least in the way the Bush administration had defined it. Americans were weary and wished the cup to pass from their lips.
The parlous condition of the world in 2012 is not the inadvertent result of that leadership fatigue. But it points out the hazards of such fatigue. The United States can either be buffeted by winds of change or it can try to chart a course through them that others can follow. Such is the gift, and the challenge, of the American Moment.