The Free Press, Mankato, MN

State, national news

December 25, 2012

Will 2013 mark the beginning of American decline?

"A modest man," Winston Churchill supposedly quipped about Clement Attlee, his successor as prime minister, "but then he has so much to be modest about." We should say the same about economists, particularly their ability to forecast anything in a useful and timely manner.

Those predicting an imminent American economic decline have usually been no exception. This time, though, they may be on to something.

Prevailing arguments about when the era of U.S. dominance would end, and which country would supplant it, have been wildly and consistently wrong for half a century. In the 1950s, Soviet leader Nikita Khrushchev was taken seriously when he told Western ambassadors "We will bury you." Today, his country no longer exists. In the 1980s, Japan was supposedly going to be No. 1; now the question is whether the precipitous decline in its working-age population will generate a fiscal crisis.

The Germans - or Europeans more broadly - were thought to be on the brink of elbowing aside the United States several times, including in the run-up to the global financial crisis in 2008, when the euro seemed to threaten the dollar's role as the pre- eminent reserve currency. Remember when Brazilian model Gisele Bundchen was quoted as saying she preferred to be paid in euros? Now the euro-area economy looks very sick indeed, and Bundchen is apparently long American icons (she married football player Tom Brady).

Becoming the world's top economic dog isn't easy. That's because any contender - China or anyone else - needs to answer three tough questions.

First, do they have secure property rights for individuals? Who would trust their rainy-day funds or their most innovative ideas in a country where, when the going gets tough, the state gets your stuff? China has a big current-account surplus and lots of foreign-exchange reserves. They also have a 2,000-year tradition of putting the government before the individual. Think about all the ways this went wrong for the Soviet Union.

Second, is the financial system viable in its current form? Japan had a great economic-transformation story - and an even greater debt-fueled asset-price bubble when its banks went mad in the mid-1980s. How confident are you that China, Brazil or other emerging markets aren't headed down the same road?

Third, is debt - both public and private - on an unsustainable path? Mismanaged debt has brought Europe to its current low point, both in the form of direct public borrowing (see Greece) and in the equally painful form of private-sector borrowing that goes bad, with nasty implications for the government's balance sheet (ask the Irish and Spanish about this).

Even so, the U.S. has serious economic, social and political problems. Just look at the current budget debacle. Democrats and Republicans are at each other's throats, struggling theatrically, rather like Holmes and Moriarty above Reichenbach Falls. If they get a fiscal deal done in the next few weeks, do you really think it will result in a sensible tax system, or bring long-term health-care spending under control? Are we going to invest more in education? Will we really have a frank discussion about what kind of social-insurance programs we want, and how to pay for them?

I'm also well aware that incentives to take excessive risk remain at the heart of Wall Street. The Dodd-Frank financial reforms contain some useful measures but do too little to significantly alter the balance of power between global megabanks and the rest of us. The Federal Reserve seems to be edging in the right direction on regulation but it is moving too slowly to make any difference for the next cycle.

And the U.S. is now entering perhaps the most dangerous phase of its long-standing tax revolt, in which Republicans insist on holding down federal revenue while the population is aging, but they won't propose specific cuts in social programs, precisely because they know that Medicare and Social Security remain immensely popular.

As a result, the political logic of the moment leads to continued increases in U.S. government borrowing, about half of which is financed, for now, by international savings at low interest rates. Our post-crisis monetary policy is contriving to keep those rates very low for a long time, presumably setting the table for a further round of mismanaged risk taking in the financial sector (just as it did after 2001).

 So while no country will rise up to take America's place as the world's leading economy, its global position is indeed threatened - by its own reluctance to have an honest conversation about the federal budget and by the unwillingness of its political leadership to confront powerful interests on Wall Street.

Sooner or later, it will be America's turn to fall out of favor with investors and to see its own interest rates rise. It is hard to know when that day will come, or precisely what pressures the country will face.

Let me only venture one forecast: We will not be ready.

             

Simon Johnson is a professor at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics. He is co-author of "White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You."

 

1
Text Only | Photo Reprints
State, national news
  • Tourism push plays up 'Only in Minnesota' ST. PAUL — (AP) — Say goodbye to "More to Explore." Minnesota tourism promoters ushered in a new slogan Thursday that focuses on "Only in Minnesota" experiences as part of their largest-ever advertising campaign. The revamped message kicks off a maj

    April 17, 2014

  • mfp ap pipeline photo Minnesota Pipe Line seeks to expand capacity MINNEAPOLIS (AP) — Minnesota Pipe Line Co. announced plans Thursday to nearly double the capacity of a crude oil pipeline that carries oil from Canada and North Dakota to the two refineries in the Twin Cities that produce most of Minnesota's and much

    April 17, 2014 1 Photo

  • Holder asserts his commitment to fighting heroin WASHINGTON — Attorney General Eric H. Holder Jr. has been crusading for more lenient treatment for nonviolent drug offenders, making it a top priority before he is expected to leave office this year. Recently, however, he has been forced to confront

    April 17, 2014

  • Less-schooled whites lose longevity, study finds ATLANTA — Barbara Gentry slowly shifts her heavy frame out of a chair and uses a walker to move the dozen feet to a chair not far from the pool table at the Buford Senior Center. Her hair is white and a cough sometimes interrupts her speech, but she

    April 17, 2014

  • Tracking system nabbing drug dealers -- and law-abiding pilots LOS ANGELES — Ken Dobson, a retired police officer, said he received quite a welcome when he landed his single-engine Cessna in Detroit two days after leaving his home in Palm Desert, Calif. Five sheriff’s cars surrounded the plane and deputies got

    April 17, 2014

  • Hypersonic jets, lasers future for Air Force researchers WRIGHT-PATTERSON AIR FORCE BASE, Ohio — Air Force hypersonic weapons and fighter jets with lasers could fly in the skies of the future. Air Force Research Laboratory researchers have made top priorities of hypersonics, directed-energy weapons and au

    April 16, 2014

  • Dress codes: Where should schools set limits? EVANSTON, Ill. (AP) — They're called leggings — popular fashion items that are tight-fitting pants to some, and glorified tights to others. Younger girls often wear them as pants with little fuss. But as those same girls approach middle school, legg

    April 16, 2014

  • On Vegas Strip, the Harmon tower set to fall -- with a whimper LAS VEGAS — One by one, the grand old dames of the Strip outlived their charms — the Dunes, Stardust and Aladdin — and down they came, thanks to some well-rigged dynamite, in a booming flash of bravado and showmanship that became this city’s staple —

    April 16, 2014

  • Man accused of abusing 2 girls in 'Maidens Group' MINNEAPOLIS (AP) — Authorities were searching Tuesday for a self-professed minister accused of sexually abusing at least two girls in a "Maidens Group" at his religious fellowship in rural Minnesota, where he told one victim she would remain a virgin

    April 15, 2014

  • Deputy shot, wounded in Norman County PERLEY, Minn. (AP) — Authorities say a 19-year-old man from Fertile is under arrest for shooting a sheriff's deputy during a traffic stop in northwestern Minnesota. The Minnesota Bureau of Criminal Apprehension says the Norman County deputy was wear

    April 15, 2014