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Cash-poor America and its future

Guest Blogger

Once the country with all the money, America is now a cash-poor international debtor. How did we get ourselves in this position and what does it mean for our future role on the global stage? Stephen S. Cohen and J. Bradford DeLong, both economists at the University of California, Berkeley, explore these questions in “The End of Influence: What Happens When Other Countries Have the Money.”

By Stephen S. Cohen and J. Bradford DeLong

The money has left the United States, and it is not likely to come back anytime soon. For so long the primary creditor -- America -- is now the world’s biggest debtor, and there is no other debtor nation of consequence. The legendary Spanish bullfighter Garcia was once asked: “Who is the world’s greatest matador?” His prompt reply: “Me, Garcia the Great. And there is no number two, and no number three.”

When you have the money and have had it solidly, rightfully, self-assuredly for about 100 years, and "you" are a big, economically and culturally vital nation -- you get more than just a higher standard of living for your citizens. You get power and influence, and a much-enhanced ability to act out.

When the money drains out, you can maintain the edge in living standards of your citizens for a considerable time (as long as others are willing to hold your growing debts and pile interest payments on top). But you lose power quite quickly, especially the power to ignore others -- though, hopefully, in quiet, nonconfrontational ways. And you lose influence -- the ability to have your wishes, ideas, and folkways willingly accepted, eagerly copied and absorbed into daily life by others.

As with good parenting, you hope that by the time this happens those ideas and ways have been so thoroughly integrated that they have become part of what is normal and regular abroad as well as at home; sometimes, of course, they don't. In either case, the end is inevitable: you must become, recognize that you have become, and act like a normal country.

For America, this will be a shock: American has not been a normal country for a long, long time.

Where did the money go? It went to pay for imports in excess of American exports, year after recent year, for oil and for manufactured goods from Asia, a good proportion of which came from U.S. multinationals in China. How did we pay? By piling up debt.

In the process we restructured the U.S. economy. We cut the proportion of manufacturing in GDP (what we produce, though not what we consume) by 7 percent of GDP, and increased the proportion of finance (and real estate transactions, not construction) by 7 percent of GDP.

How can we pay-off the debt? Not quickly, not painlessly, not easily. Can we lower it, or at least lower the rate of its increase? Yes, but. It would require a new restructuring of the economy -- shrink, radically, the place of finance in GDP and reindustrialize.

Would a plausible up-valuation of the Chinese currency do that for us? No, not substantially. We have got to do it ourselves: reindustrialize. And that means dropping the dogma of unfettered markets and re-fettered states and the resultant policies we have pursued over recent years with accelerating zeal. Only positive policy can set that transition in motion.

By Steven E. Levingston  |  May 13, 2010; 5:30 AM ET
Categories:  Guest Blogger  | Tags: america as debtor nation  
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Posted by: Jacqualine13 | May 13, 2010 5:59 AM | Report abuse

The cumulative cost of the two wars surpasses $1 trillion, including spending for veterans and foreign aid. Those costs could put increased pressure on President Obama and Congress, given the nation's $12.9 trillion debt.

"The overall costs are a function, in part, of the number of troops," says Linda Bilmes, an expert on wartime spending at Harvard University. "The costs are also a result of the intensity of operations, and the number of different places that we have our troops deployed."

Posted by: alance | May 13, 2010 2:48 PM | Report abuse

Unless we have total control of domestic spending (including entitlments like Social Security, Medicare, Medicaid, SSI, the new underfunded Obamacare, etc) as well as streamline our defense spending more in line with fighting the real enemies of this nation, we're doomed as a nation as we know it. No politician (in both parties) will have the backbone or courage to tell the truth and make the necessary changes to get us out of our fiscal problems! It's really sad!

Posted by: CJ123 | May 13, 2010 4:13 PM | Report abuse

It is hard to dispute the diagnosis - a culture of overspending and sloppy thinking, plus a gutless political class which did nothing to even try to arrest the situation over more than 20 years has gotten the US economy into an over indebted mess. My problem is with the proposed cure: the authors seem to favor "an industrial policy" to rejuvenate the economy.

Sadly, the trashcan of history is overflowing with failed industrial policies. The government, and this is "governments in general" are piss poor, to use economist jargon, at selecting "winners" in organizing an economic future. The usual example of successes - MITI in Japan - is an outlier, and, if you look closely, MITI was never as strong or as clear about what it wanted as people on the outside thought. All the heavy lifting was done by the private sector, often at odds with MITI's wishes.

European experience with state directed economic activity has been little short of catastrophic. Of course, Stalin scored some small wins, but I don't think the Berkeley professors are quite urging us to try the gulag as an industrial model.

The one sure way to condemn the US to second rate economic status forever is to allow the creatures inside the Beltway to "form a plan" of what to do. Ruin will be just ahead.

Posted by: micolpaneur | May 13, 2010 4:17 PM | Report abuse

Here's what we can look forward to in the 21st Century:

US isolationism as we focus on rebuilding and restructuring.

EU becomes even more of a hollow shell than it is now.

Chinese civil war as its economy collapses when world trade plummets again.

Most of rest of world in chaos and small wars that fill the vacuum left by the major powers.

Posted by: jfv123 | May 13, 2010 4:25 PM | Report abuse

"No politician (in both parties) will have the backbone or courage to tell the truth and make the necessary changes to get us out of our fiscal problems!"

I agree. For a politician to do anything substantial is almost impossible because you immediately become a target. A perfect example is the use of the term Obamacare. Here was an attempt to do something substantial about a specific problem, but the whole issue is trivialized and politicized with a derogatory nickname.

Stick your neck out in politics, and somebody will hang an albatross around it.

Posted by: writinron | May 13, 2010 6:16 PM | Report abuse

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