The end of US decline

There was another round of the more-or-less endless debate about the decline of the US not long ago, focused on the weak employment growth that has characterized the current ‘recovery’. I expect that the obvious inability of the US to exert significant influence, in either direction, over the fate of client regimes in North Africa and the Middle East will provoke some more discussion among similar lines.

As a public service, I’d like to bring an end to this tiresome debate by observing that the decline of the US from its 1945 position of global pre-eminence has already happened. The US is now a fairly typical advanced/developed country, distinguished primarily by its large population[1]. Precisely because the US is comparable to other advanced countries in many crucial respects, there is no reason to expect any further decline. [2]

As I’ve observed before, the US is similar to other leading countries in terms of key economic variables like output per hour worked and employment/population ratio. Like other countries it has some distinctive features, that can make it look good or bad on particular measures. Features on which the US is an outlier, in economic terms, include long average hours of work per employed person (particularly notable for women), high levels of inequality in wages and other incomes, low levels of public expenditure and taxation, an exchange rate that has typically been well below most estimates of purchasing power parity, and an international balance characterized by large deficits on the goods and services account, matched by large surpluses on the capital account.

In geopolitical terms, the US spends a lot more on its military than anyone else (in fact, more than everyone else put together) and (contrary to the beliefs of most Americans) hardly anything on development aid or other efforts at promoting global public goods. The amount of sustainable influence generated as a result appears pretty trivial. The number of places in the world where the US can directly determine, or even substantially influence, political outcomes is approximately zero – nothing like what might be associated with an old style Great Power, let alone a superpower or “hyperpower”.As I’ve observed before, Americans of all classes (except those directly connected to the military-industrial complex) get very little payoff for their military expenditure – trillions of dollars of expenditure has been unable to produce positive outcomes in a couple of relatively insignificant countries, or even to put paid to a bunch of pirates in the Indian Ocean.

On the other hand, it has to be conceded that the record of non-military aid and public good promotion is not exactly one of stellar success either. The fact is that the world is a complicated and intractable place, and running your own country is hard enough – the fact that international efforts work as well as they do is more surprising than the fact that so many fail.

I suppose it’s necessary to mention that the US has the capacity to destroy the world at a moment’s notice. But unfortunately for the world, so can Russia, probably China and maybe France or Britain. If the nuclear winter analysis is correct, even the regional nuclear powers could bring a rapid end to civilisation as we know it. And lots of other countries could easily acquire such a capacity if they were silly enough to want it.

Like other developed countries, the US has some notable areas of economic and cultural strength (IT, Hollywood) as well as areas of relative weakness (consumer goods, fashion and so on). While the precise pattern may change, I don’t see any reason to suppose that the US will either decline or advance dramatically in comparison to other developed countries.

The main implication of all this, for me, is that Americans should stop worrying about relative “decline”, “competitiveness” and so on, and start focusing on making the US a better place to live. This advice may seem gratuitous coming from an outsider. I can only respond that Australia had its own period of concern about relative decline (relative to Singapore and other Asian countries) back in the 1980s, and I said exactly the same thing then.

fn1. That effect is amplified for English-speakers. The US accounts for something like 75 per cent of developed-country native English speakers, and this is reflected in the attention it gets on blogs like this one.

fn2. As other countries catch up to the advanced group that includes the US, those in that group might be said to have declined in relative terms. But this doesn’t seem to me to constitute “decline” in any important sense.

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The end of the Arab exception?

Looking at the downfall of the dictatorship in Tunisia, and the exploding protests against the Mubarak regime in Egypt, it’s obviously hard for Western/Northern commentators, let alone Australians, to say much about what is happening now and will happen. In part that reflects the cultural and political distances involved, and in part the opaqueness of political and cultural life that is inevitably associated with dictatorship and censorship. But it seems clear that some basic premises of US policy towards the region have been rendered invalid.

Most obviously, the Mubarak regime is finished in its role as the key US ally in the Arab world. If the regime survives at all, it will be through brutal repression which makes it clear once and for all that the dictatorship is held in place solely by military force. That in turn will make the provision of substantial economic or military aid politically untenable (the Republicans were already keen to cut aid to Egypt). But without continuing aid, there is little reason for any Egyptian government to support US foreign policy in the region.

The bigger casualty is the ‘Arab exception’: the idea that the concept of democracy is not really applicable in Arab countries and that foreign policy therefore amounts to a choice of which dictator to support. [1][2]
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How to pay for the floods

The floods in Queensland and other states have destroyed a lot of public infrastructure that will need to be rebuilt, as well as damaging crops and reducing output in other industries. In most cases, if the infrastructure made sense in the first place, it makes sense to replace it, which raises the question of how to pay for it. The proposals Gillard seems likely to announce, centred on a one-off levy sound about right to me. As I argued a while back, the rebuilding is likely to raise the level of economic activity, as measured by GDP, which is the relevant measure for macroeconomic and fiscal policy. So, if the settings were about right before, it makes sense to pay for the rebuilding now, through a once-off levy, so that the net macroeconomic impact is approximately neutral.

On the other hand, the government should not seek to offset the loss in revenue associated with lost output and profits during the flood, or from flood relief expenditure. This should be concentrated in 2010-2011, and therefore should not affect the timetable for return to surplus very much. I assume (but am not absolutely certain) that the government has accepted this.

Another bonus is that the appalling “cash for clunkers” scheme is dead for good. I won’t count this as an actual saving, since it seemed unlikely ever to happen, but it’s good to have this confirmed.

One size fits nobody? — Crooked Timber

Much recent discussion of the future of the euro, most notably that of Paul Krugman, has started from the idea that Europe is not an optimal currency area, and that a ‘one-size fits all’ monetary policy is therefore bound to lead to the kinds of problems we are now observing. At any given time, some countries would benefit from a more expansionary policy and others from a more contractionary policy, so the effect of monetary union is an unsatisfactory splitting of the difference.

Without resolving that issue in general terms, I want to argue that this is not an accurate description of the current state of the eurozone. It’s true that Germany is doing a lot better than the eurozone as a whole, and the peripheral countries a lot worse. So, the optimal policy for Germany alone would be tighter than for the rest of the eurozone. The peripheral countries might benefit from an even more expansionary policy (though that’s not as clear to me as it seems to be to others. A heavily indebted country that undertakes monetary expansion is likely to find it hard to sell bonds denominated in its own currency).

But when you look at the actual policies of the ECB, including Trichet’s recent threat to raise interest rates, it’s hard to see that this policy is optimal for any EU country, even Germany.

Particularly in GDP terms, Germany’s recovery has not been that strong, and an expansion based on exports could easily be derailed by the kind of currency appreciation that would follow an interest rate rise, or even a really credible commitment to hold inflation down. And given the difficulties of handing out explicit haircuts, a modest amount of inflation seems likely to be a low-risk way of easing debt burdens without endangering the (largely German and French, and also UK) banks that hold a lot of the debt.

To say that the problem is the ECB rather than the euro is, for some purposes, a distinction without a difference. But in other respects it is critical. If the optimal currency area analysis is correct then a breakup of the euro is probably inevitable and the big question is how to manage it. On the other hand, on the analysis offered here, the ECB must, in the end, be bluffing. Faced with the end of the currency it has been set up to manage, the ECB must eventually back down on everything else, including its inflation targets. The problem on this analysis is how to broker the politics of pushing the ECB towards large-scale quantitative easing and a higher inflation target.

This is, of course, complicated by the fact that, as discussed in a number of the contributions to a recent Crooked Timber seminar , the actual policies being pursued and advocated by Germany don’t necessarily correspond to any reasonable conception of Germany’s national interest. In particular (and by no means uniquely to Germany) policies that are primarily driven by the interests of banks have become the basis of a popular backlash against other scapegoats – in this case the citizens of the peripheral economies who are on the hook for failures of the financial sector. Until that’s understood, the disastrous policies of the ECB will continue to go unchallenged.

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Well, at least that’s settled

Looking back over the blog can be a bit dispiriting. Many of the arguments we are having now were being conducted, in much the same terms, back in 2002. There is, however, at least one exception, even if it’s a relatively minor one. When I started, I included a category “Mac and other computers”, planned to express my position as a member of the beleaguered but enthusiastic minority of Macintosh users.

I’m posting this in a Starbucks in Washington DC[1] and every customer in the store, including me obviously, is working on either a MacBook or an iPhone. That’s fairly typical of my recent experience, so I think I can safely say that this issue has been settled. Of course, now that Apple is no longer the underdog, there are plenty of reasons for concern about its corporate policies, but those are more related to issues like Intellectual “property”

So, this is the last post in the “Mac and other computers” category. If only I could say the same for “Boneheaded stupidity”.

fn1. Not the kind of place I’d ever go in Australia, but decent independent coffee shops are just about non-existent here.

Zombie Economics – the movie

When I signed the contract with Princeton UP for Zombie Economics, I read the section covering movie rights, and had fun chatting about which of my friends would be best suited to play Dynamic Stochastic General Equilibrium, Trickle Down (yes, yes, I know!) and so on. Then I found out that Freakonomics actually has been made into a movie, and of course, I wanted the same. But, even in the century of the mashup, it doesn’t seem likely that a polemical economics text could be made watchable just by adding zombies (though I thought the mash worked pretty well in print).

Instead, how about starting with a comic-horror zombie movie, then making the apocalyptic zombie-generating event a financial-economic crisis? That seemed much more promising, and I starting working out the treatment in my head. All was going well until I realized that I was stealing all my best ideas from Charlie Stross. I emailed Charlie, and he said to go right ahead, so I thought at least it would be fun for a blog post.

Over the fold some of the scenes I’ve sketched so far – feel free to make suggestions which I will then feel free to steal in the unlikely event that this goes any further.

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Water policy after the flood

There’s already some finger-pointing about the management of Brisbane’s dams in the weeks leading up to the flood. I don’t want to deal with that while the emergency continues, but I will make a couple of suggestions regarding future policy in Brisbane and elsewhere

* The historical statistics on the frequency of severe rainfall events (both droughts and floods) have proved to be of little value. Everywhere in Australia, we need to work on the assumption that extreme events will be more common in the future than they were in the (pre-2000) past.[1]

* As regards Wivenhoe Dam, we need a much more cautious approach to flood mitigation, going into wet seasons with a substantially larger reserve capacity. This in turn will reduce Wivenhoe’s usefulness as a water supply source, and buffer against drought.

* One response that is immediately available to us is to turn on the water recycling plant, built at great expense during the drought and never used. Current policy is to turn it on when average dam levels are at 40 per cent. This trigger should be raised significantly. As a very rough guide, it appears that when our dams are at 100 per cent of normal we currently have enough storage for four years supply. If instead we cut the maximum to three years supply (75 per cent0, we could (roughly) cancel the impact on supply by turning on the recycling plant at 65 per cent (40+25)

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I’m still on the other side of the planet, but the news from Brisbane is bad and seems to be getting worse. Fortunately, my family and I are all out of harm’s way. Unfortunately, that’s meant we’ve suffered a fair bit of property damage, and won’t be able to do anything about it for some time. I’ll probably be off-air for a while. We’ve had some very successul appeals for help in relation to past disasters here, but I’m not in a position to run one this time. Feel free to use this thread for offers of help to those affected, and any useful insights. Please, no pointscoring or social/political debates – there will be time for that later on.

Economical arithmetic* — Crooked Timber

I’m at the American Economic Association meeting in Denver, and just attended a panel of the great and serious discussing the US budget deficit. The numbers are pretty impressive – on current projections, US government expenditure (properly measured) is likely to be around 25 per cent of national income (around 3 trillion/year) and the default budget deficit is around 10 per cent of national income. While current and former CBO directors went over the usual options, it struck me that I had seen those numbers before.

Roughly speaking, the share of US national income going to the top 1 per cent of the income distribution has risen from 15 to 25 per cent over the past decade, mostly because of the growth in size and profitability of the financial sector. As I’ve argued before, this payment to the top percentile can be seen as a kind of tax paid by the population as a whole for the benefits of living in the kind of economy that has developed over the past few decades of financialisation. (Please check irony alerts before responding!)

Clearly, any attempt to claw back some of this money to fill the budget hole would have what economists call “incentive effects”. More precisely, it would necessitate a big contraction of the financial sector. Judging by the reaction of the assembled experts when I raised this point (all declined to respond), this is literally unthinkable.

  • I’m alluding to Richard Feynmann’s joke that, in view of the size of budgets, we should talk about “economical” rather than “astronomical” numbers.

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