My post on the end of US decline, suggesting that the US now has about the influence that would be expected, given its population, relative to other developed countries, attracted a fair bit of criticism from International Relations specialists. In particular, my suggestion that the EU and US typically bargain on relatively equal terms (as would be expected since they are about equal in size and income) was criticised by Kindred Winecoff with a reprise (see also Phil Arena). We could go on for a long while picking examples to suit one case or the other, but as it happens, I can take my best illustration directly from the news headlines appearing at the same time as my post. The World Trade Organization has completed its report on US subsidies to Boeing, following an earlier report on EU subsidies to Airbus. Although the report is not yet publicly available, both sides have received it, and are leaking/spinning like made, each claiming victory. Reading the competing claims, it seems that the WTO has found that that the US subsidies to Boeing have broken the rules (yay, Europe!), but not by nearly as much as EU subsidies to Airbus (yay, USA!).

In terms of the legal dispute, this looks like a win on points for the US side. But in geopolitical terms, it’s the other way around. Not only has Europe bent the rules more, it’s done so without suffering any real consequences, and to much greater effect than the US.

From a standing start in the 1960s, Airbus has taken the lead over Boeing in the commercial aviation market, while the rest of the once vigorous US commercial aviation industry has been wiped out. And, thanks in part to the launch subsidies against which the WTO has ruled, Airbus not only has the jumbo end of the market to itself with the A380, but has been able to counter Boeing’s successful (at least terms of orders) 787 with its own A350 (running only a couple of years behind the B787). Perhaps the WTO ruling will eventually force Airbus to give back some of the money, but as far as the global aviation market is concerned, the deed is done.

While this is only one example, it’s one that ought to give advocates of the US hyperpower theory a lot of pause. If spending more on the military than the rest of the world combined (the disproportion must surely be even larger in relation to military aviation) can’t preserve a position of dominance (or even leadership) in a closely related sector like commercial aviation, it’s hard to believe that it can be of any significant value in relation to other sectors of the economy.

It’s certainly possible to argue that the kind of industrial policy that produced Airbus is economically inefficient, and that the Europeans would have been better off leaving the field to the US. But this kind of argument applies in spades to anyone who wants to claim indirect benefits from military pre-eminence.

Similarly, it’s still possible that Boeing will win, or at least regain parity, in the marketplace. But if so, it will be due to a combination of good commercial judgement and good luck, not because Boeing has benefited from being part of the US military-industrial hyperpower rather than the supposedly outmatched EU.

Coming back to the general question, I’d say that the outcome of negotations where the EU and US appear with opposed agendas depend mainly on such things as the existence or absence of veto points, and the extent to which one side or the other cares about the outcome. Where there are lots of veto points (climate change negotiations or the Multilateral Agreement on Investment) the status quo has an obvious advantaage. Conversely, even a united EU can’t stop the US from going to war if it wants to, and the US couldn’t stop the International Criminal Court or the Law of the Sea convention. The US can often split the UK and sometimes others off to prevent the emergence of a common EU position, but the veto points within the US system often mean that the US itself can’t act one in any coherent fashion.

All of this is a long way from my original post, which was mainly concerned with convergence in economic performance. But it’s certainly been interesting to engage with the very different way IR specialists view the world. This is the kind of experience that you get from blogs, and much less from official academia.

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.

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.

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.

http://www.dailymail.co.uk/news/article-1343034/Australian-towns-evacuated-fl…

Via Jeremy Sear and Tim Lambert

A nice piece from Rod Tiffen. Equally applicable to Queensland, unfortunately.

Nicholas Kristof has a column in the NYT putting forward the heretical idea that the US should spend less on the military and more on diplomacy and education. The argument is obviously right as far as it goes, but it leaves one big question unasked. An obvious reason for the focus on military spending is that Americans have massive confidence in their military and much less in their education system, particularly the public school systems.

Yet judged by results, the opposite should surely be the case. Why is this so?

The US military has fought five large-scale wars in the past fifty years, resulting in a draw in Korea[1], a defeat in Vietnam, and three inconclusive outcomes in Iraq (twice) and Afghanistan. That’s a record that makes the worst inner-city public school look pretty good. At least the majority of students, even at the worst schools, end up more or less literate.

The US military does an excellent job in defeating anyone silly enough to put a conventional army in the field against it. But, as a result there aren’t many adversaries so silly (even Saddam didn’t expect war when he invaded Kuwait and did his best to avoid it in 2002-03). Potential opponents either try to acquire nukes or fight with IEDs and suicide bombers.

Kristof is right that even where the use of military power is successful in its own terms, it is unlikely to be cost-effective – his striking observation on this is that the cost of one US soldier in Afghanistan is the same as that of 20 schools. Similarly, Greg Mortensen observes that sending back 243 troops would be enough to finance the entire Afghan higher education system [2].

But the striking thing about military expenditure is that its failure rate is so high. More or less by definition, it’s impossible for both sides to win an armed conflict, but it’s certainly possible (and probably the par outcome) for both sides to lose. So, the US success rate since 1950 is probably about what would be expected. As I’ve mentioned previously, US experience of war (apart from the Civil War) before 1950 was by contrast exceptionally favorable – even the War of 1812 was claimed as a win

Moreover, in all sorts of respects the self-image of the US (as a land of opportunity and social mobility, a generous giver of foreign aid, a beacon of democracy in a generally undemocratic world and so on) seems in most respects to have been set in concrete by 1950. The failure to learn anything from a string of military failures and disappointments seems to fit with this.

I’m talking here mostly about the views of the American public, but these views are even more predominant among the policy elite and the Foreign Policy Community. I don’t think this is primarily because either the elite or the capitalist class they might be regarded as representing benefit from wars. It’s true that there is not much of a penalty for advocating disastrous wars, but as long as you steer clear of a handful of topics, there is not much of a penalty for anything in the US policy elite, once you are regarded as “serious”. And while some businesses obviously benefit from, and lobby for, war, there are plenty more who would prefer to make money trading with putative enemies like Iran and Iraq.

At least, the majority of Americans regard the Iraq and Afghan wars as mistakes where the costs have outweighed the benefits. If that (correct) judgement could be generalised into a recognition that military force rarely generates unequivocal victory, and is rarely worth the cost even when it does, arguments like those of Kristof might begin to prevail.

fn1. In fact, it would probably be more accurate to break the Korean War into two parts: a brief and victorious defensive war in 1950 in which the North’s invading army was thrown back across the border, and a counter-invasion of the North which resulted in a disastrous defeat, and three years of bloody struggle ending in the status quo ante. October 1950 marks the point when US military policy (at least as regards large-scale international conflicts) shifted from reluctant involvement in wars started by others to an increasing preference for pre-emptive military action.

fn2. I think this is an overestimate. Mortensen is estimating the cost of keeping a US soldier in the field at $1 million a year, but taking account of support costs and deferred costs, it’s probably closer to $5 million, which implies that withdrawing a single platoon would be enough.