New Book by Cohen and DeLong

Brad DeLong and Stephen Cohen have just published a book with the title The End of Influence: What Happens When Other Countries Have the Money.

The following sentence from the introduction of the book is funny because it is so wrong, so clearly indicates the American blindness to their own ugly manipulations of power post WWII (initially to 'win' the Cold War but since the collapse of Communism as a brazen imposition of American 'will' on the rest of the world):

Having the money was a powerful tool and force. America, of course, used its economic dominance exclusively for for global good.

I'm willing to admit that the US was a less onerous overlord than most any other country would be. But for those whose neck was held down by the hobnailed boot of American 'power' (soft or otherwise), it wasn't that pleasant.

This quote from the introduction gets it right and holds some very bad news for Americans:

When you have the money -- 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 debt and pile interest payments on top). But you lose power, especially the power to ignore others, quite quickly -- 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.

These words are very true. Sadly almost no Americans yet recognize that the "light on a hill" that Reagan proclaimed has gone out and that the future for America will be increasingly grim. (Ironically it was Reagan's budget-breaking policies that helped bust the nation.) It is interesting to see DeLong and Cohen are willing to admit a truth of diminished American power which has not yet dawned on Americans.

These authors make the following point which will have very interesting implications in the coming years, implications which Americans are yet to recognize:

If you owe the bank $1 million, the bank has you; if you owe $1 billion, you have the bank. The implication is that China, the biggest and most important holder of U.S. debt, is trapped into a strange, unwanted, and uncomfortable embrace with the indebted United States. The Chinese government holds about $2.5 trillion in foreign reserves, probably 70 percent of that U.S. obligations. This comes to over $20,000 per U.S. household; there is no way the United States could readily pay it back. Because it also amounts to about half of China's GDP, China can't just write it off.

Thus, China and the United States are economically co-dependent, the producer and consumer, the creditor and the debtor. ... We're bound together, and we must manage this mutual dependence carefully and, over time, wind down those economic imbalances. Populist reactions in the United States and China must also begin to work more broadly as partners to stabilize a world in political, social, and economic disarray.

So perhaps it won't matter, at least not very much. We can hope. But one thing is sure: Absent an international economic catastrophe or a major war or another game-changing disaster, the money will not soon be coming back to America.

The world has changed. Americans need to wake up to their reduced role in the world. Unlike the Bush years, a fantasy period, in which America took a 'go it alone' stance, the reality is that the world is fragile and the US can't act alone any more. At least Obama is aware of this. I have yet to see any fundamental policy changes to reflect this reality. Changes can be peaceful and satisfactory, or fanatics (nationalists and other malcontents) can rise up and drive countries into bizarre behaviours. Fanatics get this power when citizens realize that they have been living a dream and need to face up to a new reality. Accepting a loss of dominance is hard, very hard. But Americans are going to have to face this. And hopefully the fanatics won't gain control during the period of adjustment. (I'm pessimistic given the fanaticism shown by one major party, the Republicans, who are largely guilty for getting the US into the mess. This party shows no willingness to face reality.)

This book by DeLong and Cohen looks like it will be a "must read".