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The myth of American resilience

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Bankers, financiers, capital markets lawyers, investors and economists -- people supposedly in the know -- routinely make the argument that the United States is more resilient, flexible and adaptable than any other major country in the world. America is down they say, but not out. The Americans, according to this line of thinking, will bounce back to reclaim their global economic dominance. As Clint Eastwood proclaimed in his commercial for the Super Bowl, it's Half-Time and America will come roaring back in the second half.

The myth of American resilience -- this is not about minor ups and downs in the U.S. economy -- skews the vision of many observers of the global economy. Like other myths, this one is based on a combination of dated thinking and romanticism, not unlike the faith of fans that the members of an aging sports team still have the stuff to re-live their glory days and win the title.

The truth about America is that it is anything but flexible and resilient and faces a range of obstacles that portend decline (not collapse) rather than a creative re-birth that will re-establish its supremacy.

Where the United States was once on the cutting edge of modernity, benefiting from its conquest of a continent, its steady supply of immigrant labour, and its military victories over formidable foes, the country is now hobbled by rigidities, of which the following five are of critical importance:

1. The widening income and wealth gaps

Among the principal western countries, the U.S. is the most extreme case in terms of the income gap between the rich and the rest of the population. The gap meant that a tiny proportion of the U.S. population gained the lion's share of the economic benefits of the past three decades, leaving the large majority of the population with few or no real gains. Indeed, on the eve of the great crash of 2008, the gap between the very rich and the rest was the same as it was in 1928 on the eve of the Great Depression. While Franklin Roosevelt's New Deal of the 1930s did ameliorate the severity of the Depression, it did not end it. The American economic crisis was only resolved by the entry of the United States into the Second World War following the Japanese attack on Pearl Harbor in December 1941. The war generated an immense wave of job creation and industrialization in the United States; and the war left America's chief rivals, the enemies Germany and Japan, and the allies, Britain and the Soviet Union, in a state of economic ruin.

The war did more. It opened the way for the United States to reorganize the global economy placing itself at the centre with the U.S. dollar as the reserve currency of the world, the latter a fact of great importance because it allowed the United States to go into debt on a scale that would have been impossible for any other country. In addition, winning the war strengthened American labour and the American trade union movement. The full employment economics of the post-war decades and the muscle of organized labour meant that the real income of American wage and salary earners (adjusted for inflation) doubled between 1950 and 1970. The earnings gap between the rich and rest shrank appreciably during these decades.

Following the oil price shocks of the 1970s and the miserable effects of stagflation, the door opened to the age of neo-liberalism, globalization, de-regulation, and the loss of bargaining power for organized labour. The consequence was the onset of the new earnings gap that peaked at the onset of the crash of 2008.

An economy in which productivity gains push up the incomes of those at the very top, while leaving the rest with no appreciable gains, suffers from a dearth of purchasing power. The mass of the population accumulates ever-more debt in this bubble-prone economy. For the swollen financial sector, which accounted for 22 per cent of the U.S. GDP on the eve of the crash, speculation to pounce on quick gains, became the name of the game.

2. The costs of empire

As was the case with earlier empires, the Americans bore the costs of imperial overstretch in two ways. The first, the more obvious of the two ways, has been through immense military spending. Today, the U.S. accounts for about half of all the military spending in the world. In addition to regular military outlays to maintain and upgrade the American military establishment, there has been the expenditure of about two trillion dollars to pay for the wars in Iraq and Afghanistan. Steep military outlays at a time when there is immense resistance to paying higher taxes among upper income earners has exacerbated the crisis of state indebtedness in the U.S.

The second cost of imperial overstretch is discussed much less often although it is perhaps even more important than the first.

As was the case with former empires, notably the British and the Roman, American economic dominance allowed the United States to farm out its production of a wide range of goods to countries where the cost of labour was much lower. Crucially, in recent decades, this has allowed the American people to share in the bounty of "cheap stuff" being imported into the country. While China was the primary point of origin for these imports, there were many additional sources in other low wage countries. This was a double-edged sword. It meant that outlets such as Wal-Mart offered cheap imported manufactured products, and that U.S. and other multinational corporations made vast profits producing goods where labour costs were low.

It also meant, however, that American domestic manufacturing which had once been dominant in the world, was hollowed out on a stupendous scale. In 1970, as West German and Japanese imports flowed into the United States, the U.S. ran a deficit in its trade in manufactured products for the first time in the 20th century. Since then, the U.S. manufacturing trade deficit has grown ever larger (it shrank sharply in the aftermath of the crash in 2008 but has begun to expand once again) so that it now amounts to hundreds of billions of dollars a year.

In 1980, the share of the U.S. GDP accounted for by manufacturing was close to 20 per cent. By 2008, this proportion had shrunk to 12 per cent, an alarmingly low proportion for a nation that had once been the world's industrial powerhouse. One dramatic consequence of the hollowing out of American industry has been the decimation of the jobs and incomes of the American working class, especially working-class men, who once could earn an income that could support a family, and no longer can.

Britain, the world's first industrial power, had also followed the same trajectory. Even in the mid-19th century, when British industry reached its zenith, the nation's manufacturers were involved in a struggle for primacy with the financial elite, the bankers and financiers of the City of London. By the end of the 19th century, in what has been called the second industrial revolution, that involved science, steel, and chemicals among other industries, British manufacturing lost its dominance to German industry and particularly to American industry.

What dealt a near-fatal blow to what remained of British manufacturing came in the 1980s when Margaret Thatcher was prime minister of the United Kingdom. First elected to power in 1979, the Thatcher government initiated an experiment in monetarism that squeezed inflation out of the British economy but had the effect of hurling the country into a severe recession. During that recession, scores of manufacturing establishments closed in Britain, never to re-open. Under Thatcher, finance won its final victory. The United Kingdom had been reduced to having an economy that was based on finance in the City of London and North Sea oil. For all intents and purposes, industry was dead. As was the case with the Americans, the position of British finance in the global economy allowed the British people to enjoy the fruits of cheap imports, from China and other countries. But the British working class paid the price of lost industrial jobs. And with the crash in 2008, the position of British finance in the global economy was placed in grave jeopardy.

The Romans, as the Republic rose to dominance across the Mediterranean, used their newfound power to import low cost products, a leading example being grain from Egypt, that had the effect of driving citizen farmers in Italy out of business. Those farmers had been the backbone of the Roman army. They were the main source of plebeian political power in the republic. As cheap Egyptian grain drove farmers off the land, tens of thousands of them flooded into the city of Rome, where they became dependent on food provided for them by the republic. These were the Roman citizens, relocated in the mushrooming metropolis, who were bought off by the "bread and circuses" of the patricians who sought political power for themselves. Rising patrician stars such as Julius Caesar and Pompey spent vast sums to feed and entertain the urban masses to win their votes when they ran for positions such as Consul. This was plutocracy with a flair that the American plutocrats have not yet matched. In the United States, plutocratic politicians such as Mitt Romney stick to purchasing huge swaths of time on the media to drown their opponents in abuse and to advance their own meagre talents. In Rome, plebeians were treated not only to repeated repasts but also to the pleasure of watching gladiators or animals tear human foes apart. During this last phase of the disintegrating Roman Republic, the army whose legions had once been composed of citizen soldiers, became a professional force. Over the long-term, the Roman Empire, successor to the Republic, was forced to bring infusions of Germans and other foreigners into the ranks of the army, first as individuals and later as whole legions. Rome's inability to feed itself, and its reliance on cheap imports, along with the loss of its citizen farmers, were not reversible processes.

It is one thing for great industrial states such as Britain and the United States to use their prowess when they are peak of their power to flood their own domestic markets with cheap imports. It is quite another thing to re-industrialize once industry has gone. It is theoretically possible, but exceptionally difficult, involving as it inexorably would a steep drop in the average standard of living in the country.

3. Crumbling education

One of the great strengths of the rising American Republic was the quality of its public education. The mass of white children received an education, paid for by the state that allowed American white youths to enter the labour force ready to learn how to cope with skilled or semi-skilled jobs. Two great changes have occurred. The level of education required to do all but unskilled jobs, of which there are now millions at low levels of pay, is much higher than before in an age of advanced technology. The other enormous change is that millions of affluent families have abandoned the public educational system, which has been allowed to crumble, to one degree or another across the United States. (Since education is a state responsibility, there are important differences in the effectiveness of public education from state to state.) As the affluent have fled from public education, the effectiveness of American education has dropped dramatically in relation to education in other advanced countries. In terms of literacy, numeracy and other measures, American children rank near the bottom in comparison to children in other advanced countries as tests scores reveal.

4. Ideological blinders

It is not surprising that the most influential sections of American society are highly resistant to fundamental change. Such behaviour has been the norm among the leading elements of successful empires throughout the ages. Those who have the most to lose from fundamental change are the same people who have gained immensely from the success of their empires. The very success of an empire, whose rise was due to genuine flexibility and innovation, breeds resistance to change when the empire has reached its peak and even more so as it begins its decline.

The process of shutting out the real world and its challenges in favour of the repetition of ideological homilies that once reflected innovative thought, but now are a barrier to it, is far advanced in the United States. Before them the rulers of the Chinese, Roman, Spanish, Russian, French and British empires behaved in the same way. They repeated soothing formulas -- incantations from the past -- which speeded them on their way into decline.

Affluent Americans who fear change, from within their own society and from a world in which the U.S. share of global economic output has shrunk from fifty per cent in 1945, to twenty per cent today, are inclined to seek the truths of the Founding Fathers of the American Republic to steer them on the stormy seas of the 21st century.

The emergence of the Tea Party has been the most visible recent case of a populist re-affirmation of the American civic religion that is rooted in the Declaration of Independence and the Constitution of the United States. The verities of individualism, free enterprise and the limited state are at the heart of this explosion on the political right. The idealized capitalism of the Tea Party conjures up an image of American society, not from the era of the American Revolution, but from the 1840s and 1850s. It is housed in a hazy vision of a small-town, laissez faire capitalism, before the rise of the great conglomerates such as Standard Oil, U.S. Steel and J.P. Morgan in the decades following the Civil War.

The trouble with the reified thinking of the adherents of the Tea Party, the populist right more generally and the Republican Party is that it denies empire, global enterprise and finance-centred capitalism, the essential realities of our age.

5. Formidable challengers

Everyone looks to China as posing the greatest challenge to American global dominance. China is indeed, the principal but by no means the only challenger to American hegemony. China's economic rise, its development of a capitalist model in which the state plays major, if chaotic, roles is of immense importance to all of humanity. Not least, this is for reasons of sheer scale. When twenty per cent of the human race, over one billion people, go through unprecedented transformations, the consequences of success or failure, indeed the kinds of success or failure, are colossal.

Several hundred million people in China are living in varying degrees of affluence. Hundreds of millions more still live at a subsistence level. From the vastness of this larger China come about 130 million rural workers who move in and out of the country's wage economy as conditions change.

The rise of enormous new powers always contains the risk of social explosion, wars both civil and against external enemies, and the immense danger of collapse. All of these possibilities are present in China today. The governing Communist Party, once a force for revolution, is now an empty vessel, whose sole purpose is to retain power and privilege for its leading cohorts. It is a party without vision, subject under pressure to a descent into strident nationalism exclusionism and expansionism.

A useful way to look at the U.S.-China economic relationship is to understand it as a single, volatile and quickly evolving single system. The U.S. and China have a symbiotic relationship. The U.S. provides a vast consumer market for Chinese exports. (U.S. imports from China fell from $337.8 billion in 2008 to $296.4 billion in 2009 and the U.S. trade deficit with China declined by just over $40 billion that year. As a consequence of the economic crash, in particular the severe slump in Chinese exports, about 20 million migrant workers lost their jobs by the winter of 2009. In 2010, U.S. imports from China bounced back up to $364.9 billion.) Because of the extent of the U.S. trade deficit with China (it was $273.1 billion in 2010) and the extent of U.S. direct investments in China ($22.2 billion in 2006 compared with $600 million in total Chinese direct investments in the U.S. that year), China has a vast pool of U.S. dollar holdings (in U.S. government and institutional bonds). In 2011, China's foreign exchange reserves (their size is classified as a state secret in China), the highest exchange reserves in the world, totalled about $3 trillion, about 60 per cent of the reserves made up of U.S holdings.

The huge imbalance in trade between the U.S. and China creates enormous problems for both countries. The gigantic U.S. manufacturing trade deficit with China (and other countries) has resulted in the loss of millions of manufacturing jobs in the United States over the past decade. It needs to be noted in relation to this, that the U.S.-China trade relationship is complex. While about 37 per cent of China's GDP is accounted for by exports, net exports accounted for only about 12 per cent of China's GDP. This is because China's exports have embedded within them enormous imports to make them possible. Huge imports of capital equipment and parts and components into China feed into the final manufacture of products in China. Americans import goods from China that have been partially produced elsewhere including the United States itself.

While China has built up huge reserves of dollar holdings, China desperately needs to recycle these dollars through direct investments in the U.S. and by purchasing U.S. bonds. Seen as a single system, the U.S. represents the consuming side and China the savings side. One side cannot exist without the other.

But it is a dynamic system whose motion brings with it potential crises both economic and geopolitical.

How China evolves, bringing an ever-larger proportion of its population into affluence and the mainstream of global capitalism will have a huge impact on the future of the world. Internal social upheavals, already visible in labour struggles and protests that often go largely unreported in the rest of the world, are already occurring in China. They are an inevitable consequence of the wrenching changes through which the country is passing.

These changes will generate pressures, which may open the country to wider social and political dialogue and greater degrees of popular decision-making or may generate an even harsher dictatorship that seeks legitimacy through nationalism and expansionism.

The United States and other powers will undoubtedly affect the process of Chinese development. If the American political leadership responds fearfully to China's rise, in part as a way to deal with America's own social chasms, China will be pressured in one direction. If American leaders conclude that the United States and China have symbiotic economies in which the United States provides a vast market for Chinese products, while China helps stave off insolvency for the United States through the purchase of its financial instruments, China will be pushed in another direction.

Above all, the relationship between the United States and China is highly unstable, subject to constant changes. As China's internal market grows larger and as the cost of Chinese labour rises, China will have less need for the American market. As China develops, the capacity of the United States to afford Chinese imports on such a flagrant scale will decline. This may force at least the partial re-industrialization of the United States, under conditions that will be far from favourable.

Other potential challengers to U.S. economic hegemony include India, Japan, Brazil and even Europe when it finally succeeds in making the transition to a European state that involves much more than a single currency.

To sum up, the 21st century will not be an American century as the 19th and 20th centuries were. The United States will, of course, remain a substantial power. It will, however, be subjected to the immense pressures that confront a declining empire. The cleavages within American society include the very wide gaps between the very rich and the rest of the population and the realities of a country undergoing vast demographic shifts. By the middle of the 21st century, it is estimated that 90 million of the 360 million Americans, will be of Hispanic origin, the large majority of Hispanics living in the crescent of states that once were part of Mexico. By 2050, 15 per cent of the U.S. population is projected to be African American. A further 10 per cent is projected to be made up of Asians, Pacific Islanders and native Americans. These changes mean that only one half of the American population will be composed of non-Hispanic whites, the demographic element on which the founding of the American Republic was based.

As the role of the United States in the global economy continues to decline, the U.S. will be pushed down the ladder of the global division of labour. This will bring the era of "cheap stuff" from abroad for Americans to an end, with the consequence that for the mass of the American population there will be a falling standard of living at least for a time.

How Americans cope with the pressures that confront them, chaotically or relatively successfully, will have a huge effect on American society and the world. Of one thing we can be certain: those who stubbornly assert that the United States is uniquely capable of flexibility and resilience in the face of challenges are among those who are standing in the way of developing a realistic evaluation of the pressures facing the United States. They are part of the American problem, not the solution.

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