Thursday, January 22, 2009

"Great Powers" Historian Paul Kennedy Warns Against the Planned Economic “Stimulus” Package That We’ll Need Foreigners To Pay For

Historian Paul Kennedy (link) wrote a short essay recently for the Wall Street Journal (link) titled "American Power Is on the Wane" in which he comments on the current economic health of the United States and finds the patient seriously ill. Professor Kennedy, author of many books, is perhaps best known for “The Rise and Fall of the Great Powers,” a thorough and quite illuminating study of the relationship between the economic and military power of the world’s major powers of the past 500 years. This book and his “The Rise and Fall of British Naval Mastery” have significantly informed my world view.

He argues that a country’s economic and military strength are correlated (the latter depends on the former), and that these two strengths are always in flux relative to each other and relative to those of other countries as well. In the long run, the two tend to equilibrate, but can diverge significantly in the short run. The common pattern of divergence starts with an economic expansion, followed by a military expansion to protect the wider economic interests; then the inevitable relative economic decline, which then leaves the country overextended militarily (“imperial overstretch”) relative to finances and which only exacerbates the economic decline; and then finally the inevitable relative military decline that brings the two “strengths” back to equilibrium.

It's hard to deny that the United States is in a period of relative decline in its global economic strength compared to the period 1945 -1960, when it assumed its current massive global military obligations. Our share of global output is much less than it was 50 years ago, yet our military obligations have not ebbed correspondingly. Common sense and historical inquiry tell us this mismatch is unsustainable. From troops defending South Korea and Central Europe to sailors fighting pirates in the Indian Ocean, we are spending too much of our resources as policeman of the globe.

Now comes this current economic crisis, which is accelerating our relative economic decline and consequently ultimately our military strength. Fearful of our fiscal deficits and of the apparently incipient massive “fiscal stimulus,” Kennedy writes in the Journal:

By what logic, though, should America lose more ground in the years to come than other nations…. The first reason, surely, is the U.S.'s truly exceptional budgetary and trade deficits. There is nothing else in the world like them in absolute measures and, even when calculated in proportion to national income, the percentages look closer to those you might expect from Iceland or some poorly run Third World economy. To my mind, the projected U.S. fiscal deficits for 2009 and beyond are scary, and I am amazed that so few congressmen recognize the fact as they collectively stampede towards the door entitled "fiscal stimulus."

The planned imbalances are worrying for three reasons. The first is because the total projections have been changing so fast, always in a gloomier direction. I have never, in 40 years of reading into the economics of the Great Powers, seen the figures moved so often, and in such vast proportions…. The second reason all this is scary is because no one seems to be certain how usefully (or fecklessly) this [stimulus] money will be applied…. The third thing I'm really scared about is that we'll likely have very little money ourselves to pay for the Treasury bonds that are going to be issued, in tens of billions each month, in the years ahead…. Never mind, I am told, the foreigners will pay gladly for that paper. This notion makes me queasy. In the first place, it is (without its advocates ever acknowledging it) a dreadful sign of America's relative decline.… [O]ur dependency upon foreign investors will approximate more and more the state of international indebtedness we historians associate with the reigns of Philip II of Spain and Louis XIV of France … We could be looking at as large a shift in the world's financial balances as that which occurred between the British Empire and the United States between 1941 and 1945…. Moreover … the staggering array of overseas military commitments and deployments that weigh upon Uncle Sam's shoulders…. brings us back, I'm sorry to say, to the "imperial overstretch" remarks I made some 20 years ago.

Borrowing money from foreigners to distribute among ourselves to spend on personal consumption is no path to economic recovery and prosperity.

Richard R Balsamo