Commentary on Political Economy

Sunday 14 January 2024

 Friends will recall that we have insisted on many of the points raised here by Ferguson in our blog for years now. - And especially his emphasis on WILL TO POWER, which we have discussed in connection with Nietzsche and the West generally - its Ohnmacht, or powerlessness, particularly.

America’s Longtime Sources of Power Have Turned Weak

The US used to be good at persuading allies to pursue its ends and deterring enemies from pursuing theirs. That advantage is being squandered in seven significant ways.

All the president’s (foreign policy) men: Jake Sullivan (left) and Antony Blinken (right).
All the president’s (foreign policy) men: Jake Sullivan (left) and Antony Blinken (right). Photographer: Brendan Smialowski/AFP/Getty Images

“What is the power that moves peoples?" asks Tolstoy in the philosophical essay at the end of War and Peace. “How did individuals” — he has in mind Napoleon — “make nations act as they wished?”

The political theorist Robert Dahl once offered a very simple answer to that question. “A has power over B to the extent that he can get B to do something that B would not otherwise do.” A great power can make other states or entities do what is in its national interest; and can shrug off their pressures on it to do what would suit them better.

We sometimes tell ourselves that power in the modern world is a more sophisticated thing.

In an essay for Foreign Affairs that went to press just before the horrors of last Oct. 7, National Security Advisor Jake Sullivan defined the modern “sources of American power” as a combination of “Bidenomics” (increased investment in domestic innovation and industry), revamped alliances (“a self-reinforcing latticework of cooperation”), reform of international institutions such as the World Bank and even the United Nations Security Council, and the economic and technological containment — as opposed to direct military confrontation — of hostile powers such as Russia, Iran and, above all, China. The argument was elegant — and immediately belied by events in Israel, necessitating a hasty rewrite.

The harsh reality is that the US is no longer very good at “getting B to do something that B would not otherwise do.” Who now thinks of Afghanistan, hastily abandoned to the Taliban in 2021? Ukraine, still struggling against the Russian invader, is slipping from public consciousness amid dwindling financial support from Washington.

We argue bitterly about the way Israel is waging its war against Hamas; we say much less about the impunity with which Iran’s proxies in the Middle East wreak havoc, even attacking American troops. (Friday’s US-led strikes on Houthi targets by design did minimal damage, as they were telegraphed well in advance.) The Taiwanese people voted on Saturday: What, one wonders, will be the US response if the Chinese take exception to the result and blockade the island? Should Sullivan’s essay really have been titled, “The Sources of American Weakness”?

American power sure ain’t what it used to be. During the two world wars, the Cold War and the so-called War on Terror, the US not only grew rich; it also developed a wide range of levers or tools that transformed its national wealth into power. These were the keys to America’s ascent to superpower status. Some are obvious, a few of them paradoxical. Some endure. Too many have atrophied in recent times.

By becoming the world’s largest economy in terms of gross domestic product — which it did as early as 1872, according to the British economist Angus Maddison — the US had unrivaled resources to spend on its army and navy, not to mention all the other agencies of the national security state that came later. It simply chose not to exercise power until the 1940s, when its defense spending as a share of GDP at last rose to match and then exceed that of the European great powers.

Is the US still No. 1 in terms of aggregate economic output? On a current-dollar basis, it is still clearly the world’s largest economy. China’s GDP in 2023, according to the International Monetary Fund, was probably around two-thirds of US GDP when measured in dollars. However, when it is calculated on the basis of purchasing power parity — adjusting for the fact that non-traded services and goods are significantly cheaper in, say, Changsha than in Philadelphia — China caught up with the US in 2016, and last year had an economy a fifth larger.

Losing primacy in terms of purchasing power parity is a problem, given that most of the resources to arm a state are not purchased on the world market. The Chinese navy and nuclear arsenal are much cheaper than their overpriced US counterparts. Of course, they are probably of inferior quality, too. (Recent reports of missiles filled with water rather than rocket fuel suggest that the People’s Liberation Army is far from ready for prime time.)

On the other hand, just about everything else in our still relatively globalized economy — from oil to semiconductors — is priced in dollars. And the recent strength of the dollar, combined with the lower rate of Chinese growth, means that China remains meaningfully behind the US in dollar terms.

So far so good. Unfortunately, there are many other ways in which America has undermined the sources of its power in recent years. Seven in particular stand out.

First, immigration. By being able to import the world’s talent, the US has an almost unique source of power. More than half of unicorns (privately held startups worth $1 billion or more) were founded or co-founded by immigrants. China simply cannot do this — would you want to move there? Neither would the next Elon Musk. Nor the next Patrick and John Collison (the Irish-born founders of Stripe). Nor the next Apoorva Mehta (the Indian-born founder of Instacart). I could go on.

However, a shift from legal to illegal immigration, as the US has seen in recent years — culminating in 2023 with an influx across the southern border that may have exceeded the natural increase of the native population — erodes this source of strength by reducing the quality of the “human capital” being imported.

A second problem is rule of law. What is it that makes the US so attractive to foreign labor and capital? A key part of the answer is the consistency and reliability of our legal system. Anything that undermines that edifice from the Constitution down to the efficiency of the courts, weakens the nation. Unfortunately, there are measurable ways in which this has deteriorated in recent years — it has slid to 26th in the world in the World Justice Project’s rule of law rankings, mainly because of inequities in our civil and criminal justice system — another example of what I once called The Great Degeneration.

Next comes education. In the 19th century, the US benefited from having better secondary education than the rest of the world. In the 20th century it benefited from having better higher education. But these advantages have either gone or are going. Take a look at the latest Program for International Student Assessment results if you want to see how far American teenagers now lag behind their counterparts in not just Hong Kong and Singapore, but also Estonia and Ireland, in mathematics and science. Take a look at Claudine Gay’s brief tenure as president of Harvard to see how weakened our elite universities have been by the ideology of “diversity, equity and inclusion.”

Fourth, there is public health. In the 20th century, Americans were better fed and lived longer than other people. This, too, is manifestly no longer the case. The US military is finding it increasingly difficult to attract able-bodied recruits, so widespread are obesity, addiction and other self-inflicted infirmities. Less than a quarter of young American adults are in good enough shape — and have a clean enough criminal record — to enlist.

Yes, you may say, but what about American innovation? It is a truth universally acknowledged that the most important source of economic power is technological leadership. In any cold or hot conflict, the state with the most efficient means of destruction, intelligence gathering, and counterintelligence is highly likely to achieve at least deterrence and, if necessary, victory. For most of the past century, US technological leadership has been assured. But a striking feature of Cold War II is that China is posing serious challenges in a number of key domains: artificial intelligence, quantum computing, hypersonic missiles, as well as information warfare (TikTok springs to mind). And unlike the US, China has the manufacturing capability to mass produce almost any new technology, from drones to hypersonic missiles.

There is a strong case to be made that, in the past, US government investment in research and development had immense spinoff benefits for the private sector, even though that spending’s core purpose was to enhance national security. However, it seems doubtful that the spirit of Vannevar Bush (who led the Office of Scientific Research and Development in World War II) animates today’s federal bureaucracy. We should be wary of measures billed as “industrial strategy” that expand the economic role of the state in defiance of the lessons of the 1970s, when the costs of state intervention clearly exceeded the benefits. Better outcomes would come from preserving the ability of state governments to compete in attracting private-sector investment, one of the enduring strengths of our federal system.

Sixth, there is fiscal profligacy. For more than 20 years, the federal government has run an unsustainable fiscal policy, with excessive spending and inefficient taxation causing deficits to become the norm, even at full employment, and the federal debt to rise rapidly above total GDP (to say nothing of the unfunded liabilities of welfare programs). This is a major vulnerability, given US reliance on foreign investors and the Federal Reserve to buy the bonds and other paper issued by the Treasury. The rise in real interest rates since 2022 has significantly increased the cost of servicing the debt, to the point that it is close to exceeding the total defense budget. The Fed’s expected lowering of rates this year won’t ease that burden if the debt keeps rising, as it is projected to by the Congressional Budget Office.

True, as the issuer of the world’s most widely used currency (not only as a reserve asset but as a means of payment in transactions), the US enjoys some kind of privilege, though it is not “exorbitant,” as was claimed by French critics in the 1960s. Probably, the American government is able to borrow on relatively better terms than if another currency were dominant in the world. But it is underappreciated how dependent this privilege is on our strategic primacy. Where would the dollar stand, and the 10-year yield, if the US lost a major war? That may explain why successive administrations have preferred economic warfare to actual warfare. But let’s not kid ourselves about the effectiveness of measures such as sanctions and export controls. If economic warfare were a sufficient means, Cuba and Iran would be democracies and Russia would have lost the war in Ukraine.

Finally, we must look at legitimacy at home and abroad. It is perhaps harder to quantify than any other attribute, but “soft power” clearly matters in two respects. First, it is beneficial if the US is perceived in a positive light by actual or potential allies. Second, it is crucial that American power should be regarded as legitimate by US citizens themselves. If the former seems to be more or less intact — America is still far more popular around the world than China — the latter seems more vulnerable to the shifting attitudes of younger Americans. This could matter quite a lot in the event of a large-scale conflict, as it is always younger people who are called on to do the fighting.

The US prides itself on being a democracy, and the phrase “leader of the free world” is still occasionally heard in an election year. In the 20th century, this was undoubtedly a source of strength, in that the American interventions in the world wars, the Korean War, and the 1991 Gulf War enjoyed broad public support. However, the electorate’s relative impatience with prolonged conflicts has, since Vietnam, acted as a constraint on American power. It would seem that US engagement overseas has a relatively short half-life unless (as in Afghanistan) the costs are relatively modest and the fighting done by a relatively small part of an all-volunteer force.

Pax americana is another term for the rules-based international order, in that the rules were devised in 1945 and afterward largely by the US, with input from the UK, the previous Anglophone hegemon. The lesson of the British world order is that the benefits of primacy need to be enough — and discernibly so — to offset the undoubted costs. As soon as this ceases to be true, the political will to deter potential challengers is undermined, leading to much more costly confrontations when the aggressor risks a showdown.

So, when we add together all sources of American weakness, where do we find ourselves?

A reasonable hypothesis is that the US today is dangerously close to the situation of the interwar British Empire, above all because its electorate and elite are no longer willing to bear the costs of deterrence. This raises the prospect of a confrontation (like those Britain experienced in 1914 and 1939) that will be much costlier than deterrence would have been, in which even a victorious outcome would leave the country greatly weakened.

The preferable outcome is to postpone such a confrontation — by means of détente not appeasement — until the pathologies of the rival superpower undermine its economic power. This was the fate of the Soviet Union. It is highly likely to be the fate of the People’s Republic of China, given its mounting demographic and fiscal deficits.

The sources of American weakness discussed above are all relatively easy to address through legislative measures that would reform:

    It would also be easy to create better incentives for productive investment than Biden’s questionable industrial strategy. The lesson of history is that free enterprises will invest our savings optimally if the tax code incentivizes them appropriately, whereas state subsidies will 9 times out of 10 lead to misallocations of capital.

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    The usual objection is that such reforms are politically impossible under our dysfunctional two-party system. But this is obviously wrong. Partisan division has, throughout American history, been quite easy to transcend when the survival of the US itself is at stake. Measures such as 2022’s CHIPS and Science Act — though very far from a silver bullet when it comes to reviving America’s microchip industry — illustrate that bipartisan consensus is perfectly possible when reforms are seen as imperative for national security. Just say that all the above proposals are directed against the Chinese Communist Party and you’ll have the votes.

    And that is why power ultimately must consist of more than just wealth and the tools that translate it into geopolitical sticks and carrots. In addition to legitimacy, there must be will. The US still has many, though not all, of the sources of the power it has enjoyed for a century. How far it retains the will to power is harder to say. I suspect we shall find out this year.

    Ferguson is also the founder of Greenmantle, an advisory firm, FourWinds Research, Hunting Tower, a venture capital partnership, and the filmmaker Chimerica Media.

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