by Christopher Layne and Benjamin Schwarz
Looking ahead, the health of the U.S. economy is threatened by a gathering fiscal storm: exploding federal deficits that could ignite runaway inflation and undermine the dollar. To avoid these perils, the U.S. will face wrenching choices. The Obama administration and the Federal Reserve have adopted policies that have dramatically increased both the supply of dollars circulating in the U.S. economy and the federal budget deficit, which both the Brookings Institution and the Congressional Budget Office estimate will exceed $1 trillion every year for at least the next decade.
In the short run, these policies were no doubt necessary; nevertheless, in the long term, they will almost certainly boomerang. Add that to the persistent U.S. current account deficit, the enormous unfunded liabilities for entitlement programs and the cost of two ongoing wars, and you can see that America’s long-term fiscal stability is in jeopardy. As the CBO says: “Even if the recovery occurs as projected and stimulus bill is allowed to expire, the country will face the highest debt/GDP ratio in 50 years and an increasingly unsustainable and urgent fiscal problem.” This spells trouble ahead for the dollar.
The financial privileges conferred on the U.S. by the dollar’s unchallenged reserve currency status — its role as the primary form of payment for international trade and financial transactions — have underpinned the preeminent geopolitical role of the United States in international politics since the end of World War II. But already the shadow of the coming fiscal crisis has prompted its main creditors, China and Japan, to worry that in coming years the dollar will depreciate in value. China has been increasingly vocal in calling for the dollar’s replacement by a new reserve currency. And Yukio Hatoyama, Japan’s new prime minister, favors Asian economic integration and a single Asian currency as substitutes for eroding U.S. financial and economic power.
Going forward, to defend the dollar, Washington will need to control inflation through some combination of budget cuts, tax increases and interest rate hikes. Given that the last two options would choke off renewed growth, the least unpalatable choice is to reduce federal spending. This will mean radically scaling back defense expenditures, because discretionary nondefense spending accounts for only about 20% of annual federal outlays. This in turn will mean a radical diminution of America’s overseas military commitments, transforming both geopolitics and the international economy.
Since 1945, the Pax Americana has made international economic interdependence and globalization possible. Whereas all states benefit absolutely in an open international economy, some states benefit more than others. In the normal course of world politics, the relative distribution of power, not the pursuit of absolute economic gains, is a country’s principal concern, and this discourages economic interdependence. In their efforts to ensure a distribution of power in their favor and at the expense of their actual or potential rivals, states pursue autarkic policies — those designed to maximize national self-sufficiency — practicing capitalism only within their borders or among countries in a trading bloc.
Thus a truly global economy is extraordinarily difficult to achieve. Historically, the only way to secure international integration and interdependence has been for a dominant power to guarantee the security of other states so that they need not pursue autarkic policies or form trading blocs to improve their relative positions. This suspension of international politics through hegemony has been the fundamental aim of U.S. foreign policy since the 1940s. The U.S. has assumed the responsibility for maintaining geopolitical stability in Europe, East Asia and the Persian Gulf, and for keeping open the lines of communication through which world trade moves. Since the Cold War’s end, the U.S. has sought to preserve its hegemony by possessing a margin of military superiority so vast that it can keep any would-be great power pliant and protected.
Financially, the U.S. has been responsible for managing the global economy by acting as the market and lender of last resort. But as President Obama acknowledged at the London G-20 meeting in April, the U.S. is no longer able to play this role, and the world increasingly is looking to China (and India and other emerging market states) to be the locomotives of global recovery. — Going forward, the fiscal crisis will mean that Washington cannot discharge its military functions as a hegemon either, because it can no longer maintain the power edge that has allowed it to keep the ambitions of the emerging great powers in check. The entire fabric of world order that the United States established after 1945 — the Pax Americana — rested on the foundation of U.S. military and economic preponderance. Remove the foundation and the structure crumbles.
The decline of American power means the end of U.S. dominance in world politics and the beginning of the transition to a new constellation of world powers. The result will be profound changes in world politics. Emerging powers will seek to establish spheres of influence, control lines of communication, engage in arms races and compete for control over key natural resources. As America’s decline results in the retraction of the U.S. military role in key regions, rivalries among emerging powers are bound to heat up. Already, China and India are competing for influence in Central and Southeast Asia, the Middle East and the Indian Ocean. Even today, when the United States is still acting as East Asia’s regional pacifier, the smoldering security competition between China and Japan is pushing Japan cautiously to engage in the very kind of “re-nationalization” of its security policy that the U.S. regional presence is supposed to prevent. While still wedded to its alliance with the U.S., in recent years Tokyo has become increasingly anxious that, as a Rand Corp. study put it, eventually it “might face a threat against which the United States would not prove a reliable ally.” Consequently, Japan is moving toward dropping Article 9 of its American-imposed Constitution (which imposes severe constraints on Japan’s military), building up its forces and quietly pondering the possibility of becoming a nuclear power.
Although the weakening of the Pax Americana will not cause international trade and capital flows to come to a grinding halt, in coming years we can expect states to adopt openly competitive economic policies as they are forced to jockey for power and advantage in an increasingly competitive security and economic environment. The world economy will thereby more closely resemble that of the 1930s than the free-trade system of the post-1945 Pax Americana. The coming end of the Pax Americana heralds a crisis for capitalism. The coming era of de-globalization will be defined by rising nationalism and mercantilism, geopolitical instability and great power competition. In other words, having enjoyed a long holiday from history under the Pax Americana, international politics will be headed back to the future.
Christopher Layne is a professor of government at Texas A&M and a consultant to the National Intelligence Council. Benjamin Schwarz is literary and national editor of the Atlantic.