Perspectives from Around the World

When Other Countries Have the Money

Stephen S. COHEN
Professor, Regional Planning, University of California at Berkeley
Co-Director, Berkeley Roundtable on the International Economy (BRIE)

The money has left the United States, and it is not likely to come back anytime soon. For so long the primary creditor - the rich kid - America is now the world's biggest debtor, and there is no other debtor nation of consequence.

When you have the money and have had it solidly, rightfully, self-assuredly for about 100 years, and "you" are a giant nation, armed to the teeth and economically and culturally vital - 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 debts and let the interest payments pile up on top). But you lose power quite quickly, especially the power to ignore others - 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. America must now become, recognize that it has become, and act like a normal country.

For America, this will be a shock. For other nations too. American has not been a normal country for a long, long time. Back when the U.S. had the money, it used to pay attention to other governments only when it chose, and to make certain that other governments paid attention to the U.S. even when they wished to not do so. Without the money, the U.S. government will no longer be able to act the role of the unique, multidimensional superpower. Whether this should be rued or applauded by Americans and by other peoples is an open question. That the government of the U.S. will be constrained in ways it has not been in the past is a huge change that will take getting used to, and not just for Americans. As bosses go, America's sway has been relatively easy which has permitted nations such as Japan and the larger European states to busy themselves getting rich and comfortable without the responsibilities that usually accompany their wealth and potential power and without the bother of growing up; to enjoy the comfort of having someone else in charge; and to indulge, like normal adolescents, the opportunity to blame and gripe. Once the realization sinks in that Uncle Sam can no longer quite handle it all, anxiousness is likely to replace dissatisfied restlessness. The United States will remain a world power and, perhaps, the leading nation; it just will no longer be able to be the boss. America, after all, no longer has the money.

Where did the money go? It went to pay for imports in excess of American exports, year after year, for oil and for manufactured goods from Asia, a good proportion of which in recent years have come from U.S. multinationals in China. How did we pay? After all, we imported more than we exported, we consumed more than we produced. By piling up debt - significantly it is all denominated in U.S. dollars. Foreigners have been willing to hold dollars for many powerful reasons and there is every reassuring reason to believe that for a good while at least, they will continue to do so. When the U.S. Government starts issuing debt denominated in foreign currencies - head for the hills.

An economy develops by shifting people and capital out of lower productivity activities and into higher value ones. It is a disruptive business. Recent years have afforded both China and the U.S. - through their colossal trade relationship - the opportunity to make such shifts at considerable scale. China moved, literally, tens and tens and tens of millions of peasants off the farm where they were producing just about nothing, into manufacturing with machinery where they produced much more, and then yet more again. That particular shift is the only proven way to rapidly develop an economy. But it harbors a structural problem. China was a nation of miserably poor peasants, far too poor to buy a large output of manufactured goods. Only exports would drive a massive industrialization. China repudiated the teachings of Western economics and followed the Asian development model, Japan's invention, indisputably the most successful rapid development approach ever - at least until now. The Asian model of export-led growth stresses the importance of holding down the exchange rate as both the most powerful and the least corrupting instrument to promote exports. If successful it would result in an accumulation of dollars, but that could prove very useful in case of sudden financial crises. If very, very, very successful, - it would create a vast dollar holding - for China it's now about $2.5 trill, over 2/3's of GDP. Is it crazy, a poor country like China selling its labor and goods for paper dollars and just holding them? A poor country like China lending to rich Americans? Yes, of course it is crazy. But not completely crazy. China got something much more valuable than just those dubious dollars. If, in violation of standard textbook economics, you persist in selling goods below the world market price, even below what it cost you to produce, but in the process develop the knowledge and the structures needed to work smarter to move up the scale of productivity rapidly, you come out way ahead. In China's case an eightfold increase in GDP in 20 years, and a truly great leap forward in industrial and societal sophistication.

Then there are the 2.5 trillion dollars. It is of course something of an economic dead weight as well as something of a potential embarrassment in domestic politics - why not spend it on health care? And the Chinese can't really shift those dollars into goods and services for its people, though at the margin, and it's a very big margin, it can shift some into claims on real economic assets located off-shore. China is using some of its dollars to buy the Periodic Table, taking up dominant positions in copper, lithium, and a monopoly position in rare earths, as well as rights to petroleum in awkward places in a grandly colonialist way. But the great Chinese export machine with its colossal slag heap of dollars ties China to the U.S. in ways that are intimate and very uncomfortable to both sides.

American thinking and policy have for the better part of a generation been dominated by the neo-liberal ideology of unfettered markets and re-fettered states. As it has evolved in practice at the international scale its operations have come to rely not just on an invisible hand to distribute the results of revealed comparative advantage, but upon a system guarantor to keep the whole thing from crashing, and to absorb the very real costs of system maintenance in the interests of higher purposes, be they political, or ideological or just for reasons that were once, but are no longer cogent.

The American-led system of open trade, as it has evolved in practice, is a system that doesn't stabilize itself because countries of considerable scale - first the Europeans then Japan and the Asian tigers, and now massively China - try to develop by producing more than they consume, by exporting more than they import. As a result some countries - the U.S.- have to import more than they export, year after year in ever greater amounts, produce less than they consume, and in the process sacrifice their industries that compete with those ever higher value added imports. Otherwise the system simply does not work.

In the post war period, when America first assumed this role, like the Europeans and Japanese who reindustrialized with heavy state guidance and intervention, America had its own little Industrial Policy. Industrial policy is a whispered word in its heartland, Japan, a common usage in France, and a portmanteau pejorative in America. Still America had its industrial policy - we called it Defense - and we picked and promoted winners. And it led the way in shifting American resources into critical, new, higher value added industries of the future. Think of two such industries in which American led the world for well over a generation: commercial jets and semiconductors. Together they encompass technology. Everything goes into big jets and semi-conductors go into (or into the making of) everything. And American policy had an awful lot to do with those two major industrial successes as well as several significant others.

For the past two generations the U.S. has played this role of consumer of last resort, of system balancer and guarantor. It is, to say the least, unclear, how much longer it will be able to play that role at recent scale. And it is even less clear if another giant, rich economy will take on that role - and the role does have its attractions - that is so necessary for the large scale success of the Asian development model.

For the past fifteen years, and especially the past ten, America again had the opportunity, while absorbing more and more routine manufacturing - and more and more not so routine manufacturing - from Asia at the expense of those same industries at home, to shift its own economy into what should have been the sectors of the future - just as we did previously, with a little help from our government. This time, also with a little help from policy makers here in Washington, to an astounding extent America shifted its economy into finance. Manufacturing declined as a proportion of what the U.S. produces - by 7% of GDP (though not so much as a proportion of what America consumes) and finance as an industry grew by 7% of GDP to offset that loss, thus sustaining the level of output and employment (technically FIRE - finance, insurance and real estate transactions). Effectively and at least half-consciously America restructured its economy. But if finance was to be the industry of the future, it no longer seems to be a future that many want. The freedom of action that the U.S. enjoyed was squandered.

This short essay draws on Professor Cohen's latest book:

Stephen S. Cohen and J. Bradford DeLong (2010), The End of Influence: What Happens When Other Countries Have the Money (New York: Basic Books).

June 2010

June 1, 2010

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