The Great Debate

This essay is adapted from the author’s new book “Balance: The Economics of Great Powers from Ancient Rome to Modern America.”

Hard power. Soft power. Smart Power. Superpower. This is the language of foreign affairs, full of meaning but empty of measurement. Vagueness is, of course, purposeful in the hands of skilled diplomats and politicians, but it can signal shallowness, ignorance or worse. Lacking clear metrics for power, the U.S. national security establishment speculates about possible rivals while being led astray by trendy catchphrases.

The “emerging foreign power” is a rotating special guest in the narrative of the American century. That role was taken by the Soviet Union during the Cold War, was filled by Japan for a decade and now stars China. Yet Beijing does not threaten to counterbalance U.S. power as gravely as America’s economy threatens to become unbalanced on its own.

To get a better understanding of the world’s “balance of economics,” we developed a new measure of economic power. What it shows is that U.S. power has declined from its peak in 2000 by roughly one-fourth, yet remains unrivaled.  China is surging, to be sure, but has just one-third of the economic power of the U.S. Europe is sluggish, while Japan, South America’s big three economies and India are not even close to their potential. The U.S. remains the dominant economic power in 2010 United States Europe China Japan South America India GDP per capita ($) 41,365 32,004 7,746 31,447 9,236 3,477 Growth 1.40% 1.20% 9.90% 0.50% 3.60% 7.70% GDP ($T) 12,833 12,875 10,303 3,988 2,394 4,079 Economic Power 623 456 251 93 42 39 Economic Power
Ratio to U.S. 100% 73% 40% 15% 7% 6%

The problem with growth

One big part of the well-financed campaign for economic austerity is the contention that the public debt is like a national credit card. If we keep charging on it, the argument goes, we’ll get overwhelmed with interest costs, suffer a reduced standard of living and, pretty soon, go bankrupt.

As David Walker, a prominent budget hawk and the former head of the billion-dollar Peter G. Peterson Foundation, has contended, “Both Republicans and Democrats in Washington have charged everything to the nation’s credit card, including tax cuts and spending increases, without paying for them.”

The Peterson Foundation is the leading sponsor of this brand of bogus economics. It is a spurious metaphor on so many levels that it’s hard to know where to begin.

--Laurence Copeland is a professor of finance at Cardiff University Business School. The opinions expressed are his own.--

The deal to break the deadlock in the US looks awful, far worse than going over the cliff, which I suspect would have been a lot less damaging than is usually assumed.

The 1 January agreement was a compromise over the tax to be levied on high salaries, which is purely a political issue with little bearing on the critical economic issue of how to close the deficit, and otherwise simply takes the line of least resistance, avoiding the tax rise on middle incomes, extending benefits for the long-term unemployed and suspending the immediate cuts in defence spending which would have been enforced automatically in the absence of an agreement. Worst of all, it defers the really tough decisions on spending. In fact, given how easily America’s rich can avoid taxes, it is likely that the tax rise which the President has fought so hard to impose on them will generate nowhere near enough revenue to pay for the increased unemployment benefits agreed at the same time. In other words, far from being a first step towards dealing with America’s deficit, this is a step back which will only make things worse.

This is an excerpt from “The Reckoning: Debt, Democracy and the Future of American Power,” published this week by Palgrave Macmillan.

For all the doom and gloom about “American decline,” the United States looks nothing like the twilight empires to which it’s often compared. For one thing, in this age of globalization, a far greater swath of the planet – including some surprising nations like China and Saudi Arabia – wish America well, albeit for their own, selfish reasons. Why would either country, in spite of what it may think of American culture or foreign policy, want to upset a status quo upheld, at great expense, by American power that enriches them more each and every year? From the US perspective, this should be an advantage. It creates stakeholders all over the planet that genuinely hope Washington can solve its current fiscal problems. With the exception of the British Empire, which had a relatively benign replacement lined up when it ran out of steam, history offers no other example of a waning empire whose most obvious potential rivals – China, India, the EU, to name but a few – all have good reasons to want to help arrange a long, slow approach to a soft landing.

“I have no objection to the principle of an American Empire,” writes Niall Ferguson, the Oxford historian. “Indeed, a part of my argument is that many parts of the world would benefit from a period of American rule.” Ferguson and others like him recognize the importance of the role the United States has played, a role that “not only underwrites the free exchange of commodities, labor and capital but also creates and upholds the conditions without which markets cannot function – peace and order, the rule of law, non-corrupt administration, stable fiscal and monetary policies – as well as public goods.” Ironically, many would-be topplers of American hegemony no doubt feel the same way.

By Matt Rognlie
The opinions expressed are his own.

They use the same shady economic methodology to promote their policies.

If you follow the news, you’re familiar with “IMPLAN”, albeit indirectly. It’s the software package underlying the studies that pro sports teams, among others clamoring for public favors, use to claim that each new stadium will generate several gazillion dollars for the local economy—supposedly justifying a massive public outlay. Here’s a study using IMPLAN to justify a new Sacramento Kings stadium; here’s another that looks at the proposed Santa Clara stadium for the 49ers and another that attempts to justify a new stadium for the A’s. There are studies looking at the impact of the Mavericks’ American Airlines Center, the Packers’ Lambeau Field, and Oriole Park. And, of course, there are countless others: whenever someone wants to make preposterous claims about the benefits of his pet project, he’ll inevitably turn to IMPLAN or a similar package. There’s an obvious element of pseudoscience to these studies. They use “input-output” models that painstakingly track the path of spending through the economy—a worthy goal, though perhaps an overambitious one. But they fail entirely to model the supply side of the economy, effectively assuming that there is unlimited capacity, and that each additional dollar of “spending” (magically generated by the new stadium) will become an additional dollar of economic activity—even more, in fact, after you account for the multiplier.

Strangely enough, Rick Perry’s campaign is using the same model to analyze his tax plan, in a context where it makes even less sense.

As James Pethokoukis explains, the Rick Perry presidential campaign has contracted with John Dunham and Associates to run a revenue analysis of Perry’s new tax plan. The impact of the plan depends on your choice of baseline policy: it raises $4.7 trillion less than the CBO baseline for 2014-2020 under conventional, static scoring, and $1.7 trillion less under “dynamic scoring”. Relative to the CBO’s more arguably realistic alternate baseline, the plan does better. But regardless of your preferred baseline, it’s clear that the plausibility of Dunham’s “dynamic scoring” model is key: it provides an additional $3 trillion over only 6 years!

Congress needn't be cruel to be kind in cutting the U.S. budget deficit while saving popular programs like Social Security and Medicare.

That's not to say that taxes don't need to rise, deductions pared and giveaways to corporations eliminated. That all needs to be considered, although the recent deficit commission report doesn't do the dirty work in an equitable manner. It places far too much emphasis on paring Social Security benefits, a system that works and won't be in deficit mode for several decades.

There's plenty of pain to go around in the deficit commission's proposal. The most compelling trade-off is based on the idea that lowering personal income-tax rates will achieve some long-term economic stimulus. That thinking hasn't worked in the past and won't work now.

The following is a guest post by Bruce Katz, Emilia Istrate and Jonathan Rothwell. Mr. Katz is the editor of several books on transportation, demographics and regionalism, including “Elevate Our Cities.”  Ms. Istrate is a senior research analyst with the Metropolitan Infrastructure Initiative. Mr. Rothwell is a senior research analyst at the Metropolitan Policy program focusing on urban economics, innovation, and economic opportunity. The opinions expressed are their own.

In debates over how to boost the flagging recovery, promoting exports isn’t usually at top of the list.  But it should be.  Export growth can make this recovery job-filled rather than jobless.

And the White House and allied business leaders agree. They’ve been discussing how to achieve the “new goal” that President Obama set in his last State of the Union speech: double exports over the next five years.

Ultra-low interest rates and massive liquidity injections have acted like a painkiller, stabilising the U.S. economy and preventing it from going into shock. But they have not cured the underlying problem of over-extended households and an economy dependent on increasing consumer indebtedness as its main source of growth.

The result is a highly uneven recovery. While many parts of the manufacturing and the service sectors are rebounding strongly, those most dependent on credit, particularly housing and autos, and others associated with them such as home furnishing remain depressed.

Low rates have largely solved the cash flow problem, at least for households that have remained in employment. But household balance sheets are still undergoing what is likely to be a long and painful period of adjustment that will continue to act as a drag on credit-driven spending for several more years.