The Future of America

If I had waited another day before posting on the future of democracy, I could have had the benefit of reading about Dr. Doom, aka Nouriel Roubini. Roubini is an economist who has been issuing similarly pessimistic warnings about the future of America for several years.

In a recent post on his blog (registration required), Roubini says the “American empire” is in decline for three reasons. First, it “squandered its power by relying excessively on its hard military power in the wars of Iraq and Afghanistan,” rather than using “diplomacy and multilateralist approaches.” Second, other countries and regions such as China, Russia, India, and the European Union are catching up. Third, “the US squandered its economic and financial power by running reckless economic policies, especially its twin fiscal and current account deficits.”

I’d like to think that’s pretty much what I said last week. For what it’s worth, I disagree about a few details. I don’t consider Russia to be an economic or political rival. It is not capitalistic enough — property rights are not secure and its economy is based more on crony capitalism than true capitalism. It is growing fast enough, but most of the benefits of that growth go to those at the top.

The E.U. also has problems. It a very mature economy beset by all sorts of special interest groups — farmers, greens, unions — all of whom will impede growth. Of course, the same could be said of the U.S., which is exactly the point I was trying to make last week. We’ve been growing faster than the E.U., and if we could return to the pre-New Deal relationship between government and people, the E.U. wouldn’t have a chance.

Roubini places a great deal of importance on the current account deficit, meaning basically that we import a lot more than we export. A current account deficit is not necessarily a problem since it is, by definition, balanced by the capital account. In other words, foreigners sell us goods, then take the dollars we pay them and invest in the U.S. That’s fine, but as Roubini points out, if our xenophobic leaders block foreigners from investing in physical assets like Unocal or ports, then they can only invest in treasury securities — and it probably isn’t too healthy to allow foreigners who might not be your friends to own trillions of dollars of your treasury bonds. As Roubini says, this “makes the US vulnerable to such rivals using the financial terror weapon — dumping US assets and or reduicing their financing of the US twin deficits — in situations of geostrategic tension.”

I am much more concerned about the other of the “twin deficits” that Roubini mentions: the fiscal deficit, meaning government spending is greater than revenues. It won’t hurt our economy if Dubai (a very capitalistic and friendly Arab emirate) manages our ports or if capitalists in China buy one of our oil companies. It is much more likely that such purchases would lead to even greater investments in our productivity.

But a $9.6 trillion debt, and growing, can do significant damage to our economy. We’ve already seen how the value of the dollar, relative to euros or other major currencies, has fallen by more than a third. While that benefits exporters and businesses catering to European and Asian tourists, it hurts consumers and anyone else who relies on imports.

In inflation-adjusted dollars, the per-capita spending of the federal government has increased by 2.5 times since 1969. The federal government had a surplus that year; now, depending on how you calculate it, the deficit is between $250 and $500 billion a year.

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The answer most often given is that, during the New Deal, the Supreme Court gave up its historic role of checking unlimited federal power. After the court ruled several New Deal laws unconstitutional, FDR sought legislation that would allow him to appoint six new justices. In what is known as the switch in time that saved nine, one of the justices changed his vote and from then on the court approved just about any economic legislation Congress wanted.

Yet if you look at the chart above (which I borrowed from another web site), it appears that the debt went really out of control starting in the mid 1970s. Why is that?

Back in the 1960s, a Berkeley policy analyst named Aaron Wildavsky wrote a book called The Politics of the Budgetary Process. He observed that, even without the Supreme Court, Congress still had some checks and balances. Most important, he said, the House Appropriations Committee, whose members were chosen by seniority, was run by fiscally conservative Southern Democrats who regarded themselves as “guardians of the public purse.”

Just a few years later, in 1974, the Democrats swept the post-Watergate election, gaining 49 seats. These new Democrats were not as fiscally conservative as the “Dixiecrats,” and they didn’t want conservatives in their way. So they reformed the system of selecting committee members. As noted in this book about tax policy, the “naive and utopian reformist policies” that the new Congress adopted were often “adverse to their goals.”

Of course, many members of Congress see deficit spending as beneficial to their goal of getting reelected. But it is adverse to the goal of a healthy economy that can be competitive with other nations and regions of the world.

Is there a way out? I don’t know. The obvious answer — electing more fiscally conservative Presidents and members of Congress — is a lot easier said than done, especially when anyone who wins one of those offices seems to lose their fiscal conservatism the day after the election.

The other option is for the Supreme Court to return to its historic role of blocking inappropriate extensions of federal power. That will depend on who gets appointed to future vacancies — and since justices’ opinions tend to be somewhat unpredictable, there is not much we can do about that. All most of us can do is educate people about the problems and try to discourage bad policies.