Notes, etc., to "The End of Influence"

Note to p. 8. "What happens when Japan or Germany or China creates a protected domestic launch market..."

For example, see Jad Mouawad (2009), "Exxon to Invest Millions to Make Fuel From Algae" New York Times (July 14, p. B1) http://www.nytimes.com/2009/07/14/business/energy-environment/14fuel.html.

John Stuart Mill's call for an "infant industry" exception to free trade is in Book V, Chapter X of his Principles of Political Economy, with Some of Their Applications to Social Philosophy. See the 1909 Ashley (7th) edition published in London by Longmans, Green: http://www.econlib.org/library/Mill/mlPCover.html:

The only case in which, on mere principles of political economy, protecting duties can be defensible, is when they are imposed temporarily (especially in a young and rising nation) in hopes of naturalizing a foreign industry, in itself perfectly suitable to the circumstances of the country. The superiority of one country over another in a branch of production, often arises only from having begun it sooner. There may be no inherent advantage on one part, or disadvantage on the other, but only a present superiority of acquired skill and experience. A country which has this skill and experience yet to acquire, may in other respects be better adapted to the production than those which were earlier in the field: and besides, it is a just remark of Mr. Rae, that nothing has a greater tendency to promote improvements in any branch of production, than its trial under a new set of conditions. But it cannot be expected that individuals should, at their own risk, or rather to their certain loss, introduce a new manufacture, and bear the burthen of carrying it on until the producers have been educated up to the level of those with whom the processes are traditional. A protecting duty, continued for a reasonable time, might*89 sometimes be the least inconvenient mode in which the nation can tax itself for the support of such an experiment. But it is essential that the protection should be confined to cases in which there is good ground of assurance that the industry which it fosters will after a time be able to dispense with it; nor should the domestic producers ever be allowed to expect that it will be continued to them beyond the time necessary for a fair trial of what they are capable of accomplishing...

For Alexander Hamilton, see:

Alexander Hamilton (1791), Report on Manufactures: Communication to the House of Representatives, December 5, 1791, from Alexander Hamilton, Secretary of the Treasury, on the Subject of Manufactures (Washington: U.S. Treasury): http://books.google.com/books?id=gCk5AAAAMAAJ&dq=alexander+hamilton+report+on+manufactures&printsec=frontcover&source=bn&hl=en&ei=FfHlSubKBpDasQOe6t2sAw&sa=X&oi=book_result&ct=result&resnum=4&ved=0CBoQ6AEwAw#v=onepage&q=&f=false.

Note that for our argument to be relevant, we do not require that attempts to pursue innovation-capturing industrial policies succeed. We expect the bulk of them to fail. The point is that such attempts are likely to take place, and are likely to be negative sum for the world as a whole. As economist Lant Pritchett puts it, the true curse is the pursuit of state-led development by what are nearly invariably anti-developmental states.

Note to p. 7: "We cannot just irk China..."

Back in 1993 when then-Treasury Secretary Lloyd Bentsen committed the misstep of not claiming that he wanted to see a stronger dollar--"well, I would like to see a stronger yen" he said when asked if he wanted to see a weaker dollar--it was a political misstep only, with few or no fundamental economic consequences. Today his successor Treasury Secretary Timothy Geithner is in a somewhat different position: there are potential economic consequences for the level of long-term Treasury interest rates and the cost of financing the U.S. national debt. See, for example, Simon Johnson (2009), Mr. Geithner Goes to China," The Baseline Scenario (May 30).

Note to p. 6: "The Neoliberal Order at Bay..."

This section is much too compressed--recall that one of the authors is, or at least was until recently, a card-carrying neoliberal economist himself. Briefly, the inflation of the 1970s and the resulting macroeconomic turmoil of the early 1980s created a presumption in political and policy circles that in any specific case the government failures that would result from increasing the role of the state were likely to be more damaging than the market failures that would result from decreasing the role of the state. This presumption was rebuttable. But it was very real.

One thing that the financial crisis that started in 2007 and the resulting recession that started in 2008 have done is to eliminate this presumption: as far as derivative and mortgage markets are concerned, government failure was clearly not the number one thing that we should have been worrying about.

The playing field is now leveled.

Note to p. 6: "Populist reactions..."

We, at least, are impressed and somewhat surprised by how little political demand for the restriction of imports has been generated by what we must now call the crisis of 2007-2010--with Senator Charles Schumer (D-NY) being somewhat of an exception: see "NY Sen. pressures NBA to Stop Adidas Jersey Plan," Associated Press (November 29, 2009).

Note to p. 5: on China's high savings rate

A growing number of economists in China defend its extremely high savings rate as appropriate for a developing country. For example, see Xinhua, "Economists Defend China's High Savings Rate" (January 7, 2009) http://www.chinadaily.com.cn/bizchina/2009-01/07/content_7375620_2.htm, quoting Ding Zhijie, Fan Gang, Tang Yaling, and Wu Jinglian.

North Atlantic economists, by contrast, tend to worry that the returns China's citizens are getting on the last ten percent of their income that they save are extremely low--are in fact negative in expected value. The bulk of Chinese savings that are invested abroad are invested in low-yielding U.S. Treasury assets that are likely to buy much less than their current value when and if China decides that it is time to repatriate its capital and stop funding the U.S. current-account deficit. See, for example, Maurice Obstfeld and Kenneth Rogoff (2005), "The Unsustainable U.S. Current Account Position Revisited" (Cambridge: NBER); Matthew Higgins and Thomas Klitgaard (2004), Reserve Accumulation: Implications for Global Capital Flows and Financial Markets" (New York: Federal Reserve Bank of New York).. And it is difficult to see how any economy can productively deploy as large an amount of investment relative to GDP as China is. See, for example, Michael Pettis (2009), "The Difficult Arithmetic of Chinese Consumption", China Financial Markets; Emma Saunders (2009), "Unsustainable? China’s Investment Boom," Financial Times (December 7). (For a contrary view, see Jonathan Anderson (2007), "Solving China's Rebalancing Puzzle" (Washington: IMF).

Note to p. 5: "if you owe $1 billion, you have the bank..."

What Lawrence Summers has long called the global balance of financial terror. China now has a larger relative stake in the continued strength and stability of the U.S. dollar than the United States does. Summers, however, cautions that it would not be "prudent for [the United States] as a country" to rely on the stability of this configuration. See, for example, Lawrence Summers (2004), "The United States and the Global Adjustment Process" (Washington: Peterson Institute for International Economics: Third Niarchos Lecture).

Note to p. 4. "Trying to get Sovereign Wealth Funds... to act like... the exemplary Sovereign Wealth Fund of... Norway..."

The best two things written we have seen on the attempt to corral these non-market actors into market-actor patterns of behavior are Brad W. Setser (2008), Sovereign Wealth and Sovereign Power: The Strategic Consequences of American Indebtedness (New York: Council on Foreign Relations: 0876094159); Edwin Truman (2007), Sovereign Wealth Funds: The Need for Greater Transparency and Accountability (Washington: Peterson Institute for International Economics: Policy Brief 07-6). Our belief is that this attempt is unlikely to succeed in the long run. However, as we discuss below, the extremely sharp Peter F. Drucker wrote a generation and a half ago that American pension funds' wealth accumulations would fundamentally change the playing field, and he was wrong: they were corralled.

Note to p. 3. "In... emergencies, the private property... is always controlled by... government..."

See, for example, Winston S. Churchill (1947), Their Finest Hour (London: Macmillan), p. 56, on the bill passed by Parliament and assented to by the King-Emperor on May 22, 1940, giving the government:

power by Order in Council to make such Defence Regulations making provision for requiring persons to place themselves, their services, and their property at the disposal of His Majesty as appear to him to be necessary or expedient for securing the public safety, the defence of the Realm, the maintenance of public order, or the efficient prosecution of any war in which His Majesty may be engaged, or for maintaining supplies or services essential to the life of the community...

Note to p. 2. "With mere hints... America forced Britain and France to abandon their ill-conceived colonial adventure..."

See Diane Kunz (1991), The Economic Diplomacy of the Suez Crisis (Chapel Hill: UNC Press: 0807819670). The British Conservative Party government appears to have believed that it could not prevent a devaluation of the pound should U.S. President Eisenhower order his Secretary of the Treasury George Humphries to dump sterling assets, and that it could not politically survive a devaluation of the pound and the resulting deterioration in the United Kingdom's international terms-of-trade. Why Chancellor the Exchequer Harold Macmillan and Prime Minister Anthony Eden believed that they were so vulnerable is somewhat of a mystery: lots of governments have undergone devaluations and depreciations--and politically not just survived but flourished.

Note to p. 2. "Back when the United States had the money it mattered for Americans and it mattered more for others..."

On how America used its possession of the money to attempt to remake the post-WWII world to its liking, see, for example, Michael J. Hogan (1989), The Marshall Plan: America, Britain, and the Reconstruction of Western Europe, 1947-1952 (Cambridge: Cambridge University Press: 0521378400); J. Bradford DeLong and Barry J. Eichengreen (1993), “The Marshall Plan: History’s Most Successful Structural Adjustment Program,” chapter 8 in Rüdiger Dornbusch, Wilhelm P. Nölling, and Richard G. Layard, eds. (1993), Postwar Economic Reconstruction and Lessons for the East Today (Cambridge: MIT Press: 0262041367).

On this and other forms of "soft power" more generally, the best thing we have seen is still Joseph Nye (2004), Soft Power: The Means to Success in World Politics (New York: PublicAffairs: 1586482254).

Note to p. 1: "Britain no longer had the money. The money had shifted to the United States..."

People on the American side of the Atlantic ocean often do not notice how this shift in relative global influence from Britain to the United States is viewed by many, at least by many in Great Britain.

John Maynard Keynes biographer Robert Skidelsky, for example, entitled the third year-2000 volume of his massive biography John Maynard Keynes: Fighting for Britain and wrote of how:

(p. xv) Churchill fought to preserve Britain and its Empire against Nazi Germany. Keynes fought to preserve Britain as a Great Power against the United States. The war against Germany was won; but, in helping to win it, Britain lost both Empire and greatness...

In Skidelsky's judgment, it was a shame that Hitler's being:

(p. xxi) in charge of a great nation... threw Britain into the arms of America as a suppliant, and therefore subordinate: a subordination masked by the illusion of a 'special relationship'...

And he speaks of the:

(p. xx) ...intensity and often bitterness of the struggle between Britain and America for post-war position which went on under the facade of the Grand Alliance. When the European war started, Britain, not Germany, was seen by most American leaders as America's chief rival...

He even regrets:

(p. 180) ...the deference Britain paid to America's wishes... and its failure to exploit crucial elements in its bargaining position--like fighting a more limited war, or even making a separate peace with Germany..."

Skidelsky is not alone. Paul Kennedy, a British historian at Yale, wrote of how:

...the overtaking of Britain by the U.S. a century ago also involved two democracies, and the declining country found the process a painful one...

Americans tend to view it very differently. From the American perspective, between Britain's compromise over the Oregon Territory in the 1840s (a very unusual thing for the nineteenth-century British Empire to do: usually they did not compromise but rather burned your capital and then dictated terms) and the start of World War I the British government pursued a generations-long strategy of wooing America--convincing it that its interests were close to and its values identical to those of Britain. This succeeded--and as a result America was, for British foreign policy, the equivalent of being initially dealt wired aces in seven-card stud throughout the twentieth century

(Note that in the American edition, the title of Skidelsky's third volume was changed to John Maynard Keynes: Fighting for Freedom.)