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

Steven Poole in the Grauniad Likes "The End of Influence"

This is nice to see. We are flattered. "Terse" and "chewy" are good--alas, "slightly repetitive" is not (sniff):

Et cetera: Steven Poole's non-fiction choice: The End of Influence, by Stephen S Cohen & J Bradford Delong (Basic Books, £12.99). After the end of the second world war, America had "all the money", and became the global hegemon. Now the money is slipping away, and will take with it the country's political and cultural "soft power". So argues this terse, chewy, and slightly repetitive book by two economists, who discuss the uncomfortable symbiosis entailed by China's vast dollar holdings (Americans bought houses "with money borrowed, ultimately, from China"), the growth in "sovereign wealth funds" (governments will be obliged to "exercise due control over management" in foreign companies), and the contradictions that were always inherent in "the neoliberal dream". Lucid explanations are offered of trade deficits, currency fluctuations, and the like, and the cause of the current crisis located in the ballooning of finance as a proportion of the US economy. There is an occasional enjoyably sardonic aside (neoliberals wanted to reward people for their "success at choosing the right parents"), and a bracing conclusion for the home audience: the US "will remain a world power and, perhaps, the leading nation; it just will no longer be able to be the boss".

via delong.typepad.com

Global Trendlines: The End of Influence? A Review of Cohen and DeLong's "The End of Influence: What Happens When Other Countries Have the Money"

Global Trendlines: The End of Influence? A Review of Cohen and DeLong's "The End of Influence: What Happens When Other Countries Have the Money": THE U.S. ECONOMY remains mired in stagnation, government deficits continue to grow unabated, U.S. foreign policy initiatives are stillborn, and rising competitors pose enervating challenges: Yes, American declinism is in full form once again. Of course the argument that a country’s influence rises and falls with the size of its pocketbook is nothing new. The correlation between national wealth and international primacy has been well-documented, and shifts in relative wealth have long been scrutinized for their implications on the global balance of power. Capitalizing on burgeoning demand for literature on America’s decline (and China’s rise), Stephen Cohen and J. Bradford DeLong - two well-respected UC Berkeley economists - have contributed a volume as thin as it is timely describing the latest manifestation of this historic trend.

In The End of Influence: What Happens When Other Countries Have the Money, Cohen and DeLong provide a cursory overview of the economic trends that led both to global macroeconomic imbalances and to the financial crisis of 2007. The authors describe the evolution of the U.S. economy since World War II, and in doing so, they sound the alarm for the end of the neoliberal era: gone are the days of deregulation and adoration of free markets; enter the era of “lemon socialism” and state-led development.

While these trends have been highlighted and debated in the pages of the Financial Times and Economist in recent years, Cohen and DeLong add two additional layers of anxiety. First, they assert that the American standard of living “will decline relative to the rest of the industrialized and industrializing world” - which essentially means everyone else on Earth.1 Second, America’s spendthrift ways will accelerate the erosion of American power, making it more difficult for the United States to shape the global environment in a manner conducive to its diplomatic and economic interests. At a time of growing concerns over the U.S. national debt, the options available to policymakers appear to be narrowing - a phenomenon that could be fraught with dangers.

AS FAR BACK as the Peloponnesian War, the linkage between national wealth and global influence is manifest. In addition to being a study of military history and of the passions and hubris of man, Thucydides’ History of the Peloponnesian War is an exploration of political economy. Chronicling the speeches of Sparta’s prudent King Archidamus, Thucydides quotes him as saying, “And war is not so much a matter of armaments as of the money which makes armaments effective.”2 Later on, an Athenian notes that the privileged international position of the polis affords it the bountiful pleasure of importing the world’s goods. The book is replete with Spartan, Athenian, and colonial leaders speaking about the primary role of finance in championing martial supremacy - and therefore international hegemony.

Much later, writing in 1900, American historian Brooks Adams spoke of a “financial revolution” that was propelling the United States to great power status. He noted cautiously that the “displacement of the economic center of the world...engender[ed] an unstable equilibrium which threaten[ed] war.”3 While Adams wrote of the imminent rise of the United States as a world power, he very well could have written about Germany, whose rapid economic and technological development in the late 19th and early 20th centuries upset the balance of power in Europe, and plunged the continent into the horrors of the First World War.

More recently, Paul Kennedy’s masterful book The Rise and Fall of the Great Powers sought to remind a profligate U.S. administration that a failure to tend to one’s finances historically has led to the end of primacy. At the time of its publication (1987), the U.S. economy was in the doldrums; Ronald Reagan’s concomitant implementation of neoliberal economic policies with a massive program to increase military capabilities vis-à-vis those of the Soviet Union had resulted in the United States becoming a net debtor for the first time since the First World War. Facing volatile equity markets (epitomized by Black Monday), and Japan’s economic awakening, the U.S. pursuit of military supremacy threatened to weaken further the country’s economy. Such an outcome, noted Kennedy, undermined the country’s power position - the very result Reagan’s policies purported to prevent.

Kennedy poignantly warned of the phenomenon of relative economic gains and losses: “Other, rival Powers are now economically expanding at a faster rate, and wish in their turn to extend their influence abroad. The world has become a more competitive place, and market shares are being eroded.”4 While Kennedy’s diagnoses proved to be premature, his assessment of five centuries of great power conflict confirmed that shifts in relative wealth were harbingers for shifts in political power and influence, and they often portended war.

COHEN AND DELONG aim to follow in the footsteps of these works. Yet for all the promise of the title, readers expecting to learn what, exactly, happens when other countries have the money will be disappointed. Cohen and DeLong spend the bulk of the book discussing the U.S. economy, and they fail to explore the forms of power and influence that “other countries” will employ.

To be fair, the authors provide a compelling narrative on the evolution of the U.S. economy since World War II, with some fascinating points about the socio-economic landscape in America. Among the more interesting is that amid an unprecedented increase in income inequality over the last two decades, American families “in the middle fifth of the income distribution were working 500 hours, or 12 weeks, longer per year than in 1979.”5 Unfortunately the authors did not include notes or source data; inquisitive readers are pointed instead to a cumbersome website where they may troll for sources.

To Cohen and DeLong, the current weaknesses of the U.S. economy can be traced directly to the neoliberal policies of President Reagan: deregulation, privatization, and free markets. According to the authors, one can draw a line from the rise of finance - which overtook manufacturing’s weight of U.S. GDP - to the financial crisis of 2007. While the financial sector certainly was present at the creation of the toxic assets that metastasized throughout the global financial system, the authors’ explanations for the crisis are decidedly unconvincing. Too often, the authors fall back on lazy correlations of events, leading to post hoc ergo propter hoc cases rather than new analysis.

Nevertheless, Cohen and Delong make a convincing case that the world will soon witness an accelerating resurgence in industrial policy. From the ashes of neoliberalism will emerge an era of state-led development, which could very well result in a series of beggar-thy-neighbor policies as governments move to support their national champions and key industries. As this so-called “lemon socialism” becomes more prominent, U.S. producers will be put at a stark disadvantage, contributing further to U.S. economic decline and contentious international politics.

BUT WHAT DOES THIS MEAN for U.S. influence in the world? Heavy on diagnoses, light on prescription, The End of Influence addresses neither the impacts that less financial and economic power will have on U.S. influence over the international order, nor the values the new players will propound or how they will spread their influence. Moreover, the current trends - like history itself - aren’t linear.

China is already shifting its global patterns of trade to increase South-South commerce, a phenomenon that should alleviate China’s reliance upon the United States as a consumer of last resort, reducing U.S. trade deficits in the process. Yet despite reports of Chinese investments in infrastructure and goodwill projects, this trend will not always be welcomed in the developing world. As SAIS scholar David Lampton has noted, China’s continued rise will be met with suspicion in capitals throughout the southern hemisphere - particularly those throughout Asia.6

A recent analysis in the Financial Times includes data revealing that during the five-year period ending in 2008, ASEAN’s trade deficit with China grew at a compound annual growth rate of 35.5%.7 Attendant with these outflows of wealth to China are growing fears of Chinese hegemony. Prudent U.S. strategists might use these opportunities to enhance mutually favorable trade and economic relations with emerging market countries. Not only would greater commercial relations bolster U.S. influence, but also they would have the ancillary benefit of greater U.S. economic growth through increased exports.

Cohen and DeLong missed a tremendous opportunity to sketch out what the end of U.S. influence on global affairs would mean in practice. Yet this is not their greatest failing. By treating these developments as linear, and by not accounting for the overriding role of government spending decisions, the authors offer no path forward for extricating the United States from this situation.

Their failure is not just a disappointment to readers, but a dereliction of what the country needs to hear: a focus on individual responsibility through reductions in entitlements, and support for politicians who are courageous enough not to pander to voters’ demands for taxpayer-subsidized consumption today at the expense of future generations’ prosperity is the best path for reversing America’s profligacy and restoring American influence.

Greg Weeks: Cohen and DeLong's The End of Influence

Two Weeks Notice: A Latin American Politics Blog: Cohen and DeLong's The End of Influence: I read Cohen and DeLong's The End of Influence: What Happens When Other Countries Have the Money (2010), which is a fairly brief but useful primer on how the U.S. became massively indebted and what the effects have been, and likely will be.

The book offers a more optimistic view than its title would suggest.  Other countries have the money, but that is not necessarily disastrous because they cannot afford for the U.S. economy to tank. I agree with Matthew Yglesias, who sums up their conclusion as follows:

As a result, we’re going to have to transition to a very different-looking world economic order—one in which self-conscious government planning is going to play a bigger role, one in which US living standards will decline relative to our major trading partners, and in which American cultural and ideological influence is likely to wane.

In many ways, though, the book feels too much like a rough draft.  It would have benefited from a tighter argument (it sometimes becomes repetitive), inclusion of sources (which they say are online) and the writing seems almost entirely unedited.  For example, I had to reread this mixed metaphor to figure out what they were trying to say:

Defensive industrial policy--lemon socialism--can have a similar growth-shifting effect.  Think of American football.  The helmet was defensive at first, to protect player's brains.  But it then developed into the hard-shell helmet, an offensive battering ram.  Distressed traditional industries do not consist entirely of petrified wood (p. 126).

Nonetheless, the book is worth reading. The U.S. will not necessarily come crashing down, but the sooner we accept the new reality, the better off we'll be. But we won't be as well off as we were.

Bruce Bartlett: Cracks In America's Armor

Cracks In America's Armor: For years, those concerned about America’s deteriorating global financial position--resulting from decades of trade deficits and a weakening dollar--have warned that this trend cannot continue. Almost all, however, have assumed that the end would come in the form of a bang rather than a whimper; a sudden crisis like those that have accompanied recent financial crises in Mexico, Indonesia and elsewhere.

In their new book, The End of Influence: What Happens When Other Countries Have the Money, University of California, Berkeley economists Stephen Cohen and Brad DeLong make a case for the whimper scenario, which says there is no sudden end to American profligacy, just a steady downward slide such as that in Britain following World War I.

While this will spare us the burden of a precipitous collapse, that cost will still be paid, mostly in the form of decreasing American influence on the world. Although foreigners may think that they will benefit from a decline of American power--world power being a zero-sum game--they, too, will suffer many of the consequences.

Cohen and DeLong explain that in the postwar era America’s pre-eminent economic and military position allowed it to act as the world’s stabilizer--to the benefit of the world as well as ourselves.

American aid helped rebuild Europe and Japan after the war and largely financed the World Bank and International Monetary Fund, which were critical to developing and advancing the neoliberal consensus that free-market policies and export-led growth were the keys to economic development. Where applied properly, these policies have lifted billions of people out of poverty.

The U.S. was willing to act as importer of last resort so that other countries could grow and effectively stimulate their economies during economic downturns by exporting their surplus production to us. Because we were willing to tolerate trade deficits to such a large extent, America was also able to prevail upon other countries to maintain open trading systems--any threat from us to cut off access to the American market in response to foreign protectionism would have far more serious consequences for them than for us.

The dollar’s role as the world’s reserve currency allowed us to finance our trade deficits and borrow extraordinary amounts of money from the rest of the world. Much of what we think of as America’s foreign indebtedness actually consists of Treasury securities held by foreign central banks as backing for their currencies. This is not “hot money” that is in danger of igniting a run on the dollar.

Finally, the U.S. military position allowed us to effectively coerce other countries into following our lead. But it also imposed upon us the responsibility of being the world’s policeman and first responder. Just look at Haiti, where the U.S. military is playing such a critical role in providing emergency aid. No other country or institution has anywhere close to the capability of America’s armed forces in such circumstances.

There are several reasons why the U.S. will not remain the world stabilizer it has been for the last 65 years. Among them: the lingering effects of the Great Recession; the aging of the American population; and the overtaxing of our military in Iraq and Afghanistan. Then there’s the shift of economic dynamism to places like China and India, not to mention growing trade protection and intolerance for immigrants at home.

Much of Cohen and DeLong’s book is about working through the logical consequences of this scenario. The most important one is simply the loss of American power and influence throughout the world. This is not necessarily a bad thing, they say, if we respond by being less unilateral in our foreign policy and more willing to cooperate with other countries.

One potential negative, Cohen and Delong write, is a breakdown of the neoliberal consensus both at home and abroad. They anticipate growing support for industrial policies--more active government intervention in trade and credit policies, less support for free trade and free markets.

These developments won’t necessarily reduce the standard of living for Americans. Cohen and DeLong anticipate real growth of 3% for the next two decades. However, as other countries trump that figure, our share of world output will fall. Americans will also have to tighten their belts a bit, save more and consume less, which will happen once we are forced to get our federal budget and international accounts closer to balance than they’ve been for a long time. The option of continuing to sell bonds to cover both deficits, at least of the magnitude they have been over the last 10 years, will soon no longer be an option.

I anticipate that in coming years we will see a small industry of books about American decline. No doubt many will be grossly partisan--trying to lay the blame at the feet of a particular political party. But the reality is that no nation stays on top forever. Success always sows the seeds of inevitable decay. The U.S. will continue to be among the world’s great nations for many, many years to come; we just won’t be the preeminent force we have been since World War II. The sooner we come to grips with that, the easier the transition will be to a world in which our actions will be far more constrained than they have been in the lifetime of any living American.

James Kwak on Cohen and DeLong's "The End of Influence"

Very flattering. He writes:

The Wasted Opportunity « The Baseline Scenario: I thoroughly enjoyed reading The End of Influence by Stephen Cohen and Brad DeLong.*For one thing, it’s not specifically about the financial crisis (although that does play a role), so you don’t have to read the nineteenth explanation of how a CDO works or what a NINJA loan is. For another, it’s short–only 150 pages, and small pages at that–and easy to read, so it will probably jump your queue of books to read and you can cross it off your list in just a couple of hours.

Despite being a short book, it’s about a lot of things. The most obvious is the much-bemoaned fact that the U.S. is now a huge debtor nation and is unlikely to maintain its status as the world’s importer of last resort indefinitely, and what that all means. The most central, however, is probably the global shift away economic neoliberalism–the idea that governments should withdraw from the economic sphere and allow free market forces to work their magic, symbolized by the recent effort to convince sovereign wealth funds to behave like ordinary, return-seeking institutional investors (see pages 85-89). Cohen and DeLong show that the last few decades of neoliberalism are really just a historical blip and that most of history–including most of the post-World War II–saw plenty of government intervention, even industrial policy, in countries like France (TGV, Airbus, etc.) and the United States (via the Pentagon). They see a resurgence of industrial policy all around the world (although it never really went away–see China, for example), and even if it often ends badly, it is something we will have to reckon with.

If the book isn’t centrally about the financial sector and the financial crisis, though, they still have a minor starring role. In their account, the recent period in which developing countries wanted to lend us their dollar surpluses gave us a great opportunity: “It gave America the opportunity, while absorbing more and more 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.’” Instead, though we shifted our economy into finance. “The freedom of action that the United States enjoyed because it had the money was squandered” (pp. 12-13).

Cohen and DeLong recount (in admirably condensed form) the charges generally leveled against the financial sector, but they also point out something that often is overlooked:

[Finance] had achieved the cultural dominance that so often goes hand-in-hand with economic dominance: its gigantism and ubiquity, its tonic impact on the entire economy, its fabulous success, the sheer gushing of money, its generous funding fo elected politicians, its seconding of its top executives to top posts throughout the regulatory apparatus of government, and its simple and powerful message of ‘let the market work its magic.’ It was so easy (pp. 112-13).

Cohen and DeLong do not make the financial sector the sole villain in their story. Another one is inequality: “Faced with stagnant incomes, seeing themselves falling behind those above them on the income scale, and spending their evenings watching Lifestyles of the Rich and Famous, what did the average American family do?” (p. 107). They worked more, and they borrowed more.

So where do we go from here? Although their book is all about the decline of U.S. financial power, Cohen and DeLong are far from prophets of doom. America simply needs to become a little bit more like a normal country–only a little, because we are still the world’s largest economy and its only superpower. “A drop in the value of the dollar, even a big drop, is not the end of the American economy” (p. 100). We don’t have as much weight to throw around in international meetings. I agree.

This is me talking now, not Cohen and DeLong: There is a lot of hand-wringing over global imbalances, but the answer is quite simple: the dollar needs to fall. Imported goods will get more expensive, but domestic goods won’t, and we’ll adapt. We won’t be able to dictate to the world as much as we used to, but frankly that’s a good thing, given how many other parts of the world we have messed up in our history and how wrong our extreme free market ideas turned out to be. In the long, long, long term, maybe the United States will become just another country–a larger, somewhat richer version of Canada, or Belgium, or Denmark, or something like that. We could do a lot worse.

Reihan Salam Offers More Unstinting Praise

The Agenda on National Review Online: Stephen S. Cohen and J. Bradford DeLong have just published The End of Influence, and it's excellent. Cohen and DeLong are both left-of-center, yet they occupy the technocratic end of the progressive movement, which explains their obvious sympathy for the aspirations of economic neoliberalism. One of the central virtues of the book is the sustained attention Cohen and DeLong give to some of the lazy assumptions we make about the American economy: they note that while postwar mixed economy model of the United States was very different from the models that took root in Europe, it was just as statist and interventionist. My takeaway is that the conflict over U.S. political economy is better understood as a conflict between rival industrial policies, one centered on spurring the growth of the defense industries and the Sunbelt and another centered on old-line manufacturing and the Rustbelt, than as a battle between libertarians and social democrats. The key driver for Cohen and DeLong has been large American trade deficits that have poured resources into oil-producing states and East Asia's manufacturing powerhouses. Rather than consume the dollars they earn, these states have increasingly placed them in large state-controlled sovereign wealth funds that are becoming a crucial source of investment capital for firms around the world. The question is, will these sovereign wealth funds behave like conventional private funds that aim to maximize returns — or will they seek to serve other national interests?  I wrote a far-from-flawless and rather pessimistic column on the book, which focuses on how the decline of American economic power is leading us to a new global equilibrium in which beggar-thy-neighbor mercantilism will become even more pervasive. I think of myself as a fairly upbeat person, but I can't imagine a worse state of affairs, not least because it will exacerbate the risk of great power conflict. All in all, this is a really terrific book that does an excellent job of cutting through the confusion surrounding the broader meaning of the financial crisis, etc. If there is a bright high schooler or young adult in your family, this would make a great present. It helps that the book is mercifully short, weighing in at just over 150 pages.

Peter Siris: Debt to decide stocks' fate

Siris: Debt to decide stocks' fate: Here at the start of a new decade, I think the dominant investing and economic theme of the next 10 years will revolve around how we and the world deal with the U.S. as the largest debtor nation.

In a new book, “The End of Influence: What Happens When Other Countries Have The Money,” by Steven Cohen (one of the best professors I ever had) and Brad DeLong, the authors explain how U.S. money shaped the world economy in the last century.

Our consumers bought goods that helped other countries industrialize. Our companies helped other countries build their industries. Our government provided aid that enabled Europe, Japan and Korea to rebuild from wars.

As the dominant economic power, we set the rules. We influenced others to adopt capitalism. We influenced governments to have democratic elections. We used our economic clout to get others to follow our lead militarily.

The world is now changing. We are still the richest country, but we are also the largest debtor nation. U.S. consumers are in hock, while our government owes trillions.

How this will be resolved is complex. There is a dance going on between the U.S. and other countries that is the economic equivalent of nuclear deterrence. We keep borrowing too much, but no one really objects because other countries need our consumers to support their economies and because they own too many dollars to trash our currency.

“If you owe the bank $1,000 dollars, you’re broke. If you owe the bank $10 million, the bank is broke,” the old saying goes. In other words, the U.S. economy is way too big to fail. Going forward, the U.S. will lose political power, as Cohen and DeLong see it. Many countries will follow the lead of the rich nation raining dollars, but fewer will follow the lead of the debtor. That means while we are financing wars, China and others are gaining economically.

The world economic system is also starting to change. We advocate free enterprise, but other countries have more centrally planned economic systems. They are using massive government resources to build 21st century industries. The question is: Can capitalism compete against businesses that are heavily subsidized by foreign governments?

The biggest issue may concern what other countries are going to do with their dollars. They cannot just dump them. The dollar is the underpinning of the world economy. If the dollar plunges in value, our creditors will be the big losers. But these countries can use them in different ways — like becoming more active in buying U.S. companies.

For investors, despite the gains in the stock market, I think the next few years will be choppy, especially with high unemployment.

Export businesses should do well, as the dollar drifts down, but I think consumer-dependent companies and real estate industries will continue to be weak.

Emerging markets, as well as Japan, will grow faster than the U.S.

Interest rates will go up. If we take a hard line with some of our creditors, the increases could be significant, making long-term bonds a bad bet — and putting a cap on the stock market.

The most problematic question is whether the U.S. will be able to adjust to being a debtor nation and having other countries set more of the rules. We may not have a choice.

Geno Smolensky Thinks We Have Written a Good Book for NYRB Readers

He writes:

At lunch on Friday you couldn't answer the question, "Who is the intended audience?' and not because of the poor grammar. I don't know about intentions, but clerarl the reader will be the subscriber to the NY Review of Books. I eschew that Review, but I did enjoy the book, nevertheless.

Many thanks.

Reihan Salam: The Revenge Of Mercantilism

The Revenge Of Mercantilism - Forbes.com: In 1957, British Prime Minister Harold Macmillan gave a rousing speech in the town of Bedford celebrating the country's postwar economic progress. After years of rationing and shortages of basic consumer goods, Macmillan noted that industrial production was shooting up, and that as a result "most of our people have never had it so good." Macmillan was undoubtedly right.

Though Britain's economic power had evaporated, the quality of life for the working and middle class really had improved, thanks in part to the advent of the welfare state. Even then, there was something strangely off about Macmillan's optimism. He was a Conservative who opposed Labour's brand of socialism, yet he was also its steward. And as the decades that followed made clear, Britain's mixed economy, defined by state ownership of key industries and a ferociously adversarial politics, was falling far behind the mixed economy model that prevailed in France and West Germany, where political and economic elites worked hand in glove to promote modernization and rapid growth.

At the time, the British model seemed to make sense. Almost all leading thinkers saw it as vastly preferable to the anarchy of pure free-market capitalism, and to the pro-rich policies that prevailed in France and West Germany. This view was all wrong, of course. But there was no way to know that in 1957.

What was clear, however, was that Britain had lost its freedom of action. Throughout the Second World War and its immediate aftermath, the United States drove hard bargains with a British Empire that was fighting for its life. In 1956, during the Suez Crisis,President Dwight Eisenhower brought Britain and France to heel, threatening to inflict serious economic pain if they didn't abandon a military intervention in Egypt. While this humiliating reversal didn't change the fact that "most of our people have never had it so good," it is easy to see why Britons might have felt otherwise. Over 50 years on, Americans are experiencing a similar unease.

In their new book The End of Influence, Stephen S. Cohen and J. Bradford DeLong vividly describe the evaporation of American economic power and what it is likely to mean for the United States and the world. Cohen and DeLong are shrewd observers, and they recognize that no country, least of all China, can simply replace the United States as the world's economic hegemon. Rather, they suggest that we're living through the unraveling of a basically benevolent neoliberal era, in which debt-financed American consumption fueled rapid growth throughout the world. Resource exporters, from Norway to Abu Dhabi, have avoided the dreaded "Dutch disease" by using their export earnings to build enormous sovereign wealth funds.

In East Asia, meanwhile, state-led development policies, ranging from "administrative guidance" from state-owned or state-controlled banks to currency manipulation aimed at preserving highly competitive exchange rates, spurred growth in the export sector while suppressing domestic demand. And by suppressing domestic demand, I mean that these policies keep savings rates very high and families very poor. East Asian surpluses have also been poured into sovereign wealth funds. The end result has been that American consumers enjoy cheap manufactured goods while emerging East Asian economies have poor populations but a powerful hedge against currency crises. If these countries could rely on better global institutions to protect themselves against financial crises, they wouldn't have to engage in this wasteful form of self-insurance.

In a sense, American economic power is flowing directly into these sovereign wealth funds, which continue to evolve. Norway's sovereign wealth fund is highly transparent and functions like a large American pension fund, emphasizing financial returns over other objectives. We shouldn't be surprised, however, if the sovereign wealth funds of other less-affluent, less-transparent and less-exemplary countries choose to advance the national interest through other means. Given that the money bottled up in China's sovereign wealth funds is essentially extracted from its hard-working population, why shouldn't the Chinese government use it to acquire American firms and transfer their technology and manufacturing facilities to China? This isn't the classic model of offshoring, in which technology transfer happens in response to market forces. Instead, it is a form of mercantilism with the potential to hollow out global free trade.

In the United States and Europe, Cohen and DeLong observe that "lemon socialism"--the policy of bailing out and taking ownership stakes in failing industrial and financial firms--provides another powerful impetus for state-led development policies. When the U.S. government bails out GM and Chrysler, it's rather precious to insist that the German government refuse to do the same thing. Moreover, as governments pour money into industrial firms that have become multinational, there are not-so-subtle pressures to freeze out or underfund foreign subsidiaries. If demand for automobiles continues to shrink in the developed world, overcapacity will reach comic proportions. As for expanding markets in China and India, one imagines that they will be served, badly of course, by heavily subsidized national champions closer to home.

After sparking a wave of free-market global growth that has transformed the world for the better, America's debt-financed spending binge seems to have ended with vast state-controlled pools of money calling the shots. The supposed anarchy of free-market capitalism is once again being replaced by a more regimented and statist world order. The result will be a poorer and more dangerous world, defined by zero-sum competition, deep distrust, and political elites that will line their pockets at the expense of the powerless and vulnerable. Somehow, believers in free markets and social democrats, in the U.S. and around the world, will have to unite behind a more constructive agenda, a neoliberalism tempered by a far heavier emphasis on the interests of the global poor and the global middle class. Cohen and DeLong don't offer a road map as to how we can do this, but they do offer an invaluable diagnosis of the darker world to come.

Buce: Appreciation: Cohen and DeLong on The Future

Underbelly: Appreciation: Cohen and DeLong on The Future: Readers who want the core argument from The End of Influence by Stephen Cohen and Brad DeLong might consider this roadmap: read the first chapter; then skip to Chapter 6 (State-led Development) and read the first half; then Chapter 7. (Conclusion). That will give you the takeway points (or keep reading this review and pick up another version of the takeaway points below) (or see this helpful excerpt in FP).

Am I saying you shouldn't read the rest of the book? Hm. Well, if you do skip the rest, you'll miss out on a lot of cool factoids about the current macro environment--the kind of thing that makes you such a damn nuisance so loveable at parties. But if you follow DeLong's hugely successful weblog, you know a good deal of this stuff already. On the other hand, if you don't read the intervening chapters, you'll miss out on the frustration of trying to cope with an absorbing and instructive--but maddeningly ill-organized--presentation. The book, to be blunt, shows all the earmarks haste, as if the authors felt they just had to get an oar in at this juncture of the debate, rather than think through a more complete project.

Item: there's a lot of discussion here of "the neoliberal order" (aka neoliberal dream, neoliberal utopia, neoliberal program, neoliberal game, neoliberal age, neoliberal worldview)--all without any effort at precise definition, nor (this is more important) any effort to specify just why it is so central. Item: there's a useful introduction to "sovereign wealth funds" with little to connect the dots as to how they fit into the larger argument. Item, there's a discussion of dirigiste economic growth, provocative but entirely inconclusive (Can anybody do it? Can we do it? Have we done it? Will others do it? Should we try it? etc.).Item: there's an elegant menu of competing paths to development which seems on the face of things almost entirely irrelevant to the business at hand. Item: there's a swell tour d'horizon of foreign-exchange issues, instructive if you ignore the fact that it seems almost to contradict the main line of argument.

So, of course you'll read it. But you'd better be prepared to structure a lot of the argument yourself. Let me see if I can give a summary:

1. In the future, we won't be as powerful as we have been in the past; because
2. We won't be as rich;
3. Relatively [and also absolutely?], such that
4. In fact, nobody, will be able to dominate the way we have dominated since world war II. This will lead to
5. Wasteful, beggar-thy-neighbor strategic infighting. This is a perfectly intelligible set of propositions, debatable of course (not least because we are predicting the future here), but still worth reflection. As to the first couple (not as powerful, not as rich), it happens that I believe them to be true. They are also at this point pretty familiar stuff ("that's all?" said Mrs. Buce with a dismissive snarl; she outsources macro policy to me and expects a higher-value-added return).

The last couple of pointts (infighting, beggar-they-neighbor--dare I call it mercantilism?)--are interesting and might be right, although I'd need a lot more by explicit argument to be persuaded. But this is where I could use lot more careful analysis.

Example: consider "the neoliberal (whatever)"--by which I take it they mean "the way we have lived for the last 40 years:" increasingly unfettered free markets. CD seem to be assuming that this "neoliberalism" has been discredited by the late uproar and will therefore vanish into the sunset. I'd need a lot more persuading. There is a lot of money and power that rides on the legitimacy of the market model, and these guys have no instinct to go away--hell, they don't even know they've been discredited.

Example: I am really not at all clear why they are telling me what they tell me about foreign exchange. They observe that lots of people, for a long time, have been forecasting s calamitous decline in the exchange value of the dollar. And yet it hasn't happened. There may be good reasons why it hasn't happened: we offer political stability; world lending is still dollar denominated; the lenders are locked in. Sure, fine, but what exactly does this have to do with their more general argument? Stated baldly (but this cannot be their point) it seems to suggest that we might not be losing our wealth and power and influence anywhere near as fast as might at first glance appear.

A final example: CD seem to be trying to tell us that sovereign wealth funds necessarily exercise "political" or perhaps "strategic" power instead of mere "economic" power, as we might expect from a neoliberal enterprise. The more I look at that one, the more skeptical I become. My present inclination is to surmise that the critical factor is "bigness," and that huge "private" corporations" might well start acting like (or in concert with) states; while "sovereign" funds might perfectly well find that money is more fun than politics.

Which brings me to a final, more general, point. That is: if there is an important flaw in their general argument, it may lie in their (implicit) assumption about the nature of states. They seem to presuppose a static model of statehood--the kind of thing we've come to take for granted since the Treaty of Westphalia. That would mean: a state that makes at least a pretense of commitment to "a common good," to the maintenance of public order, to the administration of justice. It would mean a state professing (however hypocritically or ineffectually) to the welfare of its people.

I think they may failing to consider just how transitory, perhaps accidental, this model might be--a lucky accident, like the very existence of life in the universe. We've lived so long (and in the US, so well) on that state model, that we forget how quickly and easily and completely it might pass away. There are already signs of states weakening everywhere--not just the basket cases like Somalia or Afghanistan, but in so many places where the ligaments of the (if you'll permit me) Enlightenment model may seem to be coming unglued.

This is a nightmarish scenario and I certainly hope I am just grotesquely wrong. If it does come to pass, what then? I don't even pretend to have a very clear idea, but whatever idea seems to boil down to two overlapping concepts: tribes, and cartels. As CD observe, we also have a half a dozen or so sovereign wealth funds that we find we must treat as players in their own right. CD seem to assume (although they don't quite say) that we should treat them as arms or allies of the stat. But what if they simply are the state? Or simply self-sustaining states-within-a-state, nesting in some vestigal state womb, but answering to no one but themselves (and each other)? What then, huh? I have no idea;it's an incomplete picture and thank heavens for that, because it isn't very pretty and I'm not in the mood for a nightmare. But I think I'd have to cope with it before I went public with any grand propositions about the future.

I don't think CD have considered this possibility (or perhaps they simply think it is too ridiculous even to consider). Yet I'd say it is one testimony to the power of this absorbing and provocative book that it generates the thought of such a bleak alternative.

The End of Influence: Amazon Customer Reviews

Amazon.com: Customer Reviews: The End of Influence: What Happens When Other Countries Have the Money

Ryan Avent Notices That We Exist

he writes:

Link exchange: The American financial crisis and recession is producing some very high quality reflection on American power and potential for decline. James Fallows has a new essay on the subject, and Brad DeLong and Stephen Cohen address such issues in a new book, excerpted this week at Foreign Policy. (Atlantic, Foreign Policy)

Matthew Yglesias Likes "The End of Influence"

He writes:

Matthew Yglesias: The End of Influence: I downloaded The End of Influence: What Happens When Other Countries Have the Money by Brad DeLong and Stephen Cohen last night and read the whole thing. From this you can draw three conclusions. One: The book is good. Two: The book is pretty short. Three: I didn’t get as much sleep as I was hoping from a “stay in and read a book” evening.

The title implies an entrant into the American declinism literature, but the thesis offered on this score is actually extremely mild. If you didn’t already know that America’s relatively geopolitical influence 20 years from now will be less than it was 10 years ago, then you really haven’t been paying attention. DeLong and Cohen don’t think China is suddenly going to become Number One Nation or anything.

What you really get here is a brilliant short tour of the rise and fall of the neoliberal project on an international basis. They offer what will strike some as an almost laughably uncynical account of the motives behind this project, but that makes the documentation of its ultimate failure all the more compelling. As they lay out, it proved to actually be the case that the only route to sustainable economic development anyone could find involved substantial state-directed export-orient

ed growth. This, in turn, required the United States to play the role of global importer of last resort. The up shot of this is that more and more America doesn’t have “the money” in the world system. And not only is the money in the hands of Asian exporters and oil producers, a very large portion of it is in the hands of sovereign wealth funds. In addition, the Panic of 2008 has left governments in the developed world with large ownership stakes in a variety of firms. As a result, we’re going to have to transition to a very different-looking world economic order--one in which self-conscious government planning is going to play a bigger role, one in which US living standards will decline relative to our major trading partners, and in which American cultural and ideological influence is likely to wane.

Laurence Prusak Approves of Our Book

He writes:

Brad DeLong writes and edits a wide ranging blog focussed on ,for lack of a better title, political economy and this short book is a fine, and very well written summation of many of the themes he has been discussing over the past few years. Written with a Berkeley colleague it is a well researched (though no notes are in the text, alas) book whose theme can be simply described by its title. However, unusually for economists, it goes far beyond the standard laments and cries over our waning economic power and delves deeply into global cultural and intellectual maters and their relation to the fiscal decline we are living through. In some ways this is even a more enduring and disturbing aspect of the mess we have mostly brought on ourselves. This may be one of the first in what could be long series of books on these subjects but I would bet it will remain one of the most succinct and influential of the future lot.

Andrew Clancy Really Likes Our Book!

He writes:

Soundview's Executive Book Alert: Debt Be Not Proud: A comedian once remarked that the invention of caller number identification, better known to everyone as "caller ID," did more to drive up debt in the United States than any other creation. It allowed thousands of American households the freedom to rack up credit card debt without ever having to answer the repeated calls from collection agencies. Over the course of the past three decades, "massive personal debt" has replaced baseball and apple pie as the most apt conclusion to the phrase "As American as ... ." In the ultimate case of stone-throwing by a glass mansion owner, the U.S. government has repeatedly cautioned its citizens about the dangers of accruing personal debts. According to authors Stephen S. Cohen and Brad DeLong, the U.S. Treasury would do well to invest in caller ID because the land of plenty is on the fast track to hearing from its creditors.

Cohen, a professor of regional planning, and DeLong, an economist, combined forces at the University of California, Berkeley to produce the upcoming release The End of Influence: What Happens When Other Countries Have the Money. In a compact, information-rich book, the pair outline America's staggering decline from a country that ended World War II with outrageous wealth and power to its current standing as a cash-poor nation whose global credit card is likely to meet with a giant pair of scissors. The story of how the nation reached this point is one that mirrors the path taken by so many of its citizens. Readers will likely get the impression that America never intended for its economic situation to get this far from its reach. However, life at the top affords certain luxuries and when, as various business authors have noted in books on leadership, a leader is surrounded by "yes" men, the leader gives less and less consideration to alternative points of view.

The End of Influence is not another in the recent chain of doomsday prophecies, envisioning an America that is suffocated by the squeeze of the Chinese Yuan to the west and the Euro to the east. Cohen and DeLong contend that America 's unique position as the world's lone superpower will vanish due to the country's irreversible debt. This does not mean the U.S. will descend the global ladder into the nether reaches of third-world status. It would be impossible for the third most populous nation on the planet to see its dominance in the realm of innovation disappear overnight. America is, after all, still the only nation to have put at least one of its citizens on the surface of a celestial body other than our own, even if that achievement occurred 40 years ago. Cohen and DeLong suggest that America 's debts will lead it to be "relegated" to status as a normal country, a position that, they assert, the U.S. has not held since the days of steamship travel.

The authors also provide key insight into a frequently discussed statistics. Executives are likely to have heard the chestnut that the Chinese government owns more American currency than the U.S. itself. The implications of this rumor have always stated that, if it desired, China could respond to American political posturing by flooding the market with dollars, thereby devaluing the greenback and shattering the American economy. This may lead readers to wonder why this has yet to occur. Cohen and DeLong answer the great China debate with another well known axiom that can be paraphrased in this way, "If you owe the bank $1 million, that's your problem. If you owe the bank $1 billion, that's the bank's problem." The End of Influence points out that the amount owed to China by the U.S. is roughly 50 percent of China 's Gross Domestic Product. The authors occasional humorous jab when revealing statistics such as this will help ease any reader tension at the state of America 's business affairs.

The End of Influence is a book that deserves a CEO's attention. Readers who tend to contain their reading of The Wall Street Journal to the domestic financial news may want to brush up on international markets and policymaking before opening Cohen and DeLong's book. As the reader progresses through the text, he or she will see that it's a title that is less about the financial impact of America 's debt and more about the way in which that debt will lead to the loss of a political foothold. To put it in slightly humorous terms, America can no longer arrive at the global restaurant sans reservation and expect the best seat in the house, but the nation isn't at the point yet where its table will be outside the kitchen door.

maureendowdsfriendwhoneverwantsanycredit@gmail.com reads the Foreign Policy Excerpt

maureendowdsfriendwhoneverwantsanycredit@gmail.com writes:

The FP piece was strong, but I felt it needed another few pages with more articulation about what this decline in influence really portends for the near-term middle distance, and a game plan to capitalize on the shifts in current. But, hell, that's what you'll tell us about on Terry Gross...

Fezzell: Affaires étrangères

He writes:

The End of Influence « Affaires étrangères: Another Zakaria-esque, post-America treatise, The End of Influence argues that American political, economic, and cultural influence is waning, though it remains–and will remain–the dominant force in international relations: “America is sure to remain a leader in cultural power, but there is a difference between being a cultural leader and an easy, almost un-self-conscious cultural dominance.”

Stan Collender: Brad DeLong's New Book Showed Up On My Kindle This Morning | Capital Gains and Games

Stan writes:

Brad DeLong's New Book Showed Up On My Kindle This Morning | Capital Gains and Games: On the one hand, forgetting that I ordered Brad's new book, The End Of Influence, a month or so ago and having it show up magically on my Kindle this morning is a little scary.

On the other hand, forgetting that I ordered Brad's new book, The End of Influence, a month or so ago and having it show up magically on my Kindle this morning is wonderful.

I almost want to say "Thank you, Thing," like they did in the Adams Family when Thing got the mail each day.

Geoff McDonald

Book Rapper: Hot Books For 2010.

RYviewpoint Doesn't Get the Irony of the Introduction, But Likes Us Even So...

RYviewpoint:

RYviewpoint: New Book by Cohen and DeLong: This quote from the introduction gets it right and holds some very bad news for Americans:

When you have the money -- and "you" are a big, economically and culturally vital nation -- 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 debt and pile interest payments on top). But you lose power, especially the power to ignore others, quite quickly -- 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.

These words are very true. Sadly almost no Americans yet recognize that the "light on a hill" that Reagan proclaimed has gone out and that the future for America will be increasingly grim. (Ironically it was Reagan's budget-breaking policies that helped bust the nation.) It is interesting to see DeLong and Cohen are willing to admit a truth of diminished American power which has not yet dawned on Americans.

These authors make the following point which will have very interesting implications in the coming years, implications which Americans are yet to recognize:

If you owe the bank $1 million, the bank has you; if you owe $1 billion, you have the bank. The implication is that China, the biggest and most important holder of U.S. debt, is trapped into a strange, unwanted, and uncomfortable embrace with the indebted United States. The Chinese government holds about $2.5 trillion in foreign reserves, probably 70 percent of that U.S. obligations. This comes to over $20,000 per U.S. household; there is no way the United States could readily pay it back. Because it also amounts to about half of China's GDP, China can't just write it off.

Thus, China and the United States are economically co-dependent, the producer and consumer, the creditor and the debtor. ... We're bound together, and we must manage this mutual dependence carefully and, over time, wind down those economic imbalances. Populist reactions in the United States and China must also begin to work more broadly as partners to stabilize a world in political, social, and economic disarray.

So perhaps it won't matter, at least not very much. We can hope. But one thing is sure: Absent an international economic catastrophe or a major war or another game-changing disaster, the money will not soon be coming back to America.

The world has changed. Americans need to wake up to their reduced role in the world. Unlike the Bush years, a fantasy period, in which America took a 'go it alone' stance, the reality is that the world is fragile and the US can't act alone any more. At least Obama is aware of this. I have yet to see any fundamental policy changes to reflect this reality. Changes can be peaceful and satisfactory, or fanatics (nationalists and other malcontents) can rise up and drive countries into bizarre behaviours. Fanatics get this power when citizens realize that they have been living a dream and need to face up to a new reality. Accepting a loss of dominance is hard, very hard. But Americans are going to have to face this. And hopefully the fanatics won't gain control during the period of adjustment. (I'm pessimistic given the fanaticism shown by one major party, the Republicans, who are largely guilty for getting the US into the mess. This party shows no willingness to face reality.)

This book by DeLong and Cohen looks like it will be a "must read".

Richard Pachter of McClatchy Rather Likes Us...

Pachter:

The End of Influence: What Happens When Other Countries Have the Money': The U.S. is losing influence, but don't be alarmed : I've long thought that the best advice one can give a youngster seeking success in the business world is to learn Chinese. Our pals in Beijing and Shanghai hold serious paper on us ("Us, U.S.," as Paul Harvey used to say) and they can wreak terminal havoc upon America, its institutions and infrastructure, if and when they chose. But it's not really in their best interests to ask us to ante up and watch us turn our pockets inside out, show our empty hands and shrug.

Why?

Cohen and DeLong invoke the quote, "If you owe the bank $1 million, the bank has you; if you owe $1 billion, you have the bank," then spend much of the rest of the book explaining why and how it's true. Along the way, they discuss the failure of neoliberalism, which sought to transfer portions of the control of the economy from the public to the private sector, skewer former Fed head Alan Greenspan, and describe with palpable awe the pandemic failure to oversee credit and banking in the United States and the major role it played - and continues to play - in our ongoing economic meltdown. The rampant corruption of the political system is also calmly recounted as a powerful catalyst for this dissolution and dispersal of American wealth.

Though both authors are academics, they're rather decent writers; DeLong is also a blogger who struggles online daily to make sense of various economic effluvia and ephemera with a combination of alacrity, disgust and amusement. But this book is far from a knee-slapper and unlikely to be chosen by Ms. Winfrey for her book club.

They cover a fair amount of ground here and their depiction of the loss of U.S. influence is tempered by their rational, non-alarmist manner. Though resistant to speculation on things that are obviously unknown and unknowable, the pair does spell out the fading power of government and private industry to collaborate on industrial and scientific innovation. The authors leave any horrific conclusions and sensational scenarios to others.

The absence of requisite funding will hit this area quite hard, they surmise. The natural constituency for this alarm might be found in either political party, though both are focused on other things. They may eventually wake up just in time to do nothing but howl and raise impotent ire, however.

Overall, the loss of U.S. dominance due to lack of governmental largess might promote more multilateralism, as we become just another country, rather than the planet's sole superpower. It may force some of our beneficiaries to stand on their own and opponents to focus inward. It may also further the domestic growth of China as their credit ceases to subsidize and support our consumption of their consumer goods. After all, it's a very big country and is already growing faster than any economy on the planet.

Cohen and DeLong's interesting look at the real New World Order is worthy of consideration as it describes a reality that's fast approaching.

Richard Pachter: rap@richardpachter.com.

Tyler Cowen Acknowledges Our Existence...

Cowen:

Marginal Revolution: The End of Influence: The subtitle is What Happens When Other Countries Have the Money and the authors are Stephen S. Cohen and Brad DeLong.  Here is an excerpt:

The Asian export-led growth model must -- over time -- transform itself to domestic consumption and prosperity models.  The American borrow-and-import model will also have to shift -- again, this takes considerable time -- to a model of consumption-at-the-level-you-produce.  And the need to keep the confidence of those who have the money that their money is well placed in the United States serves as a constraint on U.S.  policy in a way that it has never been before.

In the last three paragraphs of the book the authors describe the various stimulus attempts as something that will "buy time," but will not be sufficient to alter this basic trajectory.