choice against Iraq precipitated a widespread delegitimation of US foreign policy even among its friends. The financial crisis of 2008–2009 then shook global confidence in the United States’ capacity to sustain its economic leadership over the long haul while simultaneously posing basic questions about the social justice and business ethics of the American system.
Yet even the financial crisis and the accompanying recession of 2007–2009—accompanied by shocking revelations of recklessly greedy speculation by Wall Street incompatible with basic notions of a socially responsible and productive capitalism—could not erase entirely the deeply ingrained image abroad of America’s distinctive success in blending political idealism with economic materialism. It was striking how soon after that crisis the Chancellor of Germany, Angela Merkel, fervently proclaimed in a speech to the US Congress (November 3, 2009) her “passionate” commitment to “the American dream.” She defined it as “the opportunity for everyone to be successful, to make it in life through their own personal effort,” adding with great conviction that “there is still nothing that inspires me more, nothing that spurs me on more, nothing that fills me more with positive feelings than the power of freedom” inherent in the American system.
Merkel’s message, however, carried with it an implicit warning of what it might mean for the West if the special image of the American way were to fade. And it did begin to fade, even before the crisis of 2008. America’s image was most compelling at a time when it was viewed from a distance, as it was until the second half of the twentieth century, or when it was seen as the defender of the democratic West in two world wars, or as the necessary counterweight to Soviet totalitarianism, and especially so when it emerged as the clear victor of the Cold War.
But in the historically new setting of an America astride the world, America’s domestic shortcomings were no longer shielded from close and critical scrutiny. Broad idealization of America gave way to more searching assessments. Thus, the world became more aware that America—despite being the hope of many who have the personal drive and ambition to become part of the “American dream”—is beset by serious operational challenges: a massive and growing national debt, widening social inequality, a cornucopian culture that worships materialism, a financial system given to greedy speculation, and a polarized political system.
2: BEYOND SELF-DELUSION
Americans must understand that our strength abroad will depend increasingly on our ability to confront problems at home. Deliberate national decisions regarding necessary systemic improvements are now the essential precondition to any reasonable assessment of America’s global prospects. This calls for clear-headed awareness on the part of Americans regarding their country’s defining vulnerabilities as well as its residual global strengths. A coolheaded appraisal is the necessary point of departure for the reforms that are essential if America is to retain its position of global leadership while protecting the fundamental values of its domestic order.
Six critical dimensions stand out as America’s major, and increasingly threatening, liabilities:
First is America’s mounting and eventually unsustainable national debt. According to the Congressional Budget Office’s August 2010 “Budget and Economic Outlook,” American public debt as a percentage of GDP stood at around 60%—a troubling number, but not one that puts the United States in league with the worst global offenders (Japan’s national debt, for example, stands at around 115% of GDP according to OECD net debt figures, though most of it is owned by the Japanese themselves; Greece and Italy each are at about 100%). But structural budgetary deficits driven by the imminent retirement of the baby boomer generation portend a significant long-term challenge. According to an April 2010 Brookings Institution study projecting the US debt under varied assumptions, the Obama administration’s existing budget would have the US national debt surpass the post–World War II high of 108.6% of GDP by 2025. Given that paying for this spending trajectory would require a substantial tax increase for which as of now there is no national will, the inescapable reality is that growing national indebtedness will increase US vulnerability to the machinations of major creditor nations such as China, threaten the status of the US dollar as the world’s reserve currency, undermine America’s role as the world’s preeminent economic model and, in turn, its leadership in such organizations as the G-20, World Bank, and IMF, and limit its ability to improve itself domestically and, at some point even, to raise the capital required to fight necessary wars.
America’s grim prospects have recently been pithily summed up by two experienced public policy advocates, R. C. Altman and R. N. Haass, in their 2010
Second, America’s flawed financial system is a major liability. It presents twin vulnerabilities: First, it is a systemic time bomb that threatens not only the American but also the global economy because of its risky and self-aggrandizing behavior. And second, it has produced a moral hazard that causes outrage at home and undermines America’s appeal abroad by intensifying America’s social dilemmas. The excess, imbalance, and recklessness of America’s investment banks and trading houses—abetted by congressional irresponsibility regarding deregulation and the financing of home ownership, and driven by greedy Wall Street speculators—precipitated the financial crisis of 2008 and subsequent recession, inflicting economic hardship on millions. {2}
Making matters worse, financial speculators both in banks and in hedge funds, effectively immune to shareholder control, reaped enormous personal profits without the redeeming benefits of economic innovation or job creation. The 2008 crisis also revealed the striking disconnect already noted between the lives of those at the top of the financial system and the rest of the country, not to mention the developing world. In fact, according to a 2009 National Bureau of Economic Research working paper, the ratio of financial sector wages to those in the rest of the private economy exceeded 1.7 just prior to the 2008 financial crisis—levels not seen since before World War II. A reformation of the financial system through the implementation of simple but effective regulation, which increases transparency and accountability while promoting overall economic growth, is necessary to ensure that the United States remains economically competitive.
Third, widening income inequality coupled with stagnating social mobility is a long-term danger to social consensus and democratic stability, two conditions necessary for sustaining an effective US foreign policy. According to the US Census Bureau, since 1980 America has been experiencing a significant increase in income inequality: in 1980, the top 5% of households pocketed 16.5% of total national income, while the bottom 40% of households received 14.4%; by 2008, those disparities widened to 21.5% and 12%, respectively. The distribution not of annual income but of owned wealth by families was even more skewed: according to the Federal Reserve, in 2007 the richest 1% of US families possessed a staggering share of 33.8% of total net US national wealth, while the bottom 50% of American families accounted for only 2.5%.
This trend has launched the United States to the top of global indexes of both income and wealth inequality, making America the most unequal major developed country in the world (see Figures 2.1 and 2.2). Such income inequality might be more palatable if accompanied by social mobility, in keeping with notions of the American dream. But US social mobility has been essentially stagnant over the past few decades while at the same time income inequality has been rising. In fact, recent data for the Gini coefficient, a measure of income inequality cited in Figure 2.1, indicates that the United States ranks worst among the major economies, roughly on a par with China and Russia, with only Brazil among the major developing countries posting higher levels of inequality.
Moreover, recent studies comparing US intergenerational earnings mobility to those of various European countries show that overall economic mobility is actually lower in “the land of opportunity” than in the rest of the developed world. Worse still, America now lags behind some European countries in the rate of upward income mobility. One of the principal causes has been America’s deficient public education system. According to the OECD, America spends one of the highest amounts per pupil on its primary and secondary education, yet has some of the lowest test scores in the industrialized world. That condition saps America’s economic prospects by leaving swaths of human capital untapped while degrading the global appeal of the American system.
