Since 1933 and the New Deal, the issue of corporate risk has been bound up with the issue of social stability. The structure of risk has been built around the social requirements. During the Roosevelt administration, the boundaries of state control expanded. Under Reagan, they contracted.
What the 2008 crisis did around the world was redefine the boundaries between corporations and the state, increasing state power and the power of politicians, reducing market autonomy and the power of the financial elite. This had minimal impact on China and Russia, where the system was already tilted toward the state. It had some effect on Europe, where state power has always been greater than in the United States. It had substantial effect on the United States, where the market and the financial elite had dominated since Reagan. It also kicked off a political brawl between left and right over whether this shift was justified. In the United States in particular, the boundaries are always shifting and the argument is always couched in moral terms. In spite of variations, the strengthening of the state will be one of the defining characteristics of the next decade globally.
Along with helping define the boundary between state and corporate control, presidents and other politicians manage the appearance of things, largely by manipulating fear and hope. What made Roosevelt and Reagan great was not only that they readjusted the boundary of state and market to suit the needs of their historic era, but that they created the atmosphere in which this appeared to be not just a technical operation but a moral necessity. Whether they believed this or not is less important than the fact that they caused others to believe, and through that belief enabled the technical realignment to take place.
The most significant effect of the crisis of 2008 on the next decade will be geopolitical and political, not economic. The financial crisis of 2008 drove home the importance of national sovereignty. A country that did not control its own financial system or currency was deeply vulnerable to the actions of other countries. This awareness made entities such as the European Union no longer seem as benign as they had been. In the next decade, the trend will turn away from limiting economic sovereignty and toward increasing economic nationalism.
A similar effect will take place on the political level. An enormous struggle that we can see in China, Russia, Europe, the United States, and elsewhere has broken out between economic and political elites. Because the failure of the market and the financial elite cost the latter credibility, the first round clearly went to the state and political elites. In some countries, this shift is going to last for a long while. In the United States, the truce that has existed since the Reagan years has broken down and the battle will continue to rage.
Oddly enough, it is on the economic level that the pain of 2008 will have the least enduring effects. It is absurd to compare this downturn to the Great Depression. The GDP fell by almost 50 percent during the Depression. Between 2007 and 2009, the GDP fell by only 4.1 percent. This is not even the worst recession since World War II. That honor goes to the recessions of the 1970s and early 1980s, when we saw the triple hit: unemployment and inflation over 10 percent and interest rates on mortgages over 20 percent.
While the current economic crisis is nothing like that, it is still painful, and Americans have a low tolerance for economic pain. There are even bigger issues on the horizon, beyond this decade, when demographics shift, labor becomes scarce, and the immigration issue will become the dominant matter facing the United States. But that is still a ways off, and it will not be affecting the coming decade. This decade will not be an exuberant one, and it will strain both individual lives and the political system. But it will not change the fundamental world order much, and the United States will remain the dominant power. Ironically, one measure of U.S. dominance is how much a miscalculation by the American financial elite can impact the world, and how much pain American mistakes can inflict on everyone else.
Chapter 4
FINDING THE BALANCE OF POWER
The attack by al Qaeda on September 11 forced the United States into a response that escalated into a two-theater war, lesser combat in a host of other countries, and the threat of war with Iran. It defined the past decade, and managing it will be the focus of at least the first part of the decade to come.
The United States obviously wants to destroy al Qaeda and other jihadist groups in order to protect the homeland from attack. At the same time, the other major American interest in this context is the protection of the Arabian Peninsula and its oil—oil that the United States does not want to see in the hands of a single regional power. For as long as the United States has had influence in the region, it has preferred to see Arabian oil in the hands of the Saudi royal family and other sheikhdoms that were relatively dependent on the United States. That will continue to be a strategic imperative.
The corollary that frames U.S. options is that only two countries in the region have been potentially large and powerful enough to dominate the Arabian Peninsula: Iran and Iraq. Rather than occupy Arabia to protect the flow of oil, the United States has followed the classic strategy of empire, encouraging the rivalry between Iran and Iraq, playing off one against the other to balance and thus effectively neutralize the power of each. This strategy preceded the fall of the shah of Iran in 1979, when the United States encouraged a conflict between Iran and Iraq, then negotiated a settlement between them that maintained the tension.
After the fall of the shah, the Iraqi government of Saddam Hussein, largely secular but ethnically Sunni, attacked the Islamist and largely Shiite nation of Iran. Throughout the 1980s, the United States shifted its weight between the sides, trying to prolong the war by making sure that neither side collapsed. About two years after the war, which Iraq won by a narrow margin, Saddam tried to claim the Arabian Peninsula, beginning with invading Kuwait. At this point the United States applied overwhelming force, but only long enough to evict, not invade, Iraq. The United States once again made certain that the regional balance of power maintained itself, thereby protecting the flow of oil from the Arabian Peninsula—America’s core interest—without the need for an American occupation.
This was the status quo when Osama bin Laden tried to redefine the geopolitical reality of the Middle East and South Asia on September 11, 2001. With the attacks on New York and Washington he inflicted pain and suffering, but the most profound effect of his action was to entice an American president to abandon America’s successful, long-standing strategy. In effect, Bin Laden succeeded in getting an American president to take the bait.
In the long term, Bin Laden’s goal was to re-create the caliphate, the centralized rule of Islam that had been instituted in the seventh century and that had dominated the Middle East until the fall of the Ottoman Empire. Bin Laden understood that even to begin to achieve this return to religious geopolitical unity, nation-states in the Islamic world would have to undergo revolutions to unseat their current governments, then replace them with Islamist regimes that shared his vision and beliefs. In 2001, the only nation-state that shared his vision fully was Afghanistan. Isolated and backward, it could serve as a base of operations, but only temporarily. It might be a springboard to more important nations like Pakistan, Saudi Arabia, and Egypt, but it was too isolated and primitive ever to be more than that.
Bin Laden’s analysis was that many in the Muslim world shared his beliefs in some sense, but that given the realities of power, their support would only be tepid and insufficient to his ends. To begin moving his project forward, he had to trigger an uprising in at least one and preferably several of the more important Islamic countries. Doing that was impossible as long as the Muslim masses viewed their governments as overwhelmingly powerful and immovable fixtures.
As Bin Laden saw it, this problem was primarily one of perception, because the governments in the region were in fact weaker than they appeared. The apparent military and economic power of Pakistan, Saudi Arabia, and Egypt derived from the relationship of these countries with the Christian world (as he thought of it), and particularly with the leading Christian power, the United States. But Bin Laden surmised that even with their borrowed power, these governments were still vulnerable. His task was to demonstrate this weakness to the Muslim masses, then set in motion a series of uprisings that would transform the politics of the Islamic world. He failed in this, but his followers have continued this strategy, and their attempts to reshape the politics of the Islamic world, which have been under way since the nineteenth century, will continue to be a significant geopolitical theme of the decade to
