Predictions of American decline are nearly as old as America. We bow ritually before such prophecies lest we be accused of hubris, but inwardly we firmly believe that all problems will ultimately be overcome by the unique American capacity for self-re-invention. Valuable micro-innovations emerge regularly in more than a dozen countries around the world, but macro-innovation is mostly an American monopoly.Today, however, even congenital optimists must recognize that declarations of America’s decline have attained a certain plausibility. To start with, the nation’s financial system has become fragile. Americans want to own their own homes—a commendable aim, but they have refused to save seriously for that or any other purpose, borrowing instead. That was easy so long as real estate values—propelled in part by that very borrowing—kept rising, but inevitably that spiral, too, reached its peak and the bubble finally burst. Because falling property values cannot reliably guarantee the colossal accumulation of mortgage debt, counted in the trillions, not billions of dollars, lenders have been de-stabilized. Most finance companies, investment houses and supposedly safer retail banks have been devalued by new equity issues or simply closed down in forced mergers, with their shares falling to zero overnight in some cases. Worse still, the credibility of the dollar itself is being further eroded by the unprecedented magnitude of the new obligations assumed by the U.S. Treasury—that, too, has a limit beyond which it will be credible to speak of the dollar as the world’s main reserve currency. To reassure the anxious, the Federal Reserve as well as the Treasury have been forced to experiment with methods of crisis management whose consequences must be unpredictable. Only fools could find that reassuring. There is immense wealth in the United States, what with 19,000 airports for private aircraft, a Mediterranean’s worth of private swimming pools, and a housing stock that provides even low-income families with better dwellings than middle-income families in Europe. But even beyond the foibles of Wall Street, all forms of American wealth, public and private, are now being eroded by the inability of U.S. public authorities to accept pragmatic remedies for a long list of national problems. It seems that the Executive Branch and Congress can only reach consensus on remedies that work poorly or not at all. That is certainly true of both illegal drugs and illegal immigration, each the province of bureaucracies that are content to remain ineffective, because the policies they are supposed to implement cannot possibly succeed in any case—except to inflict much harm. It is true of mass transport, of public infrastructures in general, and of energy initiatives that are not serious enough even to be considered ineffective. A case in point is the corn ethanol fraud whereby one gallon of fuel is used to make one gallon of fuel, while a small number of people collect costly subsidies and food prices are driven up for all. As for “Homeland Security”, the original idea of building resilience into the key nodes of our complex, cybernetic economy has been usurped by bureaucracies focused on hollow, formalistic procedures: Old ladies are forced to remove their shoes before they board commercial aircraft, and tiny penknives are solemnly confiscated in the age of steel-cutting ceramic blades. Our public officials are also unable to cope with the tidal wave of “Baby Boom” entitlements that has been perfectly predictable for two decades. They have been too busy arguing with each other over issues, notably abortion and homosexual marriage, over which no agreement can possibly be reached. Above all, there is the manifest failure to contend with health care, which now consumes 17 percent of the American national income—almost twice as much as in Israel, Italy or Japan, where people live longer despite smoking and drinking in greater numbers. This colossal spending derives from the convergence of the extreme activism customary in American medicine—in which overeager surgery and maximum procedures are the norm—with the profit motive mesmerizing nearly everyone who comes within reach of patients. The result is a system that cannot provide basic preventive care for millions of children, even as it subsidizes 95 percent of the cost of quadruple bypass operations for 95-year-old patients. The sirens of decline sound not only for America’s debilities but for the achievements of others. When the doyens of political journalism amplify in trade bestsellers what every halfway-serious observer already knows—when angst goes to market, in other words—we can be sure that declinism is rising. We all know, for example, that China’s economy has been growing fast for almost thirty years and will eclipse that of the United States in sheer size. India’s economy has also been growing rapidly in the past decade and may leave the United States in third place before not very long. The Arabs in the Gulf are enjoying a carnival of consumption, fueled, if one may pardon the expression, by our money as well. Every sheikhdom is acquiring its own vast international airport and major flag airline for a future of many empty seats. In Moscow, meanwhile, there is a lot of oil and gas money flowing around as political power again becomes concentrated in the Kremlin. The declinist conclusion is clear: The bear is back, and he is hungry, with the August war in Georgia as sufficient proof of the point. Meanwhile, America’s oldest and most natural allies in Western Europe are foundering. European economic growth is seriously impeded by so-called structural obstacles, which in reality are all too human: relentlessly self-protective trade unionists and privileged chartered professionals, such as Italy’s 8,000 notaries, each of whom is guaranteed a large income from obligatory fees for doing absolutely nothing of any real value. The European Union’s economic integration is still far from complete in the face of myriad antique anomalies, while its political integration is not even advancing at its previous glacial pace now that the Irish have voted against the Lisbon Treaty. And there seems to be almost nothing that most Europeans will not object to fighting for, so that the very small expeditionary forces that are generated at great expense (man for man, the U.S. Marines are a bargain) are scarcely employable anyway. The always-warlike British and Danes, and the newly bellicose Dutch (“no more Srebrenicas” is their slogan in Afghanistan), are the exceptions. The Germans are more typical: They are in Afghanistan but systematically avoid combat. The new declinists are not all of one mind, of course. Some think America is crashing in absolute, irretrievable decay. Others think that America is merely in relative decline, a natural evolution given its outsized wealth after World War II and its near monopoly of power after the Soviet collapse that ended the Cold War. Those attentive to the ironies of history will notice that it was American magnanimity in providing for the common international good that allowed this reduction in relative U.S. power and wealth. But either way—whether America’s decline is absolute or relative—the new declinists insist that American influence is waning, that American political institutions will no longer be unrivaled in reputation and appeal, and that the values of the American Enlightenment will yield to a new global ethos that is becoming predominantly non-Western in character. Other Bubbles
All this the policy paparazzi know already, but is what they know actually true? What we really need to know to determine the future standing of the United States, and of Europe also, is how they will compare with other major players. Thus we need to know whether our current problems are signs of structural limitations or goads to greater achievement, and whether the current good fortunes of others reflect new structural advantages or more evanescent, bubble-like factors.Will China’s Communist Party continue to rule, come what may—for richer or for poorer? After all, a big earthquake in Beijing might be enough to release the accumulated resentments of decades. Or will the Party reform itself democratically, losing elections so as to be able to win them truly, as Taiwan’s once-dictatorial Kuomintang has long since done? No one knows, including the Chinese elite. Many who know China in one way or another conclude that the prospect of the same unreformed Communist Party continuing to rule a country growing at around 10 percent per year, roiled by waves of creative destruction at every turn, is the least likely of all futures. But it is the present: Continued Communist rule continues the errors inherent to that specific kind of dictatorship, starting with its tendency to massively waste capital. Many visitors to the Olympics were greatly impressed by the new infrastructure they saw in China, starting with Beijing’s airport terminal, which makes New York’s La Guardia look like the Third World airport it truly is. But the visitors are not paying the bill. Olympic extravagances aside, in every Chinese province and in hundreds of counties there are smaller versions of the megalomaniacal projects of the central government: the Yangtze “Three Gorges” Dam, whose electricity will never repay the true cost, including the drowning of substantial towns; the 1,142 kilometer high-altitude railway to Lhasa that will never justify the investment; the Yellow River flood schemes that are actually increasing desertification; and the Beijing Olympics themselves that, to limit air pollution, forced the closure of thousands of small factories, many of which now lack the funds to re-open. Local follies start with lavish Party headquarters and extravagant leadership residences, often constructed with cement and steel bars subtracted from school-building projects, and where privileged families typically remain in occupation long after the leader dies. Waste is most obvious in the absurd monuments built by local potentates, but much more costly are the countless tracts of misdirected highway, bridges to nowhere and mostly dry dams. Given the lack of professionalism and market discipline alike, why would anyone expect competence in public works?
The public waste of capital combines with private over-investment and institutionalized corruption to reduce the overall return on capital to very little, eating into the real value of Chinese savings. That is one reason why a China under continuing Communist rule could not hope to reach South Korean levels of productivity, let alone compete with American innovation in the long run. China continues to depend on imported technology, designs and structural models. Even the major Olympic buildings were all designed by foreign architects. At present, China is still growing very fast as a low-cost producer, but only dunces and writers of instant bestsellers predict its continuing rapid growth in spite of ever-rising costs.Only if the Chinese Communist Party reforms itself along democratic lines, as no Communist Party anywhere has ever succeeded in doing, could China one day outmatch the United States. An innovative democratic country of more than one billion people would eventually accumulate enough material and human capital to overtake its smaller American equivalent in every form of human achievement—enriching the world in the process, including America. But the transformation of the Communist power clique into a democratic leadership does not seem very likely anytime soon. India does not suffer from a democratic deficit but from its opposite: an increasingly corrupt and fissiparous populism that already impedes its economic growth and threatens its political future. The two largest parties, Congress and the BJP, are still headed by mostly respectable politicians, but both have been losing ground to smaller parties—including four Communist parties—and it is the smaller parties that now make and unmake governing coalitions. Each tends to disregard wider concerns to promote the narrow interests of single castes, language-zones or extreme ideologies; their parliamentary deputies increasingly sell their votes for hard cash. Some can only vote because they obtain day releases from prisons where they are serving sentences for extortion, corruption, fraud or even murder. With honorable exceptions, political corruption is now widespread at the state level as well. Overall, the combined effect of what is happening at the national and state levels is to turn Indian politics into a day-to-day affair of sharing out resources, with little room for planning and very little money for public investments. While China is over-investing in infrastructure, India is grossly under-investing in roads, airports and electrical generation, while still resisting privatization. The small, elite, central civil service is struggling to preserve old British standards of honesty at the price of preserving everything, including outmoded procedures. But at the state level, bureaucratic incapacity and overt corruption are increasingly visible. The state of Tamil Nadu, with as many people as Germany, was once very well governed by Brahmins; since their expulsion on “affirmative action” grounds, it is not even misgoverned by the lower-caste officials in charge. It is simply ungoverned. The school system is quietly disintegrating, roads remain unbuilt, and state police can be seen drinking tea peacefully alongside principal highways blocked for hours by quarreling truck drivers. Perhaps economic growth will reverse these trends, by giving the upwardly mobile a real stake in effective government. But that has yet to happen and may never happen. After all, Naples has a lot of wealth amidst its chaos yet still remains mostly ungoverned. Bad government can certainly compromise India’s economic future—the fond American belief that democracy ultimately ensures good government everywhere has no empirical basis. In India, moreover, political democracy does not comport with economic freedom or social equality; instead, it mostly guarantees the rights of the well-positioned to remain well-positioned. As for Russia, with its falling population and an economy that critically depends on raw-material exports in Third World style, it is simply not a serious competitor for the United States or Europe. But it does levy costs on both by supporting whatever anti-Western forces are active, from Hugo Chávez in Venezuela to the ruinous dictatorship of Robert Mugabe in Zimbabwe. Once hopes for a true post-Communist democracy in Russia faded, it was reasonable to expect that Vladimir Putin would at least build a proper authoritarian regime, with all power in the Kremlin but a mostly free economy. Instead, Putin has created a unique system of centrally administered gangsterism, in which out-of-favor local capitalists and foreign investors can be expropriated overnight amid threats of criminal prosecution for imaginary offenses, while assassins are elevated to party leadership in the Duma, which of course obediently legislates just as the Kremlin commands. Such is the nullity of the Russian constitutional order that the President was the chief executive under Putin, while his prime ministers were lesser figures who came and went. Now that his ex-assistant Dmitry Anatolyevich Medvedev is the President after a sham election, it is Prime Minister Putin who commands in a government of men, not laws. In the meantime, there is lots of money for extravagant luxuries for the privileged few, but very little for investment in research, development, agriculture or industry. Therefore, when the present oil and gas boom ends, as all booms must end sooner or later, the entire Russian economy will deflate. When it does, the new bourgeoisie, mostly present in Moscow and St. Petersburg, will be impoverished anew, joining the vast majority of the population that never emerged from grim poverty in thousands of villages and towns spread across 11 time zones. The State of the State
Since the current successes of China, India and Russia seem more evanescent than structural, it is likely that the United States, along with Europe and Japan, will maintain their combined primacy for a long time to come, in spite of their very real problems. This implies that the real competition ahead could still be mostly between them, and that competition will be friendly and fair with some exceptions, such as in the airliner industry. America, Europe and Japan all have a fundamental advantage in governance, albeit for very different reasons. Japan’s advantage derives from its Samurai-like bureaucracy, which provides public services that may be inefficient economically but are also of a uniquely high standard, from the world’s best police to the world’s best schools. As for Europe and the United States, they have now come to share a form of government that was invented in the 18th century, but which happens to be splendidly well-suited for the 21st: It is called federalism.These days there is no end of references to the porosity, the hollowness, the obsolescence, the impotence and the irrelevance of the state in the face of proliferating sub- and trans-state actors. Most of those references encompass half-truths, and quite a few offer half-witted conclusions. The half-truth is that the efficacy of many states is being challenged by new sources of authority and power that cohere either below or above the national level—drug cartels and ethno-national convulsions on one side, salafi pan-Islamism and the irresponsible Republic of Transnational NGOs to the other. The half-witted conclusion is that in a globalizing world states are becoming less relevant, less important. On the contrary, they are becoming more important as populations seek protection from unfavorable aspects of globalization, while the complexity of their tasks keeps increasing, worsening the consequences of errors. For example, in recent years we have seen entire economies quite suddenly afflicted by intricately technical mistakes committed by their financial authorities. There are two fundamental reasons why states retain their centrality. First, as everyone knows, the political order precedes and structures the economic order, including markets of every kind. No economic system can exist outside a political system, except in the imaginings of lighter-than-air libertarian theorists who forget that property itself is a political construct—as political order declines, property loses its value in equal measure. The second reason is that it is only at the level of the national community that democratic accountability acquires a significant degree of practical meaning. So states remain very important, but to do the two things they must do in 21st-century conditions—structure economic activity and express national identities—they need to become more agile. They must keep re-allocating functions both upward to specialized superstate entities and downward to substate entities, while occasionally bringing functions back under state control. A federal system, itself based on the recognition that good government needs to be layered and interlaced to be both effective and accountable, is the perfect form for the flexible state that best suits a globalizing world. It is certain that Transatlantic relations will be much affected by the degree and nature of the European Union’s federal integration, on the one hand, and the extent to which the American federal system can be rebalanced, on the other. We would therefore be wise to study both their evolution and their interaction. As to Europe, notoriously, the executives, legislatures or popular majorities of member states increasingly resist the unification measures that the Brussels Eurocrats keep proposing—everything from the nomination of a European president to uniform standards for cheese. But now there is another path to integration, opened by what superficially seems to push the other way: the increasing de-centralization of European states into increasingly self-governing regions, provinces, major cities or even emerging quasi-states such as Catalonia, Scotland and Wallonia (Italy’s Padania could be next). The one and only thing such disparate entities have in common is their absolute need for a layer of government above them to deal with extra-regional economic and political matters according to their own wishes insofar as possible. That can only be provided by the European Union, not by the very states from which they seek emancipation. This indirect route to integration by way of de-centralization may be the best way, perhaps the only way, to legitimize a new European federal structure that can actually work. It certainly provides a much stronger impulse for a European federalism than Eurocrats in Brussels can possibly generate, and it stands the best chance of circumventing the widespread resistance of member-state elites to political integration. As for the United States, its federalism is anchored in the Constitution, but its practical expression has been no less fluid for that. In the single year 1913, the Union ratified both the income tax amendment and the amendment establishing the direct election of senators, while the Labor Department was added to the Executive Branch and the Federal Reserve was created as a unique body that belongs to no branch at all. The growth of the Federal government at the expense of the powers of states, counties and municipalities may have made sense at each remove, as it certainly did in 1913, but it is far from clear that American federalism is well balanced today as a protracted consequence. Indeed, the failure of all levels of government to generate pragmatic solutions to major problems indicates otherwise. It is possible that in the coming years the United States will confront its major national problems politically. Indeed, that is the explicit promise of both presidential candidates. In that case, some problems may be solved to at least in some degree, or, to the contrary, they may be aggravated—for example, by paying for 96 percent of the cost of quintuple-bypass surgery for 96-year-olds. But it is more likely that Americans will once again outgrow their national problems instead of solving them, because political inhibitions continue to block effective policies, from the decriminalization of drugs to the age-rationing of Medicare benefits, while by contrast new paths of innovative economic growth are now wide open. Indeed, there are many signs that one more transformational boom in the true American style has already started, this time in the energy sector with all its wide-ranging appendages. That is not so because of fears of global warming. Many Americans agree with Czech President Václav Klaus that coconut palms and papaya trees are very nice.11.
Václav Klaus, Blue Planet in Green Shackles (Competitive Enterprise Institute, 2008). But the winning virtue of fossil fuels was their cheapness, and they are simply not cheap any more. We already see an accelerating increase in the typical mixture that propels major innovation booms: real advances both technical and organizational, false remedies that could never work, real investments large and small, phony investment schemes, subsidy-seeking projects, and outright frauds. Alongside innovations entirely genuine and already with us, including the invisible advance of a myriad of lesser new energy-saving procedures in everything from airline operations to steel production and pig-breeding, there is also the disastrous maize-ethanol fraud that John McCain was brave enough to denounce in Iowa, the leading ethanol state. That my brother’s car in Denver now runs on used restaurant cooking oil is less significant than the fact that his mind, along with the minds of millions of other Americans, is now focused on energy conservation, unconventional energy production and energy substitution—all foolish priorities when oil was still very cheap, but not now. Personal solutions are becoming commercial ventures, and there is at least one new transportation scheme—the Agassi-Renault-Nissan-Israeli electric car—that has a truly revolutionary potential precisely because it entails no new technology at all: It can be implemented on any scale with simple vehicles any manufacturer could quickly start producing. Unlike nuclear reactors, which take many years to build, or the many research projects that masquerade as practical solutions, it is the here-and-now entrepreneurial innovations that are launching the new American energy boom.
The only thing required of the American political class is a benevolent conspiracy to keep fossil fuel prices high and petroleum fuels even higher, notably by increasing gasoline taxes as world oil prices fall, to keep up the pressure for conservation and substitution. And that is all that is needed from the politicians: high prices, not subsidized research, development or production schemes. For the creativity of the American people set loose in a market environment friendly to entrepreneurial exertions will certainly find better, cheaper and quicker ways to replace oil imports, not only in the United States but worldwide. That has become a national goal at long last, and that is the news that should frighten the oil exporters, not idle talk of new nuclear reactors or anything else that requires that very capacity for public action that is so notably weak in the United States. (The U.S. Congress has not even agreed to legislate a fast process for the authorization of new nuclear reactors, where even “fast” would still allow for years of litigation in the courts.)The future of both the United States and Europe will be shaped by their true strengths—private innovation on one side of the Atlantic, local and regional authenticity on the other—rather than the weaknesses of each that now generate fears of decline. The things that count in the race to the future are human capital, social trust and institutional coherence. The first requires not only excellence and innovation in education, but also openness in learning from others and in absorbing others into our own fold. The second requires balancing that openness with social stability and community integration. And the third requires a dynamic combination of resilient federalism and subsidiarity—the shock absorbers needed to navigate safely a fast-paced globalizing world. The United States and Europe are in a far better position in regard to all three assets than is any other society on the planet. Yes, it’s true: We face severe problems on both shores of the Atlantic world. As before, we will solve them, emerging stronger than ever.
Václav Klaus, Blue Planet in Green Shackles (Competitive Enterprise Institute, 2008).