The American century is not over

Talk of decline is overstated, as Obama's second term will show
November 14, 2012

Obama's second term could see "America's domestic difficulties become smaller and its economy stronger" (photo: Getty Images)

It took some chutzpah for Barack Obama to repeat in his victory speech one of Ronald Reagan’s favourite lines, that for America “the best is yet to come.” It took even more to reprise some of his own old lines about bipartisanship, about uniting rather than dividing, after such a bitter presidential election campaign in which he himself led the way in the use of negative, demonising tactics. Admittedly, he had beaten Mitt Romney more cleanly than most pundits expected, and his Republican foes had had a disappointing night in Senate races too, so a bit of over-optimism is understandable. Yet it is perfectly possible that he could be right.

It doesn’t look that way to the 23m Americans who are unemployed, nor to the hundreds of millions in the “squeezed middle” who have seen their incomes stagnate or decline in recent years while the rich—and especially the super-rich—have been accruing new private jets and luxury homes. Nor will it feel that way if, sometime during President Obama’s second term, China overtakes America as the world’s biggest economy, which it might well do on measures that adjust economic output according to domestic purchasing power.

That moment would be purely symbolic and of no underlying economic importance. But symbols do matter, both to international credibility and to domestic confidence. Slower Chinese growth, or faster American growth, might defer the day into the first term of the next president, but nonetheless it will most likely happen, quite soon, and when it does the moment will be pored over by journalists and analysts all around the world. For it fits a convenient and simple narrative: that America is in decline, accompanied by the rest of the west which it leads. The American century, proclaimed by the founder of Time magazine, Henry Luce, in 1941, is considered over, almost three decades early.

If you take Obama’s victory speech literally, he was promising to prove that narrative wrong, even if he didn’t quite follow Reagan by saying it was “morning in America.” There are as usual good grounds for cynicism. For a start, it is a mistake to take politicians’ speeches too literally. Moreover, an odd feature of a presidential system, especially in our personality-focused age, is that it ascribes vast power to a single man, egging him on to claim to be able to change the course of an entire nation, and yet simultaneously cripples that power through the checks and balances of the US constitution. However good election night was for his Democratic party compared with once-dire expectations, it still left Congress gridlocked, with the House of Representatives firmly in Republican hands and the Senate held by the Democrats.

Nevertheless, here’s a prediction: President Obama’s second term will be a period during which the narrative of inexorable American decline is at the very least called into serious question. At best, however, that narrative will be shown to have been a profound misunderstanding of the true state of the world. For the American century is not over.

If this prediction proves correct, it will not be because of one man, nor one political institution. That is impossible in the American political system, and is also not the way a decentralised, fairly free-market place like the United States works. Nor will it solely be because of actions by or in America. Even so, it will require some leadership from the White House.

Two numbers will now dominate American politics just as they have obsessed financial markets and corporate leaders for more than a year. The numbers are, first, the country’s $11.4 trillion public debt, which amounts to more than $36,000 per American citizen. Then second, the looming expiry in January of tax cuts and concessions originally set in place by President George W Bush and extended by President Obama. Combined with spending cuts that were agreed as part of last year’s deal between Congress and the White House to increase the borrowing limit, this threatens to cause a sudden downturn amounting to about 4 per cent of US GDP, plunging the country back into recession. America would go over what everyone is calling “a fiscal cliff.”

There isn’t much time to avoid that cliff. The deal to do so needs to be done not by the newly elected Congress but by the old one, in what Americans call a “lame-duck session.” Fears that the deal might not be done; that America has become paralysed through its polarisation, or that methods used to avoid this fiscal crisis could anyway be damaging to companies, appear to have caused a substantial pause in business investment while boards wait to see what happens.

The US economy has not been doing badly by European standards: its recent annualised growth rate of about 2 per cent would place it easily at the top of western European growth rankings. Its unemployment rate of 7.9 per cent of the workforce places it well below the eurozone’s 11.6 per cent and on level pegging with Britain. But it has been doing badly by its own historic standards: at this point during the recovery from a recession, it has previously grown at annual rates of 3-4 per cent.

A main reason is that this is not a “normal” recession or recovery, akin to those over the past 40 years with which it is often compared. It is a recovery following a huge financial crash, one which followed a bubble of private credit and debt. The private sector is only gradually adjusting to that crash. Households have been cutting back debt and rebuilding their savings, while companies have become newly aware of the dangers posed by excessive leverage. So neither household consumption nor business investment was ever likely to rebound enthusiastically from the post-Lehman shock recession.

That is true also of Britain and of parts of Europe. As on this side of the Atlantic the picture is made more complicated by the huge and worrying rise in public debts that was necessary to avert complete economic collapse when private demand slumped. Even so, in America’s usually flexible, dust-yourself-off-and-start-again form of capitalism, there seems to have been something more going on beyond simply a lengthy adjustment following the financial crisis. It is that political uncertainty about the election, and especially concerning the fiscal cliff, has been making corporate boards even more cautious, even more desirous of hoarding their cash, than would otherwise have been the case.

This is not just a matter of uncertainty caused by competing policy prescriptions by Democrats and Republicans. Businesses have been concluding that the range of economic outcomes they face is unusually wide and risky. While politicians and ideologues argue about the potentially inflationary consequences of the Federal Reserve Board’s “quantitative easing,” or printing money by buying Treasury bonds and other assets, corporate boards have been worrying more about the danger of a new slump and the deflation that could result from it. When prices are falling, you don’t want to be left holding debt, for its burden rises the more deflation takes hold. In such circumstances, cash is king.

The economic prize that could come from removing this fear would be substantial. A successful political deal in Congress that prevents a drastic fiscal contraction, and thus the new deflationary slump that businesses fear, promises to unleash a wave of new business investment. The deal wouldn’t eliminate fear altogether, of course: doubts about the eurozone’s survival would make sure of that. But it could have a big impact, nevertheless.

That bright opportunity needs to be added to two other significant trends in the American economy. One is the energy revolution that is well under way, as new techniques for both shale gas and oil extraction have produced tumbling domestic natural gas prices and a boom in US production of both oil and gas. This promises not just direct economic benefits from all the energy investment, but also indirect benefits from having some of the world’s lowest energy costs. The second is the continued flow of technological innovation occurring in Silicon Valley and across the nation, in fields from information technology to bio-engineering. Together, despite all the challenges of debt and financial adjustment, these mean that America’s economy has a better chance of surprising on the upside than the downside—which cannot be said of Europe, Japan or indeed China or India.

So will the fear-reducing deal be done? That is the question obsessing Washington. For the past two years, since the 2010 mid-term Congressional elections brought a Republican surge and control of the House of Representatives, America has looked ungovernable. Yet for it to continue to be so following Obama’s victory and the Republicans’ disappointing night requires a pretty extreme view of how politicians on both sides might react to the results. While you can never entirely rule out the possibility that politicians might miscalculate, stepping so close to the cliff edge that it crumbles and then America tumbles over, such suicidal tactics do not look likely. For it is going to be in no one’s political interest to play cliff-edge chicken.

Politics remains bitter and polarised. President Obama would be making a serious mistake if he were to think that armed with a new mandate and faced by depressed Republican opponents, life is suddenly going to be easy. His opponents still want to ruin his presidency, if they possibly can. But they are not going to want the blame for ruining America at the same time. And their electoral perspective will now be one that casts forward two years, to the mid-term congressional elections in 2014, not two months to the tax-cut expiry.

So some sort of deal is most likely to be done, a combination of renewed tax concessions and preserved spending programmes. No doubt it won’t be either pretty or inspiring, but it will be a deal. To save face and keep their options open for the real fight to come, Republicans in Congress will insist that no actual tax rates are raised by the deal, even if ways are found to raise tax revenues a little, and that small businesses are not hit hard by any Democrat insistence on shifting the burden of taxation away from the middle class and on to the rich. But the point is that both sides know that the real fight over those issues will be better held during the new session of Congress.

Next year will be what politicos in America call a “work year”, implying that election years like 2012 and 2014 are not times when things can be done. It is also Barack Obama’s only real chance during his second term of achieving a further legislative legacy. The chief potential components of that legacy are more long-term fiscal reform and immigration reform.

The real fight ahead is over that fiscal reform. The last time America achieved a major tax reform was in Ronald Reagan’s second term, in 1986, when he too had won re-election and yet faced a gridlocked Congress, with the House then in Democratic hands. Tax reforms are never easy. But 1986 shows how deals can be done when both sides feel they have something to gain. Having fumbled his chance during his first term, by sidestepping the conclusions reached by the bipartisan fiscal reform group he himself had set up, the Simpson-Bowles Commission, Obama will now have a second chance to make such a deal.

Immigration reform ought to be easier. It too is fundamental to the country’s long-term future. The overhang of debt and of future spending commitments casts a shadow over the government’s solvency. Deadlock and political panic over immigration, which has persisted for much of the time since the 9/11 attacks eleven years ago, casts a shadow over the country’s long-term vibrancy. Immigrants have always kept America younger and more entrepreneurial than other countries.

The deal to ease the problem of illegal immigrants and to smooth a process of legal immigration now disastrously strewn with barriers should be easier because of the demographic reality of the Republicans’ 2012 disappointment: they failed to win support of Hispanics, the biggest recent immigrant group and one often presumed to be of a naturally conservative disposition. Party strategists will immediately be trying to work out how to win more Latino votes in both 2014 and 2016, perhaps in the latter case even with a Hispanic presidential candidate, Marco Rubio, a son of Cuban immigrants who is now the junior senator for Florida.

An America that, even within just that “work year” of 2013, had achieved some sort of fiscal reform, however clunky, that had passed immigration reform, and that thanks to a revival in business investment was motoring along at annual GDP growth rates of around 3 per cent would start to turn heads and change minds, all over the world. Perceptions swing quickly in international politics, just as they do in financial markets.

Such a swing in perceptions would begin to cause a rethink of all the fashionable assumptions about American decline. This has happened plenty of times before. In the 1970s, when the defeat in Vietnam and urban riots led many to count America out, or in the 1980s, when despite Reagan’s sunny optimism books and treatises about American decline and what was then seen as inevitable Japanese supremacy continued until Japan’s financial bubble burst in 1990.

This is about to happen again. Yet at each point when the swing in perceptions has occurred, the world has by then become a more complicated place. Cold War simplicities and the sharp division between first world and third world are both long gone. What Fareed Zakaria, then Newsweek International editor, called “the rise of the rest” in his 2008 book The Post-American World has shifted the global balance of power. But that is thanks, essentially, to American ideas of market-based capitalism spreading economic development in Asia, Africa and Latin America. And now the Arab uprisings in Egypt, Tunisia, Libya, Syria and Bahrain are changing it once again.

There was never, of course, a golden age of American hegemony when leadership was simple and the US could easily get its way. And there certainly isn’t now. America may well be less ungovernable than it looks, but the world is arguably more ungovernable than any of us would like it to be.

In his first term, President Obama discovered quickly that lofty aspirations to achieve reconciliation with the Muslim world, to engage with Iran, to close Guantanamo Bay and to withdraw gracefully from Iraq and Afghanistan were made to look foolish by messy political realities. His biggest success was to rebuild America’s position in east and southeast Asia, convincing weary allies and even old foes like Vietnam that they needed an engaged United States in order to counter-balance an increasingly assertive China. Beyond that, he essentially continued the more multilateral, conciliatory approach used by George W Bush in his second term, but benefited from a friendlier and more trusting reception around the world.

The reception may remain friendly, but the world itself will not. Three places look likely to make life especially uncomfortable for President Obama, even if he does benefit from revived American credibility. The trickiest, as so often, is Iran, whose nuclear programme the Obama administration has so far principally—and quite successfully, in a limited sense—confronted with economic sanctions and diplomatic isolation. The limited sense is that the sanctions have weakened Iran’s economy and puts its regime under greater pressure. But it has not ended or even slowed down the nuclear programme. Which is why Israel’s prime minister, Binyamin Netanyahu, has sought pledges of military action. And why President Obama may soon be forced to choose between unfeasible military strikes and an unacceptable rift with Israel.

The most unpredictable and potentially most awkward is the trouble-strewn territory of the “war on terror” conducted by both presidents Bush and Obama. Post-withdrawal collapse in Afghanistan, increased levels of seriousness and capabilities among Al Qaeda-linked terror groups in Africa and Pakistan, and an increased international push-back against Obama’s prolific use of drone attacks could all put America back on the spot, with no good options available.

The most dangerous, though, is China, and especially its territorial confrontations with Japan in the East China sea, and with the Philippines, Vietnam and others in the South China sea, both of great strategic importance to the Chinese. It is most dangerous not because China really promises to seek a conflict with the United States, but because even the threat of one between what are now the world’s two superpowers could have dramatic economic consequences.

The hope must be that China’s new leadership, being finalised and announced only days after America’s presidential vote, will seek to defuse and defer these disputes. But the continued swirl of domestic controversy about corruption in the Communist party leadership and power struggles between factions means that the new Chinese leaders might be under more pressure, and be less confident of their positions, than previous generations. Sabre-rattling against the old enemy, Japan, might then look tempting. And that would put America in a mightily difficult position, given its obligations to Japan under the defence and security treaty between the two countries.

Second terms often favour foreign policy, for presidents are by then short on domestic political capital and long on desires to strut the world’s stage and establish a legacy as a statesman. For Barack Obama, whose 2008 election victory was followed hotly by the strange gift of a Nobel peace prize before he had done anything for peace, the prospects are different. His second term could see America’s domestic difficulties become smaller and its economy stronger, confirming his country’s status as still the world’s only leader. But actually exerting that leadership in a way that justifies his Nobel is going to be uncommonly difficult.