BusinessWeek.com, July 29, 2004
Establishment types are trumpeting America's role as global police force. Too bad the U.S. just can't afford the job.
Since September 11, 2001, the phrases "American empire" and "America as an imperial power" are being heard a lot more. But in contrast to the 1960s and 1970s, when such terms were brandished by an angry domestic anti-war movement or by developing nations in U.N. debates, the concept they represent has now at least partially entered the mainstream. However much it has incurred hostility throughout most of the world, including European and other countries usually allied with the U.S., the "new imperialism" has gained ground among the Establishment here.
The post-9/11 rationale is that America has terrorist enemies and rogue states that will do it serious harm -- maybe even with weapons of mass destruction -- if it doesn't police the world to stop them. "Being an imperial power is more than being the most powerful nation," writes Michael Ingatieff at Harvard's Kennedy Center. "It means enforcing such order as there is in the world and doing so in the American interest."
But what most analysts have missed –- whether or not they support the idea of an American empire -- is that the U.S. simply can't afford the role of global cop.
THE REAL DEBT. First, the U.S. is entering this new age of empire with a gross federal debt that is the highest in more than 50 years as a percentage of gross domestic product. For fiscal 2005, which begins in October, the U.S. gross federal debt is projected to be $8.1 trillion, or 67.5% of GDP. By the time 100,000 U.S. troops were in Vietnam in 1965, it was 46.9% and falling.
One technical point that's vitally important here: It's the gross federal debt and deficits that matter, not the smaller "debt held by the public" and "unified budget deficit" that are generally cited in the press. For example, the most commonly reported estimate of the annual federal budget deficit is $478 billion for 2004. But this number is misleading, because it doesn't include borrowing from federal trust funds -- mostly Social Security and Medicare.
But the money the government is borrowing from Social Security and other trust funds will, with nearly 100% certainty, be paid back -- just like the money it borrows when it sells bonds to Bill Gates or the Chinese government. The annual federal budget deficit is, therefore, $639 billion, according to the numbers from the Congressional Budget Office. This is 5.6% of GDP, a near-record level for the post-World War II era.
BORROWING FROM ABROAD. America can –- just barely -- afford this deficit right now, but that's about to change. First, the interest burden on the debt is currently manageable because of extremely low interest rates. But the Fed is expected to raise short-term rates to 2% by yearend. More important, long-term rates will almost certainly rise even more because inflation has accelerated to 4.9% over the last six months -- a big jump from 2003's 1.9%.
If Kerry wins and takes back the tax cut for households earning more than $200,000 a year, as promised, that won't even reduce the deficit by 1% of GDP. And if he keeps his spending promises, then the monies realized by repealing the tax cut would be canceled out. The Bush budget, which the conservative CATO Institute's Chairman Bill Niskanen recently described as "a fraud" put together by "borrow and spend Republicans," would make the deficit and debt problem even worse.
Then there's the problem of the U.S. –- both the government and the private sector –- borrowing from foreign countries. Most government borrowing is now being financed from overseas -- especially the central banks of China, Japan, and other countries. These institutions are deliberately buying dollars in order to keep their currencies from rising against the greenback. But they won't keep doing this indefinitely. The U.S. is borrowing more than $600 billion a year from the rest of the world, and it can't go on much longer.
THE BIG BANG. Sometime within a decade, and most likely in the next couple of years, foreign investors will see that a steep decline of the dollar is unavoidable and will begin to unload them and U.S. Treasury securities. As with any bubble, it will be better if this one bursts sooner rather than later, when it would be even bigger. But adjustment and pain will still occur, including higher interest rates and consequently slower growth.
Slower growth will also mean larger federal budget deficits. And one event that will certainly slow growth and increase federal government borrowing well beyond current projections is the bursting of the housing bubble. Housing prices have seen an unprecedented run-up since 1995 of more than 35 percentage points above the rate of inflation. That has created more than $3 trillion in paper wealth that –- just like the illusory wealth of the stock-market bubble -- is programmed to disappear. This, too, is almost certain to happen in the next few years.
The economic impact will be at least equivalent to that of equities popping in 2000-02, which caused the last recession. Another slump is, therefore, likely in the near future, and with it a further ballooning of the federal budget deficit, as tax revenues fall and automatic countercyclical spending rises.
CHINA RISING. The combination of unsustainable public debt and foreign debt is a deadly and explosive mix by itself. Rising real interest rates and a looming housing bubble bursting make it all the more dangerous. Financial markets will exert the necessary discipline if politicians refuse to do so, but either way the U.S. can't afford even the $486 billion a year that it's currently spending annually on the military and homeland security.
And even these spending levels are a lot less than would be necessary to maintain America's power in the world. Over the next decade or so, the Chinese economy will actually surpass the U.S. in size. America has 100,000 troops in East Asia. If the U.S. were to try to maintain its current dominance of the region -- something that will probably prove impossible -- it would boost our military spending even further.
The bottom line is that the American empire just isn't affordable. Within a decade or so, the U.S. will be forced to be much less preemptive and outward-looking and to engage in scaled-back foreign policy -- even if the foreign-policy Establishment never changes its views or ambitions.
REALITY CHECK. In the meantime, the segment of American society that would like to see advances in health care, education, poverty alleviation, or any other positive economic or social goals will get bad news. The foreseeable future is a lot different from most of the post-World War II era, during which the U.S. added such programs as Medicare and Medicaid while spending literally trillions of dollars on cold and hot wars.
This time, little or no federal money will be available for any of these things until U.S. foreign policy changes. The most likely scenario is that most areas of nonmilitary discretionary spending will be squeezed relentlessly before anything gives in the realm of superpower ambitions.
The post-9/11 age of American empire will close not with a bang but a whimper, suffocated by the laws of arithmetic, the constraints of public financing, and the limits of foreign borrowing. What remains to be determined is how much the U.S. will pay -- in lost and ruined lives, as well as bills for future generations -- and how many enemies it will make throughout the world, before coming to grips with reality.