American “Declinism”

American “declinism” is a favorite theme of pessimists, who see us riding for a fall. Paul Kennedy suggested that the US could not afford its “imperial overstretch” and would tumble from its superpower perch, in The Rise and Fall of the Great Powers—published in 1987. Four years later, the USSR’s collapse left the US more preeminent than ever. Today its military budget equals those of all other nations combined. Is this finally overstretch? In fact, it’s not even 5 percent of our GDP.
That gives an idea of how really big our GDP is. America is a very rich country—because it is an extremely productive country.
It’s true that some of our spending is financed by borrowing, both by government and by individuals. Personal debt is around a trillion dollars; our national debt approaches $10 trillion. And while most government debt in the past was held by Americans, so it was said “we owe it to ourselves,” today an increasing percentage is in foreign hands. Nevertheless, as long as we continue to be incredibly productive, creating a stream of goods and services that people will pay trillions of dollars for, we can afford the carrying costs on our borrowing while still living good lives too.
Of course there are limits. As our retiree population balloons, so will our pension, Social Security, and healthcare costs. It has been variously estimated that the present value of such future government obligations totals 50 or 75 or even 95 trillion dollars. In some eyes this already amounts to a state of bankruptcy.
Even in light of our annual GDP of around $14 trillion, 50 to 95 trillion dollars is a scary amount of money. This is a complicated issue, a cat’s cradle entwining rates of interest, taxes, inflation, and economic growth, trade effects, the value of the dollar, and so forth. But a few basic points should be kept in mind. First, we’re talking about liabilities out into the distant future. And the present value of future US GDP, estimated on the same basis, exceeds $1,000 trillion; future federal tax revenues would be around $200 trillion. So we’re hardly facing ruin.
Furthermore, it’s not as though one day we’ll get hit with a bill for $50 trillion, that must be paid all at once. The national debt, in fact, should not be seen as something we ever have to pay. It’s something we have to finance; to pay the interest on. Again, we are rich enough, and productive enough, that we can afford to pay quite a lot of interest. As long as that’s true, there’s nothing wrong about carrying a national debt forever (which we have done since 1776). That debt, in relation to GDP, is actually significantly lower today than it was after WWII. It doesn’t make us some kind of debauched nation. This is confirmed by the financial markets, and other countries, willingly loaning the US money by buying government bonds with extremely low interest rates. That means they foresee extremely low risk.
Admittedly, in coming decades, government entitlement programs look set to become huge budget busters that can’t be managed without crippling tax increases. Well, it’s been said that if something can’t continue, it won’t. “Entitlements” may prove to be less than ironclad. The fact is that the bulk of these government benefits go to people who can perfectly well afford to live without them.
So we’ll probably have to give up some of those seeming free lunches. Yes, the political smashup promises to be pretty ugly. But it won’t be the end of life as we know it. And someday, China may become more powerful than the US, and maybe even richer too; but that won’t be the end of the world either. To repeat: as long as the US still remains fantastically productive, with the energies and creativity of its people continuing to churn out a cornucopia of saleable things, and with technological advancement continuing to enhance our output even more, we will not starve. Not only will we go on enjoying a high standard of living, it will likely get even better.

3 Responses to “American “Declinism””

  1. Gregory Kipp Says:

    I like your even-handed approach to discussing problems such as the national debt. Most blogs I read tend to push a particular point of view and, as a result, are not very informative or persuasive. I can usually tell when someone is speaking to an issue in an objective manner. One good sign is when that person is arguing with themselves (i.e. is willing and able to identify and discuss aspects of the problem contrary to their main theme).

    Having said that, I am quite worried about the national debt. There seems to be very little control over federal spending. I get the distinct impression we are being led by something akin to college kids with their first credit card when it comes to spending money. If I’m not mistaken, the yearly interest on the national debt is roughly the same magnitude as our annual deficit spending (at least it was so before the huge expense of the Iraq war), meaning if we had no national debt, there would be little or no deficit. This appears similar to the situation faced by those home buyers who took out interest-only loans near the height of the housing bubble. Look what happen to them when the bubble burst.

    Paying interest on borrowed money is a waste unless the “projects” funded by that borrowing are returning dividends at least equal to the interest cost. I seriously doubt that’s the case. And consider how much richer we would all feel right now if we hand no national debt and all that money paid out in interest were available for public uses.

    The last time we had a balanced federal budget was with a so-called “tax-and-spend” democrat in the White House. Yet the republicans claim small government and responsible federal financial practices are among their guiding principles. There is definately something wrong with this picture. I’m not quite sure what that is, but I suspect both sides are going to need to get their act together to solve this problem.

    We do need to be optimists about the future, because it is only with a certain degree of optimism that we can take the actions necessary to assure our continue prosperity. But we need to be smart optimists. The federal government needs to improve the handling of its fiduciary responsibilities in all areas, including the economy, the environment, and as a member of the global community.

  2. B. Peterson Says:

    “The last time we had a balanced federal budget was with a so-called “tax-and-spend” democrat in the White House.”

    Not true.

    Some parts of the federal budget are not IN the published budget. Previous administrations moved items off-budget to achieve a better picture. Bubba did not have a balanced budget. It was smoke and mirrors.

    Every few years the GAO audits the federal miltary budget and FINDS that 20%+ of that budget is unaccounted for. This is the source of our federal spending problems.

    Are Obama and McCain going to deal with this issue? Not a fat chance in hell!!!

    So, it really doesn’t matter which one of them wins, because Americans will lose either way.

    Iraq is a political diversion. The high oil price is a political diversion. The incompetence of President Bush is a political diversion. Anything else that takes the focus off the military budget is a designed political diversion. Both parties are playing the same game because they both are in the pocket of the military. That’s where some of that unaccounted for 20% goes! McCain got his. Obama got his. Hillary got hers.

    When will I get mine?

  3. American “declinism” revisited « The Rational Optimist Says:

    […] American “declinism” revisited By rationaloptimist Back in June ’08 I wrote a post answering notions of American “declinism.” […]

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