Declining US Power: Standard and Poor Downgrades US Government Debt

After the American Century

The decision is a milestone on the road to decline. Standard and Poor has decided that US government debt is no longer worthy of the highest trust. It has only been downgraded slightly, but the meaning of this event is huge. The US dollar and more specjfically US government debt has been the definition of the safest place to put your money since c. 1941. No longer. A canny investor today would want to spread the risk a bit, and also would expect to be paid a bit higher interest for investing in US government securities. The AAA rating that the US has lost is retained by Germany, Norway, Denmark, Sweden, and the UK, so these currencies will be strengthened -- something that is good but not entirely a benefit, as it hurts their exports.

The American taxpayer suddenly has a much higher debt to pay back, as the interest rate will now rise accordingly. It will cost billions of dollars that might have been used to jump-start the economy or build green energy systems. The long free ride is over. The US taxpayer will have to learn, and then have to teach the Republican Party, that a nation must pay its debts. It has to look credit-worthy. It has to have a credible tax code that generates enough income to pay the bills.

Sadly, I predict that things will get worse before they get better. I fear that instead of raising enough revenue and/or cutting enough programs to be credible, the Democrats and Republicans will wrangle and point fingers and carry their discussions into the 2012 political campaign. If they do so, the credibility of US government securities will continue to decline.

Meanwhile, China has a huge surplus in trade and no such problems. The shift of global power is evident.

Summer Reading While Traveling: Henry James, Agatha Christie, and Thoreau

After the American Century

I did not plan it, but my short summer vacation was made even more pleasant by the reading I happened to do while on trains and planes and in idle moments when not walking around or eating in France. This was the first time I took along an entire library, via an Ipad and also a Kindle, so I did not have to doggedly plow through books that I had brought along, but rather could browse and select what suited my fancy. I ended up reading three quite different books, two of them about travel in the nineteenth century, and all set in places distant from both home and the part of France near Switzerland where we spent most of our time.

I had no intention of reading Agatha Christie, but one of her books was in the Ipad -- The Mysterious Affair at Styles -- and it turned out to be one of the early Poirot stories, quite enjoyable on two levels: as a puzzle (who did it and why?) and as a period piece whose language was redolent of another world of manners and conversation irretrievably lost. This was quite distinctly a journey in time as much as it was a whodunit, and I enjoyed it far more than I would have expected. 

Henry James wrote a short work in 1879, "A Bundle of Letters," which amused me in quite a different way. As the title indicates, it consists of a series of letters. Several different people, all of whom are staying at the same high-class boarding house in Paris, write home. Each has disparaging remarks to make about the others, but indicates preference for someone as well. There are two American young women, a young American man, an impecunious Frenchman, an Englishman and his sister, and a German who is surprised and disappointed, even irritated, that the French seem scarcely upset by the recent war in which Prussia soundly defeated the French armies and laid a successful siege to Paris. 

The two American young ladies do not get along, the English do not much like the Americans (whoseverely disapprove of inherited titles and the class system). The Frenchman gives language lessons to them all and preys upon the young ladies in his spare time, and so on. The American from Boston proves to be a ludicrous aesthete whose feet barely touch the ground. The German feels superior to all, certain his nation must triumph over such effete cultures as the others represent. Humorous stuff, but not fully worked up into a novel as it might have been. Instead, the potentially complex situation simply ends when the young American woman whose letter initiated the story decides to move on to another country. When a graduate student, I would have analyzed it as an early example Jamesian experimentation with point-of-view, and the abandonment of an omniscient narrator. But on this trip the fascination for me was how each person was defining themselves against other nationalities. Each thereby became both a voice and the "other" for several other people. To read the story with any thought forces a reader to ponder not so much national differences (as the characters do) but the process of self-definition through opposition.

Finally, I read a good bit of Henry David Thoreau's The Maine Woods, which I did read once before, but long ago. Thoreau studied the landscape from a birch-bark canoe and botanized as he went. He was also fascinated by the Native American guide, reporting carefully his dress, opinions, behavior, and admirable knowledge of the region they were passing through. My trip was not long enough to complete his journey, too, so I left Thoreau slapping at mosquitoes in a bog. He seemed happy there. Some day I may get back and get him out of woods into civilization, but then again I may just leave him there. It was 160 years ago and by now he is used to it.

This reading was not only enjoyable, but it helped me forget the tiresome administrative work I did for the last year, the book that I must rewrite by January, and much else I have now managed to repress, at least temporarily. These readings, each in a different way, offered a displacement. The first and most potent escape, or displacement, was that of going where I had not been before. But in moments of idleness, how useful and pleasant to keep the work world at bay by the simple device of reading about distant places and times. It was not a plan, but it surely worked better than the reading I did in guidebooks and histories of the places I was passing through. Such things tend not to be well written, and they usually repeat one another. As James once complained, tourist information assimilated before arrival will "annihilate surprise." Read the guide afterword, to see if you agree, not beforehand. Killing the immediate future by reading guide books is likely to push one back into the very past that one is trying to take a break from. Better to have both the surprise of novels and travel narratives, as well as the surprise of new places, freshly seen.

Moon Landing Anniversary and the Decline of Wonder

After the American Century

I vividly recall where I was and who I was with on this day, July 20, in 1969 when Niel Armstrong became the first man to walk on the moon. Like many Americans, I had mixed feelings: immense curiosity about what the astronauts might find balanced against the sense that the billions of dollars might better be spent on social programs. It was the heyday of the Counterculture, and like many other students I was not a fan of military spending or government science programs. The astronauts were like big boy scouts, with their crew cut hair, bland speech patterns, and conservative clothing. Richard Nixon loved them, and missed no opportunity to be photographed with them. Even so, for those who disliked Nixon it was impossible to remain unmoved by the moon landing. For the first time, human beings would walk in a place outside the earth. What might they find? Would they survive? Would there be any trace of life, perhaps a fossil?

Each subsequent visit to the moon drew less public attention. Everyone remembers Neil Armstrong, but who can name the fourth or fifth man to walk on the moon? Forty-two years later, the space program is a mere shadow of its former self, and no one has been to the moon for a long time. The space shuttle program is ending even as I write these lines. It was plagued by delays and several fatal disintegrations. It failed to become a reliable and inexpensive shuttle bus to the stars, and there is nothing to take its place.

In retrospect, the space program was driven by the Cold War. When the Soviet Union fell apart, the "space race" was over, and Congress reduced funding for high profile missions. Now the US and Russia cooperate in running and manning the space station, and the only way to get there is via a Soviet-era Soyuz rocket launched in Central Asia. Millions of Americans used to attend Apollo rocket launches in Florida and space shuttle landings in the arid west. Clearly that patriotic tradition cannot easily be transplanted to Kazakhstan.

For much of US history, Americans found various large technological projects inspiring. In the early decades of the nineteenth century canals were the rage, followed by railroads from c. 1830 to 1870. Later they embraced great bridges, then skyscrapers, then the automobile and so on down to the space program. However, as I discussed at length in American Technological Sublime, this tradition has attenuated in the last decades of the twentieth century. The ambivalent feelings I had about the space program in 1969 were part of a national trend. People no longer found big technology a compelling rallying point for the nation.

Today the technologies that excite the public are miniaturized not monumental, and they are not national but personal possessions – ipads, cell phones, portable computers, and the like. A consumer's sublime has triumphed.

As in 1969, I still would like to see more spending on social programs, including medical care, education, and the like. But I can now see that this was not to be the historical alternative to spending money on NASA. Rather, Americans deplore almost all forms of government spending and resist taxation. The money not spent on space exploration is hardly going to welfare programs.

The moon landing, that can now be viewed on YouTube, briefly united Americans in a shared wonder, but the space program no longer serves that purpose. Nor, it seems, does anything else.

The insecurity of computer systems

After the American Century

The insecurity of computer systems, discussed previously in this space, is once again in the news. The American Pentagon has admitted that back in March 24,000 files were stolen from its supposedly secure systems. The perpetrator was presumably a foreign coountry or a very large player in the defense industry, but then again it might have been another hacker incident. There have been several examples of hackers getting into the Pentagon in the past, hardly a reassuring pattern.

Why admit this now,  more than three months afterwards? The simplest explanation is that the security breach has to be acknowledged eventually. But in the world of espionage, disinformation is also a possibility, and several scenarios come to mind.

Perhaps the 24,000 files are bogus, and they were put there in a relatively insecure place, like bait in a trap.  Or perhaps there was no security breach at all, but the Pentagon wants to create the impression that there was one, as part of some larger scheme, like selling disinformation to the Chinese. If you begin to think about such matters, there is no reason to take anything at face value.

Meanwhile, Wikileaks has distributed worldwide thousands of US military files, and at least once a week there is a news story about stolen identities, security breaches, and the market in stolen credit card numbers.

Do we need a neo-Luddite movement? It might be nice to have no money or personal records out there in cyberspace. It might even be an idea for the military to take its most important secrets off-line. But how many would be willing to give up Facebook, email, and all the rest of it? From what I can see, no one under 30, and few under 65. It seems we will have to live with this new and pervasive form of insecurity.

Wake Up Republicans: Government is not a Business

After the American Century

The idea that the US government could choose to default is a fundamental misconception. Government is not a business that can decide to fail. Default is not a valid government strategy. Government is the foundation of society. It is a contract between the citizens that cannot be broken, not a corporation that can be allowed to go broke because people do not want to pay taxes. Talk of letting government fail financially cannot be separated from a more general failure of trust between the citizens. Government is about mutual obligation. It is not an investment that one pulls out of. Government is a contract between the generations, ensuring that pensions are paid, that opportunities such as education remain available, that the infrastructure is maintained, that services such as hospitals and fire departments do not deteriorate. Republicans really do not seem to understand this. They have long argued that government is an evil that should be pared down to a minimum. But the idea that elected legislators are willing intentionally to let the government default goes far beyond that doctrine. Dangerously far.

Americans have lived with a stable system so long that they have no historical experience of the disasters that come with fiscal irresponsibility. Undermine the state government, and you undermine the dollar itself. I am not talking about the dollar losing a few percentage points against the Euro. I am talking about the Japanese and the Chinese deciding not to buy dollar debt anymore, because it is too risky. I am talking about interest rates above 10% that cripple the US economy. For a small inkling, a mere taste of what that might mean, look at Greece right now, with the difference that the EU can bail out Greece. But no economy is big enough to bail out the United States.The US taxpayers have to honor their own obligations.

The dollar has been the world currency for so long that Americans take it for granted. But its hegemony is hardly assured. Other economies look stronger right now. Even to flirt with default will scare away future investments. Should the Republicans get back into power. international investors may head for the exits. Even now, China and Japan will almost certainly plan to dis-invest in US government bonds in order to spread their risk.

The Republican Party once again is showing that it is not fit to rule. It is a reckless party with no fiscal policy, a deluded party that does not understand the dangers of this historical moment when US economic and political power are challenged. The Republicans are a dangerous party that threatens to do lasting damage to US financial security and its standing in the world.

On the Line: Reading Harvey Swados

After the American Century

As part of my research on the history of the assembly line in the United States, I have been reading Harvey Swados for the first time. The name I knew, but not the work, which remains interesting after half a century. His short story cycle, On the Line, describes the lives and aspirations of eight men who work together in a new automobile factory in New Jersey, c. 1956, the year when Swados himself was on the assembly line in such a plant.

On the Line first presents LeRoy, an African American who aspires to be an opera singer, but needs money for more voice lessons, and so goes on the assembly line. An injury cuts off his chance for a musical career, and he remains mired in the job. His partner in the factory is a young Irish immigrant, Kevin, who is at first stunned by the size, the noise, and the bustle of the factory, and saves money to buy himself a car. But then having tasted the material dream and its price, he goes back to Ireland. 

The other characters are a reformed alcoholic, a aging widower, a failed businessman in his 50s who needs the money, a high-school graduate who saves his paycheck for college, a foreman who has worked his way up from the shop floor, and finally Joe, the closest thing to a stand-in for the author - an older man who seems well read. He refuses to get psychologically trapped by any job and drifts from one factory to another. 

Swados is effective precisely because the characters are each revealed in their private as well as their work lives.  We learn of their marriages, children, homes, and problems, as well as see them at work. His goal was to get away from any romantic notion of a unified, rather homogeneous working class. At the same time, however, Swados was writing against the Cold War-inspired notion that the US was fast becoming a society with minimal class differences. This was the sociological orthodoxy for a brief time, but no one reading this book could come away believing it was true then, any more than one could believe it now.

These are excellent stories that can be read separately but gain in power when taken as a whole.
 I found Swados insightful and useful in researching America's Assembly Line (MIT Press, 2013).

Different Default Situations: US vs. EU

After the American Century

Both the EU and the US are struggling with massive public indebtedness, and in each case the problems emerge from bad decisions made during the last decade. The problems are quite different, however.

First, consider The United States. It seems hard to believe now but the US had balanced its budget and was rapidly paying off its national debt in 2000. The current fiscal woes are due to an excessive tax cut that overstimulated the economy, combined with massive military expenditures and a failure to regulate the banks. These problems all came from the White House, which dismally failed to protect the strong economy created in the 1990s. Bush overspent, undertaxed, and virtually abandoned regulation. The country needs years to get out of the mess he created, during which it needs to raise taxes back to where they were in 2000, particularly on wealthy people. But the Republicans, once a party of fiscal rsponsibility, have no intelligible economic program and they seem willing to let the nation go into default rather than compromise with the White House. In short, the American problem is firmly lodged in Washington, rooted in the failures of the Bush years. The problem is not impossible to solve from an economic point of view, but it is hard to resolve politically. The stupidity is, if you will, ideological.

Second, consider Europe. Here the problem is much different. The problem has emerged at the regional level - Greece, Italy, Spain, Portugal, and Ireland, all have weak economies and huge deficits. In contrast, some other members of the EU, notably Germany and Sweden, have strongly rebounding economies and do not have unbalanced national budgets. The problem here is that no single banking policy is appropriate for both the strong nations and those tottering on the brink of default. The stupidity in the EU is, if you will, a regional matter.

The US has a problem that could be easily solved by reverting to the tax code of the Clinton years. Possibly, something approaching this will occur, probably at the last minute. As Winston Churchill once said, the Americans always do the right thing in the end, but not before they exhaust all the other possibilities.

In contrast, it is much harder to see what the EU can do to solve its fiscal problems. The failure of Greece to pay its debts could set off a financial tsunami. Even the controlled default now being contemplated (or rather orchestrated in Brussels)  could have dire effects. The unity of the EU will be sorely tested if the fiscally responsible economies have to bail out those, like Italy, that are rife with tax cheating and black market labor. Why should Germans or French tax payers have to endure higher taxes when many wealthy in Greece continue to lie about their assets and pay less than they should?

History is not logical, of course, and it might be that the US will stumble into a completely unnecessary default, while the Europeans stumble through to a somewhat undeserved equilibrium. But the fascinating thing is to see how these wealthy countries have made such a mess of fiscal policy.  In a worse case scenario, default on either side of the Atlantic could trigger a larger world crisis, from which Asia would almost certainly emerge the stronger.

We are in for a perilous three months.