The Loss of U.S. Pre-eminence

Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

The United States became a superpower in the 1940s and, 70 years later, stands on the brink of losing that status. It rose to global pre-eminence at short notice, and its decline can occur just as abruptly. This week’s partial government shutdown both reminds us that the United States has reached such a precarious position and shows us exactly how things can now unravel as it approaches the really big confrontation over the debt ceiling.

Isolationism was a powerful idea in the 1930s and through Dec. 7, 1941. The United States felt burned by its involvement in World War I; the Senate had refused to ratify the Treaty of Versailles. By the end of 1945, the United States had created a vast military, won victories around the world and decisively tipped the balance in the largest global conflict to date. All of this was based on the political consensus that while the nation should be careful with government finances, it was acceptable to borrow heavily under extraordinary circumstances. Smart fiscal policy helped to underpin its emergent global ambition.

Now really stupid fiscal policy threatens to bring the United States down. The primary cause of any public finance crisis is not the ability of people to pay their taxes, it’s their willingness to pay their taxes — or, as in the current situation in the United States, the willingness of their elected representatives to finance the government. And this willingness is always tied closely to the legitimacy of the government. Does enough of the population think that the people with political power won it in a fair manner and, consequently, are they willing to accept policies with which they do not necessarily agree?

The United States faces a serious fiscal crisis not because of the continuing sequester or the partial government shutdown per se, but rather because of what those experiences indicate about what will be considered acceptable tactics in the imminent fiscal confrontation over raising the debt ceiling.

As some point in mid-October — on the 17th, according to the latest estimates — the Treasury will reach the legal limit on its ability to borrow. If Congress refuses to increase the legal limit on the amount of debt outstanding, the Treasury will be unable to pay its bills.

Precisely how this would play out is subject to some debate, but there is no question that it would involve a great deal of uncertainty, in the best case, or a catastrophic default that can safely be regarded as the worst case.

Today’s optimists are those who think the current partial government shutdown will allow the Republican Party to work out some internal issues — and actually make a showdown over the debt less likely. Perhaps the political base will be satisfied by a demonstration of dissatisfaction against carrying out the Affordable Care Act, or perhaps their elected representatives will heed what opinion polls show them.

Realists also like to point out that when the United States has big fiscal confrontations — for example, over the debt ceiling in the summer of 2011 — it tends to destabilize the rest of the world more than it hurts the United States. Interest rates on Treasury debt tend to go down in the face of potential fiscal mayhem. The United States is the only country in the history of the world for which that is true.

I’m more pessimistic. The United States won its global predominance in a short period, but based on a long haul of industrial development, productivity gain and fiscal prudence. Now the groundwork has been laid for its decline with political polarization, a longstanding tax revolt and a well-orchestrated campaign to undermine the legitimacy of the federal government.

The tax revolt has gone through many phases, including the rise and fall of Newt Gingrich — with his messages and tactics of the mid-1990s, including a partial government shutdown. And when the Republicans controlled the presidency, the Senate and the House in the 2000s, the United States ended up with a much bigger deficit and more debt — which, paradoxically, further fed the turn against the federal government from the right.

The silence of much of the business and financial elite on the debt ceiling — as well as on the sequester and the government shutdown — is somewhat shocking. This is a group that is usually quite vocal in promoting its self-interest. It benefited greatly from the expansion of the global economy after 1945, and that shifting perception of what business needs was part of the pressure that encouraged the Republican Party to become much more international in its orientation. The trajectory of current fiscal policy will hurt the pocketbooks of this elite.

The Constitution was designed with multiple safeguards to protect the voices of relatively small groups. This is entirely appropriate. But consequently, if a well-financed and highly motivated group of members of Congress decides that the United States should default on its debts, then the United States will default.

If the business elite cannot speak truth to the Republican Party — and persuade its leadership and enough members of Congress to return to a more moderate stand — there is not much hope for the United States in today’s global economy.