The End of Influence

Liaquat Ahamed, whose Lords of Finance you really should read, reviews The End of Influence by Cohen & DeLong, and since it's a favorable review, DeLong posts it. Short enough to read the whole thing, but too long to quote entire; here are some snippets:

* * * Berkeley professors Stephen S. Cohen and Brad DeLong argue in The End of Influence: What Happens When Other Countries Have the Money, that since the end of the Second World War, it has been the locomotive of the United States that has propelled the global economy and kept it on its tracks.

The basic pact was that America would act as the underwriter of world prosperity, allowing other countries to keep their currencies undervalued and thus promote economic development through export-led growth. Foreign countries were not only granted access to the enormous U.S. market, they were provided with liquid markets and a reasonably stable currency in which to invest their excess savings. The United States used its financial muscle to push free-market policies like open trade on the rest of the world. It was this economic Pax Americana that enabled Europe to rebuild after World War II, Japan and the countries of East Asia to industrialize, and China to take off.

In return, Americans got a lot of cheap goods from abroad and were collectively allowed to live beyond their means. For in order to provide a market for all these export-heavy countries, someone had to do the importing. The United States was thus constantly compelled to run current-account deficits, driving it further and further into debt. It was only a matter of time before this economic engine ran out of steam. * * *

At one point in their book, the authors draw a comparison between the position of Britain in the early twentieth century and the current position of the United States. I was surprised that they did not make more of the parallels. Through much of the nineteenth century Britain was the linchpin of the world financial system. It was the capital supplier of last resort during crises and acted countercyclically as the economic locomotive for the world. But, almost bankrupted by the First World War, it was no longer able to fulfill that function after 1919. The mantle of leadership should have passed to the United States. But American leaders were too parochial and insular to seize the opportunity. Thus, during the 1920s and 1930s, the United States was unwilling to lead and Britain unable.

American economic historian Charles Kindleberger used to argue that ultimately the Great Depression happened because of this failure of economic leadership on the world stage. He believed that a well-functioning global economy required one country to act as the leader, in effect to do more than its fair share of keeping the global economy moving, fully recognizing that smaller countries will freeload off of its efforts. If we are at a similar transition point in world leadership, if the United States has indeed been knocked off its pedestal in much the same way as was Britain in the early twentieth century, it does not bode well for the ability of the global economy to navigate its next storm.