Age of Empires (Part 2 of 2): Waning towards a fiscal straitjacket

The first part of this post centred on the notion of America as an empire, and how it differed from the prototypes of empires past. It concluded by mentioning briefly the role of financial statecraft -- the use of policies that influence financial flows to achieve both economic and traditional foreign policy goals. This should be expanded upon.

The United States has been home to the world's most influential and connected investment banks and financial institutions. To this day, these Wall St. firms are a magnet for talent and -- due to New York being the world's financial capital -- sources of access to capital, originators of financial engineering, and catalysts in the art of the deal; the moral hazard inherent in the US bail out of the financial system has done nothing to change this perception. However, these titans are not what they once were. The reality is that US banking will be burdened with toxic loans for years to come (despite the Fed's forthcoming QE2 measures where the central bank will presumably consume more of the wreckage of the sub prime mess) and a more stringent regulatory environment. Moreover, it is tarnished with the resentment from "Main St." as a bastion of fat cats bankers who undeservedly received bail out money in the aftermath of The Great Recession.

This belies the idea that a weakened American financial system is not only bad news for mainstream Americans, who will not have access to credit to spur economic growth via small businesses, but also for military power and the ability for America to exercise foreign policy. In realist theory it is generally accepted that military power is the key requirement; this power is supplemented with wealth from industry and commerce which act as the key pipelines to acquiring the necessary military power. Logically, a weakened commercial sector, and by extension an anemic economic growth environment (which citizens in Western countries should be braced for in the coming decade due to debt ridden personal and government balance sheets), should entail a smaller flow of funds towards military expenditures. A fiscal crunch will come -- it is a matter of when not if and has been postponed thanks to the US dollar status as the reserve currency -- and this must mean eventual American disengagement (at least partially) in terms of its military reach. And this is despite the so-called "war on terror" that is believed to be just in the eyes of the neoconservative establishment, its loyal followers, and a percentage of the US population who live in perpetual fear of the "other".

Having said this, one must neither underestimate nor bet against the neoconservatives getting their way when it comes to America exercising muscular foreign policy; it may happen again after November 2 if the Republicans take control of the House (a probability) and the Senate (a possibility).

Taking the words (from Foreign Affairs, Jul. - Aug. 1996) of the Neocon movement's scion, William Kristol, publisher of The Weekly Standard and the best know of the conservative elites, it is his contention that America's rightful international role is that of a "benevolent global hegemon":

"Having defeated the "evil empire," the United States enjoys strategic and ideological predominance. The first objective of U.S. foreign policy should be to preserve and enhance that predominance by strengthening America's security, supporting its friends, advancing its interests, and standing up for its principles around the world." [1]

He goes on to state that the question of a threat is misconceived:

In a world in which peace and American security depend on American power and the will to use it, the main threat the United States faces now and in the future is its own weakness. American hegemony is the only reliable defense against a breakdown of peace and international order. The appropriate goal of American foreign policy, therefore, is to preserve that hegemony as far into the future as possible. To achieve this goal, the United States needs a neo-Reaganite foreign policy of military supremacy and moral confidence. [2]

Mr. Kristol exercised his substantial powers of persuasion during the eight years of George W. Bush's administration where America exercised deficit spending in order to go on its military excursions into Iraq and Afghanistan and exacerbated the fiscal situation by implementing the panacea of tax cuts on a willing public that had been fed the supply-side pablum of the Laffer curve.

But where does that leave America's foreign policy ambitions in the slow growth world post Great Recession world where confidence is low, middle America resentful, and structural unemployment much higher than reported and job growth lower than expected? They must be curtailed.

No doubt, the United States will remain dominant but its power, due to the realities of fiscal austerity that is being undertaken globally -- in small steps by many nations, in a giant leap by a few -- will wane as all levels of government hurtle head long towards a fiscal strait jacket.

The level of political discourse during the current U.S. mid-term elections has ranged from vacuous to barbaric; the world's most powerful nation remains in denial of the tough decisions it faces from entitlements to taxation to defence spending to health care.

The populist infused, billionaire -- think of the Koch brothers -- funded rhetoric of the grass roots Tea Party movement has done nothing to frame the conversation on a rational plateau. Notwithstanding the Pollyanna notion of tax cuts helping to balance budgets, one must be recognize that military expenditures will be cut and America's military reach will be curtailed lest America become a totalitarian military dictatorship -- a highly unlikely scenario even amongst the greatest pessimists.

In the March/April 2008 issue of Foreign Policy, 3,400 active and retired officers at the highest levels of command were surveyed; when asked whether it was reasonable or unreasonable to expect the U.S. military to successfully wage another major war at this time, 80% of the officers said it was unreasonable. [3]

When asked about the U.S. military's preparation in terms of successfully fight a conflict in four hot spots (on a 1-10 scale with 1 being unprepared, 10 fully prepared), the results were: 4.9 for the Taiwan Strait; 4.7 for North Korea; 4.5 for Iran; and 5.1 for Syria. [4]

The Stockholm International Peace Research Institute (SIPRI), a global think tank, has done outstanding work on the military spending and armaments which has shown that America's expenditures in this regard have increased despite the economic downturn. [5]

Amid the deafening calls for fiscal austerity and the criticism of fiscal stimulus for an indebted nation, there must inevitably be a conversation about defence expenditure?

How long can this -- like America's addiction to foreign capital to fund its current accounts and budget deficits -- continue? Not indefinitely. While the sun did not set on the British Empire, Britain had to live within its means once its imperial ambitions outstripped its economic capacity.

It is vital to put a human cost to the neoconservative policies of benevolent hegemony. Consider the work of Linda J. Bilmes (who co-authored The Three Trillion Dollar War with Joseph Stiglitz) when she provided provided some preliminary figures in an essay that presaged her book:

Veterans who can no longer hold down a job, due to physical or mental injuries, are likely to qualify for Social Security disability compensation (adding another $22 billion to $38 billion to the bill). For others, the injuries they have suffered in Iraq and Afghanistan will eventually swell the rolls of Medicare, as the long-term effects of injuries and chronic illnesses appear.
Staggering though they are, these costs only represent the impact of the war on the U.S. federal budget. The many social and economic costs that the government does not pay, such as the loss to the economy of so many young, productive Americans and the costs paid by the state and local governments, communities, and private medical providers, could add another $415 billion to the total cost to the economy. Americans have so far focused only on the ballooning short-term price of the wars in Iraq and Afghanistan. but we have not yet counted the cost of caring for veterans, replenishing military equipment, and restoring the armed forces to their pre-war strength. This was will prove one of the costliest in U.S. history -- one whose bill we pass to the generations that follow. [6]

Notes:

[1] William Kristol and Robert Kagan, "Toward a Neo Reaganite Foreign Policy," Foreign Affairs, Vol. 75, No. 4 (Jul. - Aug., 1996), p. 20 of pp. 18-32. http://www.jstor.org/stable/20047656
[2] Ibid, p. 23
[3] The U.S. Military Index, Foreign Policy, Mar. - Apr., 2008, p. 73 of pp. 71-77
[4] Ibid
[5] http://www.sipri.org/
[6] Linda. J. Bilmes, "Iraq's 100-Year Mortgage," Foreign Policy, Mar. - Apr., 2008, p. 85 of pp. 84-85.

Age of Empires (Part 1 of 2): Can the US afford its imperial reach?

Most assume "no" to be the be the immediate answer but that would fail to explore the complexities of the American situation: in 'what' form is the empire, and 'why' exactly is it not sustainable? This post explores the former question; the next post the latter.

What type of empire?

The question of the United States as an empire is a fact of life to those on the left, contentious to many less interested in state actors, and an epithet to some sympathetic to the concept of benign hegemony. This post will attempt to steer clear of the pejorative; it is not concerned with whether America's reach is a positive force or exploitative --the literature on that is expansive-- but if it will lead to ask the question of whether the US can wield the same level of power in the future. First, let us consider some contrasting views of America as empire.

On the one hand, Joseph Nye --a former US Assistant Secretary of Defense and currently professor at Harvard's Kennedy School of Government-- who has travelled the lecture and book promotion circuit for the past decade promoting the the merits of "soft power" as a postscript to his noted scholarship on Power and Interdependence would forcefully disagree with the 'America as empire' notion.

On the other hand, Scottish historian and fellow Harvard professor, Niall Ferguson, has unabashedly described America's imperialistic credentials within the pages of Foreign Policy:

"During the course of the 2oth century, the United States occupied Panama for 74 years, the Philippines for 48, Palau for 47, Micronesia and the Marshall Islands for 39, Haiti for 19, and the Dominican Republic for 8. The formal postwar occupations of West Germany and Japan continued for, respectively, 10 and 7 years..."

While I neither dislike Nye's erudition nor lean politically as does Ferguson and do not subscribe to his penchant for historical revisionism --he is a member of Stanford's Hoover Institution, the well funded right wing think tank and advocates the contestable view of Britain's empire as the pioneer of free trade, free capital movements and free labour-- it is arguably Ferguson's articulation of America's reach as an empire which makes sense when framed against its military capability: a nation with more than 800 --by conservative estimates-- military bases globally, the American empire is not and has not been in the mould of traditional imperialism.

You have doubtless read of the the archetypes of empires past --be it the British, the Bolsheviks, the Romans, or the Romanovs; Anatol Lieven, an analyst at the New America Foundation think tank, has likened America to an indirect empire that resembles the Dutch in the East Indies during the 17th-18th centuries.

Since taking the reigns from a wounded Britain after The Great War and fully supplanting it by the time it entered World War 2 as the dominant economic and military force, America has unquestionably been an unprecedented global influence in a bipolar Cold War world and unipolar End of History morphing into Clash of Civilizations world.

The US penchant for self-interest has over-ridden any principled political doctrine at the foreign policy level from its executive branch: think of Woodrow Wilson's putative multi-lateralism that supposedly brought into the fold nation states of all stripes contrasted with his unabashed Dixiecrat racism; consider Henry Kissinger's amoral realism which favoured American support of despotic acolytes in favour of democratically elected regimes which did not fit with US interests--to this day polemicists like Christopher Hitchens characterize Kissinger as a war criminal; or remind yourself of Bill Clinton's naive idealism that bumbled along in permitting the Rwandan genocide (as described in Samantha "Hillary is a monster" Power's A Problem from Hell: America in the Age of Genocide). Every American originated doctrine, from Monrow to Truman to Bush evokes (in some form) Jesus of Nazareth's Sermon on the Mount in positing the idea of American exceptionalism.

Paul Wilkinson, Professor of International Relations at St. Andrews, in describing the US importantly references the United States economic (in addition to its combat) might:

"It also has the largest inventory of nuclear weapons and the most advanced high-tech weaponry in the world. America's superpower status depends on this vital continuation of huge economic strength and incredibly high levels of military expenditure, only made possible by America's unique wealth. [Moreover...] the US has a unique capability for the rapid deployment of its forces deploying both airlift and sea lift assets with remarkable speed."

However, it is through Martijn Koninjs's work on institutions that we can consider how the tentacles of US power are also rooted in the structure of global finance; in the wake of 2008's Financial Crisis, the adage of "Too Big to Fail" spawned books and become part of the vernacular in policy circles. Yet "Too Big to Fail" fails to reflect that it is the interconnectedness of financial institutions and the network effects of negative feedbacks that have resulted in credit, the grease of global commerce, drying up, and the financial system coming to a halt. It is the nature of capital to bypass obstacles and pursue the highest return; and this is done through the financial engineering of American financial institutions hence the proposition of "Too Connected to Fail" remains the greater danger.

Indeed, size is important but understand that while China's state owned banks are now the world's largest, a failure of a Chinese financial institution at this time will have comparatively less effect on most developed nations (save for Australia) than a failure of a significantly smaller American investment bank --such is the nature of America's empire--because when America sneezes, the rest of the world truly does catch a cold.

Notwithstanding the meaningless rhetoric of 'less government' during the current US mid-term elections, it is important to consider the role that the American state played in the expansion of international financial markets and the reliance of American intermediaries as the primary conduit of global capital. The American financial system, has been a key factor in perpetuating American empire: financial statecraft has become an essential pillar of strength. It is wounded, and the fiscal situation makes America more vulnerable: it is down on the matt but is it out for the count?

Commonwealth Games 2010: Choices after the circus is over

The road forward?

There is no easy path forward, no prescriptive panacea to rid the nation's of its deficiencies; uneven development is not simply the fault of the ruling class --undoubtedly, individual responsibility plays a role-- but they must be retrospective in what has worked and what has not in proposing a feasible future so that reality can match hyperbole in terms of the country's future.

Education

When Jawarharlal Nehru, India's first Prime Minister, evoked the nation's "tryst with destiny" he subsequently embarked on creating world class tertiary education at the expense of sound primary and secondary systems. The result was a never ending brain drain since 1947 and to date, 35% of the population remain illiterate while some 15% of Indian students reach high school, and 7% graduate.

There are those who criticize the great unwashed and complain of the indigence and indolence of India's teeming masses, but surely, this is short-sighted? Is it not the ignorance of the underclass who have received either poor or non-existent schooling in the vital formative years that is of greater concern? Ignorance begets ignorance for when a proper education is not received, it is not valued.

The collapsed pedestrian bridge provides the visual metaphor: it looked good when it was completed but it did not have the foundation to sustain the stream of people who would cross it --akin to the skilled citizenry required to move a post-industrial society forward?-- and, as such, it broke apart when under stress and must be re-built properly anew with the proper foundation and care.

Development

Using China's mercantilist template as a development model is not the answer for India. One cannot argue with the leaders in Beijing and their ability to manage top-down for their form of mercantilism works at the macro level: China's massive foreign exchange reserve growth is a reflection of an undervalued exchange rate, loan subsidies to its export champions and import restrictions to protect its nascent industries. But if it cannot continue without serious American political backlash in the aftermath of the Great Recession of 2008-09.

The liquidity resulting from China's reserves has been funneled into in a real assets-- we see this in the real estate bubble which will implode one day; unarguably, China is infrastructure ready and has built a world class project management culture --by evidence of the Beijing Olympics, the Shanghai skyline and the myriad "special economic zones" and open coastal cities-- but the continuing sterilization of its monetary reserves cannot go on without ensuing intervention from other countries. In a zero-sum framework of global economic growth, China is screwing its biggest customer by not permitting it to adjust to the disequilibrium in its economy.

In addition, the People's Party Manadarins will face the task of providing a safety net for the citizens. China's economic miracle has been made possible by the tireless toil and sacrifice of its migrant worker; these struggles have been skillfully shown in Fan Xiling's documentary Last Train Home. How long can they be expected to keep going, especially if the target markets fully de-leverage, consumption recedes and the production from the world's factory is no longer required?

Society

Whether one subscribes to the classical liberal view of Peter Bauer or is an adherent to the welfare analysis of Amartya Sen; whether one prefers Paul Collier's top down approach or William Easterly's bottom up focus to economic development, one would have to be in complete denial that economic liberalization has been beneficial to many, specifically the aforementioned middle class in urban centres.

However, most in the country remain desperately poor and are in a worse state of affairs despite liberalization; they have been left off the growth track and in the zeal to placate a corporatist model of development, there has been (in the words of David Harvey) an accumulation by dispossession template followed in rural India which has not benefited society's underclass. The Maoist rebellions in India will not magically go away. Current Indian Prime Minister, Manmohan Singh belatedly admitted:

"We cannot overlook the fact that many areas in which such extremism flourishesare under-developed and many of the people, mainly poor tribals, who live in theseareas have not shared equitably the fruits of development. It isincumbent upon us to ensure that no area of our country is denied the benefitsof our ambitious developmental programmes ."

This is a positive step yet the fear is that the focus will continue to be on the terrorist activities of the Maoist rebels rather than on the narrative, which Sudeep Chakravarti, author of Red Sun: Travels in Naxalite Country, argues should be focused on the failings of the nation, where the disconnect between urban and rural India on matters political, economic and social has given rise to the manifestation of extreme-Left wing movements amongst the rural poor.

The reaction from India's media has centered on shame and excuses but some good can come out of the Commonwealth Games fiasco: here are two thoughts that are worth noting from two different worlds: business and humanities.
The first, again from Harvard Business School’s Michael Porter, on the behaviour required of its political and business elites:

“India needs to learn to be more self-critical, more open, and much more honest about what needs to be done.”

The second from Quentin Skinner, Professor of the Humanities at Queen Mary, University of London, citing Cicero in describing the values that potential leaders require is aimed squarely at the country's political class:

“a willingness to subordinate our private interests to the public good; a desire to fight against corruption and tyranny; and an ambition to reach out for the noblest goals of all, those of honour and glory for our country as well as for ourselves”

Commonwealth Games 2010: India is not ready for prime time

Misquote of the week

“These rooms are clean to both you and us. However, it may not appear so to
some others. They want certain standards in hygiene and cleanliness which may
differ from our perception,”

Lalit Bhanot, Official spokesperson and Secretary General for Delhi 2010 Commonwealth Games.

A wake-up call

Before a bridge collapsed near the Delhi’s Commonwealth Games venue and the Commonwealth Games Federation (CGF) gave the Delhi 2010 organizers a day to clean the athlete’s village due to its accommodations being “absolutely filthy”, few outside India and even fewer outside of the Commonwealth –a last remaining shard of the shattered British Empire – had heard of Lalit Bhanot.

Hopefully, they will have to neither hear of nor hear from him again. But that misses the point, for Mr. Bhanot is an archetype all too familiar to those hailing from South Asia: the argumentative, cocksure, dismissive bureaucrat who is wholly incapable of instilling a modicum of confidence in his ability to keep his word and execute in an efficient, effective, transparent and incorruptible manner.

Moreover, the collapsed bridge and unsanitary conditions in the Athlete’s village juxtaposed against the outward veneer of exclusive residential real estate and gated communities – Emaar Properties has used the tag line “A historic address for those shaping India’s future” to sell these properties after the games– are metaphors for the two India’s.

India shining or slumming?

One comprises a 300 million strong middle class – ostensibly well educated, often with marketable technical skills – which grows affluent and fat (due to a stressful, sedentary lifestyle) in the urban core, the other comprises a rapidly growing underclass that is uneducated, illiterate and malnourished and in the extreme cases – when abetted by foreign agencies – taking up arms in a class struggle as Maoist (also referred to as Naxalite) insurgents in the rural peripheries.

Scratching beyond the surface:

Why should you care about Bhanot’s verbal incontinence?

You should care because his comments, as defensive and narrow minded as they were hide some tough truths of reality that bolster the argument that the 2010 Commonwealth Games made no sense for Delhi.

Public health: you should know that in addition to its teeming masses, India has an incomprehensible public sanitation problem – 700 million Indians have no toilets in their homes – which translates to breeding ground for illness during the monsoon season thanks to an absent civic infrastructure. Jason Gale reported on India's sanitation crisis in the March 2009 edition of Bloomberg Magazine.

Hype vs. reality: you should know that despite Nandan Nilekani and Thomas Friedman’s belletrist tomes, India is clearly not shining for those teeming masses. Perhaps if you have “Imagining India: Ideas for the New Century” and “The World is Flat: A brief History of the Twenty-First Century” in your library collection, you may want to replace them with Aravind Adiga’s “The White Tiger”, that offers and insightful glance into the world of the “Half-Baked Indian” who must claw and scratch, just like the chickens in wire coups waiting to be slaughtered in Old Delhi’s open air market, in order to navigate the dog eat dog world that is modern India.

India or China: you should know that despite (the 19 August 2010 edition of) The Economist newspaper’s provocative “Contest of the Century” profiling India and China, and their strained relationship, this is not a true contest; were it a race, China would have lapped India. Some say that India's leadership undertook the task of hosting the Commonwealth Games in order to show that the country 'had arrived' but given the country's populace cares more about cricket than the Commonwealth, and engineers get paid more for writing computer software code over pouring concrete in large infrastructure projects, it was not the right time for this undertaking.

Economic development: it must be evident to a policy maker that China is at least 20 years ahead in terms of economic development as the neoliberal ethos took hold in the corridors of power of the People’s Party despite the politburo’s putative commitment to communism. Under Deng Xiaoping’s economic reforms, China’s coastal regions became tomorrow’s global centers of industry and commerce that are ready to lead the world today while in India, according to Michael Porter, the strategist every MBA student knows, “Indian firms face a really compelling logistical disadvantage over companies in China in terms of getting goods and services to market.”

Political reality: you should finally understand the inherent frustration of the Indian populace when it comes to their performance of their leaders in the Indian political class; they don't trust them but in keeping with their identities, they vote in a block fashion come election time.

The Commonwealth Games has provided a mirror to the corruption endemic in the country and the incompetence in undertaking infrastructure projects when the right individuals are clearly not in place until crisis mode takes hold. Furthermore, it has shed light on the excrement (literally and figuratively) that people become desensitized to as they go about their daily lives looking out for themselves.

The nation's promise

Ironically, the bureaucratic elites in India are populated with talented individuals, skilled at the highest levels and the nation's most selective institutions produce polished professionals able to make meaningful contributions to all sectors of society. However, within the government machinery framework, it is the lack of governance that permits an unremarkable legion of middling and lower level bureaucrats who simply cannot deliver the goods; these Commonwealth games have shown that despite India’s incomparable promise --in terms of opportunities in all manner of infrastructure, education at the primary, secondary and tertiary levels, and a demographic dividend that is the envy of many nations facing increasing dependency ratios-- it is very clearly not ready for prime time and will not be until a cultural shift takes hold.

Protesting G20: An insider's view of Saturday's debacle

The following is a description of Saturday's G20 protests in Toronto, Ontario provided to me by a peaceful observer. All italics have been added by me.

The seemingly peaceful demonstration descended into a riot as protesters moved towards the fence, confronting riot police. Getting anywhere near the fence was virtually impossible. All roads leading up to it were blocked by thousands of very angry riot police eager to attack.

I tried to keep a distance from the chaos, but still saw a lot of the vandalism caused by the so-called Black Bloc, many who self identify themselves as anarchists. I witnessed much of the destruction up close, including the vandalism of shops and banks and the setting ablaze of police vehicles.

It is disappointing to see the message of about 10,000 protesters overshadowed by the actions of, what seemed to be, a group of about 100, maybe a few hundred at most.

Although there was a huge police presence around us, they seemed to just stand around observing intently, as the Black Bloc continued on its tirade of vandalism.

Why did the police look on, seemingly unconcerned? Not sure, but here are some of my speculations. Perhaps, it was too hard to get to the Black Bloc hooligans, since part of the group's strategy was to couch themselves amongst non-violent protesters. Or, maybe the police were more interested in guarding the fence, US consulate, and police station, than they were in protecting Toronto's businesses. In any case, (Canadian Prime Minister) Harper's gratuitous spending will seem justified now, even though the G20 should never have taken place in Toronto.

I was going check out a G20 street party with a lawyer friend of mine last night, but after witnessing the violence and seeing that police were agitated and far out-numbered the protesters, we decided it was too dangerous.

Good thing we didn't. Many people were arrested and beaten last night, including two National Post reporters. Many more were arrested just for being at the wrong place at the wrong time. Hanging out around Queen's Park and U of T, would have put any innocent bystander at risk for police suspicion.

I don't know what the anarchists will do today (referring to Sunday June 27). I've heard that most of them are from Quebec, which seems plausible since I heard a lot of the black-masked protesters speaking French to each other.

I suppose it's easier to vandalize Toronto when you're not from Toronto.


Concerned Observer
of 2010 G20 summit