Is America's Decline A Myth?

Until recently I had been of the view that the narrative of American decline was more myth than reality. After all, in terms of hard power, the United States can deploy overwhelming military force anywhere in the world. In terms of economic power, the US is still the largest economy in the world and the threat of being excluded from American capital markets remains quite a powerful threat. Equally, American soft power - the cultural power to make others think your way of thinking - is still a leading source of advantage in the world. From a near term perspective - say, the next 10 years or so - American decline is unlikely to manifest itself.

From a longer term perspective - say, from the middle of the century and beyond - I am starting to have my doubts. My pause for thought has been caused after reading two books by Edward Luce - 'Time To Start Thinking: America And The Spectre Of Decline' and 'The Retreat Of Western Liberalism'. The first book makes a fairly good case for American decline, even if it is a bit off in terms of timescales.

'Time To Start Thinking: America And The Spectre Of Decline' outlines a model of American decline. It starts with the relative impoverishment of the American middle class. In addition to the question of growing inequality and social ossification, it makes the fairly innocuous point that the middle class is also the consuming class, and that falling middle class incomes imply falling rates of middle class consumption. We now know that since the dot com crash in 2001, US levels of consumption had been maintained by growing levels of debt. The liquidity crisis of 2007 exposed just how vulnerable American consumers had been. To stylise Warren Buffet, the tide went out and an awful lot of them were swimming naked.

In itself, this might not be a cause for concern. However, it does have a consequence that could have been reasonably foreseen. Growing inequality, the loss of manufacturing jobs overseas, and slow economic growth have all contributed to a squeeze on the American tax base, which has served to squeeze the American education system. This education squeeze has caused the stagnation of productivity growth in the US. Improving productivity is the key to improving salaries, and is underpinned by improving educational standards. In fact, the reverse has happened. Falling educational standards (at an international level) have led to falling productivity, which has brought about the sluggish growth that has restrained wage rises.

The consequence of this vicious circle is that innovation rates in the US have fallen as well. In this sense, America has started to lag behind more dynamic economies, especially those of East Asia. Reduced innovation rates have been compounded by the development of a governmental bureaucracy that the author claims is stifling American competitiveness. The Asian economies are outcompeting the US, which is why American companies have shifted their production to Asia.

Within American society, the winners are looking to cement their gains - with the result of tax cuts further eroding the tax base upon which the American educational system rests - whilst the losers (the people left behind) becoming far more angry. This is polarising American society and is making America more ungovernable, particularly through the rise of the Tea Party in Congress. Mr Luce finally caps his model by drawing attention to the sheer corruption of Washington, at all levels, which ensures that nothing significant will change. The model is now set in concrete.

'The Retreat Of Western Liberalism' continues the theme outlined in 'Time To Start Thinking', which is not just the decline of America, but expands to include the decline of the whole notion of Western Liberalism. There is definitely a theme developing.

The book is an easy read, consisting of an introduction to frame the issue, and then four arguments on the theme. The first argument - the demise of the 'Washington Consensus' and the rise of the 'Beijing Consensus' - is the one that I warmed to first. It continues the argument of the previous book in holding that the political classes in America and Europe have failed their constituents, allowing for the rise of the easy populism of the Brexit and Trump varieties. In the view of the author, they are both likely to damage the prosperity that underwrites the liberal order, making things worse rather than better.

This is the argument of the continued decline of the Western order. Counter-balanced against this is the rise of the rest of the world - mainly of Asian nations, with the primus inter pares being China. How should the West - principally America - accommodate the rise of China? This is the question addressed by the second argument, and it provides an uncomfortable experience for Westerners. The main conclusion is that a confrontation between America and China is inevitable. Sadly, the direction of policy is heading in that direction.

This theme is developed further in the third argument, which is all about how to avoid springing the 'Thucydides Trap'. "How does the established power react to the rise of a potential challenger?" (p,156). The Athenians went to war, and lost. Mr Luce believes that a similar result will be obtained if America violently confronts China. The answer, according to the author, is the reinvigorate Western Liberal Democracy. To reverse the direction in which it is heading.

Mr Luce presents his ideas on this in the fourth argument. The main contention is for the West to renew it's main strength - Liberalism. The belief is that free markets deliver prosperity, which is what underpins a liberal democratic order. It provides a counter against the protectionism and mercantilism that currently has hold of us. It counters the nationalism and xenophobia from which we currently suffer. In order to achieve this, we need to combat the chumocracy and cronyism in which we live. By developing a more open society, we will enhance our prosperity and renew our democracy. The book ends with a rallying cry that could serve as a call to action.

One question that the reader might have is whether or not action is needed? The main premise is the decline of America and Europe and the rise of China and Asia. What happens if that doesn't occur? It may be the case that China becomes old before it becomes rich. It may be the case that China falls in on itself under the pressure of it's own internal contradictions. It may be that there is a confrontation between China and America, and China loses. There are many working parts that might cause this vision not to happen.

However, the trends exposed by the two books do give us a great deal to think about. Each one has the potential to give rise to an interesting set of scenarios. For example, one on which we are currently working is the possibility of an implosion of China. I may comment further on this in a future post. It certainly does provide some interesting material. My point is that American decline is not inevitable, and that renewal is a distinct possibility.

Of course, that does mean moving away from the fatalism that wants to 'Make America Great Again!'

Stephen Aguilar-Millan

© The European Futures Observatory 2017

Donald Trump's Baltic Challenge

I was recently given the opportunity to play Donald Trump in a wargame that examined some near term futures for the Baltic States. The operational brief was fairly loose, in that I could determine my own objectives, so I thought that I would have a look at how 'Offshore Balancing' might unfold as a policy option for the US.

I set myself three objectives as Donald Trump - one long term and two short term. The long term objective was to ensure that Europe took a greater responsibility for it's own defence. The first short term objective was to get Finland and Sweden to become more engaged in the European common security architecture; and the second short term objective was to encourage the European nations to pay their way within the common NATO framework. Perhaps we might unpack those objectives?

The policy of Offshore Balancing is one in which the United States draws back from it's international obligations, and leaves it's regional partners with primary responsibility for their own defence. In the shape of a transactional President - such as President Trump - this means holding greater amounts of fiscal resources within the continental United States. It is a marked change of policy for America, and creates a degree of uncertainty on the part of the allied nations as to whether or not the United States would adhere to it's security guarantees.

Sweden and Finland are not NATO members, but are part of the European Union common security framework. I thought that it would be interesting to try to drive Sweden and Finland away from their implicit neutrality and closer to the NATO framework through the European Union structures. How would Sweden and Finland respond to a less engaged United States?

I have been reading about the problem of burden sharing in NATO for over thirty years. No effective solution to the problem has been found in that time. There is a target of NATO members to spend 2% of GDP on defence, but very few do. Instead, they rely upon the American taxpayers to fund a common defence structure. This is a classic case of what economists call the 'free rider'. By defending it's interests in Europe, the United States also defends the interests of the European NATO nations at the same time. A more transactional President might seek to change that situation, and that was what was wrapped up in my objectives.

In the game, I sought to achieve my objectives using two strategies. The first was to relax financial sanctions upon Russia. To encourage Russia to be a bit more aggressive towards the Baltic. This happened as we moved up towards the nuclear threshold. I don't quite think that the European NATO allies quite understood that the US under President Trump wouldn't underwrite their aggression with an American nuclear umbrella. I don't think that it had sunk in fully that Europe would be on it's own unless they accepted the demands of President Trump, and that wasn't a particularly good place to be.

My second strategy was aimed at Germany. In particular, the German twin surpluses - the trade surplus (currently 8.0% of GDP) and the fiscal surplus (currently 0.5% of GDP). I was using a post-Keynesian sector balance argument to the effect that Germany needed to operate a fiscal deficit in order to redress the trade surplus, particularly the trade surplus with America. Putting this into English, I was arguing that the German government should debt finance a programme of rearmament, which ought to purchase military equipment from American suppliers. This argument wasn't especially successful, but it was a long fuse that had started to burn slowly.

In the end, in the game, we retreated from the nuclear threshold. That, quite clearly, is in nobody's interest. I think that I did manage to plant some seeds of doubt in the minds of the European NATO allies about how responsive the United States would be to a more aggressive Russia. I think that I did encourage Russia to be more aggressive towards the Baltic States. This did result in a certain movement of Sweden and Finland towards the European security framework. However, my one takeaway from the game is how long it takes to bring a policy anywhere near fruition. In my view, Offshore Balancing is a long game, requiring a great deal of patience, persistence, and skill. I doubt whether the current incumbent of the Oval Office has these.

I now have a template against which I can measure events as they unfold. Will truth be stranger than fiction?

Stephen Aguilar-Millan

© The European Futures Observatory 2017

UBI Caritas?

Once again, the idea of a Universal Basic Income has entered onto my agenda. I have to say at the outset, that the greater exposure to the idea I have, the less I like it. I have been spurred to action by the publication of a policy brief by the OECD on the costs and benefits of adopting a Basic Income as a policy option. As always, it is instructive to consider the assumptions made in generating the scenarios. However, we are getting a bit ahead of ourselves.

A Universal Basic Income is a payment made by the government to every eligible adult living within it's jurisdiction. Those supporting this policy point to the advantages that it could generate in unleashing the innate creativity of a population, freed from the chore of earning a living. People would be free to pursue their leisure interests and to develop creative new businesses free of financial pressures. It is advocated as a measure of social justice.

As a general principle, the idea has some innate attractions. The point about social justice is well made, but is UBI the best way to achieve those objectives? On a more practical turn, how do we decide who is included and who is not? What about UK citizens living abroad? What about overseas citizens living in the UK? What about children? What about pensioners? Each proposal for UBI answers those questions in a different way, which makes comparisons of the different proposals difficult to make.

The OECD policy brief excludes pensioners but includes children, albeit at a lower rate. In this study, working age benefits and tax thresholds would be replaced by a UBI. No new money would be applied to the scheme, so it would be a simple redistribution of existing benefits, including savings on administration costs. In this case a UBI of £230 per month would be paid to all adults and £189 per month to all children in the UK. The problem is that the OECD calculates that the UK poverty line to be at £702 per month. As a means of social justice, it would leave many of the people currently dependent upon benefits below the poverty line and without any further recourse to state assistance.

This highlights a fundamental flaw in the idea of UBI. The proposal would take state assistance, which is currently targeted at those most in need of assistance, and give it to everyone. Without any new money to add to the initiative, it would increase poverty rather than reduce it. We would all still need to work, even those who are incapable of work - the sick, the infirm, those approaching retirement. This doesn't sound like an act of social justice.

The proposals that do address the issue of social justice, such as the proposal of the RSA for a Basic Income, do recognise the need for more money to be injected into the proposal. How much more is often very vaguely couched. The RSA proposal places the hit on Income Tax for those earning over £75,000 a year. Other proposals have placed a burden upon Corporation Tax. I have reservations about much of this being collectable.

People and finance are fairly mobile nowadays. When Francois Hollande was elected on a policy of soaking the rich, the rich upped sticks to go and live abroad. It is notoriously difficult for American governments to get US corporations to repatriate their profits and make them subject to US Federal taxes. In the absence of capital controls and restrictions on emigration, a policy of soaking the rich would be very hard to enact.

This, again, is a fatal flaw in the idea of UBI. A UBI is, in terms of economics, a transfer payment. It represents the transfer of value from one person to another without any corresponding transfer of value. Getting something for nothing, one might say. For this to work, there has to be a transferor as well as a transferee. The question arises of why the transferor would want to give value to the transferee. We do in our daily lives when, for example, we give our children their pocket money. However, extending this into adulthood does seem to stretch the point.

There have been other societies dominated by transfer payments. One thinks of the Rome of Nero and Caligula, the France of the Bourbon monarchy, the Russia of the Romanovs. None of these ended happily. Perhaps that is where we are headed? Our sense of entitlement is now so great that we believe that everyone else owes us a living? What happens if we find out that this isn't the case?

Stephen Aguilar-Millan

© The European Futures Observatory 2017

Four Futures: Life After Capitalism

Four Futures: Life After Capitalism

by Peter Frase (Verso Books 2016)

ISBN: 978-1781688137

I am often astonished at the power of a really simple futuring technique - such as 2x2 matrices - to generate such interesting results. This book represents one such exercise. There are many of the conclusions that I don't agree with, there are some parts where I feel that the model is ill-defined, but the overall product is one that ought to commend our attention.

The basic premise of the book is that the liberal order established by the Washington Consensus has moved beyond it's shelf life. It's very difficult to argue against that belief. However, that in itself is uninteresting because it fails to consider what comes next. A futurist would keep one eye on what is likely to replace the Washington Consensus. This is what the author attempts to do.

The analysis has two critical uncertainties - the axes of the 2x2 matrix - a world of hierarchy as opposed to a world of equality and a world of abundance as opposed to a world of scarcity. This gives rise to four possible worlds - equality with abundance, hierarchy with abundance, equality with scarcity, and hierarchy with scarcity. Underpinning each of these worlds are the twin issues of automation and climate change. These rather colour the approach to each of the futures.

Each future is characterised by the dominant features that the author believes will be apparent. Equality and abundance is characterised by communism. Not the Soviet communism to which we have become accustomed. More the communism described by Marx, where the state withers away and we can all live our lives in relative harmony. Many have described this rather utopian vision, but the author sees it as possible if the singularitarians and transhumanists are any where near correct.

Hierarchy and abundance is a different matter, however. In this case, automation leads to material abundance, but the protection of intellectual property rights leads to the benefits of automation accruing to only a few. The 1%, if you like. This scenario is dubbed as one of Rentism, as a fortunate minority benefits from the rents accruing to technology. These are 'Rents' in the Ricardian sense. In modern times, we would call this 'passive income' - money for doing nothing.

The world of equality and scarcity is characterised as one of socialism. In this case, the scarcity of climate change has outweighed any benefits accruing from automation. However, the scenario has a sense that society sees itself as being in it all together, and the climate induced hardships are shared out on a widespread basis. There is a lot to commend this view of the future.

The final scenario - hierarchy and scarcity - is perhaps the darkest. The author labels this a world of exterminism. In this world there isn't enough to go round, and those at the top of the hierarchy secure the lion's share for themselves. It leads to a widespread reduction in population numbers, a scenario characterised by the dominance of security issues and, ultimately, genocide.

As with all futures, there are elements of each of these which are evident in the present. For example, one dimension of exterminism could be seen as the apparent indifference towards the poorer nations displayed by the richer nations. One could argue that the recent moves towards co-ordinated climate action represents a socialist solution - the pain is distributed amongst those most able to bear it. Equally, it could be argued that the world of Rentism is evident in the technology sector today, where the winner takes all, protected by barriers of intellectual property law. The world of communism is less evident today, but one could argue that the NHS exhibits elements of that world.

If each of the scenarios are present today, it is not unreasonable to take the view that elements of each scenario will be present in the future. In many respects, this is how we ought to approach 2x2 matrices. They highlight potential dominant themes rather than produce a specific blueprint for the future.

This is all to the good, but there were points at which I felt a little short changed. This was over both the critical uncertainties and the dominant issues. With a focus on two critical uncertainties - social relations and material abundance - I felt that the book missed more than it caught. For example, I would have liked to see more prominence for the mechanism of distribution (market based or centrally planned?) to complement the issues of social relations (ownership and control). I feel that the author missed something important here.

One major omission in the book was a time frame in which all of this was to happen. A sharper focus on this would, I feel, have shed better light on the dominant issues. For example, if the book had a time horizon of a couple of hundred years (it was sub-titled 'Life After Capitalism'), then perhaps climate change might not be a dominant issue because the climate damage would have already been done. Equally, in two hundred years time, ought our current concerns about automation seem quaint?

By not grasping the issue of time, the author opens himself to all sorts of challenges in the realms of dominant issues. I would imagine that most futurists would be able to identify five off the top of their heads (mine would be war, security, space exploration, the funding of public services, and the re-invention of humanity). By omitting a time frame, the author leaves himself open to the criticism that he ought to have talked about 'those' issues instead.

I quite liked the book. It is short and to the point. It is readily readable. The author has an engaging style of writing which makes the prose just flow along. It is an important work on an important topic that is not a hard read. If only academic texts could follow this lead!

Stephen Aguilar-Millan

© The European Futures Observatory 2017