Republics die, warned Plato, through a combination of bad judgment and disordered cravings. How close is America to such decline? After exhausting wars and a collapse in its financial system it is arguably at its weakest point for a generation. Not-so-weak, however, as if it had abandoned Iraq and not salvaged some credibility through the Petraeus-led surge of troops.
In the latest edition of Foreign Affairs Roger Altman has long-term hopes for America but sees a short-term period of retreat from the world:
- Political energies will be focused on domestic economic priorities;
- A lack of resources for overseas enterprises - both from the taxpayer and private capital markets;
- An undermining of the Anglo-Saxon model because of the massive bailouts.
Altman contrasts American and wider western weakness with Chinese strength - which, with its $2 trillion of foreign currency reserves - has the wherewithal to invest in strategic relations with emerging states and in control of strategic raw material resources. He sees a steady transfer of power from America to China although these trends should not be overstated.
So to the key question: Will President Obama's stimulus remedy or exacerbate America's economic weakness?
The US budget deficit will hit about 12% of GDP because of the Obama stimulus; that’s double the proportion that helped cause the 1987 stock market crash. There is a real danger, therefore, that the 'cure' might be more dangerous than the illness. As Republican Mitt Romney has warned: “We've borrowed so much already that if we add too much more debt, or spend foolishly, we could invite an even bigger crisis. We could precipitate a worldwide crisis of confidence in America.”
Romney also worries that there is nothing in the current plans that suggest the White House or Congress wants to get a grip on the long-term pressures that are causing a structural deterioration in America’s fiscal position. Without, he says, reform of Social Security or Medicare, businesses and individuals know that big tax rises await them and that won’t encourage enterprising investments. He continues:
“There is a real danger that with trillions of additional borrowing -- from the budget deficit and from the stimulus -- world investors will begin to fear that our dollars won't be worth much in the future. It is essential that we demonstrate our commitment to maintaining the value of the dollar. That means showing the world that we will put a stop to runaway spending and borrowing.”
The National Review has analysed the extent of pork in the stimulus - listing at least fifty 'unstimulating' components. Much more useful would be an increase in defence spending – so argue Tom Donnelly and Gary Schmitt. They contend that certain defence expenditures meet all three of the Obama administration’s criteria for a successful stimulus:
- It should be timely (putting dollars into economic circulation rapidly);
- Targeted (of clear value to the nation); and
- Temporary (not a new and permanent entitlement or long-term program that would make the government's finances even more problematic).
A truly bipartisan fiscal stimulus would have combined corporate tax reform (for the Republicans) with public works programmes (for the Democrats). Instead, editorialises the Wall Street Journal, we have a pork-stuffed bill written almost exclusively by the Democrats. There have also been warnings from “infrastructure reformers” that, notes David Brooks, “the [stimulus] bill mostly funds 1950s-style projects.”. There have been concerns from the EU and Canada at protectionist tendencies in the stimulus. There are signs that union-only firms will monopolise some parts of the stimulus.
For Professor Eric B. Rasmusen of Indiana University, the stimulus bill avoids doing what is really necessary:
"What the American economy urgently needs is not Keynesian stimulus, but reform of the capital and housing markets, particularly in the rating agencies, bank portfolios, and government encouragement of reckless lending. That is where the problem started, and where it might have remained-- with the mild recession of the first half of 2008-- if Presidents Bush and Obama had reassured the American public rather than predicting doom. Whether Keynesian stimulus works is an open question in economics, but it is fairly well settled that what governments implement is not the nonpolitical stimulus that professors recommend. The various Congressional proposals so far are not stimulus bills at all. They are a mix of special- interest tax cuts and pork barrel spending with a general-interest layer of tax cutting on top. It would be better not to try to use fiscal stimulus at all."
Whatever the reservations of Mitt Romney and 95% of Republicans the stimulus will pass. Republican moderates like Arlen Specter has ensured that a $827bn package has the votes to reach the desk of President Obama for his signature. Those who care about American leadership have to now hope that it will work.