I wouldn't grade Dan Drezner's recent effort to grade American hegemony very highly. In fact, I believe I would give it an "F." Dan Writes: One of the benefits of having a hegemon is supposed to be greater provision of global public goods. According to hegemonic stability theory, if the United States is really still the hegemon, then it should be providing the following things:
- Provisions of liquidity
- Market for distressed goods
- Long-term counter-cyclical lending
The U.S. did all of these things during the Asian financial crisis, for example. This time around, the U.S. grade is not as high. There has certainly been provisions of liquidity -- though if one defines the start of this crisis as the fall o 2007, then it's not like LIBOR has fallen to pre-crisis levels.
The U.S. is not a market for distressed goods. On the margins this is due to incipient protectionism, but mostly this is due to the U.S. economic contraction. Indeed, this is why the recession has so deeply affected Pacific Rim exporters.
The worst grade, however, is on counter-cyclical lending. (Here Drezner quotes:) The pursuit of capital suddenly seems like a zero sum game. A dollar invested by foreign central banks and investors in American government bonds is a dollar that is not available to Eastern European countries desperately seeking to refinance debt. It is a dollar that cannot reach Africa, where many countries are struggling with the loss of aid and foreign investment.I give Drezner an F for the following reasons.
- Provide liquidity: The Fed and Treasury are doing everything within the limits of the law to perform the lender of last resort function. Save for that scary period last fall, I don't think the problem in global financial markets has been a lack of liquidity. The problem is lack of capital and perceptions of very high counter-party risk.
- Expand counter-cyclical lending Dan overlooks the fact that governments created the IMF in 1944 to provide counter-cyclical lending when private markets wouldn't (like now). Thus, the question is whether the US is facilitating the IMF's ability to act in this capacity. Here the US scores high--it is striving to increase the funds available to the IMF (New Arrangement to Borrow) from the current $250 billion to $750 billion, of which the proposed US contribution is $100 million.
- Drezner also neglects the more obvious point that the US has a very large current account deficit. Hence, the American ability to attract capital inflows is an indication that counter-cyclical lending is functioning. Capital is flowing to a country that needs inflows to finance an external imbalance. In 1929, the US had a current account surplus and thus net capital inflows were perverse for the international economy.
- Provide a market for distressed goods: Drezner argues that imports are down because of recession. He neglects to mention that in 2008, the US purchased $2.5 trillion of the world's goods and services. That's 5 percent of total world output (non-US) in 2008. Of course import demand will fall as we move into recession--the point is to avoid "Smoot-Hawleyism"
1. Provide stimulus: the stimulus package of 5.5 percent of GDP is the largest stimulus enacted anywhere (except Saudi Arabia), in absolute terms and as a share of GDP. Perhaps we can consider this a corollary to Open Market for Distressed Goods, although the Buy American provisions are a bit discouraging.
2. Provide leadership: the Obama Administration is pressing G20 governments to do more. Thus far the prodding is having mixed results.
Finally, Drezner fails to offer a counterfactual. Yes, things are bad. One wonders how much worse they would be if the US was not performing these functions.