Saturday, October 9, 2010

The Merits and Demerits of Relative Decline

. Saturday, October 9, 2010

Matt Yglesias comments on all the worry about America's decline (put into perspective succintly by Kevin Drum here):

Something to note here is that relative [American] decline would almost certainly be a good thing. America’s share of world population is pretty small, so far and away the most likely scenario for American relative decline would be “catch up” growth in large poor countries such as China, India, Brazil, Indonesia, Pakistan, Bangladesh, and Nigeria. And I hope it happens! A lot of third world countries adopted staggering bad policies in the postwar era. That bolstered America’s relative standing in the world, but it was a human tragedy. Besides which, even if faster growth in those places leads to relative decline in American dominance, it would almost certainly boost our living standards in absolute terms. Healthier, better-educated, freer, richer, more productive people in all those other countries would invent marvelous things, produce great works of art, etc. and we’d all win.

What Yglesias is saying here is that there are two ways for American prestige to decline in relative terms: 1. the numerator (American affluence) can decrease; 2. the denominator (global affluence) can increase. Both would lead to a smaller quotient, but #1 would be bad for global well-being while #2 would be good for it.

I'm with him, as far as it goes. But there's a but: Power Transition/ Hegemonic Stability Theory predicts rising geopolitical instability as the relative position of the leading state declines. Basically the idea is that security dilemmas are mitigated when one state has a preponderance of power, but are exacerbated when other states approach parity (if the rising state is dissatisfied with the international order). Robert Keohane, one of IPE's founding fathers, argued that multilateral institutions might be sufficient to ease those pressures, but that theory has yet to be put to a strong test. The recent record of the major multilateral institutions doesn't leave me with too much hope.

That doesn't mean that we shouldn't strongly encourage the continued development of the rest of the world. We should. But we need to be wary to not fall into the spiraling trap. So when we read people like Fred Bergsten laying the groundwork for a trade war we should run as fast as we can in the opposite direction. (Anyone want to bet that Krugman won't link approvingly to that Bergsten post within 24 hours?)

It's a shame, but it seems that today's international economists don't remember the basic lessons of Charles Kindleberger. Everyone has gone back to Keynes and Minsky in the past few years, but Kindleberger is just as worthy of a re-read. Today's protectionists too often have partial equilibrium (domestic) economic models in mind when what's needed is general equilibrium (international) political economy models. And so they advocate instability when the world desperately needs stability.

Don't listen to them. They preach destruction.


Emmanuel said...

It's Mr. Destruction Preacher here.

Actually, you should welcome a nice trade spat. Consider what you say:

(1) The end of US influence is not at hand; and
(2) China is run by incompetents; therefore,
(3) The US has nothing to fear in an altercation with China and will benefit from demonstrating what happens to other interlopers who question US influence.

Regardless of your POV, it's time for all concerned to cut the crap and demonstrated their place in the global pecking order. Enough cheap talk for the Great and Good America has nothing to fear, anyway.

Kindred Winecoff said...

The U.S. could "win" in a trade war with China, no doubt, if by "win" you consider only relative gains. After all, Walmart can just start stocking goods from Vietnam or Malaysia rather than China. There isn't another "biggest economy in the world" for China to sell its goods too.

But that sort of win would be Pyrrhic. I happen to think that relative gains are usually less important than absolute gains.

The Merits and Demerits of Relative Decline
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