The future of America' s financial dominance: consider four factors.

AuthorHormats, Robert D.

It appears to be accepted wisdom that the current global financial crisis, because it had its origins in the United States, marks the end of American financial leadership. That is not, however, a foregone conclusion. Whether and how much this crisis will weaken U.S. leadership will depend heavily on four factors:

* First, how well America's financial and monetary authorities, markets, and economy respond to this crisis and how quickly the country rebounds;

* Second, what changes are made to avoid the recurrence of anything of similar magnitude in the future;

* Third, whether American leaders, in crafting a new stimulus and job creating package, do so through programs that also address underlying structural problems such as investment in infrastructure and support for the development of new sources of clean energy;

* Finally, how quickly after the crisis and recession Washington reverses the sharp rise in the government's debt-to-GDP ratio that will take place during this period, begins to engage in more rigorous budgetary practices than it did earlier in this decade, and puts entitlement programs on a sustainable basis. I will focus primarily on the last of these.

LONGER-TERM THREATS TO U.S. LEADERSHIP

The current financial crisis presents the greatest immediate threat to America's prosperity and financial leadership in many decades. But the greatest long-term threat is complacency--complacency about the enormous financial imbalances that will emerge rapidly in coming decades as baby-boomers retire in growing numbers and their health requirements increase. These imbalances, coupled with large budget deficits resulting from a tendency in Washington to give Americans more government than it asks them to pay for, loom large on the horizon. They could pose serious dangers for the U.S. economy and financial system in coming decades, unless corrective measures are undertaken in coming years.

For the last two decades, the United States has sidestepped a series of tough economic, financial, and energy issues. The American political system appears to suffer from chronic shortsightedness. Too often, its leaders have engaged in wishful thinking, believing that impending financial problems will go away on their own, with no need to take corrective action.

Difficult decisions have been avoided on how best to pay for current wars and homeland security (all of the added costs have been borrowed), reduce energy dependence, ensure the sustainability of Social Security, Medicare, and Medicaid, and bring long-term revenues and spending into balance. For years, the default position has been "do nothing" or, at least, nothing that would involve any real sacrifice or political pain. We collectively have ignored the serious implications of inertia.

Polarization of the American political system has blocked the bold measures and the political compromises required to overcome this inertia. By ducking these issues, Washington has shifted a heavy financial burden to future taxpayers. It has also jeopardized the nation's future economic well-being and security, its resilience if faced with new internal or external crises, and its capacity to play a robust long-term global leadership role.

THE CURRENT CRISIS AND THE GLOBAL ECONOMY

Although the United States is the epicenter of the current crisis, the turmoil has rapidly become global. As this crisis vividly demonstrates, economies and financial markets are extremely closely integrated. This crisis, like a virulent virus, has spread throughout the world. No area has escaped contagion. Troubled securities that originated in the United States were sold in large amounts to foreign institutions. And weakening economic activity in the United States has curtailed the exports and thus the weakened the economies of America's trading partners.

But financial excesses--including runaway housing speculation--have also occurred independently in countries other than the United States. And in many emerging economies, stock prices rose dramatically through the early years...

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