What's Next, America?

The decline of the U.S. has often been foretold. American politics still has time to make the necessary correction in its course.

Quo vadis, America? The paralyzing dispute over raising the debt limit and now the downgrading of creditworthiness show the U.S. is in a serious crisis. It is now the “sick man” of the globe. Whether the world economy finds its way to growth or falls back into a recession hinges on the U.S.’ development because it is by far the largest economy.

Both are possible. Either the world will experience a historic turning point, in which the decline of world power, the rise of other powers and the change to a multipolar world will accelerate; or the U.S. will comprehend the downgrade as a serious warning. The ratings agency may have miscalculated by $2 trillion in its debt prognosis, or it may have not — but at its core the analysis is correct.

America’s problem is not a lack of economic power, but rather its political class. The U.S. is no Greece; it also doesn’t have the worries of Italy and Spain. It can pay its current debts and would be in the position to reduce its mountain of debt — provided its politics strike the right course.

The “Sick Man” America

The last two decades hold an encouraging and a deterring example: Germany and Japan. Japan became the “sick man of Asia” in 1990 and has not found a way out of stagnation until today. The main reason is political paralysis. In the 1990s, Germany was considered the “sick man of Europe.” It had structural problems: from its social security system, which could hardly continue to support the costs of an aging population, to its immigration policy, to its taxation system. The government lacked the power to reform.

The costs of unity let the mountain of debt grow even faster. The black-yellow alliance (of the Christian Democratic Union and the Christian Social Union with the Free Democratic Party) was voted out in 1998. The red-green alliance (of the Social Democratic Party and Greens) saw reforms through, but committed technical errors. In repairing the social and taxation systems, corrections were necessary. In 2008, Germany passed the stress test of the global financial crisis fairly well; it is the “strong man” of Europe today and stands very reputably in comparison to the economic tigers of other continents. The recovery took several years.

Which path will America choose — reform or stagnation? The decline of the U.S. has often been foretold. Up until now, the country has surprised its critics and admirers in most cases with its ability for self-correction. Nations can, however, commit mistakes. The largest sources of mistakes for a powerful nation are hubris and decadence.

What must happen is rather clear: America must save. However, this is a more long-term solution than an immediate one. In the short term, the little recovery the U.S. has achieved must not be endangered by drastic spending cuts. In the long term, it must limit the dramatic rise of government spending as in the last 10 years and allow the government to accrue higher incomes. The largest cost drivers are the military, as well as the expenditures of the basic pension and Medicare system for seniors; the U.S. is also aging. The greatest obstacles to healthier government incomes are tax advantages for corporations and top earners.

In the battles of the past few weeks, the radical wings of both parties have prevailed and worsened the crisis. Right-wing Republicans hold fast to the ideology that government taxes should be as low as possible. Left-wing Democrats refuse reforms in the pension system, for example, via a “demographic factor” as in Germany, which doesn’t unduly harm the individual retiree, but reduces total expenditures. The cuts in the government budget will take effect immediately; that will be costly for growth and further job creation. So far, the necessary long-term reforms are absent.

The real question is whether America’s political class still deserves “credit,” and therefore trust. In Germany, politics needed several years to develop this trust. The markets will also give the U.S. a bit of time. But if they take too much time, Japan’s destiny threatens them.