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October 3, 2013

The Loss of U.S. Pre-eminence

The United States became a superpower in the 1940s and, 70 years later, stands on the brink of losing that status. It rose to global pre-eminence at short notice, and its decline can occur just as abruptly. This week’s partial government shutdown both reminds us that the United States has reached such a precarious position and shows us exactly how things can now unravel as it approaches the really big confrontation over the debt ceiling.

Isolationism was a powerful idea in the 1930s and through Dec. 7, 1941. The United States felt burned by its involvement in World War I; the Senate had refused to ratify the Treaty of Versailles. By the end of 1945, the United States had created a vast military, won victories around the world and decisively tipped the balance in the largest global conflict to date. All of this was based on the political consensus that while the nation should be careful with government finances, it was acceptable to borrow heavily under extraordinary circumstances. Smart fiscal policy helped to underpin its emergent global ambition.

Now really stupid fiscal policy threatens to bring the United States down. The primary cause of any public finance crisis is not the ability of people to pay their taxes, it’s their willingness to pay their taxes — or, as in the current situation in the United States, the willingness of their elected representatives to finance the government. And this willingness is always tied closely to the legitimacy of the government. Does enough of the population think that the people with political power won it in a fair manner and, consequently, are they willing to accept policies with which they do not necessarily agree?”

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Read Simon Johnson’s full Economix blog post here

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