American Hegemony after the Great Recession

A Transformation in World Order

Brandon Tozzo

• Publisher: Palgrave Macmillan
• Year: 2017
• Print ISBN:
  9781137575388
• eBook ISBN:
  9781137575395
• Topic: Política y relaciones internacionales
• Subtopic: Historia económica

This book traces America's rise as a hegemon of the capitalist system, arguing that the greatest threat to global economic stability is America's polarized and ineffectual political system rather than foreign competition from China and the European Union. The author points to China's considerable demographic problem, which will likely undermine its economic potential. Furthermore, the sovereign debt crisis in Europe – which has left the continent politically fragmented by an institutional malaise – is evidence of the United States' continued status as the world's most successful nation. Tozzo posits that, due to factors such as its initial response to the financial crisis, the near failure of its banking system, the catastrophe of the debt ceiling crisis, and the election of Donald Trump as president, the greatest threat to American hegemony is America itself.

© The Author(s) 2018

Brandon TozzoAmerican Hegemony after the Great RecessionInternational Political Economy Serieshttps://doi.org/10.1057/978-1-137-57539-5_1

Begin Abstract

1. An American Crisis; A Global Recession

Brandon Tozzo¹

(1)

Trent University, Peterborough, ON, Canada

Brandon Tozzo

Email: [email protected]

End Abstract

Since the end of the Second World War, the USA has been the dominant capitalist country in the international system. It has been central to the expansion of businesses into new markets and into new territories. While America has relied upon incentives, it also has at its disposal the most advanced military in the world to ensure the stability of the capitalist system. During the financial crisis of 2008, the USA was the source of crises, with the financial contagion spreading to the rest of the global economy. Since then, this superpower has been mired in poor economic growth with its political system seemingly unable to contend with these new problems. A relatively minor crisis in the American housing market has had far-reaching and dire ramifications in seeming unrelated parts of the world. The problems quickly spread to the Eurozone, which could soon be on the verge of collapse due to a series of sovereign debt crises. Even in East Asia, China has taken measures to ensure the continuity of its regime and the country’s continued economic growth. The recession has highlighted that capitalism is a global system that interconnects disparate countries and peoples. And yet after all these difficulties with massive unemployment and an increase in poverty, reform of the financial system remains tentative and difficult. The costs of the crisis are borne by some of the poorest people, while investors and corporations receive tax cuts and government bailouts. Even the USA, the largest economy in the world, seemed unable to mitigate the effects of the recession.

The purpose of this book will be twofold: first, to explain the historical development of the financial system as a political project that conditions the response of political leaders to the Great Recession that began in 2007. Contrary to the Great Depression where a series of new domestic and institutional arrangements have been put in place, the outcome of the Great Recession was to reinforce the international status quo, with America remaining dominant (Helleiner 2014). While the power and influence of the financial industry is a contributing factor, there are far more complicated reasons for the inaction. In each region, the responses to the recession have been inhibited by the limitations of institutional arrangements dictating a series of policies, on the one hand, and pressure from financial markets and the financial industry to maintain the financialization of the system, on the other. In the immediate wake of the crisis, there was considerable political will to reshape the international financial system, but as the immediacy faded, orthodoxy remained, despite years of tepid economic growth in most OECD countries.

Secondly, and most critically, this book will intervene in a debate on the future of American hegemony. The response of the USA to the crisis has developed a contradiction: the main threat to American hegemony is not from the global capitalist system, nor from foreign competitors, but its political system. Since the Second World War, the USA has been the hegemon of the international capitalist system—promoting free trade, market liberalism and a central player in many international institutions. Polarization is common in American politics. The American public is divided on a wide array of social and economic issues: whether the state should promote school prayer, women’s access to abortion, the role of government in health care and same-sex marriage. While each of these issues is significant in their own right, they have not had global ramifications. Since the onset of the Great Recession conflict has expanded into areas that were previously non-politicized or where there was cross-party consensus. With an increasingly ideologically divided Congress, the rise of the Tea Party, and the success of Donald Trump in 2016, Americans are now seriously debating whether the USA should remain committed to global free trade and open markets, and whether America should continue to maintain its role in institutions like NATO (the North Atlantic Treaty Organization). However, despite the politics, the USA currently has low unemployment, decreasing budget deficits and a booming stock market. Compared to other countries, the USA has come out the Great Recession in a stronger position than its major contenders. My analysis is not that America lacks the economic resources or policy tools to manage contradictions in capitalism or international crisis, but, the crisis has shown the American political system is becoming increasingly unwilling due to politics. To put the overall thesis of this book succinctly, the greatest threat to American hegemony and the stability of global capitalism in the twenty-first century is America.

I will also provide an analysis of the major challengers on an international stage to American hegemony in order to show that they suffer from significant institutional, political and economic problems. In Europe, the institutional framework of the EU and the Euro has constrained both wealthier northern countries and the economically weak south. While the economic crisis in Southern European countries is abated through loans, along with austerity measures, politically, there is little popular will to increase the political unity of Europe. On the contrary, years of recession, a migration crisis from the Middle East and the rise of right-wing nationalist parties have made many Europeans far more sceptical of “Project Europe”. The Recession has shown the fissures within the European Union, along geographic lines. In 2016, Britain voted for a “Brexit” from the European Union, and while the details have yet to be worked out, this is a worrying sign for future integration in Europe. It continues to be unlikely Europe will be able to seriously contend with the USA as a unified global superpower in the near future.

The other major contender that many expect to compete with the USA is one of its largest trading partners: China. While the country has experienced a dramatic economic transformation since it began opening in the late 1970s, China now faces a series of new problems as it tries to move from a middle-income country and “go global” (Shambaugh 2013). Certainly, the rapid development of China and other countries such as India and Brazil represents a shift in regional power towards these new, growing economies, but as of yet they lack the military or economic capacity to challenge the USA as a dominant actor on a global stage (Christensen and Xing 2016). China faces a series of economic, social, demographic and political problems that have undermined the optimism about its ascendency as a Superpower. The driving force behind China’s policy prior to and during the recession has been due to its demographics. China must keep its economy growing in order for the regime to keep its legitimacy, thus it has kept buying American and even European debt to ensure global economic stability. Yet, there remain numerous questions about China’s long-term stability and capacity for economic growth. Its domestic housing sector is overvalued in certain markets, while its stock market crashed in mid-2015 and has yet to recover. Furthermore, there are numerous social factors that could undermine its stability, including its ageing population placing pressure on the state, its demographic disparity between men and women due to China’s One Child Policy, and dramatic unrest among its working population. Institutionally, the capacity of the Chinese Communist Party to maintain its control over the country is the case a protracted recession remains an open question, but at least several years on, it appears premature to suggest China has the capabilities to match, or overtake, the USA.

In the wake of crisis, there have been two major schools of thought on the future of the USA as the dominant country in the global capitalist system. The first group of so-called declinists, which include Zakaria (2009), Ferguson (2011), Friedman and Mandelbaum (2012), Bremmer (2012), Panitch and Gindin (2012), argue that American power is in relative or absolute decline, either due to foreign competitors or due to contradictions in capitalism. The “anti-declinist” group, which include Helleiner (2014), Vermeiren (2014), Prasad (2014) argue that America’s decline is overstated. The USA remains a politically stable, economically affluent and militarily dominant country despite the recent protracted recession. While this book firmly belongs in the anti-declinist school of thought, it makes a significant observation that differs from the other scholars by examining the role of domestic politics on the long-term prospects of American hegemony.

The book will balance a comprehensive overview of the changes in the international economy since the recession with the domestic policies of each major region. It will provide an analysis of the globalization of the international economy: how global finance in particular no longer has political boundaries, but is transnational in scope. This book will evaluate how each region has responded to the crisis and offer some criticisms and policy suggestions based on what has been successful and where there have been failures.

I will rely on a series of distinct literature throughout this book that will help to examine the global economy as a whole and the domestic factors in each case study, borrowing much from the International Political Economy and Comparative Political Economy literature. In Chaps. 3 and 4, I will assess the problems in international capitalism that started just prior to the Great Depression, as well as the major reorganization of the international system that occurred after the Second World War. The interwar period was the most recent time there was a hegemonic vacuum in global politics. Britain had declined as a Great Power, and the USA was constrained by domestic institutions which prevented it from participating in European affairs and in the League of Nations. Then, I will evaluate the major economic and geopolitical conflicts of the Cold War, including the Korean and Vietnam wars. From there in Chap. 2, I will examine the origins of the decline of the Bretton Woods system of capital control and the rise of the neoliberalism in the 1980s. It will also outline the origins of the globalization of finance in the 1970s, which accelerated during the 1980s and 1990s. It will briefly discuss the periodic crisis caused by the financialization of the system, such as the peso crisis, the Southeast Asian crisis and the dot-com bubble. This will be followed by a discussion of the opening of the Chinese economy, and the collapse of the Soviet Union. By the 1990s, America was the lone superpower and neoliberal capitalism was popularized as the only path to economic prosperity.

In the year 2000, America was booming, China had joined the World Trade Organization, and countries in Europe adopted the Euro. However, shortly after the terrorist attacks of September 11th, 2001, problems started to arise. The USA began to accumulate massive deficits in the War on Terror, provided by Chinese financing. Countries opposed the US war in Iraq. Yet, the global economy for the most prospered due to low inflation, high growth, fuelled by debt, and cheap borrowing. By 2007, the USA entered a recession due to collapsing housing prices. By the summer of 2008, firms such as Bear Sterns and Lehman Brothers began to show signs of trouble. In September 2008, the US government decided to let Lehman Brothers fail, leading to a massive crisis in the global financial system. I will spend time discussing the causes of the crisis and the ramifications of it for the USA, the Eurozone and China. Initially governments throughout the G20 united in a coordinated response to the crisis, introducing stimulus packages and targeted bailouts. After the worst of the crisis abated, the response of each region began to differ in policies towards the recession.

The approach I will use recognizes that capitalism is a systemic and totalizing force, but that it must be discussed in its historical context to be appropriately understood. It is even more pertinent at this time when capitalism is in crisis and the developed world is mired in recession. Moreover, this section will reference the mainstream International Relations (IR), Comparative Political Economy (CPE) and the International Political Economy (IRE) literature. Scholars in mainstream IR often argue the America promotes international stability, free markets and political liberalism; it is often viewed as benevolent, progressive and necessary in global politics. ¹ IPE often integrates production and the capitalist system in their analysis, but shares a number of assumptions with IR, emphasizing the actions of the US government as the main agent that spreads capitalism. ² The focus of these chapters will be a re-examination of the USA using Marxian analysis as a theoretical guide.

Chapter 4 will examine the Eurozone crisis and its ramifications for Europe’s place as a potential competing superpower. The economic crisis has led to a series of bailouts from national governments. Since 2008, there has been a considerable increase in sovereign debt in the PIIGS (Portugal, Italy, Ireland, Greece and Spain). Prior to the recession, many of these economies could borrow cheaply, but now international confidence has turned against them. Although the crisis is economic, the limitations of the Euro limit the policy responses from national governments. Essentially, the PIIGS must undergo painful austerity measures as a condition of bailouts rather than lowering the price of their currency or inflating their way out of debt. The problems with Eurozone are institutional. Though there are methods to overcome the crisis, they are complicated by the institutional structure of the EU.

The 2008 financial crisis and the subsequent recession have highlighted the problems associated with trying to develop a common currency for a region as varied as the Eurozone. The 17 countries that use the Euro are bound by treaty commitments to abide by the policies set out by the European Central Bank (ECB), which sets interest rates for the Eurozone. Nonetheless, a true fiscal union does not exist between EU member-states. Guidelines do exist to limit overall debt-to-GDP ratios and curtail annual deficit spending, but the enforcement mechanism for these rules is weak, and is often disregarded by the more powerful countries in the EU. ³ At the national level, each country sets its own budget, allocates its resources according to its own priorities and accumulates its own sovereign debt. This has led to high degree of incoherence in European policy, as well as sparking a crisis between prudent northern European countries and the spendthrift south. In contrast their northern counterparts, Mediterranean governments chose to borrow cheaply using the favourable interest rates that they gained through the adoption of the Euro.

As a result of this borrowing and the crisis, a major sovereign debt crisis has occurred in Portugal, Italy, Ireland Greece and Spain (PIIGS), all of which, with the exception of Ireland, accumulated high levels of debt in the years prior to 2008. So far, it is the Greek economy that has teetered closest to a full default, reaching an unsustainable 140% debt-to-GDP ratio in 2011. ⁴ Financial markets, sensing that Greece is unable to carry such a large debt given the size of its economy fled Greek bonds, driving up borrowing costs. In response, Germany, France and the IMF have provided ad hoc bailouts through the European Financial Stability Facility (EFSF) in order to prevent a default that could undermine the Euro and lead to a broader crisis in the Eurozone. But despite receiving billions of Euros in aid, Greek 10 year bond yields remain high, indicating a low degree of investor confidence in Greece’s long-term economic prospects. ⁵ This is partially due to the unpopularity of the austerity measures demanded by Germans in return for bailouts. The situation has deteriorated to the point where German and French leaders have started to openly discuss the possibility of an orderly default, in recognition that Greece is too deeply in debt to ever pay back investors. The lack of central control over fiscal policy has led to disparate responses to the crisis. The wealthy countries of the north do not want to burden their citizens with supranationalizing the debt through the extensive use of Eurobonds, nor do they want to lower the debt burdens through inflationary policies. Thus, growth remains anaemic and periodic bailouts remain the orthodox policy due to the institutional limitations of the Euro.

To compound the problems, a variety of nationalist movements across Europe have gained popularity. Countries like Austria, Hungary and Poland have experienced a dramatic increase in the support for parties that promote nationalist or neo-fascist agendas. Even in France—a country at the hub of the European project—support for the National Front has increased both due the economic problems associated with the Great Recession and domestic racial tensions along with terrorist attacks. Similarly, in Britain, the Conservatives party made a promise to hold a referendum on its continued role in the European Union as a method to appease supporters of the United Kingdom Independence Party (UKIP). When the referendum was held, the exit ...

Table of contents

• Cover
• Frontmatter
• 1. An American Crisis; A Global Recession
• 2. The Great Wars and the Post-war Consensus 1914–1979
• 3. The Neoliberal Orthodoxy 1979–2000
• 4. A Crisis in the European Union
• 5. The Demographic and Economic Problems of China
• 6. American Political Polarization and the Rise of Trump
• 7. The Coming Global Crisis
• Backmatter