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America emerged from the end of the Cold War as the unchallenged superpower. The early 1990s saw the peak of its power. Over the next two decades its margin of superiority over the rest of the world has steadily declined. In the long run this is likely to continue, but the United States will also enjoy some periods of rising power due to the missteps of others. Europe was rising but no longer is. It has averted an immediate crisis with a large financial bailout of its heavily indebted countries, but still faces wrenching budget cuts which might make its debt crisis worse. The loss of credibility of the Euro restores the U.S. dollar as the unrivalled global currency. In turn that means the United States can print and spend hundreds of billions of dollars without triggering inflation. China has developed severe internal financial imbalances, and these may moderate its growth for a few years. Still, so far the United States is doing remarkably little to help itself.

Both George W. Bush (towards the end of his second term) and Barack Obama deserve great credit for turning the deepest global financial crisis in eighty years into nothing worse than a bad recession. The passing of Obama’s health-care legislation is also a major step in bringing the kind of stability in people’s lives that other industrial societies have long enjoyed and averting a crisis of health care costs. On the other hand education, at all levels, has been allowed to falter for want of comparatively small sums of money. At a time when the United States faces sharply rising competitive pressure from China and India, Americans are choosing to deprive themselves of education. America’s only chance of competing successfully in a much more educated world is to transform itself into a super-educated society. For now, it is losing ground instead.

A major obstacle to America’s competitive success is its deep political divisions. It is unable to sustain political consensus even in defense of overwhelming and obvious national interest. The Republican Party refused to back Obama’s stimulus bill during the financial crisis. The Tea Party movement has arisen ostensibly in protest of the additional debt Obama has taken on. However this movement did not form when Bush was borrowing at record levels while the U.S. economy was growing, when it should have been paying down its debt. It only formed to protest borrowing when the alternative was considerably worse. There is little doubt that there is a masked racism behind the otherwise irrational protests of the Tea Party. The Republican Party as a whole has largely played along with or actively promoted this radical movement. With such deep divisions, America will be unable to invest in its human capital and infrastructure to compete in the long run. America’s ethnic diversity is growing, and its political polarization is growing with it.

The world economy is starting to recover from the crisis initiated by the Wall Street crash. The U.S.

Economy has been growing for months and is starting to create new jobs. China and India have been growing smartly since the fall of 2009. If the world is entering a new phase of growth, the pattern will be different from the last phase, and that will make a big difference for America’s role in the world. In the three decades before the 2008 crash, the leading sector in the U.S. economy was finance. The high rewards in this sector drew in America’s best talent. But Wall Street made a lot of money for itself without serving any direct productive function in society. Finance can serve production by channeling capital from those who save to those who invest in new factories, or it can counterfeit money by using money to buy stocks and bonds and then sell these to others who buy them in the hope their price will keep rising. Wall Street mainly did the latter. This speculation did serve one useful purpose; it created more dollars for use in world trade and investment. A counterfeiter delivers the same benefit to society. The dollar was the world’s money, and the world needed ever more money to enable economic growth. Wall Street functioned as the kings of old, creating money, pocketing it, and being the first to spend it. That is why the kings and Wall Street professionals have had such nice palaces. This trick cannot be performed twice.

Going forward, the United States needs to build a new set of skills for its people. Americans need to learn to export competitively items that Chinese and Indians will import. Market forces cannot build the needed skill base on their own. Government investment has been necessary in all countries for building human capital on a national scale to meet changing patterns in the world economy. In the American federal system, most of the required work needs to be done by states. It is there that politics are the most dysfunctional. The largest state, California, leads in dysfunction and delusion. State government spending as a percentage of California’s economic output is at its lowest level since the early 1970s. California’s ratio of students to teachers in schools ranks it 49th out of fifty states. New York state does much better in schooling its children. California is the most ethnically diverse state and suffers the greatest political disunity. The ugly reality is that its predominantly white voters have been very reluctant to pay to educate its predominantly Hispanic children. The state and the nation will pay a high price for this folly.

Sanjoy Banerjee teaches International Relations at San Francisco State University.

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