Over the last three decades, the share of financial corporations in total U.S. corporate profits has risen from 20 percent to a peak of over 40 percent. Finance, more than technology or energy, has been the leading sector in the U.S. economy. Many of the most brilliant American graduates went into finance, and much of the skill growth in American society has been in the development of new techniques of financial speculation. It would be wrong to say this has been a purely exploitative activity. American finance did perform a vital service for the world: It printed the world’s money. The circulation of capital among financial corporations generated more capital, which generated both consumer demand and investment. That did a lot to make the global economic boom of the last few decades possible. But speculative finance can continue no longer.
This situation leaves us with a fundamental dilemma. America has an unbalanced set of useful skills. Restoring economic growth will require the development of some new sets of skills. That is certainly possible, but not within three or four years, and that is only the long term obstacle. In the short term, there is the real estate crisis, the vicious cycle of income loss and decline of demand, the inability of the banks to make loans, and above all, the swift globalization of the crisis. Even these two problems cannot be solved by known means. The stimulus package will help, but the vicious cycle is much bigger than the stimulus package.
In this setting, Obama and America cannot expect to restore economic growth. The most that can be done is to protect the middle class, and hopefully the poor as well, from the worst. This is where government action can be effective. The destruction of money that has occurred due to the financial crisis makes it possible for the U.S. government to print money for some time without risking inflation. The Federal Reserve Bank has risen to this task with enthusiasm. The banks may or may not be directly nationalized, but the way to get a loan will be to contact your member of Congress. Politicized finance, like the loan melascommon in India before economic liberalization, will emerge in America in some form.
All this is like morphine. There are times when you need it, but it does harm quite early on and is very hard to quit. America can enter a period of socialism for the middle class, if it can break the residual power of the Republican Party. The alternative is even worse.
Obama’s war policy is yet to settle. He seems to be planning a slow withdrawal from Iraq, but the risk is that if the insurgency revives while U.S. troops are still there, continued withdrawal will look like defeat. In Afghanistan, policy is still murkier. There is no policy available that will solve the problem of jihadi sanctuaries in western Pakistan. It is not simply that the Pakistan Army is reluctant to fight jihadis there. The army cannot motivate its soldiers to conduct prolonged campaigns. Instead, the army has relied on helicopters, jet planes, and artillery, causing heavy civilian casualties in the region. India never used such weapons in counterinsurgency operations in Kashmir. America cannot then induce Pakistan to solve its problem for it.
Outright defeat at the hands of the Taliban is a realistic possibility. The most promising strategy for America is to bring in more troops for a holding action, and then to expand the Afghan army as fast as possible, recruiting from the most loyal ethnic groups in the north. Supply lines through Pakistan are increasingly under attack. The realistic alternative is supply through Iran. That is the only route avoiding Pakistan where supplies can be brought by ship and then trucked over moderate distances. The Russian and Central Asian route currently under discussion is prohibitively expensive. The Iran route would require U.S. concessions on Iran’s nuclear program. But the choices facing Obama in Afghanistan are stark; he will have to sacrifice some fundamental interest.
In the 1990s, The United States exercised effective global leadership. Western Europe was closely allied with it, and Russia and China did not challenge it. Since then, Russia had consolidated its state and is determined to act as a great power. China has grown enormously. India, though friendly toward America, has also gained strength. The United States must now develop more cooperative ties with all major powers and be the fulcrum of new global agreements. The U.S.-India nuclear accord is a good example of the way the U.S. can continue to exercise leadership even in a “post-American world,” as Fareed Zakaria called it.
Eventually, a radically new global economic order will have to be built. Obama will have a chance to exert more influence than any other leader, but only in coalition with other world leaders.
|Sanjoy Banerjee teaches International Relations at San Francisco State University.|