U.S. fiscal comeuppance matter of when not whether

Guest Column:
Simon Johnson
“A modest man,” Winston Churchill supposedly quipped about Clement Attlee, his successor as prime minister, “but then he has so much to be modest about.” We should say the same about economists, particularly their ability to forecast anything in a useful and timely manner. More

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OP-ED/LETTERS TO THE EDITOR

U.S. fiscal comeuppance matter of when not whether

Guest Column:
Simon Johnson
Posted 12/31/12

“A modest man,” Winston Churchill supposedly quipped about Clement Attlee, his successor as prime minister, “but then he has so much to be modest about.” We should say the same about economists, particularly their ability to forecast anything in a useful and timely manner.

Those predicting an imminent American economic decline have usually been no exception. This time, though, they may be on to something.

Prevailing arguments about when the era of U.S. dominance would end, and which country would supplant it, have been wildly and consistently wrong for half a century.

In the 1950s, Soviet leader Nikita Khrushchev was taken seriously when he told Western ambassadors “We will bury you.” Today, his country no longer exists.

In the 1980s, Japan was supposedly going to be No. 1; now the question is whether the precipitous decline in its working-age population will generate a fiscal crisis.

The Germans – or Europeans more broadly – were thought to be on the brink of elbowing aside the United States several times, with the euro seemingly threatening the dollar’s role as the pre-eminent reserve currency. Now the euro-area economy looks very sick indeed.

Becoming the world’s top economic dog isn’t easy. That’s because any contender – China or anyone else – needs to answer three tough questions.

First, do they have secure property rights for individuals? Who would trust their rainy-day funds or their most innovative ideas in a country where, when the going gets tough, the state gets your stuff? China has a big current-account surplus and lots of foreign-exchange reserves. They also have a 2,000-year tradition of putting the government before the individual.

Second, is the financial system viable in its current form? Japan had a great economic-transformation story – and an even greater debt-fueled asset-price bubble when its banks went mad in the mid-1980s. How confident are you that China, Brazil or other emerging markets aren’t headed down the same road?

Third, is debt – both public and private – on an unsustainable path? Mismanaged debt has brought Europe to its current low point, in the form of direct public borrowing (see Greece) and private-sector borrowing that goes bad, with nasty implications for the government’s balance sheet (ask the Irish and Spanish about this).

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