Customer Reviews

The End of Influence: What Happens When Other Countries Have the Money

5 star:		(7)
4 star:		(2)
3 star:		(7)
2 star:		(0)
1 star:		(0)

 

 

After finishing J. Bradford de Long and Stephen Cohen's book, I admit I'm still very much in the dark about the consequences of the redistribution of Wealth from the US to the rest of the world, particularly China. Although there's a lot that's interesting in the book, the failure to solve the main question is highly disappointing.

"The End of Influence" has two overlapping themes: The rise of Sovereign Wealth Funds and the Fall of the Neo Liberal Order. The argument is that they are interlinked - the decline of Neo-Liberalism makes Sovereign Wealth Funds more dangerous, and the robustness of Sovereign Wealth Funds makes Neo-Liberalism seem less appealing.

Let's start with Neo-Liberalism: Since the Middle 1970s, the Post WW2 conception of a mixed economy came under increased attack by those whom de Long and Cohen call "Neo-Liberals". The failure of managed Capitalism in the UK, and its apparent failure in the US, caused a backlash against government interference in markets. The roll back of government interventions in markets was not complete, but it was widespread. It effected not only the US and the UK, but also most of Northern Europe, much of East Asia (and Israel, although the authors don't mention that). Right wing Neo-Liberals loved inequalities and markets; Left wing Neo-Liberals considered them a necessary evil. And the dismantling, deregulation and privatization of market industries sped up, as governments went out of the business of business everywhere... or almost everywhere.

The big (but not the only) exception was China. After Mao's Death, China started to slowly embrace Capitalism. It started to manufacture on a large scale. And as it had low labor costs, it exported its products aboard, especially to the United States.

When you start selling your product to a certain country, you end up with a lot of its currency. But this currency is normally not very useful to you; you have to convert it to your local currency. By buying much of your local currency and selling the currency of the customer country, the exchange rate changes. The customer currency becomes less valuable, and yours more. Therefore, goods produced in the customer country become more attractive to consumers in your country, and goods produced in your country become less attractive to them. And the trade imbalance... gets balanced.

Or so it is supposed to happen. But China (and other countries before, but China is the biggest, and so the effect is the largest) did not want to stop its export-fueled growth. It wished to ensure continuous export induced economic momentum. The way it did that was by preventing the Chinese currency (the Renminbi) from appreciating against the dollar. Instead of converting the dollars gains from selling Chinese products in the US to Renminbis, the Chinese government kept the dollars.

What has it done with them? It has lent them back to the United States! Thus, ironically, the dirt poor China has been subsidizing US consumption. China's economic growth has been fueled by selling manufacturing products to the US, and then loaning the profits to the US so that the US can buy more products! This meant that the Chinese government held a huge amount of money in the form of US debt - creating the world's largest sovereign wealth fund.

Now that China has the money, and holds it in US Debt, what could it do with it? What are he consequences of China being America's creditor? This is where the story gets unclear. From De Long and Cohen, one gets two stories, partially contradictory, about what happened next.

According to both, the Sovereign Wealth Funds (SWFs - China's is the largest but not the only one) posed a threat to the Neo-Liberal order. But the Neo-Liberals tried to "domesticate" the SWFs, make them act like "regular", profit seeking wealth funds. Had they managed, SWFs would not have been very dangerous.

But they have failed, and according to one story de Long and Cohen are telling, SWFs are extremely dangerous. The economic crisis of 2008 (caused at least partially by the cheap credit created by the SWFs) has soiled the reputation of Neo-Liberalism. Industrial Policy is now back with a vengeance. And the SWFs would now start to use their power strategically, buying up technologies that could be used to enhance economic growth in the US, and using them to enhance growth in China. The frontier of economic growth would move east. With China now having the money, America would have to pay attention, economically and politically. It would not be a thrall to China, but it would be much weaker than it is today.

The other story De Long and Cohen tell is, from an American perspective, much more optimistic. It focuses on the insight, repeated in the book several times, that if you owe enough money to the bank, you own the bank. The huge debt America has to China offers its own kind of power on the Chinese. America could inflate away Chinese saving. China has a huge amount of US treasury bonds. It can't put the money anywhere else: there's nowhere else to dump so much money. China has subsidized US consumers for a decade, and it is likely to keep doing it in the foreseeable future. Having someone else working for you is not altogether an unpleasant experience.

Furthermore, US debt could not lead to a payment crisis, like the Asian credit crisis of the late 1990s (see Paul Krugman's excellent The Return of Depression Economics and the Crisis of 2008). Unlike Thailand and the other debt ridden Asian economies of the 1990s, the US debt is enumerated in its own currency. The US cannot run out of dollars, and so it cannot go bankrupt.

So what happens when other countries have the market? I'm not sure. I doubt de Long and Cohen are certain. They make a case for China posing a mercantilist threat to the US, as well as for China acting as a willing foreign worker, slaving away for the US benefit. No doubt there is truth in both cases, but Cohen and De Lung fail to synthesize them. "The End of Influence" is thought-provoking, but not conclusive.

Brad DeLong writes and edits a wide ranging blog focussed on ,for lack of a better title, political economy and this short book is a fine, and very well written summation of many of the themes he has been discussing over the past few years. Written with a Berkeley colleague it is a well researched (though no notes are in the text, alas) book whose theme can be simply described by its title. However, unusually for economists, it goes far beyond the standard laments and cries over our waning economic power and delves deeply into global cultural and intellectual maters and their relation to the fiscal decline we are living through. In some ways this is even a more enduring and disturbing aspect of the mess we have mostly brought on ourselves. This may be one of the first in what could be long series of books on these subjects but I would bet it will remain one of the most succinct and influential of the future lot.

This book is a very modest introduction to the shifting balance of power between the United States and the emerging world, especially China. The authors note that the United States has been the "systemic guarantor" of the international economy by consuming other countries' net exports while issuing large amounts of sovereign debt to soak up the dollars by providing a safe, dollar-denominated asset. This is not a particularly novel observation, and the authors' policy prescriptions (U.S. needs to save more, consume less, produce more) have been repeated thousands of times by now.

The book is a bit more interesting when the focus turns to the fall of the Washington consensus, which the authors also call the "neoliberal dream." The rise of active sovereign wealth funds and "lemon socialism" are proof that governments are not willing to play a hands-off role in economic affairs. DeLong and Cohen argue that the financial crisis and political pressures from citizens are giving foreign governments the legitimacy and impetus to intervene in order to influence market outcomes. The analysis into this reality does not go very far however, and in only 150 pages, very little hard evidence is furthered to support the book's bland conclusions. The endnotes are not in the book but are posted online so readers can look there for more substantial works in the field of political economy.

This book is still worth reading for those seeking a short introduction to the decline of America's soft and hard power. But, readers attracted by the subject and the high profile authors might be disappointed by the book's brevity and lack of appreciable depth.

The title really grabbed me when I first saw this book. The authors present their case for the failure of the "neoliberal" economic dream that has been exercised by both political parties. The book has some very thought-provoking theises. For example; they discuss the advantage that the US has had over the last century of havinso much wealth. Other countries and people in other countries wanted to emulate us...visit NYC, buy Levi heans, listen to American music, watch American movies, etc...because we were successful, we were leading the way. As we have become not only a debtor nation but a deep, deep, debtor nation, the preceptions change and other countries appear to be winners and we lose not only pretige but the economic benefits that come with being the country "with all the money". We can't fix our roads and bridges while China has Mag Lev high speed rail from Shanghai airport to downtown. Which country and culture do you think is going to stir confidence in the global marketplace?

The authors explore many other areas, some that are not commonly discussed but most are well-worn for anyone who has been curious enough to read about this topic.

My biggest complaint is with the lack of an ending. It seems like the book is cut 40-50 pages short. They did not bring the book to any reasonable conclusion or try to project some ideas of how they might suggest that we begin to get out of this mess.

The End of Influence does a terrific job illuminating role of law & policy in shaping the US economy. On the basis of a number of questionable policies over the past 15 years, they note,

"the United States has half-consciously re-shaped its economy. The country shifted some 7 percent of its GDP out of manufacturing and added some 7 percent of GDP in the expansion of finance, insurance, and real estate transactions. . . . The communities of engineering practice and innovative technological development do move and emerge elsewhere as you shift labor from real engineering, which calculates stresses in materials and quantum tunneling in doped semiconductors, into financial engineering, which calculated delta-hedge decay and vega convexity for synthetic securities. It also means that you must create more and more debt so that other nations have the dollars to accumulate and not balance their trade-and yours."

Slowly, fitfully, the taboo against industrial policy is being broken by brave authors like Cohen and Delong. We who study law-saturated sectors like IP and health care have seen in some detail the inevitability of government involvement in innovation; the question is only whether such involvement is productive or nonproductive. Given that "fully half of economic growth-1.5% per year-comes from technological and organizational progress," we have to hope that the government does a better job stimulating it this decade than it did in the last.

In this book, the authors discuss, by an large, two main issues. The first is Sovereign Wealth Funds, or in short SWF. The authors lay down in clear way why the SWF will be used, not only to maximize profit, but also as a political tool. The second issue the authors discuss is the fall of the Neo-liberals; a fancy word for people who believe the government should step out of the way of businesses.

As for the SWF's, not a lot of new ideas were discussed here. However, the authors did provide a clear explanation of the Chinese peg of the Yuan to the dollar and how that fact has created imbalances in the world economy in the form of huge reserves on the Chinese side and massive deficits and excessive consumption on the U.S. side. The authors also raised a few interesting questions regarding the role of the SWF in the U.S. economy, and how the Chinese will use their excessive reserves to take control of American companies in order to obtain their knowledge and the like. I found it quite odd that the authors failed to mention that the Chinese have been buying natural resource companies like hot rolls straight out of the oven in order to secure themselves access to natural resources in a world where the price of commodities has been rising steadily and the U.S. dollar has been declining. All in all, the discussion of SWF's was interesting even though somewhat shallow.

As for the decline of the Neo-liberals, in short, no new added value here. The same old review of the deregulation process the Western economies went through in the past 30 years or so..

Overall, although not without flaws this book was a rather interesting and quick read. Having said that, the authors failed to provide a concrete conclusion to the question that the subtitle raises of "what happens when other countries have the money?".

Short book on how world economy is likely to change due to fallout from "great recession" and ongoing trade deficits, demographics, etc.; enjoyable and easy to read, but not too much I wasn't familiar with already

As published in Forward magazine. [...]

It is amazing what you can pack into 160 pages without ever seeming to pack. Stephen Cohen and J. Bradford DeLong, both professors at Berkeley, make their erudition and their prose seem effortless. In the process, they tell you what happened to the global economy and why, where the money went and who's got it, what will happen next and when to start really worrying. They also manage to be ironic every now and then--something you seldom find in business books--and give this slim volume a personality lacking in most of the hand wringing and blame-laying out there.

The book starts with a stark, simple statement. After 60 years of economic dominance, the United States has seen the money on which that was based begin "to drain away. Soon it will be gone." The reader and the U.S. economy both will have to take a big gulp and go on. We will have to learn to be one nation among many, not the dominant one, just as post-imperial Britain did.

The authors' point is that the neoliberal prescription of free markets with as little government intervention as possible has run its course. To be clear, neoliberalism exists on both the right and the left. Barry Goldwater was a neoliberal, so were Margaret Thatcher, Jimmy Carter and Bill Clinton--strange bedfellows but sharing the belief that you should "free up the market and let it rip."

Several things have happened to bring that chapter to a close.

First, other countries managed their economies while we let ours rip. "America doesn't `do' industrial policy," the authors write. "We don't like it. We don't approve of others doing it. We think that when they do, it hurts us and usually ends up hurting them as well. Furthermore, we're just not set up to do it." But as Japan built its steel and shipping industries and Brazil built Embraer into a national champion in regional jets, the United States lost its manufacturing sector and its dominance in the oil industry. Those that have implemented industrial policies most successfully have what Thorstein Veblen called "the advantage of backwardness." They didn't have to reinvent themselves; they just had to catch up with us. And we became easier to catch as we lost ground over time.

Second, the juggernaut that is China has put together "the fastest, biggest economic success in world history." We do not actually import from China. We import from "an integrated trans-Asian production network" that includes high-end components from countries like Japan and raw materials from Australia, all of it feeding into and out of production in China. In addition, a lot of China's growth comes from innovation's overflow into the rest of its industrial ecosystem propped up by an undervalued currency. We squandered the opportunity to move into higher-value exports. Instead, the Chinese bought dollars and plowed them back into our financial system. As manufacturing declined, finance grew in exact inverse proportion--from 21% of GDP to 14% for manufacturing and the exact opposite for finance.

Finally, we borrowed our way out of dominance. As a nation and as individuals, we owe more than we earn. We have, as they say, negative equity. Our economy is under water and, like Britain at the end of the First World War, we don't have the money to do anything about it.

The recession recovery plans currently underway will buy us time, say Cohen and Bradford, but they can't put Humpty Dumpty back together again. "After all," they conclude, "Humpty was an egg."

Nothing new. I was not impressed with the thoughts or ideas. Nothing to stand out as to make the reader move to action.

This book would go well with an undergraduate International Macroeconomics course. DeLong and Cohen explain in plain English the national income accounting identity between the U.S. and China -- what Neil Ferguson called "Chimerica." China saves 40% of its national income, the U.S. saves almost nothing. Since China's Savings > Investment, they run a current account surplus, exporting more than they import and purchasing more foreign assets than foreigners purchase of their assets. Investment in the U.S. > Savings so it runs a current account deficit. China lends to the U.S. who in turn buys Chinese products and the process continues.

An estimated 70% of China's $2.5 trillion of reserves is invested in dollar-denominated debt, primarily U.S. Treasuries. China isn't looking to make money on the deal, it loses money, but the accumulation of reserves is necessary to keep its currency and, by extention, goods & services undervalued to a dollar that is steadily depreciating.

The U.S. "enjoys" this position because after World War II, it was the country "with the money," and the dollar has been the world's preferred reserve currency. Since we are the free-market arsenal of democracy, other countries were willing to emulate us and aspire to be like us. But with our affluence came our debt-- developing countries are happy to lend to us and we are happy to import their cheap goods.

The point of the book is that this won't last forever, or much longer:

"When you have the money--and "you" are a big, economically and culturally vital nation--you get more than just a higher standard of living for your citizens. You get power and influence, and a much-enhanced ability to act out. When the money drains out, you can maintain the edge in living standards of your citizens for a considerable time (as long as others are willing to hold your growing debt and pile interest payments on top). But you lose power, especially the power to ignore others, quite quickly--though hopefully, in quiet, nonconfrontational ways. And you lose influence--the ability to have your wishes, ideas, and folkways willingly accepted, eagerly copied, and absorbed into daily life by others."

DeLong and Cohen predict the end of neo-liberalism, the worldwide movement of the last 35 years to privatize, deregulate, and loosen barriers to trade and capital movements. The world heeded our neoliberal advice through the 1990s but now watches with cynicism as we practice what we didn't preach:

"When the United States bails out its auto industry, or its banks, or insurers, or airlines--shouldn't France and Germany do so, too?"

The authors examine the history of the U.S. financial system, in a similar fashion as Johnson and Kwak do in 13 Bankers. From the 1940s to 1970s, we had high income taxes and major restrictions on financial sector activity. Yet, we saw low unemployment and 2.5 percent annual increases in productivity. From the 1970s onward we had lower income taxes and deregulated all sectors of the economy and saw The Great Stagnation-- lower productivity growth. DeLong reminds us that deregulation was championed by those on the Left, like Ted Kennedy and Jimmy Carter:

"Deregulation was, however, a fringe technocratic good-government movement. And it would have in all probability remained a fringe technocratic good-government movement were it not for the macroeconomic breakdown of the 1970s...The failure of the managers of the mixed economy to produce full employment and price stability in the 1970s undermined the whole enterprise--and created the opportunity for the neoliberals to attempt to implement their dream."

The neoliberal enterprise was embraced by those on the center-left as much as those on the far right. The Fed had been soft on inflation in the 1970s, and there were solid arguments for freeing up the private sector from onerous regulation in an increasingly competitive global market. The answer to the central question of whether to make the pie larger or make it more equally distributed became more slanted toward increasing the size of the pie:

"Politicians on the left tended to give a Rawlsian defense that the best way to help the poor was not to punish but to incentivize the rich: Shrinking the regulatory, interventionist, and management role of the states and cutting back on progressive taxes would align the economic incentives of the rich with the social goal of economic growth, and in the end, the relatively poor would wind up better off in a more unequal but much richer society. Politicians on the right tended to regard greater inequality as an absolute virtue: Those at the top of the economic pyramid--because of their smarts, their skills, their enterprise, their industry, their luck, their success at choosing the right parents--deserved a very comfortable life and to be sharply distinguished from their fellow citizens."

The widening income desparities-- the growth in income has been extraordinarily slanted toward upper-incomes has quashed progressive faith in the enterprise.

"The ratio of the top 1 percent (of incomes) to the middle fifth went from 10 to 26 times. What caused the change?"

1. "The top 10 percent (of income) owns 77 percent of all stocks," and those rose in value. 2. Marginal tax rates on upper-incomes were cut. 3. "Huge, recent waves of unskilled immigrants, legal and illegal, compete for low-wage jobs, pulling down the bottom of the income scale."

4. "Imports and offshoring: The influx of imported goods pushed down employment and pricing power at American manufacturers."

5. The decline of unions.

6. Technology replacing low-skilled workers.

7. Culture: CEO pay, top athlete pay, etc. have grown very disproportionately to everyone else.

The authors then relate the phenomena:

"Is there a connection between rapidly rising inequality, stagnant middle-class earnings, and the collapse of savings in the United States? It is very likely that these trends are all closely linked. Faced with stagnant incomes, seeing themselves falling behind those above them on the income scale, and spending their evenings watching Lifestyles of the Rich and Famous, what did the average American family do?"

The average American family took on debt to keep their lifestyles in line with the increasingly wealthy.

"Between 1966 and 2006, this debt, adjusted for inflation, rose by almost 3,000 percent."

This is the agreed-upon hypothesis for our financial crisis from both DeLong on the Left, and Raghuram Rajan on the Right. The push for homeownership--sponsored by the government--increased the amount of this debt, and the bubble built:

"(T)hough mortgage debt rose from about one-third of GDP in 1990 to over 80 percent now, home equity (the percentage of the house not owed as mortgage debt) fell from two-thirds of GDP in 1990 to one-half of GDP by 2006; it has, infamously, fallen since."

The beneficiary of this movement was the financial sector.

"As manufacturing declined as a percentage of what Americans produced--from 21 percent of GDP in 1980 to 14 percent in 2002, finance grew to fill the gap--exactly! And though just about every think tank and politician issued dire warnings about soaring health-care costs, none came forth with programs, or even warnings, to restrain the growth of finance...Finance was the driving force. It had achieved the cultural dominance that so often goes hand-in-hand with economic dominance: its gigantism and ubiquity, its tonic impact on the entire economy, its fabulous success, the sheer gushing of money, its generous funding of elected politicians, its seconding of its top executives to top posts throughout the regulatory apparatus of government, and its simple and powerful message of "let the market work its magic." It was so easy."

People with degrees in math, engineering, physics, etc. moved from building stuff to engineering financial instruments-- CDOs, CDS, etc. Hence, most of our recent productivity gains have been in the financial sector alone.

DeLong points out, as I thought about recently, there were always two exceptions to the neoliberal rule: Technocratic central banking and defense spending. Through the space race and winning the Cold War, the U.S. government subsidized the invention of the semi-conductor, microwave oven, the Internet, and other private sector "spin-offs." What we called "defense spending" the rest of the world called "protectionism." What DeLong doesn't point out is the rise of monopolies in the financial sector that, as Hayek preached, threaten the neoliberal order before government does.

The fear that international economists had in the last 15 years was of a sudden collapse of the dollar from, for whatever reason, the international community losing its faith in this system. That didn't happen, as the various countries involved worked to keep the value stable. Instead, the world witnessed the collapse of the U.S. financial system and the problems seemingly created by the neoliberal shift in the last 35 years.

But the other aspect of the global economy that threatens the neoliberal order that DeLong and Cohen highlight is the rise of sovereign wealth funds. It's not just rich private citizens making major investment decisions, it's rich countries-- Russia, Norway, Saudi Arabia, China... over $3.5 trillion dollars held in foreign investments. These countries aren't going to be content holding low-yielding assets like U.S. Treasuries forever, especially if America looks unwilling to deal with its long-term structural deficits (Medicare). Eventually, they will move more and more into ownership of private companies. We've already seen some of that tension recently-- the xenophobic reaction when a Dubai company tried to buy a Houston port. They already have the power to direct investment in their own countries-- to engage in industrial policy.

The authors look at some of the rules proposed for these sovereign wealth funds, but it's quite silly to think that national interests won't rule the day. And the U.S. has now lost its ability to influence or preach.

So, what must happen? The U.S. needs to save more and spend less. China needs to save less and spend more. One hopes this happens gradually, orderly, because it will cause shifts in our productive sectors that will be difficult overnight. We'll be manufacturing and exporting more, and our currency will likely no longer be the world's reserve.

I give this book 3.5 stars out of 5. The authors don't bother giving an exposition of where neoliberalism comes from, or explicitly state that countries that eschew markets do so at their own risk (although DeLong preaches this to his students). They also don't talk about how the U.S. is supposed to start saving more when it has a social safety net unfunded into the future with long-term structural deficits as a result.

But that makes it a short read, easy for a layperson or undergraduate to understand.