Balance

The Economics of Great Powers from Ancient Rome to Modern America

Glenn Hubbard, Tim Kane

• Publisher: Simon & Schuster
• Year: 2013
• ISBN:
  9781476700274
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

In this groundbreaking book, two economists explain why economic imbalances cause civil collapse—and why America could be next. From the Ming Dynasty to Ottoman Turkey to Imperial Spain, the Great Powers of the world emerged as the greatest economic, political, and military forces of their time—only to collapse into rubble and memory. What is at the root of their demise—and how can America stop this pattern from happening again?A quarter century after Paul Kennedy's Rise and Fall of the Great Powers, Glenn Hubbard and Tim Kane present a bold, sweeping account of why powerful nations and civilizations break down under the heavy burden of economic imbalance. Introducing a profound new measure of economic power, Balance traces the triumphs and mistakes of imperial Britain, the paradox of superstate California, the long collapse of Rome, and the limits of the Japanese model of growth. Most importantly, Hubbard and Kane compare the twenty-first century United States to the empires of old and challenge Americans to address the real problems of our country's dysfunctional fiscal imbalance. Without a new economics and politics of balance, they show the inevitable demise ahead.

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INTRODUCTION

And on the pedestal these words appear:

“My name is Ozymandias, King of Kings:

Look on my works, ye mighty, and despair!”

Nothing beside remains. Round the decay

Of that colossal wreck, boundless and bare,

The lone and level sands stretch far away.

— Percy Bysshe Shelley, from “Ozymandias”

Human life one hundred years ago, on the eve of the First World War, was dramatically and measurably worse than it is now. The average annual income of a person in Western Europe was $3,077, and only a thousand dollars higher in England and America.¹ No one had televisions or antibiotics in 1913, let alone computers. A thousand years ago, life was more miserable still. The average annual income in any region of the world in A.D. 1000 is estimated to have been the equivalent of four hundred dollars, except in northeast Asia, where it was fifty dollars higher. Human life was generally “nasty, brutish, and short,” as the philosophers said, perhaps more so in cities than in the state of nature. But two thousand years ago, human life was rich and happy in a civilization that had emerged like an island in the sea of historical misery. The emperor Caesar Augustus presided from his modest house on the Palatine hill over the marbled city of Rome and the interlinked empire of the same name. After four prosperous decades of rule by Augustus, which had followed a century of civil wars, A.D. 13 was the last full year Rome enjoyed before his death. Historians credit Augustus with carving a stable and prosperous empire in the marble of time, a Pax Romana that endured for centuries. Yet Rome did not, perhaps could not, last forever. Three centuries of Roman leaders after Augustus could not cure the relentless stagnation of Roman politics and erosion of its economic vitality. Why?

This book is not about empire, but about economic data and the hard facts of Great Powers in human history. We stand on the shoulders of historians who have perceived this subject matter as a narrative of great leaders, great armies, and great cultures. All were mortal. Thanks to countless scholars, our generation can understand this puzzle better than ever before. What our book aspires to add comes from our peculiar domain of economics, which by nature sees the world in a most unnatural way. We see “supply” and “demand” and “incentives” and “constraints” in markets not just for goods and services, but also markets for prestige, security, and political power.

A quarter century ago, the Yale historian Paul Kennedy penned an authoritative survey of the deeper forces shaping world affairs, in The Rise and Fall of the Great Powers, which introduced readers to the insight that relative economic strength was the main foundation for military and diplomatic forces that dominate most traditional narratives.² The explosion of unparalleled historical data in recent years gives us an opportunity to reexamine the Great Powers.

Consider imperial Rome, which many do now as a unipolar and intellectual forefather of Pax Americana in our time. The popular imagination sees Germanic tribes massed by the thousands on the far side of the Danube River, clanging their battle axes and shields, readying to invade. In the end, we have been told, Great Powers succumb to barbarian hordes. This image echoes through history, as far back as the three hundred Spartans fighting against the Persian armies at the “hot gates” of Thermopylae, to the noble British resisting the dark continent of fascism, even to our modern struggle against jihadi terrorists. This heroic image must be recognized as an irresistible illusion. Military defeat is, of course, a capstone on the decline of Great Powers, but history errs in confusing symptom with cause. Recoil at the idea that mundane currencies, debt notes, and productivity ratios determine the future. But, at the very least, agree that the truth about the fate of nations is not swords, not plowshares, but a combination of the two.

The Battle of Adrianople on August 9, A.D. 378, is just as good a date as any to mark the turning point in Rome’s decline and fall. The invading Goths were cornered near the city of Adrianople (located near the modern city of Edirne, Turkey) by Roman forces led personally by Emperor Valens. He wanted to repel the foreigners once and for all. On that day, however, the Romans did more than lose the battle; they were routed. Emperor Valens was killed in battle along with most top officers, tribunes, and soldiers. Rome’s vulnerability sparked a century of Germanic invasions that pushed further against the imperial border until the great city itself fell.

That account of the battle is more or less correct, but it misses the point. For one, Roman society had been rotting internally, not just for decades, but for centuries, before Valens died in battle. More importantly, that story mistakes why the Goths were fighting in the first place. They were rebelling against their Roman allies, not invading, and only because pillage was their only recourse to starvation. In the year 376, these Gothic tribes were fleeing the Huns and were allowed to settle south of Danube as new allies of the Roman army. But Valens inadequately supplied them with promised land and provisions, then sent them on a death march to a different city, where they were denied entry. It is no surprise the Goths rebelled, but their success proved how weak the empire had become. This chapter of history affirms that the decline of Rome, contra Kennedy, was caused not by imperial overstretch or any kind of external threat. It shows, as does history from ancient empires to modern Europe, that the existential threat to great civilizations is less barbarians at the gates than self-inflicted economic imbalance within.

Overcentralization of political power, for example, is a common factor in imperial decline, usually a century or more after the centralization is enacted. Many Westerners know the story of the seven epic voyages of Admiral Zheng He (Cheng Ho). A century before Christopher Columbus discovered the New World, the Ming empire could have dominated the world if it had not abruptly turned inward in the middle of the fifteenth century. Few realize how dramatic and economic in nature the story is. The Yongle emperor Zhu Di ruled from 1402 to 1424, and ordered the restrictive trade policies of the Confucian technocrats to be reversed. He opened trade missions with Japan, the Philippines, India, and beyond. He funded a strong navy that stamped out piracy. Then, thanks to centralization of authority, Zhu Di’s successor closed off trade, which was reversed by the next emperor, then reversed again by the next. The great Ming treasure fleet was ultimately destroyed in harbor at the emperor’s own command. To confirm the message that the act symbolized, imperial decrees made the construction of oceangoing ships punishable by death.

Empires and nations often lose their balance without understanding the tectonic economic forces in motion. On the other hand, rulers are often unable to adapt even when they understand those forces, an eerie and fascinating parallel to the Great Powers in our time. Imperial Spanish rulers went bankrupt again and again, even as shiploads of New World silver flooded Spain. They remained oblivious to the productivity revolution that empowered their rivals. Great Britain panicked in 1900, as European rivals caught up to its industrial might. Partially in denial of relative decline, Great Britain could not imagine expanding the level of potential engagement with its subject territories beyond free trade.

Indeed, if America’s global economic power ends, it will almost surely be due to a loss of fiscal balance that forces it down the well-worn path of history’s Great Powers. The cracks we hear—a minor credit warning from Moody’s or acrimonious political fights over the debt ceiling—confirm that the only existential threat facing America is from America itself.

Once we look at history through the lens of economics, we can never look back. History becomes much more than a drama of personalities, revealing a surprising rhythm of policy choices that seem irrational with the benefit of hindsight. One theme in this book is that political institutions are often too slow to adapt to changing economic reality. The institutional focus of our theory of decline is neither original nor timely. Mancur Olson (1932–98) was a pioneer, particularly his Rise and Decline of Nations, published in 1982. The political scientist Francis Fukuyama, who rose to prominence with his prescient “The End of History” essay in 1989, has been leading scholarship in this area ever since.³ And we are happy to find common cause with Daron Acemoglu’s and James Robinson’s Why Nations Fail, the 2012 book that made their decades of academic research on economic institutions publicly accessible. Their book powerfully explains how “inclusive” institutions trump “extractive” ones in generating long-term economic growth, and the political roots of vital institutions like the rule of law and property rights.

What our book adds is a new way to measure economic power, that vague notion so often expressed in daily discourse but never well defined. We also examine how once-vibrant societies become politically and economically stagnant, rather than how they grow in the first place. The bulk of the book studies the Great Power imbalance, invariably economic. Finally, we use those lessons to focus on the pending imbalance of the United States; we do so not just as scholars but as policy advisers.

AMERICA’S EXISTENTIAL THREAT IS FISCAL

America today faces a financial imbalance, threatening its world leadership as an economy and a power. The threat comes not from foreign enemies but from a breakdown in long-term fiscal discipline. In recent years, the budget deficit has grown to roughly $1 trillion every year, the mathematical result after $3 trillion in expenditures are matched by only $2 trillion in tax revenues, roughly. Readers are no doubt aware that what we are describing is a much bigger dilemma than the so-called fiscal cliff, the nickname of the political standoff that ended 2012 but was really just a minor chapter in story that has grown more dire over the past four decades.

Recent research by Harvard economists Carmen Reinhart and Kenneth Rogoff suggests that countries with a total debt to gross domestic product (GDP) ratio that exceeds 90 percent face a tipping point of decline.⁴ And the United States, with annual deficits that now amount to 5–10 percent of annual GDP and a debt-to-GDP ratio of around 70 percent, is rapidly heading toward a critical level of imbalance. That is a consensus—of economists. The consensus of politicians is a rather different kind, a bipartisan unwillingness to take action, arguing that “deficits don’t matter” and/or that deficits should be fixed . . . later (after the current recession/election/drought/insert-crisis-here has passed in a few years). Indeed, the United States has been getting away with runaway national debt at relatively low interest rates in recent years only because of the perverse contrast with European sovereign debts that are even more precarious. America is the debtor of last resort, the safe haven in a global glut of indebted sovereigns.

Where consensus is lacking among economists as well as politicians is how to bridge the fiscal gap. There are countless plans to fix the budget, coming from various blue-ribbon panels, notably the Bowles-Simpson commission, created in 2010 by President Obama. There have been hundreds of similar plans proposed ever since Ronald Reagan spotlighted the issue during the 1980 presidential election. And while we could proffer another solution, it is no longer credible to believe that even the best economic plan will be a solution. It is not just the economy that is imbalanced. Runaway budget deficits are not a math problem. They are a process problem, a political problem.

Many plans to fix the U.S. federal budget would work in a technical sense, but none can be enacted. Our political institutions cannot accommodate them. Dealing with this threat requires a change in Washington. The stagnancy of U.S. politics is the focus of It’s Even Worse Than It Looks: How the American Constitutional System Collided with the New Politics of Extremism, by political scientists Thomas E. Mann and Norman J. Ornstein. M...

Table of contents

• Cover
• Dedication
• Acknowledgments
• Chapter 1: Introduction
• Chapter 2: The Economics of Great Power
• Chapter 3: Economic Behavior and Institutions
• Chapter 4: The Ruin of Rome
• Chapter 5: Treasure of China
• Chapter 6: The Sun Fades on Spain
• Chapter 7: Rule of Slaves: The Ottoman Paradox
• Chapter 8: Japanese Opening
• Chapter 9: British Decimation
• Chapter 10: Europa: Unity and Diversity
• Chapter 11: California Dreaming
• Chapter 12: United States Beyond the Consequence Horizon
• Chapter 13: Amending America
• Appendix
• About Glenn Hubbard and Tim Kane
• References
• Notes
• Index
• Copyright