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Economists: Internal Stagnation is Biggest Threat to America

New book examines economic collapse of great powers

• October 19, 2013 5:00 am

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If America one day collapses like the great powers that came before it, it will not be because of a foreign invasion, one economist said Thursday at a Charles Koch Institute event.

Tim Kane, chief economist for the Hudson Institute, said the cause will be much closer to home.

"The existential crisis facing America is not terrorism or barbarians at the gates," he said. "It’s our own internal stagnation."

Kane spoke about his new book, co-authored with former Council of Economic Advisers chairman Glenn Hubbard and titled Balance: The Economics of Great Powers from Ancient Rome to Modern America. The book contains eight case studies of great powers, ranging from Ottoman Turkey to post-World War II Japan, that all floundered due to economic and political stagnation, according to the authors.

For example, the inchoate Roman Empire flourished in the first century under its first emperor Augustus, who favored expansion of trade and decentralization of authority to its provinces, Kane said. Hadrian then pulled back in the second century, to the dismay of the bellicose Roman public, declining to fight for the expansion of territory and building walls.

Hadrian compensated for his drop in popularity by forgiving all Roman debts and enshrining a law that would award bonuses to the Praetorian Guard every time a new emperor assumed power. The result was the "third century crisis," a 50-year period of political instability that gave rise to 25 different Roman emperors, Kane said.

Rome’s economy tanked as Severus debased the currency and Diocletian nationalized the shipping industry, offered free bread in cities, and decreed that every Roman, including their children, must stay in the same profession, Kane said.

"Beneath every economic imbalance is a political imbalance," he said.

Kane and Hubbard develop a new measure of "economic power" in their book, factoring in the GDP per capita, economic growth, and GDP of countries relative to the United States. Europe has 73 percent of the economic power of the United States, while China has 40 percent and Japan 15 percent, according to their calculations.

However, Kane noted that U.S. economic growth is trending downward. The Congressional Budget Office projected last year under one scenario that America’s debt-to-GDP ratio would surpass its World War II-era peak of 109 percent around 2025, he added.

Kane attributed the troubling U.S. economic trends to dysfunctional institutions that he said have always imparted perverse incentives throughout history.

Campaign finance laws, beginning in the 1970s, barred candidates from coordinated campaigns with independent spending by individuals and penalized corporations and unions for political activity, Kane said.

Those changes cemented financial advantages and clout for the two main parties and actually increased polarization, he said. Politicians no longer had the incentive to work together on issues such as entitlement reform as a result, preferring to focus on short-term battles rather than long-term compromises.

Institutions and incentives matter, Kane said.

"People have become less partisan, but our two parties have become more extreme," he said. "It’s not the political parties—it’s the rules."

Although some political commentators view the recent Citizens United Supreme Court decision striking down restrictions on independent spending for political speech as an abettor to polarization, Kane said it should actually improve matters by inviting innovative ideas from outside the two major parties. He pointed to the emergence of the anti-slavery Republican Party amid the Democratic-Whig divide in the 1860s as a similar historical precedent.

Kane and Hubbard call for measures like a "bipartisan" balanced budget amendment in their book that would cap outlays each year at the level of median annual revenue collected in the seven prior years. The ultimate goal is to maintain functioning political institutions that crumbled in past empires, Kane said.

"The economy will take care of itself if you bring good politics back," he said.

Published under: Campaign Finance, Economy, Think Tanks