The Year the World Economy Turned

The world economy has turned on the United States.

After an unprecedented seven years of peacetime growth, aided by declining real energy costs, cheap capital and, in recent years, expanding export markets, the free lunch ended. In 1990 U.S. economic expansion ground to a halt. Rising oil prices, a spreading capital shortage, tightening credit markets and the deadening burden of massive accumulated public and private debt took their toll. Moreover, frictions in the world trading system threatened to make the current recession one of unexpected length and depth.

Throughout the postwar period, the United States was accustomed to being master of its own economic fate. As the world's predominant economic power, America had the authority to mobilize other industrialized economies in time of crisis and to act unilaterally if necessary to protect its interests. But Washington and New York, once the world's preeminent political and financial capitals, must now share the spotlight with Tokyo, Bonn, Frankfurt and London. In this new multi-polar economic world, the United States is still the first among equals. But it no longer has the moral authority or the economic leverage to dictate the course of events. Leadership has of necessity become a collaborative effort. European and Japanese economic and political concerns now place real limits on U.S. action. The U.S. economy and American economic decision-making must now be adapted to an emerging global economy that no longer revolves around the United States.

The waning of the Cold War has changed the environment for U.S. policymaking. The internationalism of the Bush administration is frequently at odds with domestic isolationist elements on both the right and the left. In the past, foreign economic objectives were often subordinated to security concerns in a desire not to alienate allies. But without the constraint of the Cold War, America will not be as reluctant to aggressively pursue its economic goals. At the same time, it will have less leverage because Europe and Japan are less reliant on U.S. military protection. As a result, a more assertive America will confront a more assertive world, a prescription for confrontation.

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