CAMBRIDGE – One of the first challenges that President Barack Obama will face is the effects of the ongoing financial crisis, which has called into question the future of American power. An article in The Far Eastern Economic Review proclaims that “Wall Street’s crack-up presages a global tectonic shift: the beginning of the decline of American power.” Russian President Dmitri Medvedev sees the crisis as a sign that America’s global leadership is coming to an end, and Venezuelan President Hugo Chávez has declared that Beijing is now much more relevant than New York.
Yet the dollar, a symbol of American financial power, has surged rather than declined. As Kenneth Rogoff, a Harvard professor and former chief economist of the IMF notes, “It is ironic, given that we just messed up big-time, that the response of foreigners is to pour more money into us. They’re not sure where else to go. They seem to have more confidence in our ability to solve our problems than we do.”
It used to be said that when America sneezed, the rest of the world caught a cold. More recently, many claimed that with the rise of China and the petro-states, an American slowdown could be decoupled from the rest of the world. But when the United States caught the financial flu, others followed. Many foreign leaders quickly switched from schadenfreude to fear – and to the security of US treasury bills.
Crises often refute conventional wisdom, and this one reveals that the underlying strength of the American economy remains impressive. The poor performance of Wall Street and America regulators has cost America a good deal in terms of the soft power of its economic model’s attractiveness, but the blow need not be fatal if, in contrast to Japan in the 1990’s, the US manages to absorb the losses and limit the damage. The World Economic Forum still rates the American economy as the world’s most competitive, owing to its labor-market flexibility, higher education, political stability, and openness to innovation.