If the U.S. No Longer Leads, Who Will?

These days, American economic leadership is being repeatedly thrust into question.

Surely, the likes of China and Russia have long been complaining about a “uni-polar” world dominated by the United States and demanding some kind of an orderly collective economic and financial system to be put into place. Since the advent of the global economic crisis, even close allies in continental Europe and Canada who share the American belief in the market economy, free trade and private enterprise have raised doubts about the Anglo-Saxon model of unfettered capitalism and highly speculative financial markets. Meetings of the Group of Twenty leading industrialized and emerging economies now regularly moot altering the international economic architecture which has been in place since World War II.

Economic Malaise

The United States is indeed suffering a period of economic drift, but it isn’t a real problem. True, we have been living beyond our means, running enormous budget deficits and getting a free ride on the dollar, buying more abroad than we can afford and letting others support the global reserve currency.

But none of this would have prevented the United States from carrying on as a global leader. In fact, by running budget deficits and sustaining domestic consumption, the United States has provided a market for the rest of the world to develop — which many countries have done successfully, most notably Mexico, India and China. Since the end of World War II, the United States has been consistently running trade deficits, providing dollars which the rest of the world needed in order to invest at home and to stabilize their domestic financial systems.

Finally, even excessive government borrowing is not a major problem over the short term. The U.S. Treasury supplies the global financial system with safe and secure instruments which savers around the world use to keep their savings.

The United States has been getting paid dividends for setting up the global economic and financial system and acting as its guarantor. The system has been working well, and both the United States and its creditors benefit from it. In the 1960s, European central banks — with the notable exception of the Bank of France — held on to their paper dollars even though they could exchange them for gold at the U.S. Federal Reserve. In the 1970s, oil exporters held vast amounts of U.S. debt. Now, Japan, China, Russia and other exporters keep buying U.S. Treasuries because they all have an interest in preserving this system.

Political Instability

Nevertheless, the United States has lost its ability to lead — and did so all of a sudden, seemingly overnight. A decade ago, when the dot.com bubble burst and corporate malfeasance came to light, the U.S. government implemented tough measures, notably the Sarbanes-Oxley Act. Even though U.S. regulators were criticized for excessive zeal and unfavorably compared to hands-off regulation in the U.K., the subsequent financial crisis, which hit London-listed shares especially hard, showed which approach was correct.

But in the current crisis, the United States seems unable to provide any useful solutions or models not only for the rest of the world but, most importantly, for its own economy. It has no plausible way to achieve sustainable growth and bring back the 8.4 million domestic jobs lost since the start of 2008. The government is gridlocked. None of the crucial issues dividing society and weighing on the economy — from immigration laws to overhaul of the financial sector to health care reform — have been resolved.

New York Times columnist Thomas Friedman wrote recently that foreign participants of the 2010 World Economic Forum in Davos, Switzerland, kept taking him aside and asking what was going on in Washington. For the first time, he notes, the rest of the world has started to worry about political stability in the U.S. — words that used to be reserved for Third World countries.