It Is Not Easy Being Leader Of The World

Some days it’s just plain stressful when the world keeps looking to you to solve its problems, to be global hegemon.

(As always, by "hegemon" I mean not evil imperialistic power, but instead what historians mean from their study of the Delian League in Ancient Greece: "benevolent leader".  A hegemon provides public goods, whether that is the defense of small Greek city states against the Persian Empire, being lender or consumer of last resort across nations, stabilising and regulating international financial markets, ensuring safety of international shipping routes, and so on.  The critical point is that hegemon implies benevolence; "benevolent hegemon" is redundant. If it were otherwise then, among other things, the evocative phrase "Hegemony or Empire" would be just a meaningless and empty contrast.)

Following the 2008 Global Financial Crisis, proponents of hegemonic stability theory (HST) – the idea that the world economy is most stable when some nation is powerful enough to assert its position as global hegemon – looked to the US to return with a roar to the world stage. Those proponents drew inspiration from Charles Kindleberger’s studies of the 1930s world recovery from the Great Depression. Then it was the US that led the way to global prosperity; so too now only when the US is restored as global hegemon will the world economy recover and global stability return.

In this view, as global hegemon the US cannot help but be benevolent.  The US provides global public goods on which the rest of the world either shirks responsibility or cannot afford. Under HST, the world looks with respect and admiration at its hegemon. The US’s soft power is complete: what the US wants is automatically what the rest of the world wants.

But HST proponents will find it difficult reconciling their view of what the US can do with what the US actually does. Matthew Klein in February 2014 described how the US Federal Reserve needed to base its actions only on what was happening in the US economy, not on any risks of potentially destabilizing other economies:

"the turmoil in certain emerging markets wouldn’t affect the policy decisions of the U.S. central bank. […] Monetary policy is hard enough without having to worry about the spillover effects to other countries that should take care of themselves."

So, the Fed was not going to change its plans just because some emerging markets might be at risk.

Right before this Fed reassertion of its position, Raghuram Rajan, the highly-respected Governor of the Reserve Bank of India, had drawn attention to how, in contrast to the crisis days of late 2008, by early 2014 international monetary cooperation had broken down. Rajan noted how emerging markets had powered global economic recovery from the depths of early 2009 while the advanced economies remained moribund. But by January 2014 when those same emerging markets needed greater international cooperation with the advanced economies, the industrial countries were instead saying, "we’ll do what we need to, you do the adjustment".

In Rajan’s view and experience (and those of many other observers), the global economy had become ever more inter-connected, to where one might think sensible policy-makers ought to believe:

"We would like to live in a world where countries take into account the effect of their policies on other countries and do what is right, broadly, rather than what is just right given the circumstances of that country."

The industrial countries, led by the US, would not play by these implicit rules of the game.

Rajan’s statements together with a growing clamour from other emerging economies elicited a US response with four distinct lines of reasoning. First, there was fallback to how, within the rules of Federal Reserve System operations, the US central bank could not, by law, take into account the well-being of any party except the US economy when charting its actions. Thus, US global hegemony, i.e., US provision of global public goods, would run foul of US law.

Second, some observers in the US claimed that the world economy was not really as inter-connected as Rajan and others might think. Given the coordination that all policy-makers had embarked on to save the global economy in late 2008, this claim rings both false and self-servingly hypocritical. Third, some observers in the US suggested that if any foreign economy was adversely affected by US monetary policy, it was only because those economies ran "high current-account deficits, high fiscal deficits and relatively high inflation". So, really, "the challenge is brought on by their own domestic policies [and] it’s unfair to say it’s all the Fed’s fault."  And, finally, that old saw: What is good for the US is, ultimately, good for the world.

It must be tough to be global hegemon, being constantly reminded that stability of the world economy is your responsibility. No one could fault a diverse group of domestic observers and policy-makers for statements that are appropriate and sensible in difficult local circumstances, but when viewed from an international perspective are instead jarring and inconsistent with a modern, enlightened take on global policy-making.

The problem is, world leadership demands high standards. Soft power is hard to earn but easy to lose. In world leadership, whatever the reality, it is perception that matters. Suppose that instead of the US suggesting monetary policy was hard enough without having to worry about spillovers onto other countries, it was China responding to the charge that its exchange rate policy and savings behaviour were causing global imbalance: "Bringing hundreds of millions of my people out of poverty is hard enough without my having to worry about your trade deficits too".

Suppose that economies adversely affected by US monetary policy were thus affected because those economies ran high current-account deficits and high fiscal deficits.  Then those countries adversely affected by the savings outflow from Asian Thrift?  They were thus affected because they were countries prone to high current-account deficits and high fiscal deficits anyway.  Indeed, the US itself would be an example of that.


If the US is to draw on the approbation of its domestic lawmakers before it can conduct economic policy that might turn out to be good for others, then the US really should not be lecturing Germany on how with great economic power comes great responsibility, how in the Eurozone Debt Crisis, Germany should be helping other nations at its own expense.

Finally, it almost surely remains true – as it has been for decades – that what is good for the US economy is good for the global economy.  But then so too what is good for India, China, Brazil, and Indonesia is directly good for over a third of humanity, and indirectly good for likely yet another third of humanity in the economies that trade with them.  The argument on US centrality in the global economy was literally true when the world’s economic centre of gravity hovered just off the eastern seaboard, somewhere in the Atlantic Ocean.  But in the last three decades that centre of gravity has already moved 5,000km east, drawn by the rise of China and the rest of East Asia.  Soon perhaps even more than what is good for the US economy, it will actually be what is good for the East that is good for the global economy.

Yes, HST is almost surely right that the connected global economy needs a global hegemon. The question is, are we looking for our hero where we should or just where we’ve come to out of laziness and habit?  When will we need to agree the US can no longer be global hegemon?

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  2. I would note that one of the major themes of Charlie’s *World in Depression* was that what the world economy needed in the 1920s and 1930s was for the USA to be a benevolent hegemon–and yet the USA was not willing to take on the job…

    Brad DeLong

  3. Yes, Kindleberger wrote convincingly how in the 1930s the world needed the US to be global hegemon but that the US was reluctant to serve. And yes, the world today again needs benevolent global leadership. But perhaps rather than mere reluctance, it is now its outdated vision of the world that keeps the US from global hegemony.

    • slightly optimistic

      “When will we need to agree the US can no longer be global hegemon?”
      A majority decision at the G20 or the UN surely won’t do it. So much for global politics which determined that global financial stability is necessary.
      Incidentally the chairman of the G20’s Financial Stability Board is the governor of the national Bank of England. Independence seems compromised as usual.

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  5. Chris Lowery

    This sounds a little to me like wishful thinking on your part. Some people, including many who are not particularly sympathetic to the U.S., argue that the most beneficial thing the U.S. could and should do now to improve the global economy is to get its own economic house in order. Your criticisms of the Fed’s actions to contribute toward this strikes me somewhat as sour grapes. While it can certainly be argued that the more recent actions by the Fed have been less than helpful to the emerging economies, it is also true that at the height of the financial crisis the Fed’s actions in advancing many billions of dollars to foreign-owned banks and foreign central banks were instrumental in stemming the free-fall of the global financial system. If that’s not the beneficial act of a hegemon, I don’t know what is.

    In addition, without getting into the weeds on the issue, there’s a strong argument to be made that (for whatever reason, altruistic or selfish) the U.S.’s acting in the broader interest — in absorbing excess global production and savings for many years — played a significant role in creating and encouraging the very imbalances that led to the Great Recession. I believe that the U.S. should take aggressive steps, including doing more to protect its domestic market, to address those imbalances, while at the same time protecting and advancing its workers’ interests. More to the point, I would argue that the current U.S. trade pattern with China benefits both China and U.S. multinational corporations, while working against the interests of American workers and their families. If this trade were brought into balance in a manner that respected higher U.S. wage and workplace standards, it would cost very little in terms of U.S. consumer prices, while doing much to reverse the current race-to-the-bottom practices of multinational corporations in searching out the lowest global employment and environmental standards — benefitting both American and foreign workers, including those in China.

    While you regularly suggest that China may be more benign and globally-indispensable now than it is often portrayed as being, and will soon supersede the U.S. as global hegemon, I’d ask if you truly believe that there is anything (other, perhaps, than certain rare earth elements) that China produces now, or will in the near future, that the U.S. and its other trade partners couldn’t easily do without if they were to engage in the same mercantile practices that China currently utilizes to protect its market. And if the answer is, as I suspect, no, then how do you reconcile that with the view that it will be permitted to succeed to global hegemony with the sufferance of either the U.S. or other countries?

    As an aside, this is not to defend every action of the U.S., or to suggest that its actions have been universally altruistic — clearly, they have not. But I do find the constant drumbeat to criticize and write off the U.S., and to denigrate all its actions as self interested and destructive, as being tedious in the extreme in the face of so many other countries criticizing the U.S. at the same time that they are shirking their own regional and global responsibilities. In fact, I would suggest that both the U.S. and other countries would be much better off, if those countries with the means to do so would assume a greater share of what should be a collective burden in maintaining global peace and promoting global prosperity. Absent their willingness to step up to their responsibilities, in my opinion they forfeit the right to criticize those who do, however imperfectly the actions of those who do may be.

    And lastly, I would point out that the U.S. economy and its people still retain extraordinary and unequalled competitive strengths. This is not the first time in its history that the U.S. has been challenged more by its own internal issues than by external threats. I would suggest that, if the past is any indication, at some point in the near to midterm Americans will finally be forced to get their act together and straighten out their internal political and economic issues — and the result will likely be good not only for Americans, but for others, as well…

  6. Chris – I agree with you on many of the substantive points you make. To be clear, that I am often critical of the US doesn’t mean I don’t deeply respect and admire both the nation and its people – even though I might not put it quite the same way that you do. I don’t know that I suggest that China [or indeed any other country] will be, as you say, “more benign and globally-indispensable” than the US, or that China will be global hegemon any time soon. If I do come across as suggesting that then I’ve been careless in my writing and speaking. I have no firm reason to believe either – instead, what I do believe is that hypocrisy and inconsistency and misunderstanding and prejudice need to be ruthlessly pointed out – because it is by ridding our discourse of those that we will have greatest hope for advancing everyone’s well-being.

    Thank you for your thoughtful remarks.

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