Why income inequality threatens world order

The Boston GlobeJuly 2, 2014 

President Obama has been taking a lot of flak lately for his reluctance to get more involved militarily in conflicts in Syria and Ukraine.

But his attitude mirrors the public mood. Americans on both the left and the right are feeling ambivalent about their superpower status.

Last year, for the first time ever, more than half of all respondents in a Pew poll agreed that "the U.S. should mind its own business internationally and let other countries get along the best they can on their own." Just 20 percent felt that way in 1964.

It's tempting to chalk that up to weariness after more than a decade of war. But it's not just wars that Americans are shying away from. It's also free trade agreements and foreign aid.

I suspect that this new isolationism stems from something that has little to do with Afghanistan or Iraq: income inequality here in the United States.

Here's my theory: Around the time of World War II, the United States offered much of the world a deal that went something like this: "We'll protect you, financially and militarily, but in exchange, you've got to follow our rules."

The deal was, in many ways, a win-win. Financial rules crafted in 1944 in Bretton Woods, N.H., helped stabilize the world economy, which had been shattered by total war.

The World Bank and the IMF were created to give struggling countries loans, but only if those countries pegged their currencies to the U.S. dollar and followed monetary policies laid down by the United States. Nearly four dozen Allied nations signed on. "They thought it was the best deal out there, or the only deal out there," said Benn Steil, author of "The Battle of Bretton Woods."

U.S. military dominance also helped make the world more prosperous. Countries that sheltered under our security umbrella spent their energies rebuilding, rather than defending against the next threat.

The upside for America was that we got to largely write the rules for the systems that govern the world today. We pick the head of the World Bank. We host the United Nations. We decide which bad guys get shut out of the world financial system, because the U.S. dollar is still so central to it.

But perhaps the biggest beneficiaries of this quid pro quo were U.S. corporations. As Europe regained prosperity, its citizens bought more of our stuff. In Asia and elsewhere, U.S. diplomats used their power to pry open foreign markets and push for favorable terms.

It paid off. Look at a chart of US corporate profits since the 1940s, and you will see an exponential climb. The incomes of the titans who ran those companies similarly skyrocketed.

Average American families grew more prosperous too -- at first. But in recent years, mean household income for 40 percent of American families has flatlined.

So it is any wonder that they've got buyers remorse on their superpower status?

After all, U.S. taxpayers, who make up 4 percent of the world's population, shoulder more than 40 percent of the world's military costs.

Last year, American taxpayers spent $600 billion on defense, more than China, Russia, Saudi Arabia, Britain, France, Japan, Germany, India, Brazil, Israel, and Iran combined.

Even after every soldier in Afghanistan comes home, the U.S. will still have 54,000 in Germany, 48,000 in Japan, 9,800 in the United Kingdom, and 15,000 in Kuwait. It's hard to justify policing the world to people who don't see enough police on their own streets.

"People clearly do question why we are spending so much money on overseas commitments when we have so many problems at home," said Steil.

But here's the thing: As more and more Americans call for reneging on this deal, more countries will worry that they can't trust us to protect them. They'll be more likely to take steps to protect themselves in ways that could be destabilizing. (Think: Saudi Arabian nuclear bomb.)

Once this deal is off, the world order as we know it will unravel. No one is sure what will come next. That's scary. That's why the only thing our allies hate more than American bossiness is American neglect.

The deal we made needs some tweaks. But it's still a good deal, for the United States and the world. To keep it going, we must ensure it's a good deal, too, for ordinary Americans.

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