Global Public Goods From The Hegemon: The New World Order [Part II] by Bill O’Grady of Confluence Investment Management
This report is the second installment of our four-part series on The New World Order. This week we will focus on two themes. First, we will examine the global public goods the superpower provides, and second, we will analyze how the U.S. has provided those goods. The global hegemon will often face tensions between the desires of domestic constituencies and its foreign obligations. Every superpower has to negotiate these pressures and each tends to have its own particular ways of meeting both objectives. However, it should be noted that no superpower can subjugate the goals and aspirations of its citizens indefinitely. In other words, if the cost of hegemony becomes too high, a nation may be unable to maintain the position. History shows that no superpower dominates forever. History also shows that there are sometimes “gap” periods between superpowers; unlike 1945, the changeover is not always simultaneous.1 I believe the evolution we are currently seeing, which will be discussed in Parts III and IV, will keep the U.S. as the reigning hegemon but with a much different manner of exercising that role.
The Global Public Goods from the Hegemon
The superpower’s public goods consist of two broad categories, military and financial. In terms of the military, the hegemon acts as the global peacekeeper. Although it doesn’t become involved in all conflicts, it does have the power to do so and will tend to intervene when a conflict threatens what the hegemon considers to be a vital interest.3
Since global economic growth is usually in the interest of the hegemon, the other key objective is to protect global shipping. Anything from thwarting piracy to preventing regional powers from becoming “gatekeepers” at important shipping chokepoints is the responsibility of the superpower. Thus, the hegemon is usually the largest naval power in the world.
In addition, the superpower usually needs to engage in covert actions for those dangers that don’t warrant direct military action but still need to be addressed.4 The hegemon, with this extensive intelligence apparatus, provides information to allies that cannot afford or are simply unable to collect themselves. Not only does that help with global security, it further ties other nations to the hegemon.
Essentially, the hegemon has to be able to project power globally. It needs to employ both direct and covert methods to fulfill this requirement. Unlike a “normal” nation, who only needs to defend its own sovereignty, the superpower needs to maintain global order.
The financial public goods the superpower provides are as follows:
- Act as consumer (importer) of last resort;
- Coordinate global macroeconomic policies;
- Support a stable system of exchange rates;
- Act as lender of last resort;
- Provide counter-cyclical long-term lending;
- Provide a truly riskless AAA asset for benchmarking purposes; and
- Supply deep and predictable financial markets.
Every hegemon creates its own policies to meet both its domestic needs and provide these global public goods. The Dutch and the British, the two previous superpowers, implemented the gold standard for international economic policy. This met the financial public goods of numbers 2, 3, 6 and 7. The gold standard committed nations to an international regime where a trade surplus nation would accumulate gold, which would raise prices on domestic goods, making that nation less competitive and, eventually, lead to an erosion of the surplus. Thus, providing long-term lending (#5) occurred somewhat automatically, although it tended to enforce austerity on a trade deficit nation that its working classes would oppose. Since suffrage was limited, these working classes were unable to express their preferred policies at the ballot box and had to suffer through falling wages or unemployment until the trade deficit was resolved. For individual nations, #5 was not met, but for the entire global economy, the gold standard did establish stability that counter-cyclical long-term lending would provide. The gold standard, through its mechanism of balancing trade and money, tended to reduce the lender of last resort role (#4).
The first public good was provided, along with the global security public good, through colonies. Colonization not only provided a global footprint for projecting military power, it provided economic depth that allowed the colonizing nation to build wider markets. This economic depth facilitated the role of importer of last resort because the colonizer could run a trade surplus with its colonies to prevent the importer of last resort role from becoming a constant drain on resources.
How the U.S. has Exercised the Hegemon Role
Due to historical and institutional constraints, the U.S. did not have the hegemon “tools” that Britain had when America became the leader of the free world in 1945. And so, American policymakers had to create new ways of projecting financial and military power to meet the challenge of hegemony.
First, by the time the U.S. accepted the role of superpower in 1945, the gold standard was severely compromised. The strong economic expansion fostered by defense spending during WWI led to more political power for the working class and women who worked in the factories to make military goods. This factor gave these groups power and led to expanding suffrage, which undermined the gold standard. During the Great Depression, nations that abandoned gold recovered quicker than those who maintained the link. The incentive to devalue against gold and “beggar thy neighbor” was strong. Returning to a full gold standard was risky; there was great fear that communism would be an attractive alternative to capitalism, and the automatic stabilizers inherent in the gold standard would lead to stifling austerity and support the search for alternative economic systems. So, at Bretton Woods in 1944, the U.S. established a system in which the U.S. dollar would become the reserve currency. In this system, instead of holding gold, nations would hold dollars. They could convert to gold at a fixed rate if they became concerned about American policy, but, in general, the U.S. ended the gold standard and implemented a dollar standard. Essentially, this tied the fate of the free world’s economy to that of the U.S., the supplier of the reserve currency.
The U.S. began as a rebellious colony which separated from the British Empire. Although Theodore Roosevelt gained a few colonies after the Spanish/American War, America didn’t conceive of itself as a colonial power. After WWII, the U.S. strongly supported the decolonization of the European empires. However, if the U.S. wasn’t going to use colonies to project power, it had to come up with other methods to fulfill this hegemonic role. Instead of colonies, the U.S. created a series of defense agreements, including NATO and a long-term defense agreement with Japan. It also created international institutions, such as the World Bank and the IMF, to act as facilitators of global finance. These institutions became tools of American power projection. In addition, the U.S. created a series of basing agreements which allowed the American military to project power across the world without direct control of the hosting nation.
Finally, America had to abandon its traditional small government/small military stance it had enjoyed as a normal nation. The U.S. had to project power globally. Thus, it needed a military to match that role. In order to build that military and support the constant expansion of consumption to meet the importer