Financial Crisis and American Decline?

11/04/2008 05:12 am ET | Updated May 25, 2011
  • Joseph Nye Distinguished Service Professor, Harvard University; Author, 'Is the American Century Over?'

Is the current financial crisis an indicator of the long term decline of American power? When I wrote Bound to Lead in 1989, the conventional wisdom was that the United States (and its economy) were in decline. I did not believe it then, and do not believe it now. I was in Paris last week, and spoke with a prominent French economist. He urged that we pass the legislative package quickly because, in his words, " you have a financial crisis, but the real American economy is still strong." There has certainly been a lot of schadenfreude on the part of Putin, Chavez, and even Lula da Silva. Hugo Chavez skipped the opening of the UN to visit China saying that Beijing was now much more relevant than New York. Russian President Dmitry Medvedev said the crisis was a sign that America's global economic leadership leadership was drawing to a close. Putin blamed non-Russian causes for Russia's stock market collapse of more than 50%. But as noted in the New York Times after the failure of Congress to act last Monday, "In only a few days, Latin American leaders have gone from schadenfreude to fear." New York and Washington are still more important than other capitals. Certainly, Wall Street and Washington have made a mess with their hubris and failure to regulate, and a painful recession is likely. They deserve the criticism they are receiving. However, assuming that we accept the pain of recovering from the bubble promptly (avoiding the Japanese trap of prolonged bailouts), and remain open to the rest of the world, the American economy still has impressive long term strengths that are reflected in our productivity. But we may pay a price for the recent debacle in our soft power. The seeming effectiveness of our capital market institutions provided an important source of attraction to the United States. Will we recover that or will it be a case of "once burned, twice shy?" Let's hope that an Obama victory next month will start the recovery of both the economic and soft power that the Bush Administration has squandered over the past eight years.