Heg bad – leads to excessive military investments which distort the economy and escalates global risks

Over time the United States' financial position has deteriorated sharply. During the Clinton administration reducing the budget deficit was a priority but the Bush II administration follows the Reagan administration in practicing extreme deficit financing. The United States is now the world's largest borrower, draining the world of liquid capital on an unprecedented scale of over $500 billion per year and $4 billion each trading day (Bergsten, 2004). Now the IMF warns Washington that US budget deficits "pose significant risks' not just for the United States but for the rest of the world." A 2003 IMF report notes: "Higher borrowing costs abroad would mean that the adverse effects of US fiscal deficits would spill over into global investment and output" (quoted in Becker and Andrews, 2003). In a brief period the financial situation has reversed to a condition of hegemonic instability. Taking stock, the hegemon's provision of financial liquidity has come with destabilizing effects all along: IMF enforced liberalization of capital markets exposed developing countries; financialization in the United States affected developing countries in the form of speculative capital ("flash capital"); and finally, the global consequences of financial deficits in the US.

The hegemon is a net source of development capital. The United States has been one of the stingiest foreign aid donors among OECD countries and this function has long changed from minimal to, on balance, negative: "since 1972 the American economy has been a net importer of capital (to the tune of 17 percent of gross national product last year)" (Ferguson, 2001: 127).

The hegemon serves as market of last resort While this has been true for quite some time, increasingly over time it has taken on a darker hue. By importing far more than it exports the US has built up a massive trade deficit (at $489 billion in 2003). The US share of world output declined from 25.9 per cent in 1960 to 21.5 per cent in 1980 (Kennedy, 1987: 436) and has continued to shrink. The rapid rise of Pacific Rim economies from East to Southeast Asia has been based on exports to the US. Some American and Asian dynamics dovetail: the rise of Wal-Mart to the status of the US and the world's largest retailer has been paralleled by the rise of Chinese and East Asian imports in the US. But couple this with American deindustrialization, loss of manufacturing jobs and increasingly also white-collar jobs, and growing American indebtedness at every level from the household to the federal government, and it is clear that this is not a sustainable pattern.

The US economy has been deindustrializing on a massive scale and suffers structural job loss. "The United States has lost 3 million manufacturing jobs in recent years" (Popkin and Kobe, 2003: 62). "From 1995 to 2002, the number of factory jobs rose 22 percent in Canada and 24.6 percent in Spain, versus a loss of 11.3 percent in the United States" (Diesenhouse, 2003). This differential is too large to be accounted for simply in terms of industrial maturity. Manufacturing jobs are cheaper in Mexico since NAFTA and cheaper still in China since China has become a WTO member. Outsourcing and "offshoring" now extend to service and software jobs that are cheaper in India. At Microsoft the motto is "Think India" ("two heads for the price of one"). Blue chip companies such as IBM are now moving jobs offshore; even state labor bureaus whose mandate is job creation send their information processing jobs offshore (a case in point is Indiana and the practice has since been retracted). One prediction is that "3.3 million services jobs in America will move offshore by 2015," led by the information sector, as part of "a trend that is real, irreversible and another step in the globalization of the American economy" (Lohr, 2003). In the 1990s vanishing manufacturing jobs seemed to be compensated by growth in new economy jobs, but since the dotcom bust this prospect has faded. The standard Clinton era response to job loss in manufacturing was that what you earn is a result of what you learn. This is now invalidated or refers to yet a higher learning curve; the jobs that are now moving offshore are straightforward software programming and code reading while software design remains onshore. But the American educational system is not prepared to take up this slack. The flexibility that enabled the US economy to generate many jobs during the 1990s now moves jobs offshore with the same agility. Flexibility, the post-Fordist code word, applied to corporate agility all along. The present wave of job losses squarely affects the middle class, which is already burdened by debt, so in time this will undermine domestic purchasing power.

The hegemon uses carrots rather than sticks. Carrots or sticks are probably in the eye of the beholder. What have been the carrots for Central America, for Nicaragua, Panama, El Salvador, Haiti? Particularly since the American victory in the Cold War, economic policy on the part of the Treasury and IMF increasingly became a political instrument to reward allies and discipline foes (Nederveen Pieterse, 2004b). The US budget for foreign aid and diplomacy has been shrinking as steadily as military expenditures have increased. American military expansion from the late 1980s now results in a million soldiers in 350 bases and 800 military facilities in 130 countries across the world; does this suggest carrots or sticks?

The hegemon endeavors to be the system's best behaved free trader. During the Clinton administration the WTO was promoted as the spear point of an American-led globalization project alongside NAFTA and APEC; in contrast, the Bush II administration has replaced reliance on the WTO with "competitive liberalization" and bilateral free trade agreements (Bergsten, 2004). The Bush II administration's recourse to steel tariffs and farm subsidies clashes with the WTO and the steel tariffs have since been repudiated by the WTO. The unilateralism of the Bush II administration has a general negative impact on international trade; trade policy has increasingly become an instrument of power politics (Bello, 2003).

The hegemon has a special responsibility for keeping the peace. This is not an unlimited commitment. Paul Kennedy (1987: 515) referred to "imperial overstretch," saying "the sum total of the United States' global interests and obligations is nowadays far larger than the country's power to defend them simultaneously." The American investment in unrivaled military superiority since the end of the Cold War has its own destabilizing ramifications: it comes with neglect of diplomacy, a pattern of investments that distorts the US economy, and mammoth projects to sustain the military-industrial complex such as Plan Colombia and billion dollar non-functioning weapons systems such as Raytheon's Patriot missile system and the Defense Missile Shield. The adoption of the preventive war doctrine in the 2002 National Security Strategy and the Pentagon strategy of "permanent war" imply a growing militarization of foreign policy which is destabilizing.

This is recognized in the mainstream business press. Control Risks, an international security consultancy based in Britain, describes American foreign policy in its Risk Map 2004 report as "the most important single factor driving the development of global risk." It notes that many in the private sector "believe that US unilateralism is creating a security paradox: by using US power unilaterally and aggressively in pursuit of global stability, the Bush administration is in fact precisely creating the opposite effect" (quoted in Fidler and Husband, 2003).