Saturday, October 14, 2017

Book Review: The Accidental Superpower

The Accidental Superpower, by Peter Zeihan, has a long subtitle: "The Next Generation of American Preeminence and the Coming Global Disorder." The thesis is summarized in a talk Mr. Zeihan recently posted here, and which I reviewed in my previous post, here. Both the book and the talk are a perfect trifecta of things that interest me: geography, politics and economics. Accordingly, my enthusiastic account of the video might be described as "breathless."

I found the book equally fascinating, and I pretty much inhaled it as others might a good novel. Mr. Zeihan is a talented writer and makes an excellent case. But now I will force myself to take a more critical eye and look for weaknesses. There are a few.

Briefly, Mr. Zeihan's thesis is that two things have changed: 1) the Soviet Union is no more, and even Russia itself is in the process of disintegrating; 2) The shale revolution means that the United States is largely energy independent, and therefore no longer relies crucially on foreign trade as it once did.

The result is that the global free trade regime, institutionalized under the Bretton Woods framework, is breaking down. From the US perspective, Bretton Woods provided lots of allies as a bulwark against the Soviets, and also guaranteed American energy supplies, including from the Persian Gulf. In return, the US policed global sea lanes, ensuring safe travel from the Skagerrat and Malaccan Straits, all the way to the Straits of Hormuz and everything in between.

The result is the Soviet Union was defeated, and everybody got rich--from Western Europe to Japan, Korea, and even China, Israel, Chile, and more.

But now, because of shale oil, America has little incentive to patrol the global trade routes. Accordingly we will no longer guarantee shipping through the Persian Gulf or the Indian Ocean, or over much of the rest of the world as well. Absent energy needs, the USA depends less on trade than any other country on earth, and can simply rely on itself. Or so Mr. Zeihan maintains.

The US can get away with this new isolationism because it is blessed in two ways: geography and demographics.

Geographically, America has more navigable, internal waterways than the rest of the world combined, not even counting the intracoastal waterway from Chesapeake to the Rio Grande. Since transport by water--even today-- is more than a factor of ten cheaper than by truck, and still a factor of three cheaper than rail, the US has a huge advantage. Further, our water network overlaps the largest bit of agricultural land in the world. Put bluntly, a homesteader in Iowa had, via the Mississippi, cheap access to global markets, even from Day One in the early 19th Century. By comparison, today's small farmer in Mexico's Chiapas state still has no cheap access to any market, not even Mexico City.

The Iowan will get rich. The Chiapas peasant will remain poor no matter how much some stupid Commandante rails against the injustice.

Second, while birth rates have declined in most of the world, the US still has relatively bright demographic prospects (though perhaps not as bright as Mr. Zeihan imagines). By contrast, countries like Canada, Japan, Greece, and especially China and Russia, are facing a crisis.

Using these two factors as a guide, Mr. Zeihan offers predictions for the next 15 years, beginning in 2015. The book was written in 2014--a very long time ago. Back then oil cost $100/bbl, the Canadian dollar fetched US$1.05, and the word "trump" doesn't even appear in the index. Further, he never mentions robotics (a subject in the more recent video), which certainly changes the situation considerably.

Still, for all that, his predictions hold up reasonably well:

  • Russia is at the point of demographic collapse and will cease to be a viable nation within the next decade.
  • The Chinese economy will collapse, and China as a unitary state will disintegrate. He points out that China throughout its history has only briefly existed as a single state.
  • Japan, no longer able to source oil from the Persian Gulf, will need to conquer neighboring, oil-bearing territories to meet its needs. He predicts that Manchuria and Sakhalin Island will fall to the Japanese.
  • The fastest growing economy over the next fifteen years will be Mexico (though the spread of robotics might change this).

So I think all of this makes sense, and I am now making sure that my retirement funds don't include any investments in China--that part of his argument is completely convincing. Still, there are some flaws, and it is now my duty to point them out.

1) Geography and demographics are certainly important, but hardly determining. That America has a near-perfect geography is as much historical accident as anything. Andrew Jackson could have lost the Battle of New Orleans, or worse yet, not fought it at all. A president not named Lincoln might have agreed to Southern succession on the condition of peace. A talented Canadian negotiator could have settled on the 42nd parallel rather than the 49th. Any of these would have changed American history dramatically, negating our geographical advantage.

History is contingent. Or put another way, history is just one damn thing after the other. Geography is the stage on which it all takes place, but it really doesn't tell us very much about the ultimate outcome. None of Mr. Zeihan's predictions will come true if the US descends into civil war, or if California really secedes from the union, geography notwithstanding.

Demography isn't all that it's cracked up to be, either. For example, Greece and Japan both have similar geographies (mountainous, seafaring nations), and similar demographics (old). Yet the prognoses are very different: Greece is predicted to be a failed state, while Japan will muddle through mostly as is. Culture matters a lot. Mr. Zeihan gives it too short shrift.

2)  I don't think Mr. Zeihan understands very much about economics. Some of this is just semantic--he refers to geographically-rich countries such as the US as "capital-rich." I think "resource-rich" would be more precise. Capital is investment in plant and equipment, which can be bought and sold and where depreciation is a problem. None of that applies to the Mississippi River, at least not in any meaningful sense.

Despite having no navigable waterways, Japan is a capital-rich country because of its beautiful cities, high-tech factories, elaborate rail system, and skilled labor force.

3) Mr. Zeihan claims that because of the retirement of the baby-boomers, total capital will decline. This is partly because we're not saving anymore (I stopped saving last month), and also because we're living off our accumulated wealth.

And this is true as far as it goes, but Mr. Zeihan leaves out the other half of the picture. Beyond withdrawing our savings, we are also withdrawing our labor. Capital is often usefully expressed as capital density: capital per worker. If total capital declines and the total number of workers declines, there is no obvious change in the capital density. So I think Mr. Zeihan exaggerates the scale of this problem.

The more important problem is the decline in the labor force. If Mr. Zeihan had phrased his argument from that point of view I think he'd make a stronger case.

4) Despite the crystal clarity in most of the book, there are a few sections that just didn't make any sense. For example, he claims that the Mexican drug war will lower the cost of labor--and for the life of me I don't understand his argument. It doubt it's true. First, a drug business, and much more a war, requires labor and therefore competes with other industries, raising wages. And second, civil discord makes labor less flexible and less productive, increasing the total cost. Again, I don't believe he thinks like an economist.

5) Mr. Zeihan apparently has never heard of comparative advantage. While the geopolitics he describes will undoubtedly change the comparisons by which the advantage is calculated, the principle will still hold.

Mr. Zeihan lumps all 1.2 billion Chinese together as "low-cost labor." But surely among that mass of humanity there exists particular skills and infrastructure that are comparatively advantageous--be it porcelain or shoelaces or rice or whatever. The US will still trade with China.

So I am skeptical that there will be the collapse in world trade that he predicts. Yes, the Americans will withdraw from the Persian Gulf and the Indian Ocean. And maybe even from the Mediterranean. But likely not from other important trade routes.

So he's left out culture and economic complexity. That let's him tell a simple, engaging, largely convincing story. It's fun to read. I think it's mostly true. But it is far from inevitably true. And indeed, there are enough differences between the book (2014) and the video (2017) to indicate that it won't be true.

Further Reading:

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