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After the Wall Street crash of 1987, there was a period of perhaps half a dozen years in which American self-doubt was a factor in international relations. The crash was blamed on “portfolio insurance,” the bubble-fuelling financial innovation of the time, and it persuaded many commentators that the U.S. economic model, featuring hyperkinetic trading of financial securities, was inferior to the bank-dominated systems of Germany and Japan. A few weeks after the crash came the publication of Paul Kennedy’s study of imperial overstretch, “The Rise and Fall of the Great Powers.” Kennedy’s warnings about the combination of vast military commitments with limited budgetary resources captured the mood of the nation: The book became an improbable best seller, despite its formidable 600 pages.
Looking back on that period, it is remarkable that the crash and the budget deficits of the 1980s had any impact at all on U.S. behavior. Within a few years, American confidence was boosted by the Soviet implosion, a fast victory in the first Gulf War, and the economic humbling of Japan and then Germany, despite their supposedly far-seeing banking systems. But although some celebrated “The End of History,” American self-doubt remained. “The cold war is over and Japan and Germany won,” some quipped; and in the 1992 election, a foreign policy veteran was unseated by a challenger who promised to put domestic economic challenges ahead of international ones. For at least the first year or so of his administration, moreover, Bill Clinton tried to act on his mandate. He downgraded the US-Japan military alliance in favor of an aggressive push to open Japanese markets—until Joe Nye, a contributor to this Forum, helped to reverse that error. He stood aloof from the war in the Balkans, at least until 1995. He presided over a decline in foreign policy spending, ranging from the peace dividend extracted from the Pentagon to the dwindling of US foreign assistance.