But one point that follows from the financial crisis which is terribly, terribly important is that by combating our crisis of private debt with an extraordinary expansion of public debt, we inevitably are going to reduce the resources available for national security in the years ahead. Because as the debt grows, so the interest payments you have to make on it grow, even if interest rates stay low. And on current projections, the federal debt is going to be absorbing around 20 percent, a fifth of all the taxes you pay, within just a few years. The item of discretionary federal expenditure most likely to be squeezed is, of course, defense. And there are lots of historic precedents for that. So, I fear that the financial crisis doesn't just impact on the economy. It actually impacts on American power in the hardest sense.
Unlike Britain in 1945, which was crushed by debt and slow growth, doomed to imperial decline, I think there is a way out for the United States. I don't think it's over. But it all hinges on whether you can re-energize the real mainsprings of American power. And those two things are: innovation, technological innovation, and entrepreneurship. Those are the things that made the United States the greatest economy in the world, and the critical question is: Are we going to get it right? Can we revive those things in such a way that, in the end, we grow our way out of this hole the way the United States grew its way out of the 1970s and, of course, out of the 1930s?
Do the American people have the will -- and does the Obama administration have the right policies -- to rev up what William Baumol calls the free-market innovation machine? I'm confident about the first variable in that equation, not so confident about the other.