As we write, the crisis of the American welfare state remains a latent one. Few people, least of all in the government, wish to believe it is real. But the crisis could manifest itself with dramatic suddenness if there is a significant shift in the expectations of financial markets at home or abroad. And when the finances of the United States "go critical", there will inevitably be moves to cut back any federal program that lacks strong popular support. Though relatively inexpensive, and not in themselves a cause of American overstretch, "nation-building" projects in far-away countries will surely be among the first things to be axed.

After all, what could be more "discretionary" than the cost of running Kosovo, Afghanistan or Iraq? We are already seeing in Afghanistan, and will soon see in Iraq, how little America is actually willing to spend on postwar reconstruction. By May 2003, the United States had disbursed a paltry $5 million to the main Afghan Interim Administration Fund, a tiny fraction of the $20 billion the Afghan government says it needs to achieve economic and political stabilization.  This is especially astounding given the indisputable fact that it was in the anarchy of post-Cold War Afghanistan that Al-Qaeda took root and flourished.

In short, the colossus that currently bestrides the world has feet of clay. The latent fiscal crisis of the American welfare state implies, at best, an empire run on a shoestring, at worst a retreat from nation-building as swift as the original advance towards it. As Edward Gibbon once wrote, "the finances of the declining empire" do indeed make an interesting subject.

Niall Ferguson is Herzog Professor of Financial History in the Stern School of Business at New York University, and senior research fellow at Jesus College, Oxford University. Laurence J. Kotlikoff is professor of economics at Boston University.