A profound essay suggests that empires operate somewhere between order and chaos, and there comes a moment when great empires can be collapsed by seemingly minor disruptions.
Niall Ferguson, the Laurence Tisch Professor of History at Harvard University, has written a profound analysis of the destruction of empires for the journal Foreign Affairs, reprinted here. Ferguson posits that an empire’s slide into chaos is abrupt and disruptive, rather than gradual and cyclical, as traditionally thought.  

Historically, scholars seemed unified around the notion of gradual decline and phased transitions:

A series of five paintings by Thomas Cole, which hang in the New York Historical Society, depict the fall of empires as a process moving through five stages: lush wilderness, a nascent agrarian idyll, an opulent merchant society, destruction from invading armies, to collapse and desolation in abandoned land.
Historians Giambattista Vico, Oswald Spengler, and Arnold Toynbee share a common vision of destruction as seasonal and rhythmic. Paul Kennedy’s The Rise and Fall of the Great Powers discusses the phenomenon of “imperial overstretch”, the notion that great powers overextend themselves, economically and militarily, and create the very seeds of their destruction.
Similarly, anthropologist Jared Diamond proposes a “green” theory of collapse: that empires destroy themselves by abusing their natural environments. Ferguson notes that Diamond falls prey to the same blunder that traditional historians have made, that whether the cause of collapse is economical, cultural or ecological, it occurs over a protracted period of time, often centuries.
The decline of the Roman empire has been attributed to long-term, collective failures that converged to cause its collapse.
Protracted decline prevents leaders from making changes, as the pain of making immediate and often costly changes is too high when contrasted to the alternative, leaving these issues to future generations to resolve.
The threats facing the United States are often characterized as long-term in nature, the “slow march of demographics”, the economics of an aging population that will eventually overwhelm economic sustainability.

Ferguson suggests that the cyclical nature of destruction as a theory of empire collapse is fundamentally flawed. Empires are complex societies, delicate social, cultural and economic systems that operate fluidly, organically, and in a state of delicate stasis. Sudden, often small events or circumstances, such as those described by Nassim Taleb in The Black Swan, can disrupt this equilibrium and create a crisis of such magnitude that the entire organism collapses.
It is these “proximate triggers” that we must be concerned about, that can cause wide-spread conflagration and destruction of complex systems. Small inputs to these systems can “produce huge, often unanticipated changes – what scientists call the amplifier effect.” “When things go wrong in complex systems, the scale of disruption is nearly impossible to anticipate.”
“Empires exhibit many of the characteristics of other adaptive systems – including the tendency to move from stability to instability quite suddenly.” Ferguson argues that the speed of collapse of the world’s greatest empires strikes against the very notion of cyclical collapse: Rome collapsed in just five decades, the Chinese dynasty fell in little more than a decade, and the French Bourbon monarchy passed from “triumph to terror” in only four years. Within a decade from the end of World War II, the British empire had conceded independence to Bangladesh, Bhutan, Burma, Egypt, Eritrea, India, Iran, Israel, Jordan, Libya, Madagascar, Pakistan, and Sri Lanka.
Ferguson argues that most “imperial falls” are associated with fiscal crises. These crises are marked by “sharp imbalances between revenues and expenditures, as well as difficulties with financing public debt.” What is the implication for the United States? According to Ferguson, “alarm bells should therefore be ringing very loudly, indeed, as the United States contemplates a deficit for 2009 of more than $1.4 trillion – about 11.2 percent of GDP, the biggest deficit in 60 years – and another for 2010 that will not be much smaller.”
He further argues that “over the last three years, the complex system of the global economy flipped from boom to bust – all because a bunch of Americans started to default on subprime mortgages, thereby blowing huge holes in the business models of thousands of highly leveraged financial institutions.” Is this the trigger event for a collapse of American Empire?
Even if his hypothesis is wrong, his argument merits considerable attention. Are we at the end of our American Empire? Is the American Dream dead? Are we at the precipice of a sharp decline in our standard of living and the demise of the American Century, or is this the Great Recession merely a bump in the ascendancy of our Empire? Either way, we are staring at an unprecedented economic event, itself generating a loss of confidence so remarkable and breathtaking that it will likely cripple American bravado for a generation.

State pension funds are significantly magnifying risk and manipulating their expected rates of returns in order to reduce massive shortfalls between actual pension funds on-hand and expected pension liabilities to their retirees.
Following the Pew Center’s Trillion Dollar Gap report on the pension crisis, The New York Times reports, here, that states continue to purposely distort their expected rates of return to prevent their already large pension funding shortfalls from growing steeply. Significantly, states are also concentrating greater portions of their assets in a riskier range of investments, such as commodity futures, junk bonds, foreign stocks, deeply discounted mortgage-backed securities and margin investing in an effort to seek higher returns.
The outright inflation of expected rates of return on pension assets, often pegged at over 8 percent, allows governments to diminish their annual cash contributions to the plans, but ultimately succeeds only in deferring the pain to later years. The fiction of inflated returns on pension assets temporarily closes the funding shortfall and allows governments to ease their current budgetary constraints, but fails to address the fundamental urgency of the crisis: that pensions and retiree health care benefits are grossly underfunded.
Pegging their expected rate of return to a realistic rate could have immediately disastrous consequences, though, and cause marked increases in annual contributions and significantly increase the gap between available assets and expected liabilities. A case-in-point is Colorado, which assumes an 8.5 percent rate of return and a $17.9 billion shortfall. Resetting this rate to a more realistic (yet still high) rate of 8 percent would increase the shortfall to $21.4 billion.
In desperation, state and local governments are also attempting to maximize returns by investing their assets in volatile financial instruments. This, as private companies are increasingly moving their assets towards safer fixed-income instruments, such as bonds, and away from risky instruments or equities. This strategy will merely increase volatility, and subject the pension funds and individuals’ retirement savings to the vagaries of the market and another collapse. The lessons from the last few years remain unlearned by those who manage America’s assets, yet the consequences of these failures are ultimately borne by others.

A trillion dollar gap exists between states’ pension and health care promises to their current and future retirees and the funds on hand to pay for these liabilities.
Taxpayers have, for decades, been induced into believing that unfunded pension plan increases were painless methods of increasing employee pay, especially pay for unionized workers.  Deferring the pain has left state and local governments with a massive, unfunded liability, though, and could bankrupt many state governments.
The report published by the Pew Center on the States highlights the chasm between the promises made to government employees throughout the last three decades and the stark choices that will have to be made to pay for these benefits in the coming decades. These choices will exacerbate tensions between state government stakeholders, their citizens and employees.
The gap is roughly divided into two benefit components, pension costs and health care benefits. These benefits will increase steeply over the next few decades and will burden states and local governments with very difficult choices, namely, whether to dramatically raise new revenue by increasing the tax burden or slash services to their constituents, or a combination of both.
The Pew report starkly highlights these important facts:

The gap is likely to be much higher, as the measurement date for this study and the pension assets was June 2008, well before the financial implosion and collapse of the financial markets.
Accounting gimmickry called “smoothing” allows investment managers to report their gains and losses over time, easing the pain of any losses by deferring their recognition. This accounting gimmick allows funds to understate losses temporarily, but will accentuate those losses in later years if fund valuations or contributions fail to keep pace.
Up until 2000, states had combined surpluses of $56 billion in their retirement plans. From 2000-2008, “growth in pension liabilities had outstripped growth in assets by more than $500 billion.”  This fact is amazing, because the period of 2000-2008 roughly coincides with the most dramatic asset valuation bubble in history, leading to equally large pension asset bubbles. The deflation of asset valuations could collapse pension asset valuations and lead to significantly higher contributions or cuts in these programs,to the extent permitted by law.
Retiree health care and other non-pension benefits represent an even gloomier statistic: only $32 billion in assets fund a projected $587 billion liability. Only two states have more than 50 percent of the assets needed to meet their liabilities for retiree medical or non-pension benefits, Alaska and Arizona, meaning that the largest states are  significantly underfunded.
Unlike pensions, states “generally continue to fund retiree health and other non-pension benefits on a pay-as-you-go basis – paying health care costs or premiums as they are incurred by current retirees.” As “both medical costs and the numbers of retirees grow substantially each year, these costs will escalate far more quickly than average expenditures.”
As the number of retirees grows over time, “extremely underfunded systems confront an additional problem: their assets need to be kept more liquid to pay benefit As a result, investment opportunities that can prove advantageous to a large investor with a long horizon are closed off.”
Returns on pension plan assets are extremely volatile, with median annual losses approaching 26 percent in 2008.
Pension plans typically invested in conservative assets in the 1970’s, but have begun shifting their assets to equity investments. By 2007, “equity investments accounted for 70 percent of all state pension plan assets”, increasing plan volatility exponentially and placing the assets at risk.
States have given themselves “funding holidays” as favorable investment returns masked the deficits in actual contributions. Now that that the market has stumbled badly, the folly of these funding decisions has been revealed.
States have promised a slew of unfunded benefit increases in lieu of salary increases, which are extremely difficult to remove or rescind. These unfunded benefit increases include early retirement incentives, sharing of excess returns, and spiking of final salaries. In general, pension benefits are constitutionally protected and become a political time bomb for any politician attempting to retract them.

The pincer-like effect of severely depressed asset valuations, which will ultimately result in significantly decreased tax revenues, and lower pension asset valuations, will cripple local governments. This will necessitate increased pension contributions, which will severely test the ability of local and state governments to maintain balanced budgets. The true test will be whether these state and local governments can uphold the insane promises they made to their employees, over many decades, and raise taxes significantly, or whether they will be forced to abrogate those promises and services in favor of fiscal sanity and discipline.
Either way, the future looks increasingly bleak for these municipal entities, who made promises they knew they could not keep, and saddled future generations with these obligations. Beginning soon, local governments will either have to renege on the promises made to employees decades ago, tax current and future generations for benefits never received, or curtail services to their stakeholders and citizens. These choices are all poor, and will create significant pain for everyone.