I don't think the "Smart Power" term is meant to imply that we previously used stupid power... it's a buzzword, selected for immediate impression on an audience that's only half paying attention. What they are trying to communicate would be perhaps better expressed as subtle power vs crude power, but that would be too subtle for the audience.
One problem with the formulation is that power, crude or subtle, is only as smart as those who apply it, and I see no evidence that we're any smarter than we were before. You can apply crude power without being smart, and you can also apply subtle power without being smart, and make a mess either way. Try to be too subtle without an accurate and dispassionate assessment of what you're getting into and all you do is tie yourself in a series of knots.
Ego has always been an issue. Whether today's military is or is not superior to that of the early Vietnam years would depend on a number of factors, not least of which would be how we choose to define "superior". In any event I'd argue that the change in the US position relative to the rest of the world has more to do with political and economic factors than with military ones. I'm also not convinced that America has declined economically or politically: the situation has changed because the rest of the world has gained. That's not altogether a bad thing, in fact it's in many ways a good thing, but it does change the game and we have to change with it.
You could argue that the West has actually gained power... but so has the non-west, and at a greater rate. Again, this is by no means entirely a bad thing.
I dislike political correctness as much as anyone, but we have to recognize that the days when we could simply impose a solution that suits our interests are gone forever. Now it's all about seeking solutions that serve multiple interests, though none will ever be suited perfectly. It's analogous in some ways to the difference between a dictatorship and a democracy. In a dictatorship decisions are quick, simple, and clear; in a democracy they are anything but... but in the long run, which is more stable?
All of our current fights are being conducted in other nations, and in each case we are trying to establish a government that will be seen as sovereign, not subordinate to us. This necessarily constrains our military options. If we wanted to run these places as colonies and call the shots ourselves, we'd have more options, but that would raise a new set of problems.
I'm not convinced that AQ really wields significant economic power.
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