Atlas Unburdened: America's Economic Interests in a New World Era

The end of the Cold War era invites a strategic shift in the economic as well as the military posture of the United States. Pluralism in the former Eastern bloc means that the East-West conflict ceases to be the defining strategic reality. Moreover, the coming of age of Western Europe and Japan signals a new pluralism of economic power in the West. The birth of these twin pluralisms calls for a fundamental redefinition of the American national interest.

Yet, thus far, these dramatic changes have not generated a fundamental reappraisal or major initiatives from American officials, other than a willingness to begin gradual arms reduction. For the basic American conception of its global interest tenaciously resists revision. Since the late

1940s, the American stance in the world has been built on two bedrock premises: the containment of Soviet communism, which was legitimate and necessary, and the promotion of global laissez-faire, which always had a more doubtful foundation.

To Americans the pairing of anticommunism and laissez-faire may seem obvious and even axiomatic, but the first has never logically required the second. Western Europe and Japan, after all, are also resolutely anticommunist, but they have never been crusaders for classical economic liberalism. For the United States, however, the Cold War and global laissez-faire went together.

Geopolitically, an anti-Soviet grand alliance engendered a satisfying deference to the United States by America's allies. On East-West relations, they tended to follow Washington's lead, while Washington, in turn, paid for its leadership by bearing a disproportionate share of the costs of the Cold War. On matters of economics, America took the lead in promoting the ever greater liberalization and integration of the global market system. But as guardian of that system, the United States was constrained, paradoxically, to tolerate a good deal of covert mercantilism among its trading partners. The United States subordinated its own national economic interest to goals for the system as a whole, which it viewed almost as an extension of itself. The role of the dollar as the world's reserve currency, likewise, brought geopolitical benefits but escalating economic costs.

The twin goals of containing communism and promoting American style capitalism offered a reliable hierarchy of foreign policy goals. Postwar geopolitics, at its core, was about limiting the reach of the Soviet Union. That imperative provided a dependable calculus of American national interest in every theater of the Cold War. Peripheral conflicts were deemed significant to the United States mainly on the basis of whether they advantaged the Soviet Union. Our commitment to liberal capitalist democracy could be subordinated to accommodate fairly nasty right-wing regimes (Chile, El Salvador, South Africa) and even wayward communist ones (Yugoslavia, China, Cambodia), as long as they blocked Soviet expansionism. In the American political mainstream, the only serious policy disputes of the Cold War era hinged on whether the Soviet linkage in particular regional conflicts was strong enough to justify U.S. intervention in such places as Vietnam, Cuba, or Nicaragua.

The logic of the postwar system also provided a hierarchy of geo-economic goals, though these were more intuitive and rarely enunciated. America's own economic power was assumed as a given. Explicit industrial goals were eschewed as unnecessary, as contrary to America's stated ideology, and as a bad example for America's trading partners. Hardly anyone acknowledged or addressed the contradiction between practicing a mixed economy at home and promoting a laissez-faire economy globally. America's reflexive goal was to move the world economic system ever closer towards the ideal of laissez-faire, with ever freer movement of goods and capital.

There was an economic and political logic to America's dedication to laissez-faire. As the leading capitalist nation, America's manufacturers and bankers saw advantage in the freest possible movement of goods and money. As the leaders of the anti-Soviet alliance, U.S. diplomats were pleased to offer America's Cold War allies the prize of free entry to the world's biggest market. The two goals complemented each other perfectly.

Thus, both ideology and geopolitics reinforced the fierce loyalty to "free trade" that has defined membership in the bipartisan foreign policy establishment. Yet this logic meant that the United States often had to be content with one-sided free trade lest we offend allies. It also meant that America tended to be sheepish and unstrategic about its own departures from free trade in weapons procurement, farm price supports, textile quotas, and various "voluntary" restraints extracted from trading partners. These ad hoc measures were understood as concessions to interest groups that violated the free trade ideal. Policy makers had no alternative model for defining their objectives for the world trading system.

Until the revolutionary events of 1989, the idea that the United States should revise its conception of its national security to emphasize economics rather than geopolitics offered a certain logic, but a very difficult case to make to voters and editorial writers. For even if the American economy was deteriorating, the high politics of the Cold War remained paramount. Moreover, the central role of the United States as propagator of the free market faith made it awkward to preach any brand of economic nationalism as the policy of choice. As a result, politicians who favored any form of industrial policy, "conversion" from military to commercial prowess, or even a new emphasis on economic renewal were seen not as proponents of a dissenting school of political economy, but as jingoists, simple protectionists and geopolitical naifs.

With the end of the Cold War, however, the dissenting view can be taken seriously. The dissenting model reflects a growing understanding of the economic burdens that the United States has been assuming as it has played the role of Atlas. The burdens have not only been those of the U.S. defense budget. Since the publication of Paul Kennedy's The Rise and Fall of the Great Powers, the conventional wisdom among critics of American policy is that the United States "overstretched" militarily in the Cold War and is paying the piper today in economic decline. While the military burdens have certainly been considerable, they are now fortunately on a downward path. The more serious, continuing problem stems from America's commitment to an unrealistic, laissez-faire conception of the global marketplace that undermines both the world economic system and America's own well-being. If the end of the Cold War era allows us to reduce our military burdens, the emergence of a new, pluralistic global economy allows us to share some of the burdens of maintaining a stable and growing world economy and to redefine America's interest within it. The alternative to laissez-faire is not an inward-looking protectionism. There is another option that was well understood at the end of World War 11: a liberal internationalism that genuinely serves America.

The Paradox of Hegemony
In Professor Charles Kindleberger's term, the United States for nearly fifty years has played the role of geo-economic "hegemon" much as Britain did in the middle and late nineteenth century. In Kindleberger's hypothesis, which has since been embellished by Stephen Krasner, Robert Keohane, John Ruggie, among others, the global economy tends to be systemically unstable, for much the same reason that an unregulated domestic economy is unstable. An unstabilized market economy is vulnerable to cycles of overproduction and underconsumption and to panics that originate in the financial sector. The financial instability in turn leads to monetary contractions that only reinforce the macroeconomic propensity to boom and bust, as their effects spread to the "real" economy

Domestically, this tendency could be leavened by activist macroeconomic policy as well as interventionist central banking and other regulatory measures intended to contain financial instability. These could be explicitly Keynesian, via appropriate public budget deficits and surpluses; or they could involve an implicit Keynesianism of countercylical military spending, social insurance, and multi-year union contracts, all of which serve to stabilize purchasing power across the business cycle.

But internationally there is no Keynesian mechanism because there is no central currency, nor any central monetary authority or government capable of enforcing a common macroeconomics. Instead, when individual nations try to solve their domestic economic problems, they restrict the market for other nations' products by periodically deflating or resorting to mercantilist devices. Tendencies to overproduction, competition based on cheap wages, and resulting shortfalls of aggregate demand are only intensified when nations attempt to capture strategic advantage in particular products at the expense of other nations. The traditional liberal remedy for the multiple dilemmas of global free commerce is simply more free commerce. But free trade, by itself, does not solve the Keynesian problem and may in fact worsen it.

Kindleberger and others have suggested that the global economy can be stabilized only when a powerful nation plays the role of flywheel. The hegemon, in Kindleberger's conception, performs several functions. It serves as quasicentral banker, providing the system with financial liquidity in times of stress, as well as credit to temper exchange rate instability. It serves as market of last resort and encourages other nations to keep their markets relatively open. As a relatively rich and technologically advanced nation, the hegemon is also a net source of development capital. And it has a special responsibilty for keeping the peace.

The nineteenth-century version of this system worked roughly as the theory of hegemonic stability describes, though it coexisted with such anomalies as empires and German, French, American, and Japanese protectionism. It also had the notable disadvantage of being based on a gold standard, which achieved stability at the price of periodic deflation and left liquidity dependent on discoveries of new gold fields. After World War 1, when a weakened Britain ceased to be the world's central banker and a hesitant America was not yet willing to play a hegemonic role, dissension and eventual anarchy reigned. According to this theory, the system slid towards depression and autarky, then into crude nationalism and war, precisely because it lacked a benign hegemon.

Keynesian vs. Laissez-Faire Internationalism
In the revisionist memory of orthodox economists, the postwar reconstruction that began at the Bretton Woods conference of 1944 was nothing more than the restoration of classical economic liberalism, based on free movement of capital and goods. As Professor Jagdish Bhagwati wrote in his recent jeremiad, Protectionism, "The Bretton Woods Conference ... designed an international infrastructure that embodied the principles of a liberal international order." But at the time, the goal was something else entirely. The statesmen of the 1940s were activists. They were mindful of the need to invent an alternative to the two extremes that recent history had burned into their consciousness: the terrible instability of laissez-faire capitalism during the 1920s and the destructive retreat during the 1930s into autarky and currency blocs, which in turn led to popular revolt against democratic rule, extreme nationalism, and the Second World War. The postwar system, in John Ruggie's nice phrase evoking Karl Polanyi, was not intended to be classical liberalism but rather "embedded liberalism" -- a market economy acknowledging social realities and tempered by stabilizing institutions.

In the 1940s none of the architects of recovery on either side of the Atlantic placed much credence in laissez-faire. The Great Depression had discredited the idea that markets were self-regulating. The war had demonstrated the power of economic planning and the possibility of full employment. Virtually every Western leader of republican conviction, whether nominally Social Democratic, Christian Democratic, plain Democratic, or even high Tory, believed government had a major role to play in the economy. Government would take on a variety of jobs as stabilizer and stimulator of growth, planner of public investment, guarantor of high employment, umpire of social bargaining, and director of a benign welfare state.

In 1944 the statesmen of Bretton Woods attempted to design a world economic order biased towards full employment and high growth. Prior to the 1940s, one was simply a free trader or a protectionist. But the Keynesians defined a third alternative -- a liberal internationalism that was by no means tantamount to laissez-faire internationalism. The two key figures here were Keynes, the chief British representative at Bretton Woods, and his American counterpart, Harry Dexter White, who was a left-wing New Dealer and very much an American Keynesian. Both held that the traditional gold standard compelled nations to balance their external accounts by contracting their domestic economy. An economy growing faster than the rest of the world would suffer an excessive appetite for imports, soon followed by outflows of gold. And under a gold standard yoked to free trade, the only way to remedy this imbalance was to constrict the domestic money supply and domestic demand. Such national austerities cascaded into global austerity, which then invited defensive national autarkies and deepened the downward spiral.

The Keynesian remedy was to share a degree of sovereignty with a new global monetary authority. From that source, nations could borrow liberally to cover temporary payments deficits, rather than responding in the traditional way, by deflating. The Keynesians hoped that this regime would both permit domestic economic policies of full employment and gear the international system as a whole towards plentiful credit and high growth. The Keynesians were qualified free traders: they considered the systemic commitment to high growth, planning, and full employment necessary to make porous domestic markets politically bearable. In the absence of such a global regime, nations might have to limit free movement of capital and goods to practice Keynesianism in one country.

But, to borrow from T.S. Eliot, between the conception and the creation fell the shadow. Once Roosevelt died and the war ended, neither the Truman administration nor the Congress was prepared to cede that degree of sovereignty to intemational institutions, least of all to institutions likely to be dominated by foreigners of dubious collectivist persuasion. The actual International Monetary Fund turned out to be rather more modest, partly because forces of financial orthodoxy had regained influence in both Britain and America, and partly because of the concerns about sovereignty A parade of bankers, led by the president of the New York Federal Reserve Bank, Benjamin Strong himself, testified against the ' already watered down IMF design for a global regime based on cheap credit, which seemed reminiscent of nineteenth century cranky populist monetary schemes. In 1946 and 1947 the United States retreated from its bold commitments to a new global financial order, and Europe descended into recession. What rescued global Keynesianism -- of a sort -- was the Cold War.

However, instead of a Keynesian world order, American power came to play the stabilizer role that was briefly envisioned for the IMF and World Bank. The dollar, not Keynes' imagined reserve currency "Bancor," provided the system with liquidity and a bias toward growth. The Marshall Plan and America's Cold War spending, not a large-scale World Bank, balanced America's chronic export surplus and provided capital for postwar reconstruction. On paper, a degree of sovereignty had passed to a new generation of supranational bodies that looked to be a vast improvement upon the frail institutions of the Versailles regime. But in practice the U.S. Congress was willing to cede such authority only because the new international institutions were well understood to be proxies for the United States.

There was now a sharp disjuncture between the forms of a moderately Keynesian global regime, the geopolitical realities, and the understanding of what had been ventured. Though the global economic system invented in the mid 1940s was emphatically a mixed regime with Keynesian and social democratic stabilizers, the regime's guarantor, the United States paradoxically had the least enthusiasm for either abandoning classical liberalism or ceding sovereignty.

Thus the very departures from laissez faire that helped anchor a mixed system were not entirely acknowledged by the system's prime sponsor. Conservative Americans accepted nominally supranational institutions only because they were surrogates for American power. They tolerated restrictions on the free flow of capital and goods only as transitional measures necessary for early postwar reconstruction. They accepted the Keynesian welfare states of Western Europe as necessary anticommunist bedfellows, not as ideological soulmates. And when laissez-faire became fashionable again, private capital became fully mobile, and planning fell into disfavor, it was in the United States that the resurrection of classical liberalism was greeted with special glee. For this supposedly was the ultimate aim of American doctrine.

Yet, as the ethic of laissez-faire gained ground, it did so almost in lockstep with the relative decline of its prime sponsor, the United States. America's endeavor to inject its own norms into the policies of other nations and rules of the trading system, while retaining its status as system leader, has come at increasing cost to America's own (poorly grasped) national interest.

The Costs of Hegemony
As America's economy has ceased to be effortlessly dominant, the costs of hegemony have increased. These have been conventionally understood as the unsustainable fiscal expense of maintaining a military protectorate. In official circles, there is long-standing clamor for "burden-sharing" of military costs with U.S. allies. But that analysis overlooks two other kinds of costs that directly flow from America's hegemonic role: structural costs to American industry and the macroeconomic strains of supplying the world's currency and serving as engine of world demand.

The structural costs include the penalties that America incurs as the necessary exemplar of laissez-faire trade. America permits itself a closet form of strategic industrial planning only as an incidental byproduct of military spending. Approximately 75 percent of government-sponsored R&D outlays are funneled through the defense establishment, compared to less than 10 percent in Germany and Japan. Commercially-oriented industrial targeting of the sort practiced by both MITI and the European Community is ideologically verboten and can be accomplished only incidentally. American trade negotiators chronically find themselves in the ludicrous position of earnestly denying that U.S. supremacy in aircraft has anything to with the trillion dollars expended on purchases for the Air Force. The end of the Cold War drags the issue out of the closet. America now must face directly the ideological question of what deliberate technology policy we desire, to what national ends, and subject to what global ground rules.

The hegemonic role has also made America the principal technological cold warrior and leading crusader for an elaborate system of export controls, monitored by an ad hoc international coordinating committee known as COCOM. Here again, to set a good example for its trading partners, the United States enforces on its own producers the tightest restrictions against exports of advanced technologies that might conceivably fall into communist hands. These include not just military technologies, but also "dual use" products, which in practice encompass the entire range of advanced high-tech goods. Many American manufacturers have been dissuaded from even applying for export licenses for such products as personal computers, only to see licenses later granted to German or French competitors. A report to the National Academy of Sciences estimated that these restrictions cost American industry some $9.3 billion exports in 1987. Even as the Cold War has wound down, the United States continues to practice this perverse brand of economic warfare. In the most recent COCOM talks, the United States successfully pressed its allies to leave the basic structure of export licensing intact, with selective liberalizations.

Macroeconomic Costs
The macroeconomic strains on America's role as Keynesian engine and stabilizer and as global banker have been evident since the mid-1950s. No sooner did U.S. diplomats achieve their objective of removing wartime controls on most European currency than the U.S. dollar came under unsustainable pressure. As the Belgian economist Robert Triffin began predicting in the late 1950s, the dollar could not long simultaneously play the role of global reserve currency and enjoy reasonable stability as a national currency for the United States. Either the world would be deprived of necessary liquidity, or the America economy would suffer unacceptable inflation.

Beginning in the 1960s, the United States resorted to various devices to maintain this balancing act, including a modest creation of IMF "Special Drawing Rights," "swap" credit fines with other central banks, and a special tax to discourage dollar outflows. But as the other market economies gained power, the balancing act became more difficult. The Vietnam War intensified the pressure. In 1971 the United States suffered dangerous outflows of gold, and President Nixon suspended the convertibility of dollars for gold at a fixed rate. The system shifted to floating rates, effectively ending one of the key Bretton Woods inventions.

In the 1970s the system came under further stress due to the OPEC oil shock. While OPEC's windfall petro-profits were "recycled" by Western and Japanese banks, mostly to Third World oil-importing nations, the price shock left a legacy of embedded inflation in the industrialized North and unsustainable debt in the underdeveloped South. In the North mild deflationary remedies slowed growth but did not break the price spiral. This was the famous "stagflation" of the 1970s. Centerleft administrations, in power in most of the Western democracies in the mid 1970s, proved unable to broker a solution. When monetarists gained control of the policy levers in Britain and America in 1979, they applied a cold bath remedy of stringent monetary contraction. That treatment did flatten inflation, but it left the world on a path of slower growth.

Economically, these events also accelerated the impetus towards the deregulation and globalization of market forces. Politically, they further discredited the Keynesian/social democratic center-left. The ascendancy of the center-left in Europe and America for much of the postwar period had been heavily dependent on steady growth and full employment. High growth had permitted a class entente by providing labor with rising real wages, capital with acceptable profits, and the welfare state with sufficient resources to buffer the unfortunate and lubricate the overall social compact.

But when growth flagged and unemployment rose, the costs of simultaneously financing a welfare state for the middle class and subsidizing the dependent populations became politically and ideologically unacceptable. Benefits had to be targeted to the needy in a way that alienated the productive middle class. Higher budgets triggered tax revolts. Suddenly, the new idea was laissez-faire, and the center-right, energized by the gospel of entrepreneurship, was ascendant. As the global private economy became ever more integrated, nations such as Mitterrand's France, which initially attempted expansionary policies, found themselves captive of the same forces of imported austerity that Keynes had described so well in his brief against the classic gold standard. The discipline of a global market economy, it turned out, did not require a gold standard, only relatively open borders. Keynesianism in one country proved as difficult as socialism in one country.

The one enduring outlier nation turned out be the United States. America found itself continuing to practice an unacknowledged Keynesianism at ever escalating cost to its own well-being. With much of the world suffering from debt, high unemployment, and stagflation, the one source of fiscal stimulus to the global economy was the U.S. budget deficit. As Japan and Germany tended their own gardens and fiercely resisted the pressures of imported inflation, the dollar remained in its anomalous role as global currency. In theory Reaganism preached an economics of free markets and fiscal restraint. In practice, Reaganism offered a fiscal stimulus driven first by increases in military spending and later by a structural deficit borne of tax cuts.

Supposedly, the post-1973 regime of floating exchange rates would force each nation to bring their macroeconomic policies into harmony with those of trading partners, or suffer runs on their currencies. But the United States, as monetary hegemon, was the one nation able to borrow in its own currency. The United States was thus oddly exempt from this discipline, at least in a short run that turned out to be distressingly long. In the early 1980s foreign capital flooded into U.S. money markets, attracted by Federal Reserve Chairman Paul Volcker's monetarist anti-inflation remedy of double-digit interest rates. That, of course, bid up the value of the dollar, abruptly pricing U.S. goods out of world markets -- just when long-term structural forces were also making U.S. goods relatively less competitive.

But thanks to this hegemonic exemption, as the U.S. balance of payments deficit widened and the trade accounts worsened, the value of the dollar, instead of going down, kept going up. American products became ever more uncompetitive, while the first Reagan administration kept insisting that the free market, by definition, had to be getting the value of the dollar right. A high budget deficit exacerbated the problem by requiring the U.S. to suck in even more foreign capital. A related ideological stubbornness -- a dedication to low taxes and high military spending -- precluded macroeconomic remedy.

When Treasury Secretary James Baker belatedly conceded early in the second Reagan Administration that markets could indeed be getting the value of the dollar wrong, the strategy changed but the larger ideology did not. The Plaza Accord of September 1985 committed the five leading nations to a rough management of exchange rates and a coordinated effort to drive down the value of the dollar. However, the Group of Five stopped well short of devising a new Bretton Woods or constructing an expansionary solution to Third World debt. It was a moment that cried out for bold statecraft, but the leaders of every major capitalist nation save France were conservatives who did not believe that markets required major structural interventions. The traditional policy goals of the United States -- ever greater deregulation and liberalization of the global system and disdain for policies of economic stabilization or industrial targeting -- only intensified.

A cheap dollar coupled with persistent budget deficits failed to solve America's trade imbalance. Contrary to standard theory, the structural damage to U.S. competitiveness caused by the period of dollar overvaluation did not instantly reverse itself when the dollar cheapened.

As the 1990s begin, the U.S. trade deficit is still in excess of $100 billion a year. Nations eager to hold market share they had captured proved very adept at "pricing to market" and compensating for the cheaper dollar. Despite a macroeconomic imbalance, kmerica was able to import the capital it needed to finance its budgetary and trade deficits. Increasingly, however, America did so by selling real assets. With its twin deficits, America has therefore continued to be a Keynesian engine sustaining a moderate pace of global growth. But it does so at escalating cost to America's own economic health.

After Hegemony
There is an orthodox account of the cause and cure of America's economic slide, and a dissenting account. The orthodox account is the product of an extremely potent alliance among three forces: cold warriors, business leaders, and neoclassical economists. As I have suggested, the cold warriors like American markets to be as open as possible because trade serves as the glue of alliance; in their minds, the low politics of trade takes second place to the high politics of national security In U.S.-Japan negotiations, as -- Clyde Prestowitz observes in his book Trading Places, the United States has repeatedly made trade concessions in exchange for military ones. If U.S. priorities place geopolitics ahead of geo-economics, America's trading partners are only too happy to oblige.

The second member of the triad likes global laissez-faire for the obvious reason: corporations want the right to seek markets, materials, and earnings wherever they choose and to escape the discipline of national regulation. Orthodox economists complete the triangle by preaching that the least regulated market is most efficient; they certify that the system is scientifically sound. The legs of this triangle reinforce each other. Neoclassical economists, industrialists, and investment bankers flow in and out of government, where they share the premises of the cold warriors about America's hegemonic responsibilities. American industry, in turn, supports researchers known for respectable, internationalist thinking, which is to say laissez-faire. All these linkages create a club of like-minded people, who then marginalize heretics.

In the orthodox account, America's industrial slide is mainly the result of macroeconomic factors-a low savings rate and an excessive budget deficit, which in turn require domestic interest rates to be too high. Standard economics insists that structural factors such as industrial organization, training systems, and policies of strategic trade, have a trivial effect on the competitiveness of nations, and in any case cannot (by definition) improve on the market. The standard account holds that it would be self-defeating for America to respond to its worsening competitive standing by resorting to sectoral policies or strategies of managed trade. Such measures are dismissed both as wrongheaded theory and as irritating to America's allies. Any counsel to this effect is viewed as self-serving pressure from injured interest groups at best, and jingoism at worst, and never as a dissenting school of political economy.

The orthodox school also holds that foreign investment in America is an unambiguous blessing and that concern about foreign ownership of factories, farms, real estate, and proprietary technologies is anachronistic in a globalized economy, if not nativist. Finally, standard economics insists that trade policy, again by definition, can make no difference. If America turns up the diplomatic heat and coerces Japan to buy more supercomputers, American consumers will compensate by purchasing some other import. As long as the macroeconomic fundamentals are unchanged, the same trade balance will persist.

Interestingly, the orthodox disdain for strategic trade has had to shift rationales in recent years. In the 1980s a number of respected, eminently orthodox economists have propagated a New View of trade, arguing that the location of production is not, in fact, the consequence of "factor endowments" but is substantially indeterminate. 2 They point to the key importance in an advanced economy of mastering new technology ("sliding down the learning curve") and developing economies of scale. Many reputable trade economists now concede that it is possible for strategic trade policy to "capture advantage" at the expense of trading partners. As a result of this literature, economic orthodoxy has retreated to a political science analysis of the undesirability of neo-mercantilism. Strategic trade might work in theory, but in the American context it would likely be captured by interest groups, embolden other nations' mercantilist impulses, and therefore produce sub-optimal economic results.

The dissenting story of America's economic predicament is less neatly packaged and more politically diverse. It attributes the falling competitiveness of American industry to a variety of structural factors, including the dynamics of American capital markets, the organization of American firms, the short time horizon of American investors, the quality of American schooling and job training. The dissenting view does not deny the importance of savings rates, budget deficits, and the value of the dollar. But it insists that they don't tell the whole story.

Ideologically, the dissenting camp includes odd bedfellows. For example, business leaders frustrated by Japanese mercantilism find the macroeconomic account of America's declining competitiveness unconvincing. Trade unionists see an integrated global economy as relentlessly undercutting good jobs. Most Japan specialists find the insistence that Japan's intricate mercantilism doesn't matter absurdly deductive. Empirical studies of the structure of the Japanese economy identify a complex web of relationships that effectively resist imports. This emerging view is ideologically inchoate. Some its most provocative representatives-Clyde Prestowitz, Chalmers Johnson, Kevin Phillips, George Lodge, among others--consider themselves essentially conservative Republicans, while others of this school, such as Lester Thurow, Robert Reich, Laura Tyson, and James Fallows, are liberal Democrats.

A good example of the dissenting school is the 1989 MIT report Made in America: Regaining the Productive Edge, by Michael L. Dertouzos and colleagues. The 1988 Report of the Cuomo Commission on Trade and Competitivness offered a very similar argument. According to the MIT report, manufacturing does matter; American industry is not well structured to emphasize exports, nor is it good at translating innovation in the laboratory to either process technology or product development. U.S. industry remains excessively driven by accountants rather than engineers. America fails to invest adequately in education, particularly in its non-college educated workforce, and it notoriously under invests in lifelong training. In this view, regaining market share in key industries is a legitimate goal of public policy, not a lamentable form of mercantilism.

This sort of argument, despite its packaging in a mainstream idiom, is usefully subversive. For its real message is profoundly opposed to laissez-faire. At bottom, it makes the case for economic interventionism. It implicitly acknowledges that the nation-state is still the place where most people draw paychecks and where social contracts must necessarily be hammered out, notwithstanding the globalization of production. Even if the American foreign policy elite would prefer that this were not the case, the leaders of Japan and the European Community still think like economic nationalists. And America's economic and diplomatic leverage to convert them to our brand of laissez-faire has never been weaker.

Until very recently, the logic of American hegemony, both as protector of military security and as advocate of global free markets, was so potent that the dissenting analysis could not receive a serious hearing. When it comes to trade policy, most Democratic economists as well as Republican ones are resolute defenders of classical liberalism. In the last Democratic incumbancy, the most potent opposition to either industrial policy or aggressive trade policy came from within the administration, not from the Republican opposition. Politically, the ascendancy of laissez-faire and the disrepute of Keynesianism have caused candidates with interventionist instincts to couch their program mainly in terms of getting tough with trading partners. In the 1988 election, the press treated Richard Gephardt as a simple Japan basher, not as a candidate offering a different theory of political economy. Indeed, Gephardt himself was not quite sure just what that dissenting theory might be.

But all of this is at last changing, and rapidly. The old laissez-faire iron triangle of businessmen, diplomats and economists is wobbly. Industry, for its part, is no longer unanimously supportive of the classical liberal agenda. The dissenting view reaches far beyond the "loser" industries of the orthodox fable. America's most advanced manufacturing industries are now constituents for both a more collaborative relationship between industry and government and a more assertive approach to trade. The Bush administration may not care whether America's last large manufacturer of semiconductor fabricating equipment is sold to the Japanese. But IBM cares, even though IBM is the quintessential "internationalist" American company. The principal lobbyist for disbanding export controls is now the U.S. Chamber of Commerce. With the Cold War ebbing, the East-West conflict ceases to be the overriding determinant of policy for the diplomats. Even the economics profession has made room for a dissenting view of trade, as well as grudging recognition that the organization of the firm, of financial markets, and of educational and training systems do affect America's ability to compete.

Full Circle
In a sense, we have come full circle, back to the challenge of 1944. Geopolitically, there is the opportunity that Roosevelt foresaw, to keep the peace based on a system of collective security anchored by the great powers. There is no need for global expenditures approaching a trillion dollars a year on the EastWest arms race.

Economically, the Keynesian problem persists: how to gear the world towards high growth and full employment, and how to pool national sovereignty, to that end. In 1944 the United States proved reluctant to cede sovereignty because America was too strong. Empowering organizations controlled by foreigners seemed almost an afront. Today there is resistance to a new round of global institufion-building because America seems too weak. It is easier to cling to the habits of American economic hegemony and the false idol of laissez faire, even as those illusions corrode America's own wellbeing.

But we have to rebuild the world system and redefine America's national strategy in that system with the same boldness and imagination as the statesmen of 1944. First, we need to acknowledge the reality of pluralism. One hopes, contrary to Professor Kindleberger, that the role of hegemon can be played by a concert of great nations, for no single nation currently has the combined political and economic stature to do the job single-handedly. Such a system would require a pooling of state sovereignty and financial authority in several functional areas: an international trade organization with real enforcement powers, which acknowledged the virtue of a mixed economy and sought not pure free trade but fair rules of the road; a genuine global public central bank or regional banks, with a Keynesian bias towards high growth rather than an inclination to serve merely as debt collector for private creditor banks. Likewise, new public regional development banks should replace the role played so ineptly by private commercial banks in financing the growth of the underdeveloped South and Eastern Europe.

U.S. influence in the Bretton Woods generation of monetary institutions is gradually fading. Instead of clinging to the perquisites of former hegemony, we should welcome that shift. In exchange for giving Europe and Japan more influence (which is coming anyway), we should insist that they take on more responsibilities. At Bretton Woods, Keynes rightly attempted to structure incentives that would force nations with chronic surpluses to expand, rather than placing the burden on debtor nations to deflate. It is unacceptable that a few nations, notably Germany and Japan, should run immense trade surpluses year in and year out. As chronic surplus nations, they enjoy high employment economies with tight monetary policies, low real interest rates, and low inflation. That intensifies the competitive advantages enjoyed by their firms and exports deflation to other nations. Japan and Germany (and of course Germany is now really the European Community) have come of age, and they should shoulder more responsibility. The best single diplomatic move of the post-Cold War was the agreement between the United States and the European Community that the E.C. would take the lead role in the economic development of Eastern Europe.

All of these shifts portend a triple windfall for American progressivism, if American progressives can rise to the occasion. First, the Cold War was the glue which held together disparate types of conservatives and made liberal Democrats occasionally seem less than entirely patriotic. Second, the sharing of the hegemonic role with the E.C. and Japan increases the relative weight of nations that do not believe in laissez-faire economics as a reasonable way to organize a society. (Notwithstanding the conservative joy at the triumph of Adam Smith over Karl Marx, the arrival of Eastern Europe as a junior partner is likely to increase the company of social democrats, not Thatcherites.) Third, a post-Cold War domestic agenda of national economic renewal, with a healthy dose of public investment, ought to be the natural agenda of progressives.

America should welcome the increased freedom to define and pursue its own economic advantage. It should even welcome the fiscal discipline that goes with a state which is no longer hegemon. If we had to borrow from abroad in yen rather than dollars, the budget deadlock would end, and fast. Robert Reich calls for an agenda of "outward-looking economic nationalism." The idea is that strengthening the competitiveness of the United States should be part of a global strategy of high growth, under auspices other than laissez-faire, but with a maximum degree of relatively free commerce. As I have argued elsewhere, we should not shrink from selectively managed trade, where that is what major trading nations want. 3 The quest for absolutely free trade is often the enemy of relatively freer trade. Europe and Japan each want for their national producers a market share in the most dynamic new technologies, and we should wish no less for the United States. The pulling and hauling over market shares will undoubtedly involve a big dose of competition based on the usual market criteria of price and quality. But in a few key industries, such as semiconductors, it will also involve a measure of managed markets, consortia, and political bargaining. We should not view this as the devil's own instrument, for it is probably necessary to assure that the United States remains a diverse, advanced economy. There is even evidence that it can add to, rather than detract from, the world's total wealth, by energizing productive investment and minimizing pre-Keynesian chaos.

The global intelligentsia may think of itself as stateless, and global capital may see nation-states as anachronistic encumbrances. But the state remains the locus of the polity, notwithstanding the best successes of supranational institution building. And the polity remains the arena best suited for counterbalancing the excesses of the market. It does matter, therefore, if American workers have access to the most high-productivity jobs, and it matters whether enterprises that provide those jobs are located in the United States. The EC is right to insist that foreign owned companies which operate within Western Europe as "European" companies meet some threshhold tests, such as whether they conduct research and development and produce "high-end" components in Europe, or merely slap together final assembly.

These tests may strike some purists as distastefully mercantilist, but until the millennium of global government comes, or until all nations have roughly the same labor and social standards, it is a necessary accommodation to political and economic reality. The United States would do well to explicitly address which key industries it hopes to retain and what mix of foreign-owned and domestic companies is appropriate. One pursues such policies not because one despises foreigners, but because the invisible hand does not produce equitable outcomes and the visible hand remains a national one.

We should particularly welcome regional polities, such as the European Community, as places where free commerce can expand without destroying social democratic and Keynesian stabilizers in the process. Although the Europeans may not quite practice classical liberalism, it is profoundly wrong to view the EC as merely "Fortress Europe."

Somewhere between the failed utopias of pure socialism and pure laissez faire there exists a practical middle ground where economies can operate dynamically, and civil society can flourish as well. It was the challenge of the generation of the 1940s to rebuild liberal society and keep totalitarianism at bay, against a background of Cold War and garrison economics. It is our challenge, half a century later, to use the emerging era to renew the promise of a mixed peacetime economy and a broadened conception of citizenship. The post-Cold War era will mean an end to Soviet hegemony in the East and American hegemony in the West. It will certainly be a post-communist era, but surprisingly enough, it could turn out to be a post-laissez-faire era as well.

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