Opinion

Chrystia Freeland

The future of power

By Peter Rudegeair
July 6, 2011

 

At the Aspen Ideas Festival last week, Chrystia’s discussion of war, economics and America’s role in the world featured a who’s who of leading voices: Robert Hormats, the Undersecretary of State for Economic, Business, and Agricultural Affairs; Joseph Nye, a professor at Harvard’s Kennedy School of Government; and Liaquat Ahamed, the Pulitzer-prize winning author of Lords of Finance: The Bankers Who Broke the World. Here’s a transcript of some of the highlights of their conversation.

How the deficit debate affects U.S. diplomacy:

JOSEPH NYE: In congressional discussions we get the short-, the medium-, and long-term mixed up. Here we have a problem often estimated as a $2 trillion problem about getting the debt under control, or the deficit under control, related to the debt. And what did Congress do in April when they were trying to balance the budget? They cut $8 billion out of the State Department budget and thought that that was doing something about the deficit. That is absolute nonsense. It’s like a drop in the wind that’s gone immediately. But from the point of view of the State Department where you have a $50 billion budget, that’s a huge hit.

CHRYSTIA FREELAND: Did Bob take you out to supper last night to ask you to say that?

JOSEPH NYE: No, no, this is all on my own, and I’ve actually published this in Foreign Policy.  But the point is it’s an illustration of the confusion of time horizons.  We do have to do something about the question of the deficit, but there’s an enormous confusion about time horizons.

On America’s historically low taxes:

LIAQUAT AHAMED: I do think the one striking is how low the taxes are as a percentage to GDP.

CHRYSTIA FREELAND: In America?

LIAQUAT AHAMED: In America.

CHRYSTIA FREELAND: Tell that to American voters.  They don’t seem to agree with you!

LIAQUAT AHAMED: Taxes as a percentage of GDP — federal taxes — are currently 15%. That is the lowest level–

CHRYSTIA FREELAND: That’s like Hong Kong, right?

LIAQUAT AHAMED: That’s the lowest level they’ve been in thirty, forty years.  With all the enormous commitments that our federal government has entered into, I think that’s crazy.

[...]

LIAQUAT AHAMED: I’m going to go down on this program as the high-tax guy.  If you’ve got commitments, you should pay for them, and I think it will involve raising taxes.  Britain was able to beat France during the Napoleonic wars largely because the British had higher tax rates and were able to sustain a higher tax burden than the French.

“The greatest unforced error in economic history”

JOSEPH NYE: I tend to be relatively optimistic in my book The Future of Power about the American economy in the long run.  The World Economic Forum says we’re the fourth most competitive in the entire world; China is 27.  If you look at nanotechnology, biotechnology, these are areas where we’re clearly in the lead.  The fundamentals are there; it’s just that we’re doing such a lousy job of managing it right now. We’ve got two political parties like teenagers playing a game of chicken where the cars go towards each other.  Sometimes those cars crash.

CHRYSTIA FREELAND: This would be the debt ceiling debate. Do you think there could be a crash?

JOSEPH NYE: Somebody said at the opening session of the Ideas Festival a couple of days ago, if that occurs, if we undermine the credibility of the U.S. Treasury to meet its debts, it will be the greatest unforced error in economic history.

CHRYSTIA FREELAND: Gentlemen, quick flash question: is it going to happen or not?  Likelihood of unforced error?

ROBERT HORMATS: I think it certainly can be avoided and should be avoided.  I think it is unimaginable to me that anyone would want to put the creditworthiness of the United States in doubt, much less take these kinds of actions.  And it would be harmful from a financial point-of-view; it’d be harmful from a foreign-policy point-of-view and harmful from a national security point-of-view because it would undermine faith in the United States around the world.

I dug out an odd factoid that in 1840 the country with the largest GDP was Russia, because there are so many Russians and it was larger than Britain.  But no one would have said that Russia was the leader of the world or the global economy…  Total GDP is a very poor measure [of economic power].

U.S. power under an “Eisenhower foreign policy”

JOSEPH NYE: In my book I call this an Eisenhower foreign policy.  Eisenhower said your foreign policy starts with strengthening your domestic economy; you spend too much on the military, you weaken your domestic economy.  Remember, the Russians by the time when the Soviet Union was about to collapse were spending over 22% of their GDP on the military — that’s huge. America by comparison today is 5%, so we’re a long way from a–

CHRYSTIA FREELAND: We’re not quite in a Soviet scenario — that’s reassuring!

ROBERT HORMATS: Joe has made a very interesting point.  One thing that — I did a book on how we pay for our wars — of the early part of the cold war the view of Americans was that the Russians felt they could win the cold war by bankrupting the United States so that we would have such a terrible domestic scene that we would pull back from engagement from Europe and elsewhere.  It turned out exactly the opposite: the Russians bankrupted themselves and they had to pull back.

JOSEPH NYE: And the other thing of an Eisenhower foreign policy is his advice, “Don’t get involved in land wars in Asia.”  In that sense, it’s not the same as isolationism to say that we don’t have a strong enough national interest to be worth spending $110 billion a year in Afghanistan.  On the other hand, if you look at American presence in East Asia, 50,000 troops in Japan — Japan pays for most of them.  The troops in Korea — Korea pays a good chunk of that.

CHRYSTIA FREELAND: So if Afghanistan wants to pay for U.S. involvement, that’s OK?

JOSEPH NYE: No, we shouldn’t be in Afghanistan.  Now, with policy you have the problem of you start from where you are, not from where you want to be.  But I think what Obama has said is that we’re not going to make the mistake we made in Vietnam of thinking that with counterinsurgency we can suddenly make this all work out.  What we’re going to do is switch our strategy from a very expensive counterinsurgency to a much more affordable counterterrorist strategy.  And that means you have a lighter footprint which you can sustain for a longer duration.  That’s what I call a smart strategy.  And you don’t measure that by percentage of GDP spent on the military or the numbers in the defense budget. You measure it by whether it is actually accomplishing the goals you’re looking for.  I think we’re going to take 10 or 15 percent cut in the defense budget over the next several years as we work through something that looks like Simpson-Bowles [deficit commission report]. I don’t think that necessarily means a 10 or 15 percent cut in U.S. influence in the world if we use the resources in the defense budget wisely.

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