Given the economic state of the Union and its impact on you as financial professionals, I expect most of you think it's a bit weird to be starting your program this way – by considering the national security and foreign policy challenges our next president will face. President McCain or President Obama will have to cope with the knock-on effects of the worst financial panic since the Great Depression. What time is this going to leave for foreign relations? The answer is that it better leave a lot. We aren't going to make it safely out of the various messes we are in without more than a little help from foreign friends.
The fact is that we have been living on foreign credit rollovers. The bailout we have just authorized is not self-financing. It is yet another rollover dependent on foreign creditors. For it to work, foreigners must choose to buy the debt we are issuing rather than invest their money elsewhere. At the moment, T-bills are the only refuges anyone can think of other than gold, so there doesn't seem to be much of a problem. But will they respect us and want more T-bills in the morning?
No one abroad now has any confidence in President Bush or the leaders of either party in our Congress. Together, our executive and legislative branches have cut taxes and offered ordinary Americans inner peace through impulse purchasing and the avoidance of personal sacrifice. They have colluded in the largest increase in government spending in living memory and mired us in two bloody interventions in the Islamic world that we do not know how to end. Nothing they have done to date suggests any recognition of the need to replace denial and self-indulgence with realism and fiscal discipline. Nor does anything that either presidential candidate has said about the panic of 2008 acknowledge these needs.
In three months, most members of Congress will still be there but Calamitous George will be gone, having bequeathed to his successor the task of reintroducing pay-as-you-go government to our country. The first problem the incoming administration will confront is a rapidly mounting budget deficit with a built-in fiscal time bomb of unsustainable tax cuts that are due to expire in 2010. The next president will have only a few weeks to present a budget for that fiscal year, which the outgoing administration has declined to do. As part of this, he will have to insist that the House and Senate agree with him on a credible workout plan for the American economy – a very painful requirement that both candidates fear to discuss.
Persuading Foreign Creditors
Whatever he says or doesn't say on the campaign trail, the next president will have to persuade foreigners that we have finally decided to make the hard choices we have been avoiding and to set priorities for deep cuts in spending and increases in revenue. Without this assurance, they are most unlikely to continue to lend us the money we need to make the difficult transition to responsible fiscal practices while restoring economic growth.
That transition will touch more than domestic policy. There is no reason to expect foreign central banks to continue to finance U.S. wars of choice, unless we can make a far better case than we have done that these wars are not counterproductive, that they will not go on forever, and that we have figured out how and when to end them. There will be no so-called "long war" fought with other peoples' money. The financial crisis therefore adds urgency to the need to rethink our approach to our relations with the Islamic world and our purposes in spilling so much blood in Muslim societies.
We have done a great deal of damage to our international political, military, and now our economic prestige and reputation for financial probity. In foreign relations, the next president will start from well behind. He will need a strong mind, firm convictions, charm, and a silver tongue to regain foreign respect for our country and trust in its institutions, including its currency. To recover economically, we need help. To get it, we must have the confidence of investors in China and the Arab world as well as in Europe, Japan, and Russia. To restore and sustain prosperity, we must work with these countries and others to reinvent global institutions and rules of conduct so that they reflect current power alignments and realities. Those we inherited from the post World War II era reflect the patterns of wealth and power that prevailed many decades ago. They have proven incapable of delivering more than lofty talk and dumbstruck inaction.
It is nearly 19 years since the Berlin Wall fell and the Cold War ended. After World War II, we Americans created and sustained a new and unprecedentedly just and generous world order. The world came to look to us for farsighted leadership and a commitment to international decency. Consistent with this tradition, in the immediate aftermath of the Cold War when Iraq attempted to annex Kuwait, the first President Bush rallied the United Nations and other global institutions as well as our many allies and friends behind the defense of a world order based on non-aggression and the rule of law. The prestige of our country has never again been so high.
Sadly, our subsequent stewardship of world affairs earned us no plaudits for wisdom, foresight, or concern for the rights and interests of others, including our closest allies, whom we largely ignored. We dithered through the narcissistic ‘90s and did not lead. Our management of foreign relations under Calamitous George – since 9/11 – has very seriously discredited us in the eyes of the world. We are feared but not respected. We are a ubiquitous global presence but almost nowhere still admired. Our statements annoy and do not persuade. Increasingly, others are working around us rather than with us.
The disillusioned former champions of America throughout the world continue to hope we will rise to the occasion as we did after World War II. It isn't that they yearn for our leadership as such, but that they recognize that leadership is required, that there is no country other than America that can provide it globally, and that the America they knew and loved before our experiment with a diplomacy-free foreign policy was an America worth following – one that they hope can be born again. If we do not provide the inspiration and leadership that our allies and friends hope we will, either no one will do so or those most resentful of our errors of omission and commission will take the lead in crafting a future designed to hold us down. The next president must reaffirm our traditions and assert them to assure that the world order of the future is one congenial to American interests and values.
To do this, he will have to study the arts of peace as well as war. To prevail in the struggles he will inherit, he must belatedly enlist allies. The United States and the Western world have a special need for allies in the Islamic world to refute and disarm the extremist deviants who threaten us as well as them. As part of the recalibration of American policy, the next president will have first to supplement and then gradually to replace bluster, boycotts, and bombs with the processes of empathy, enticement, and engagement that are integral to sound diplomacy. Peacefully persuading foreigners that it is in their interest to do things our way is a lot less costly and more effective than attempting to bully or bludgeon them into cooperation.
The extent to which we have come to rely on coercion in our foreign relations is illustrated by our government's budget and staffing pattern. Ninety-three percent of the roughly $1 trillion we spend on relating to the world beyond our borders each year goes to our military. Six percent is spent on intelligence. Only one percent is devoted to diplomacy. There are more members of military bands than there are foreign service officers. We had a chronic budget deficit even before we began to throw money at our collapsing banking system. A look at the priorities our budget establishes reveals that we have also nurtured a longstanding statecraft deficit.
Diplomacy is the first line of any nation's national defense. The weapons of diplomats are words and their power is their persuasiveness. Talk is cheaper than firepower and does less collateral damage, so it makes sense to try it before blazing away at adversaries. We Americans have pursued excellence in the arts of war. We have achieved it. I have a modest suggestion for the next president. Why not build diplomatic capabilities of comparable excellence? Why not try diplomacy?
A diplomatic build-up is timely. The Pentagon has said it plans to ask the next president for a $57 billion increase in funding in the next fiscal year. But, for the first time in a long while, we cannot evade serious questions about levels of military spending. Do we really have to spend more on the ability to use force than the rest of the entire world combined, as we already do? Are there viable and less costly ways to get our way than going to war? How much military spending is really essential? How does what we are spending relate to actual threats, as opposed to readying ourselves to refight the wars of the past? Given other urgent priorities, moreover, how much can we afford right now? What can be deferred or curtailed? The worst of all possible outcomes as we make these choices would be to rein in spending on our armed forces while doing nothing to improve our capacity to conduct our foreign relations by measures short of war.
This brings me to a fundamental point. Others will neither follow our lead nor help us if our system of government and our economy are out of order and seen as models to avoid rather than to emulate. Both to set us on the right path and to gain us the cooperation we need from abroad, the next president must galvanize us into getting our act together here at home. This is not just a matter of reinventing government to propel our economy into rapid recovery and to enhance our international competitiveness. We have allowed a daunting array of other domestic problems to fester into crises.
As you know all too well, these problems include public and private pension systems that are slouching toward insolvency; a health insurance system that is driving individual Americans to despair and businesses over the edge; an educational system that saps rather than fuels the competitiveness of the U.S. economy; a workforce unnerved by broken immigration policies and the precipitous decline in industrial jobs to less than 10 percent of our labor market; an energy policy that celebrates self-indulgence and continually deepens import dependence; increasingly shabby infrastructure, complete with collapsing bridges, terminally gridlocked traffic, and man-eating potholes; the terrifying consequences of climate change; almost universal disbelief in the capacity of Washington to do anything about any of these things; and so forth. In almost every one of these cases, ideology and the wing nuts who purvey it on both the right and left are the primary obstacles to solutions. The next president must unite the sensible center of our nation behind pragmatic problem solving. Denial, delay, and distraction by political spin are no longer options.
Irrelevant International Institutions
The same is true internationally. Recent events have shown how lacking in relevance the systems and institutions we rely upon to protect international order and prosperity have become. To our economic detriment, the global monetary reserve system remains overly dependent on the US dollar. There is no mechanism for damping down wild price fluctuations in energy markets. There is still no effective framework for addressing the challenges of climate change. The Group of 8 now includes Russia but excludes many whose participation is essential to address the current financial crisis, countries like Brazil, China, Saudi Arabia, and South Korea, and the Group of 20 is an embarrassing afterthought. The International Monetary Fund, World Bank, and other United Nations-affiliated bodies have proven incapable of coordinating a global response to much of anything. The Doha Trade Round has collapsed and the World Trade Organization has no viable plan to promote the further expansion of transnational trade and investment that is essential to global economic recovery.
The most urgent task for the next president must be to reestablish the credibility of the United States and to erase Washington's reputation as the home of the world's first genuinely autistic government. If he can do so, he will be able to leverage our restored standing to gain the cooperation of other nations in reforming and reinventing these systems and organizations so that they are effective – or in creating still others that can be effective. Doing so is essential to restore stable and predictable growth to the global economy into which our own is now inseparably integrated.
Meanwhile, just as the economic order has been destabilized, so has the political order. In the Caucasus, Russia has just acted in open disregard of long-established principles of international law, including the United Nations Charter and respect for the sovereignty and territorial integrity of an independent state. In doing so, Russia relied explicitly on precedents the United States set in the Balkans. Scofflaw behavior, it turns out, is contagious. Russia's actions in Georgia do not signal a new Cold War but something even more dangerous – a possible return to the law of the jungle in which all nations base their international behavior on the notions that the end justifies the means and that expediency, not principle, should guide policy. Law protects the weak by constraining the strong. Unless we are confident that we will always have the upper hand (and I, for one, would not want to bet on that), it is in our interest to work with others to shore up the rule-bound international order we worked so hard throughout the twentieth century to establish.
Part of doing this is conforming to the golden rule, that is to "avoid doing what you would object to others doing." Even if Guantanamo, Abu Ghraib, extraordinary rendition, torture, and indefinite detention without charge or benefit of counsel were not un-American, which they are, they constitute dangerous invitations to others to do to us what we have done to them. They mock our advocacy of human rights and the rule of law, and they delegitimize our leadership. They reduce our pride in our values to so much hypocritical debris.
The next president will want to clear that debris and to restore our pride. Even as he works with other nations to build international cooperation on financial and economic matters, he must seek to salvage what he can in Iraq and reformulate our approach to the Afghanistan-Pakistan front. This is not the time or place for a detailed exploration of the many issues confronting us in these two very different places. Suffice it to say that we have managed to stabilize our occupation of Iraq but not Iraq itself. By very large majorities, Iraqis want us out of their country, but it remains to be seen what kind of Iraq our departure will leave behind. It could be pretty ugly.
With its infrastructure smashed, its domestic tranquility shattered, and a fifth of Iraqis – the equivalent of sixty million Americans – displaced from their homes, driven into exile, or dead, Iraq resembles nothing so much as many of the American veterans who have served there. It is battered, embittered, and in physical and mental pain. We cannot undo this or expect Iraqis to be grateful for their country's American interlude. But we should now be able to leave Iraq with confidence that it will not be a haven for al Qa`ida or other anti-American terrorists and that it will not menace its neighbors with weapons of mass destruction. That is a victory of sorts, though some may question whether it justifies the $700 billion – $10 billion each month for the past five and a half years – and the many lives that we have spent to achieve it. After all, there were no al Qa`ida terrorists in Iraq before we invaded, nor – as it turned out – was there any WMD.
Our intervention in Afghanistan has meanwhile melded it and Pakistan into a single geopolitical region. It is now very clear that our strategy there is not working, but it is far from obvious what should replace it or indeed whether any approach that relies primarily on military means can hope to succeed. The growing impression in the Islamic world is that we are engaged there in some sort of open-ended Crusade against Islam and its adherents. This view is a major impediment to our forming alliances with the Muslim mainstream. Such alliances are, however, essential to reduce anti-American terrorism and to prevent the antipathy to Americans that now dominates Southwest Asia from going global. The growing perception of Americans as violent Islamophobes is also a barrier to attracting Arab investment. It complicates our ability to deal with Iran's expanded influence in the Middle East and the implications of its nuclear program. As we adjust our policies toward Afghanistan and Pakistan, we must take these interests in the broader world of Islam into full account.
The United States is a global power, even if, in our obsession with the Middle East and adjacent areas, we sometimes seem to forget this. The collateral damage to our influence elsewhere from our direct and indirect involvement in wars in Muslim lands has been immense. This represents long-term damage that it will take many years to repair. The distraction of wars of choice has also distracted us from the need to devise strategies to harness the strengths of rising powers like Brazil, China, and India to our advantage. That, too, is a task the next president must take up.
With global political institutions like the United Nations still unreformed – and therefore to a considerable degree ineffectual – a great deal of international authority has devolved to the regional level. One side effect of this is to exclude or sideline the United States as others in the international community take decisions on matters of interest to Americans. We need to reengage at the regional level. In order to do so effectively, we will have to set aside our habit of ignoring the interests and views of others as we hector them about elements of our global agenda. This is even worse than not showing up at important regional gatherings or showing up only to deliver a harangue and then leaving without listening. We need a war on arrogance as much or more than a war on terrorism. Again, serious attention to building diplomatic capacity would help to restore our global stature, credibility, and influence.
There is no problem I have identified that we are incapable of solving. With all the ill will we have accumulated abroad and the challenges we confront at home, we Americans remain a remarkably fortunate and notably resilient people to whom the world continues to look for leadership. Our homeland is vast and bountiful. Despite some erosion in our civil liberties, we continue to enjoy stable democratic government and very high levels of personal freedom and opportunity. By nationalizing some of our key financial institutions, we may – according to the standards we apply to China – have temporarily jeopardized our status as a market-economy country. But there is every reason to be confident that, once the current panic subsides – as it will – our entrepreneurial dynamism will make a strong comeback. Our society will remain open to both ideas and talent. Our traditions and our values call out for reaffirmation and restoration, not repudiation or abandonment in the name of expediency.
It has, of course, been a long time since Americans faced the kinds of difficulties that are now before us. We have become unaccustomed to the notion that we must make hard choices or endure sacrifice in the interest of a better future. The president we select three weeks from now will need all the help he can get from all of us – a return to civil discourse and the placing of the national interest above party or individual ambition, the smoothest possible replacement of departing officials with the best men and women we have, and the willingness to look at options for dealing with our many problems pragmatically rather than through the distorting lens of ideology. The challenges we face are as daunting as any we have faced in the 232 years of our existence as a nation. But, with the right leadership, we have it in us to rise to the occasion. If we do not, we will have no one to blame but ourselves.