Grand Strategy

ASP In the News | May 12-14

Ian McAllister — Wed, 14 May 2008 16:33:00 -0400

The Associated Press (05/ 13) quotes Daniel Levy on the state of the Middle East peace process.
Foreign Policy in Focus (05/12) cites William Hartung on lessons learned in the Iraq War.
The New York Observer (05/12) mentions Parag Khanna in a discussion of the state of US hegemony.
World Politics Review (05/12) cites Flynt Leverett on China-US tensions.
US News (05/09) quotes Steve Clemons on Hillary Clinton's fading political future.

ASP in the News | May 5-7

Ian McAllister — Wed, 07 May 2008 15:28:00 -0400

Pacific Daily News (05/07) analyzes Parag Khanna's hypothesis of the decline of U.S. hegemony.
US News (05/06) quotes Sherle Schwenninger on the cost of doing business in the U.S.
AFP (05/06) cites Steve Clemons discussing the negative impact of Clinton's comments on Iran.
Hard News (05/06) discusses Peter Bergen's research on the link between education and terrorist recruitment.
The People's Daily (04/25) quotes Steve Clemons arguing against a boycott of the Beijing Games.

LIVE WEBCAST | Chuck Hagel: Ending the Nonsense

Patrick Doherty — Wed, 30 Apr 2008 14:46:00 -0400

Senator Chuck Hagel on a Realist Internationalism for the 21st Century

Sen. Chuck Hagel, Steven Clemons, and American Strategy Program Director's Council Chair Rita Hauser at a recent Salon hosted by Clemons and the New America Foundation.

Former serviceman, businessman, and long-serving politician, Sen. Chuck Hagel (R-NE) contributes a wealth of personal experience on America’s most pressing issues from the domestic economy to political divisions to the Iraq war. The self-proclaimed patriot is not afraid to question the nation’s current status, recent policy debacles and future prospects. America: Our Next Chapter is a tough but optimistic letter from one concerned citizen to the rest of America.

Click on the player below to watch this event LIVE at 12:00 pm on April 30, 2008.

George Soros's New Paradigm: Behind and Beyond the Superbubble

Patrick Doherty — Mon, 07 Apr 2008 14:29:00 -0400

Steve Clemons, director of the American Strategy Program here at the New America Foundation held a media conference call Friday with George Soros to discuss his new book, New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means. The book is available in electronic form, here. To listen to the MP3 of the call, click here.

In the book, Soros examines the financial roots of the current financial crisis and what to do about it. After the call on Friday, my colleague Sam Sherraden looked at Soros' market analysis and policy prescriptions in this special edition of Global Economic Snapshot. I will take a little more time to examine the geopolitical roots of the crisis, focusing on his concept of the Superbubble and extracting some strategic lessons for the United States.

Bubble of Damocles

According to Soros, the Superbubble is the product of a 25-year feedback loop. That loop involves market fundamentalists, who rose to power in the Reagan administration, acting on their belief that markets generally tend toward equilibrium if left alone by the government. In the process, over-deregulating markets and producing a long series of speculative bubbles.

Ironically, those fundamentalists pioneered a new cocktail of government intervention--usually some combination of monetary policy, Keynesian fiscal stimulus, targeted re-regulation, and some kind of geopolitical adjustment, to stabilize the markets and correct for "minor" busts like the 1987 crash, Long-Term Capital Management, the Internet bubble and now the housing bubble.

According to Soros, each succeeding bailout, instead of calling into question the wisdom of continued de-regulation, further entrenched market fundamentalists in their belief. The Fed, led for most of this period by Alan Greenspan, a market fundamentalist himself, became the trusted steward of not only banks, but of market stability more broadly. Without a regulator supervising these new markets and assuring investors that some minimum standards necessary for stability were being met, markets began to securitize risk at a dramatic rate in the mid-1990s. With Greenspan at the Fed, market institutions knew they were playing with an implicit government safety net and it led to signficant excesses. Nevertheless, until a few months ago, many believed that they had tamed the beast of risk in a voluntary, market-based way.

The subprime bubble was part of this hedging of risk. With loads of offshore dollars looking to invest in the rock-solid American housing market, institutions turned to collateralized debt obligations as a means to mitigate the risk incurred by expanding the mortgage market to home buyers with below-standard credit ratings. With no regulation, however, CDOs became untethered from the actual risk in the U.S. housing market, making it impossible to accurately value the securities once the underlying mortgages started defaulting at unexpected rates. Without a way to value the security, institutions are now in the process of simply having to write off billions of dollars of securities, creating a solvency question that is freezing up corporate lending, and impacting the real economy.

Leo Hindery, speaking here at New America last week, believes there is approximately $850 billion in bad subprime mortgages out there, and only a little more than $200 billion have been written off so far. Large though that is, there is an even larger bubble, the ultimate product of twenty-five years of market fundamentalism, looming on the horizon.

Called credit-default swaps, this unregulated derivative market has a total estimated value of $45 trillion dollars. Soros calls this a "Damocles sword" hanging over the global markets. Writing in the New York Times about similar concerns, Gretchen Morgenson observed that, "JPMorgan Chase, with $7.8 trillion, is the largest player; Citibank and Bank of America are behind it with $3 trillion and $1.6 trillion respectively." If that Superbubble bursts, the financial system really could collapse.

Roots in Cold War Grand Strategy

For the American grand strategist, this is clearly a major concern. American economic vitality is essential in any conception of U.S. grand strategy and this kind of risk cannot be allowed to continue. But, large though it is, the Superbubble is still a symptom of a larger strategic dysfunction. To understand that, it is essential to recognize that the Superbubble, which Soros argues was started in the early 1980s by Reagan's economic policies, was a product of the final stage of the Cold War.

At the end of the Carter Administration, our Cold War grand strategy was fraying. Containment, of course, established that since America could not win a military confrontation with the Soviet Union, we must keep the East-West struggle primarily one of economic and political systems. In effect, we said our economy would do the strategic heavy lifting.

In 1980, our economy was in significant trouble, and Containment was at risk. We found ourselves in a perfect storm of two oil shocks, the arrival of Europe and Japan as economic competitors, the end of the Baby Boom, and the massive deficits incurred during the Vietnam War. In short, the post-war economic engine that produced the halcyon decades of the 50s and 60s had run out of fuel--before America had won the economic contest with the Eastern bloc. Jimmy Carter's new Federal Reserve Chairman, Paul Volcker, had to raise interest rates to tame inflation. Combined with Carter's well-intentioned but incomplete efforts at energy conservation, the American economy went into a deep recession.

At the same time, in the wake of Vietnam and the failed hostage rescue mission, Desert One, American military capability and morale was at an historic nadir. In addition, the Soviets had invaded Afghanistan and the Shah, our agent in the Persian Gulf, had fallen to the Islamic Revolution.

At some level, Reagan and his advisors knew these complex geopolitical stakes. Their agenda, combining a feel-good domestic PR campaign, pressure on the Saudis to open the oil spigot, military spending, aggressive covert operations in Eastern Europe and Central Asia, and a shift toward market fundamentalism provided the social, economic and political lift that America needed to shore up Containment for long enough to let the Soviet system collapse -- first.

This was the geo-strategic context in which Soros' Superbubble was born. The prescription of market fundamentalism was part of a larger package to salvage Containment and finish off the Soviet Union. With no pathway to rebuild the asset-based and middle-class post-war economy, Reagan and his team chose the financial equivalent of steroids, debt. It was a gamble purpose-built for this finite strategic mission.

Strategic Drift

After the collapse of the Soviet Union, neither the George H.W. Bush administration nor the Clinton Administration could find a new grand strategy for America. Instead, Bush 41 dealt with Cold War clean-up issues like reuniting Germany, stopping Iraqi aggression in the Persian Gulf, and facilitating a peaceful transition of power in Moscow. The Clinton team remained in crisis management mode while trying to expand America's Cold War economic engine and balance the budget. Aided by a genuine increase in productivity driven by information technology, the combination appeared to work. Riding out the crashes in Mexico, Asia, and Russia, America, it seemed, had figured out how to tame a market economy and now our role was to expand that economy globally while defending its choke points.

It was a false positive that reinforces Soros's theory of reflexivity in both markets and geopolitics as well. In reality, Rubinomics allowed the Superbubble to continue its speculative ways with the rise of the internet bubble. The broader culture of laissez-faire also contributed to perfidy in corporate accounting houses and the spectacular collapse of Enron. Meanwhile, our fascination with the rise and fall of the Asian Tigers blinded us to the long-term implications of the slow but massive export- and urbanization-driven Chinese growth engine. Meanwhile, our stability policy in the Gulf gave new energy to a little-known band of extremists name al-Qaeda. When 9/11 hit, our economic and political myopia allowed a home-grown group of extremists known as neo-conservatives, allied with domestically-focused Karl Rove, to use another innaccurate set of narratives to push us into further economic and military distress.

Back to Basics

It is now time to get back to grand strategic basics--and the Soros narrative helps us get there. Despite the $45 trillion in credit default swaps, the rise of Asia, our overstretched military and the spectre of al-Qaeda, there is plenty of opportunity for the United States to find a new direction. We obviously have to fix the problem of the Superbubble--figuring out a way to stabilize the pool of credit default swaps and then creating a new generation of efficient market management institutions to ensure a prosperous and competitive balance of stability, assurance, agility and innovation.

But simply strapping a new set of regulations on the remnants of America's Cold War economic engine is the ultimate in futility. This no more than what Reagan did in the 1980s and what got us into the Superbubble in the first place--a collective inability or unwillingness to envision a new era of domestic growth based on something other than SUVs and Exurbs paid for with home equity loans or subprime mortgages.

Soros implicitly understands this when he said in the conference call that he believes America needs to turn to climate change to find a new source of economic growth. Climate change, of course, is just the tip of the iceberg, a leading symptom of our macroeconomic dysfunction.

Driving climate change but also our trade imbalances, energy insecurity, and myriad other major challenges, is the unavoidable reality that the world needs to bring 4 billion people into a global economy that is crashing with the 2 billion already in it. Indeed, the McKinsey Global Institute last month released a major report saying that the primary global economic opportunity of the coming era will be helping China's urban population grow to 1 billion, a project that requires massive investment and innovation in energy, transportation, land use and resource use. And behind the Chinese are another billion Indians and 2 billion other low- and medium-income people around the world whose needs and dreams are driving them into the global economy.

This is where our future lies. America is at its best when it sets out to address the driving challenge of the era. With five percent of the world's population and 25 percent of global GDP, we will always be stronger economically than militarily. So once again, our economy will have to do the heavy lifting. That means leading the innovation in energy, transportation, land use and resource use here at home, then exporting America's cutting-edge products, infrastructure, and services into increasingly compatible markets in Asia and around the world.

Soros' new book is a major contribution to our understanding of the financial system and the bubbles that threaten us. But the next administration needs to integrate strong sectoral recommendations such as these into a broader grand strategy for the present era. Then and only then will our economy will be on a sound, sustainable footing.

Democratizing Capital

Patrick Doherty — Wed, 26 Mar 2008 15:57:00 -0400

In each formulation of American grand strategy since World War II -- until we inexplicably stopped such planning in 1992 -- the President and Congress relied on the power of the American economy to do the strategic heavy lifting. Sixteen years, however, is far too long for even the American economic engine to coast without a strategic re-alignment, and the stimulus, bailouts, subsidies and even military operations that naturally ensued have forced even Martin Wolf of the FT to declare the "dream of global free market capitalism" dead. Writing in the upcoming issue of The Nation, Sherle Schwenninger, looks to the architects of the New Deal and finds three lessons essential for re-tooling the American economic engine and bring market capitalism back home to America's shores.

Democratizing Capital

by Sherle R. Schwenninger | The Nation | April 7, 2008

Historical analogies are never exact. Yet many of the choices we have before us today are similar to ones that an earlier generation of progressives faced as the 1932 election approached. As we do today, progressives then confronted a society beset by a huge gap between classes and an economy laid flat by the bursting of the speculative excesses of the previous decade. To be sure, our economy is nowhere near Depression levels of collapse. But the choices New Deal progressives made are worth revisiting because they provide sound first principles for dealing with the economy and government today. Indeed, many of those principles are even more appropriate for today's world.

The first lesson to be learned from this earlier era is that a large middle class requires an economy that generates a broad base of jobs paying middle-class wages. The New Dealers were not opposed to "rigging" the labor and financial markets to achieve this result. New Deal progressives believed the economy should exist to serve society, not the other way around, and that the government has a duty to shape the economy to meet middle-class aspirations. A high-wage, middle-class society would, in turn, be good for the economy: living wages would not only ensure adequate demand for the economy but in so doing would spur new investment and productivity growth, creating a virtuous circle of rising living standards.

The belief of New Deal progressives in an economy that could create good middle-class jobs stemmed in part from their resistance to large social welfare subsidies to individuals, on the grounds that this would encourage an unhealthy dependence on the state. Moreover, even though they favored progressive taxation, New Dealers were skeptical of a society dependent upon the permanent redistribution of income. The principal goal of many New Deal programs was not to relieve the conditions of poverty--although they often did so--but to build physical and human capital that would allow people to escape permanently from poverty. Thus New Dealers emphasized government programs that expanded education, spread property ownership, invested in America's common physical and knowledge capital, and seeded the industries of the future. It was not perfect, in large part because it preceded the civil rights revolution and thus left out millions of African-Americans. But it did build the largest and most secure middle class America has ever known.

Today we see the consequences of a much different way of thinking about the economy and society. Over the past two decades we have been told that globalization is an immutable force and that we must bend to its demands, embracing the agenda of free trade, financial deregulation and less progressive taxation. The best we can do, we're told, is to let globalization run its course and compensate the losers, even though no amount of new social welfare measures could compensate for the loss of millions of good-paying manufacturing jobs. Thus, without any real debate, America's political elites have chosen for us a highly stratified, low-wage society with great costs to our middle-class way of life and to our productive economy.

The second New Deal principle is about achieving a high-wage economy and at the same time more widely distributing the capital and skills for wealth creation. The principal policy tool the earlier generation used was massive public investment and public building. The public investment programs they pursued not only created many new middle-class jobs but also laid the foundation for a more productive economy, which led to even more middle-class jobs. Agencies like the Tennessee Valley Authority in the 1930s and '40s were followed by even more extensive public investment initiatives in the postwar years. From 1950 to 1970, the government spent more than 3 percent of GDP on public infrastructure alone. It built everything from highways to schools, power systems to parks.

Throughout the New Deal era, public investment was America's way of enacting industrial policy. It was understood that public investment paid for itself many times over. The GI Bill alone generated returns of up to $7 for every dollar invested. And because it generated returns to the economy and society, New Dealers in the postwar period were not afraid to raise taxes or to borrow in order to ensure adequate levels of public investment. And borrow they did, even though the national debt was a much larger percentage of GDP than it is now.

For the past few decades, however, we have made a very different choice. As concerns over the budget deficit have grown, and as tax-cutting mania has taken hold, we have cut back on public investment. Since 1980 we have devoted less than 2 percent of GDP to public infrastructure and have allowed federal spending on basic research and development to decline as a percentage of GDP as well. As a result, a backlog of public investment needs--clogged roads and ports, collapsing bridges and levees, uneven broadband access, an antiquated air traffic system, an undersized energy infrastructure--has begun to cut into our economic growth and undermine our efficiency.

A third principle of middle-class America that the New Deal offers us relates to the concentration of power and capital. Earlier progressive reformers distrusted such concentrations. Not only did they threaten democracy; they also warped the economy and distorted consumption and investment. Government therefore must be a strong countervailing force to big business and oligarchic power, and must be organized so that it cannot be captured by one economic group at the expense of another or the general public.

The New Dealers were particularly concerned about the power of Wall Street and the financial community. They feared a national credit system that was dependent on Wall Street bankers, whose interests were not always aligned with the needs of homeowners, farmers and small and medium-sized producers. They therefore sought to democratize capital by creating myriad credit institutions that would ensure that all regions and sectors of the economy had access to capital. They created a variety of federally subsidized credit programs to enable people to construct homes and start businesses and to allow states and municipalities to build schools and modernize infrastructure. It was here that the New Deal was most creative--combining a strong federal state with the local and regional decentralization of capital and the local and regional control of these programs and institutions.

As with other first principles of a middle-class America, we have seen a reversal of priorities over the past few decades, as big financial institutions have again asserted their influence over the economy and economic policy. The new power of Wall Street has been evident in its successful push for financial liberalization and deregulation, in the emphasis accorded the deficit and concerns about inflation as opposed to full employment, and until recently in Washington's preference for a strong dollar, which favors financiers over real producers. This triumph of Wall Street over Main Street has been responsible in part for the hollowing out of the tradable-goods sector and for the asset bubbles and predatory lending that have wreaked havoc on the economy. Indeed, one of the first things the New Deal would have us do is reregulate the financial system and put the interests of the productive economy over those of Wall Street.

In all these respects, whether it be high wages, public investment or the decentralization of financial power, the New Deal succeeded because it changed the way the economy worked. And it did so by marrying progressive reforms with Americans' preference for independence, whether from government subsidy or big-business paternalism. This is the enduring lesson of the New Deal.