Michael Lind’s Unified Theory of U.S. Political-Economic Grand Strategy

On Friday, 24 July 2009 I went to see a New America Foundation panel discussion of The Power Problem: How American Military Dominance Makes Us Less Safe, Less Prosperous, and Less Free, by Christopher Preble, the Director of Foreign Policy Studies at CATO. Mr. Preble is, along with Andrew Bacevich, Robert Jervis, Christopher Layne and others, a member of the Coalition for a Realistic Foreign Policy. It was a very Coalition-y event, with a panel comprised of ideological misfits amidst our ill-representative bipolar political spectrum. At one point Mr. Preble felt it necessary to state that people think he’s a Republican because he works at CATO, but that he is not.

I’m a fan of Mr. Preble, and a swath of other of the Coalition for a Realistic Foreign Policy thinkers. I have previously made Preble’s point with respect to Gareth Porter’s book, Perils of Dominance: Imbalance of Power and the Road to War in Vietnam (“Militarism: Loose It or Use It,” 3 February 2008). Mr. Porter’s book is a specific case study of Mr. Preble’s point with respect to the Vietnam War era.

What interested me most about this discussion was Michael Lind’s comments. When his turn came, off the cuff Mr. Lind spun one of the most trenchant, compelling and unified analyses of the last century of U.S. grand strategy I’ve ever encountered. Without saying it in so many words Mr. Lind shows how the present economic crisis is a systematic crisis resulting from the evolutions of an international system that is the product of a U.S. grand strategic and international political-economic bargain decided upon coming out of the interwar crisis years and the outbreak of the Second World War.1

A transcript of the relevant sections of Mr. Lind’s comments, as well as editor’s notes, follow (Mr. Lind’s comments are 0:43:03-1:00:15, I excerpt his comments starting at 0:45:11):

Michael Lind, Gordon Adams, Christopher Preble, Michael Cohen, The Power Problem, New America Foundation, Washington, D.C., 24 July 2009

I think if you look at both our national security policy and our global economic strategy — and there is one — these two things are not completely unrelated even though they’re usually discussed as though they’re on separate planets — you can understand both by referring to four countries, which happen to be the other four great powers or greatest powers: Germany, Japan, Russia and China. You can’t understand out national security strategy or our trade policies without thinking about these countries in particular.

First our national security strategy. As many people have pointed out — this is simply the standard interpretation2 — our foreign policy during the Cold War was one of dual containment. We were containing four countries, not just two. We weren’t just containing the Soviet Union and communist China, but we were also containing post-1945 West Germany and post 1945 Japan. And the reason the U.S. adopted this hegemonic global military strategy — which was not what it had intended in World War II. In the course of World War II the Roosevelt Administration in its planning assumed you would have a three power world, essentially the British, the Soviets and the Americans and that Chan Kai Check would govern China as a satellite of the Americans.

But in the Cold War this all broke down. And what evolved was a system in which the Germans and Japanese would be permanently demilitarized. Their security would be provided unilaterally by the United States. You can call it NATO, but it would essentially be a unilateral offer of guarantee for this disarmed Japan and this disarmed West Germany. At the same time the Soviet Union and China — which late in the Cold War became a geopolitical ally of the U.S. — would be contained, they would be outside of the system. And we would be protecting Japan and Germany — Japan from both China and the Soviet Union and Germany from the Soviet Union.

Now, what does that have to do with economics? There was a deal implicit in this strategy, which is, okay Germany and Japan you have this massive military industrial complex and unlike after World War I we’re not going to have punitive reparations and so on to bring about some future Hitler as a result of humiliation. We want to rebuild you and integrate you into this American-led system, including a global free trade system, or managed trade system. So the deal is, you don’t make tanks, you make cars, you don’t make guns, you make radios. So you will become civilian manufacturing superpowers and this is in the interest of the United States, at least according to American strategists because this will avert the reemergence of an independent Japanese military great power and an independent (even) West German military great power and the emergence of a multipolar world, with multipolar rivalries, like those of the 1930s.

So the deal, which was taken up more by Japan than by West Germany, which has had fairly liberal trade relationships, both with us and with its neighbors in Europe, was that you export to us and we will turn a blind eye to the fact that you, Japan, use non-tariff barriers to keep our products out of your markets, to the fact that you’re targeting particular industries in the U.S., to the fact that you’re hiring lobbyists in Washington to promote your industrial strategy in the 70s and 80s. We will turn a blind eye because we’re willing to sacrifice certain American industries — and here the libertarians part from my interpretation — we will sacrifice certain American industries in order to keep you part of the U.S. Cold War coalition and we will tolerate things that if we were not military allies and protectors we would never put up with. And so that was basically the pattern.

Now, the end of the Cold War comes along. There was a fascinating debate. I was sort of on the sidelines of it as executive editor of The National Interest, Irving Kristol’s foreign policy magazine by the way, back in the early 1990s, late 1980s. And you had the America first isolationists, you had the balance of power school, there were the liberal internationalists and so it was a fascinating debate. It was all shut down in the aftermath of the Gulf War and we’ve had the de facto basic same strategy under both Clinton and Bush and now under Obama — with the exception of the more aggressive neoconservatives slant.

And the decision was made — it sort of evolved, you know, it’s not a conspiratorial thing, but this became the new consensus after the Gulf War in 1991 — the decision was made we will continue the policy of dual containment. In other words, we’re not going to rethink it. We’re not going to say oaky, NATO, we’re going to admit Russia and turn it a concert of power, or we’re going to get rid of it, we’re going to come up with a new system and bring in the Chinese. No, basically we will continue to be Japan’s protector nation and South Korea’s, we will maintain these Cold War alliances and we will maintain NATO, which will be expanded, for fear — and I’m simply reporting, I’m not endorsing this because I agree, I think, with everyone on this panel that a certain paranoia has driven all of this — for fear that after reunification Germany would emerge as a Fourth Reich, this sort of lose canon neo-militaristic power. And so the geostrategic purpose for the expansion of NATO, it served both of the goals of dual containment after the Gulf War. You push NATO all the way up to the borders of a weakened, post-imperial Russia so you’re still containing Russia, no longer the Soviet Union, but the Russian Republic. And at the same time, you’ve embedded Germany even more deeply in this system of U.S. alliances, of hegemonic alliances.

It’s not a traditional alliance system. Traditional alliance system is more like the allies in World War I, World War II. … The American alliance system is a hegemonic system. We expect nothing, really, in return. They’re essentially client states and protectorates, most of our so-called allies. They’re not actual equal partners. We will protect them for what we perceive as out interest in a world order that’s beneficial to us. They really don’t have to do anything in return to protect us. But we don’t see this as charity, at least the establishment. This is promoting a world order.

We maintain this dual containment system after the Cold War. Paul Wolfowitz and others had a name for it in the early 1990s some of you may recall from stories in the New York Times and elsewhere.3 It was called Reassurance. That was the initial [name] during the first Bush administration. This was called the Reassurance Doctrine. We would reassure the other great powers of the world that because we would look after their geopolitical interests, they would not need to rearm and they could continue to devote their economic energy — in fact, George W. Bush said this at Westpoint in [2002].4 He said the other countries should concentrate basically on trade and we will maintain these enormous strengths [crosstalk]. My point is, this is not a crazy idea. I think all of us would agree that this is flawed and ultimately doomed, but there is a system here.

My final point in analyzing this consensus system is the economic counterpart since the Gulf War. And this is a system called Bretton Woods II. Bretton Woods II is the term that economists use for this very strange global economic order that evolved in the last twenty years. In which American consumers went into debt in order to purchase goods from primarily China. China has, at least up until the crash, 90 percent of the non-oil trade deficit with the United States. But even before China moved up in this decade, it was East Asian countries,5 to a lesser extent Germany in Europe. So you get this very odd system where the United States is the consumer market of first resort for the other three leading market or quasi-market economies of the world, which today are Japan, China and Germany. Japan, China and Germany all have substantial merchandise trade surpluses. The United States has had an ever growing merchandise trade [deficit].

When you read these discussions taking place on economy planet and national security planet, without the frame of reference to the bargain here it’s just kind of missing the point. There was a geopolitical bargain underlying America’s offer of unilateral access to U.S. markets, particularly to Japan which practices a fairly sophisticated form of mercantilism at the expense of U.S. exports. And then after the cold war the elites in the United States decided to extend this to China.

This brings us up to the present and why this system is collapsing before our very eyes. What worked for Japan, a country much smaller than the United States, they could trade with us while protecting their markets from American exports. This cannot work, that export-oriented model was doomed the moment China, the world’s most populous nation adopted it. There are simply not enough first word consumers in the U.S., or in the U.S., the E.U. and Japan put together, to accommodate all of the stuff that first China and now India are capable of doing. In that sense this bargain is doomed. This is one of the underlying reasons for this crash, because China would not have had these enormous dollar surpluses — some of the oil-exporting countries would have, but China would not have — had it had a more demand-oriented domestic consumption driven policy. It’s this export-oriented policy that allowed it to accumulate these dollar surpluses and indirectly, through purchasing American debt, for reasons we need not get into, but that also helped their exports, enabling American consumers to go on this binge which then helped build up what is really gross overcapacity in Chinese manufacturing.6 So this system has crashed now. It’s not coming back. … It’s run into its limits. So Bretton Woods II is dead as a global economic system. There is no other domestic consumer market, apart from the U.S., that is capable of accommodating all of the export capacity, not only of China, but of Japan and even Germany, which has trade surpluses with all its European neighbors.7

So how does this effect security policy? Well, my prediction is that the costs of digging our way out of this collapsed 1990s, 2000s post 1992 global economic system, which again rested on this geopolitical bargain between the U.S. and these potentially threatening great powers, except for Russia, which is becoming more and more of a resource power, but it was the other three major industrial great powers: China, Japan and Germany. We’re simply not going to be able to afford a military that’s at four of five percent, particularly a military which had as its actual purpose — and let me wrap up just by saying this — the actual purpose if you read Michael Mandelbaum, who wrote a very good book setting forth what I think is the establishment position,8 I’d recommend it to everybody, if you want a view from the inside. [crosstalk]

But he says the real reason we have this giant military is not because we need all these aircraft carriers in order to prevent jihadists from sneaking into the U.S. and getting on airplanes. We don’t actually need this giant army to deal with the North Koreans or this or that rogue state. Rogue states and terrorists — which are real problems I’m not diminishing this I may take them more seriously than some of the other people up here, I mean they’re problems.

If you look at the structure of our military, it is designed to intimidate China, Germany and Japan and Russia if they even think about rearming. That’s why we have the size of the military. Because it’s grossly oversized if you actually want to fight jihadists and AFPAC. But when people come out and say — as President George W. Bush is — that’s the purpose of our military: no one should even think about competing with our capabilities. Well, who’s thinking about competing with the capabilities of the U.S. military? A bunch of guys in suburbs or a cave in Afghanistan, Pakistan? No. We know what the countries are, the ones that can never be named as objects of U.S. Strategy: China, Germany, Russia, Japan.

I’ll end with a prediction. The collapse of Bretton Woods II is going to bring down this Reassurance strategy by creating a fiscal crisis for the American state, of which we are in the early stages because of the enormous debt from the bailout, combined with, if we avoid future bubbles, a fairly slow rate of growth. And this is going to create enormous political conflict in the United States. The defenders of the Pentagon — of whom I am one — I don’t want to cut to dangerous levels — but there’s going to be a battle between the Pentagon and the American Association of Retired Persons over if we’re going to cut government spending by two or three percent, is it going to come out of the Pentagon budget or are we going to slash Social Security … or are we going to slash and reform Medicare. And so my money is on the old people.

Editor’s Notes

  1. A thumb-nail sketch of this history: The formative political experience for the Second World War and early post war foreign policy establishment was the failure of Wilsonianism in the Interbellum years: the Great Depression, the downward spiral of beggar-thy-neighbor economic policies, the rise of fascism and militarism, the intensification of great power competition leading to a repeat of “the war to end all wars” and the eventual need for the United States to return to Europe for a second major war within 25 years. The post-war international system that these people — Harry Truman, George Marshall, Dean Acheson, George Kennan, Paul Nitze, Harry Dexter White; in Europe: John Maynard Keynes, Jean Monnet, Robert Schuman, Ernest Bevin — created was only partly spurred by suspicions of the Soviet Union. Its other motivating force was the avoidance of a third repeat of the pattern of world war that dominated the first half of the Twentieth Century. That system consisted of the suppression of great power competition under the political-military preponderance of the United States as the just guarantor of international order, combined with with market — and market only — based access to resources under a pseudo-legal international economic order in the IMF, the IBRD (World Bank) and GATT, eventually WTO. Already by 1960 this system was being challenged by a world recovering from the devastation of World War (Arthur Schlesinger reported that President Kennedy often said that “the two things which scared him most were nuclear weapons and the payments deficit”). For a decade the United States fought a rear-guard action to uphold its obligations, until the strain of guns and butter (the Vietnam war era inflation and current account deficit) lead the Nixon administration end the Bretton Woods policy of dollar-gold convertability on 15 August 1971.

    What followed was a period of monetary instability and a number of ad hoc attempts to remedy it — the Smithsonian Agreement (1971), The European Snake (1972), The Exchange Rate Mechanism (1979), the Plaza Accord (1985) — as well as a period of financial crises of increasing of increasing size and scope — the Latin American Debt Crisis of 1982-1985, the June 1982 ERM realignment and François Mitterrand’s liberal turn in the face of intense dollar-Deutche mark pressure on the franc, The Mexican peso crisis of 1994, the Asian Financial Crisis of 1997-98. All of these developments are evolutions of a system of dollar hegemony. Throughout this period the current account deficit grew in fits and starts, leading to the current crisis, whose primary cause is the faltering of the United States in its attempts to prop up the world economy by turning its consumer base into the buyer of last resort and mopping up the worlds excess money in its current account, consumer and fiscal debts.

    For my part, whatever its failings, this system has obvious competitive advantages over what came before it. Mr. Preble ends the session saying, “Power held by others is something to be welcomed, not feared.” I’m not so sure about that. There is, however, one failing with which I cannot argue: as Mr. Lind’s said, that of its being doomed.

  2. E.g. this is the interpretation of the reigning standard work on the early Cold War formation of U.S. grand strategy, Melvyn Leffler’s A Preponderance of Power: National Security, the Truman Administration, and the Cold War (Palo Alto, CA: Stanford University Press, 1992).

  3. Tyler, Patrick E., “U.S. Strategy Plan Calls for Insuring No Rivals Develop,” The New York Times, 8 March 1992, p. A1. The document in question was the Defense Planning Guidance of 1992, early drafts of which were leaked to the New York Times. At the time, the Secretary of Defense was Dick Cheney. Mr. Wolfowitz was Undersecretary of Defense for Policy in the Pentagon. Secretary Wolfowitz had delegated the job of writing the document to his deputy, Scooter Libby, who had in turn delegated it to Zalmy Khalilzad. Participants in the discussions surrounding the Defense Planning Guidance included DOD Office of Net Assessment head Andrew Marshall and independent defense intellectuals Richard Perle and Albert Wohlstetter. These are the usual suspects. A subsequent, whitewashed Planning document omitting the language of dual containment was released as the official, final version, Tyler, Patrick E., “Pentagon Drops Goal of Blocking New Superpowers,” The New York Times, 24 May 1992, p. A1. See Mann, James, Rise of the Vulcans: The History of Bush’s War Cabinet (New York: Viking, 2004), pp. 208-215.

  4. Bush, Jr., George W. “Commencement Address at the United States Military Academy at West Point,” West Point, New York, 1 June 2002, http://georgewbush-whitehouse.archives.gov/news/releases/2002/06/20020601-3.html (accessed 26 July 2009). The key passage would be as follows:

    Competition between great nations is inevitable, but armed conflict in our world is not. More and more, civilized nations find ourselves on the same side — united by common dangers of terrorist violence and chaos. America has, and intends to keep, military strengths beyond challenge (applause) thereby, making the destabilizing arms races of other eras pointless, and limiting rivalries to trade and other pursuits of peace.

    While overt talk of the strategy of hegemony was originally suppressed in the Defense Planning Guidance of 1992 (supra, note 1), after September 11th, 2001, the neoconservative element in the administration was ascendant, peoples’ sensitivities to bald talk diminished and the strategy became overt in the September 2002 National Security Strategy of the United States. Sanger, David E., “Bush to Outline Doctrine of Striking Foes First,” The New York Times, 20 September 2002, p. A1.

  5. Mr. Lind is here telling the long history of the present crisis. The intermediate history goes back to the dot-com bubble and the developing nation foreign direct investment bubble, precipitating the Asian financial crisis of 1997-1998, on which I have previously commented (“The Committee to Save the World, Ten Years On,” 26 March 2008).

  6. The idea that capitalism has entered a phase of overcapacity and hence perilously declining profit margins can be found in its most Marxist “propensity of capitalism to crisis” version in the two works of Robert Brenner, The Economics of Global Turbulence (Brooklyn, NY: Verso, 2006) and The Boom and the Bubble: The U.S. in the World Economy (W. W. Norton & Company, 2002), both based on his special issue of New Left Review, “The Economics of Global Turbulence,” series I, no. 229, May-June 1998. Similar theories can be found in more mainstream versions in Robert Reich’s Supercapitalism (New York: Knopf, 2007) which draws heavily upon John Kenneth Galbraith’s The New Industrial State (Boston, Mass.: Houghton Mifflin, 1967).

  7. The unnamed theory behind Mr. Lind’s reasoning about the current crisis is that of the “savings glut” (or alternately, demand dearth) advocated by, among others, Federal Reserve Chairman Ben Bernanke “The Global Saving Glut and the U.S. Current Account Deficit” (Virginia Association of Economics, Richmond, Virginia, 14 April 2005) and Financial Times economic correspondent Martin Wolf, first in his special comment and analysis column, e.g. “The Paradox of Thrift: Excess Savings Are Storing up Trouble for the World Economy,” Financial Times, 13 June 2005, then in his book, Fixing Global Finance (Baltimore: Johns Hopkins University Press, 2008). I’m tempted to say something to the effect that in these articles you have the “economy planet” whose orbit never crosses that of “national security planet,” of which Mr. Lind spoke — that the grand-strategic bargain underlying the savings glut is never addressed — but in the 2005 piece, Mr. Wolf writes:

    True, the huge current account deficit gives the US the happy combination of guns and butter in the short run. Since the external deficit is bigger than the fiscal deficit and also bigger than the amount that the US is spending on its armed forces, either of these can be regarded as a free lunch, if only for the moment.

  8. Mandelbaum, Michael, The Case for Goliath: How America Acts as the World’s Government in the Twenty-First Century (New York: Public Affairs, 2005)

Photograph, left to right, Michael Lind, Gordon Adams, Christopher Preble, Michael Cohen; courtesy of the New America Foundation; used under the Creative Commons Attribution-Noncommercial-Share Alike 2.0 Generic license.

The Day I Became a Hegelian

I remember distinctly 14 April 2000, the day the Dow Jones Industrial Average dropped 617.78 points, or 5.7 percent, to 10,305.77 (Fuerbringer, Jonathan and Alex Berenson, “Stock Market in Steep Drop as Worried Investors Flee; NASDAQ Has Its Worst Week,” The New York Times, 15 April 2000, p. A1). The company where I worked offered options and stock purchase plan heavy compensation packages and it was the first really precipitous drop in the stock market since the online discount stock brokers like E-Trade went really big. At the office where I worked nothing got done that day: no one could do anything but watch their portfolios plummet. I remember a group of us going out for lunch. This was in Seattle and the Harbor Steps II was still under construction. At that time it was just a reinforced concrete skeleton and a kangaroo crane. As the group of us walked down — I don’t know — probably University Street, I looked up at the concrete stack of Harbor Steps II and the bustle in and around it and it occurred to me that if the stock market were to continue to fall like it was, the development company might halt construction — that building would cease its coming into being. At that moment, I saw that it was primarily a blueprint, an architect’s vision, a developer’s profit and loss projections, investor expectations. It was less matter and more idea and at that moment I first thought that maybe there was something to this Hegel fellow.

Abandoned construction, Bangkok, Thailand, approximately Sukhumvit and Soi 8, 2 December 2006

Similarly, when S. and I were in Thailand, we stayed in a neighborhood a few blocks from an abandoned, half finished concrete skeleton of a building. They were actually fairly common in Bangkok. So quickly had this construction project been abandoned that there were places where the rebar had been put in place and half the concrete had been poured when work had stopped. A pillar ended in a jagged mound of concrete with the remaining half of the uncovered rebar simply jutting skyward. I took one look at that building and said to S., “That’s probably left over from the Asian financial crisis.” That’s how suddenly and ferociously the Asian financial crisis struck: people simply walked away from multi-million dollar building projects. When the beliefs don’t pan out, the rock and the steel cease to fill out their imagined dimensions.

Ten thousand years ago ideas played almost no role in human affairs or history. Today they play a significant role, perhaps already the better part of every artifact and interaction. The Pattern On The Stone as Daniel Hillis called it. The stone is inconsequential: the pattern is everything. It is a part of the direction of history that ideas gradually at first, but with accelerating speed, displace matter as the primary constituent of the human environment.

And that, as I read it, is Hegel’s Absolute

The Committee to Save the World, Ten Years On

The Committee to Save the World, Time Magazine, 15 February 1999

It’s mostly consigned to the past, but it increasingly seems to me that the Asian financial crisis of 1997-98 and the attendant reaction of U.S. economic policy makers was the watershed economic event of the present era. The economic handlers of the time, most outstandingly Alan Greenspan, Robert Rubin and Lawrence Summers came as close to the rank of heros as economic policy makers are allowed (“the committee to save the world” in Time Magazine’s famous formulation). During the period 2 July 1997 through 23 September 1998 — the floating of the Thai baht to the deal to bail out Long Term Capitol Management — the Federal Reserve held rates steady at 5.5 percent, then in September, October and November made a succession of impressively restrained off-committee 25 basis point rate cuts. The firebreak held and the U.S. economy got another 24 months of economic growth, crossing the line to become the longest uninterrupted economic expansion in U.S. history in February of 2000. On such a basis is the formidable reputation of Alan Greenspan built.

But the unenunciated strategy of Greenspan, et. al. during this period was to stave off the spreading crisis by converting the vast and voracious American body of consumers into the buyer of last resort for the world. The countries in crisis would be propped up through IMF aid packages, but also through the newly enhanced competitiveness of their goods on the U.S. market. This was accomplished through the aforementioned interest rate cuts, but also at Treasury through the strong dollar policy.

U.S. trade deficit, 1991-2005

Source: Wikipedia; U.S. Census Bureau, Foreign Trade Division

The broadest mechanism by which interest rates work is through home mortgages. As interest rates decline they set off a wave of home loan refinancing, liberating spending previously sunk into housing costs. That combined with the (psychological) wealth effect of the stock market and a historic credit binge came together in the person of the American consumer to pull the world back from the brink. A glance at the above graph of the trade deficit shows that 1997 was the inflection point.

In so far as the way that the U.S. opted to combat the global spread of the anticipated “Asian contagion” was to transform the U.S. consumer into the buyer of last resort through loose credit, the collapse of the housing market bubble is the continuation of, or the knock-on effects of the Asian financial crisis of 1997-98. It could only be postponed, not avoided; transformed, not stopped. Old wine in new bottles.

It was fairly apparent to most observers during the late 1990s and 2000s that the Federal Reserve was struggling to stave off a crisis and did the best that it could, but was merely kicking the can down the road. There was plenty of commentary at the time that the Fed was merely letting pressure off one bubble by inflating another. And inside the Fed they were fully aware that this was what they were doing, but they had to deal with the crisis at hand and figured that they would cross the bridge of the iatrogenic consequences of their policies when they came to them.

In this sense the ultimate cause of the present economic crisis is a structural imbalance in the world economy that has a tendency to generate crises. One portion of the world, the developing, produces without consuming and as a result experiences a glut of savings. The other, the U.S., consumes by borrowing the surplus savings of that other portion of the world. Witness the current account deficit of the United States with China and the strategic fallout thereof. The problem is political-economic in nature and the ultimate solution lies in the realm of politics, not behind the scenes financial wizardry.