Financial crisis

I don't want to be a killjoy, but a troubling thought occurred to me last night. If -- repeat, if -- Obama's economic team has in fact managed to ward off a major depression -- even at the price of greatly increased long-term debt -- will that make it harder for them to institute various long-term reforms that really ought to be considered?  

Don't get me wrong: unlike some rightwing critics like Rush Limbaugh, I’m not hoping for failure. Avoiding a lasting depression is a very good thing for all sorts of obvious reasons, not least of which is reducing the suffering of Americans who would be poorer the longer the downturn lasted. But if you are one of those people who think that the United States had been living beyond its means for some time, and that certain aspects of our society need more fundamental rethinking (and here I'd include an overly ambitious foreign policy), then there's a black cloud in this potential silver lining.   

A few months ago, support for major reforms was enhanced by the sense that the United States really was in serious trouble. Obama's team clearly hoped to take advantage of this perception, just as the Bush administration took advantage of 9/11. As Rahm Emanuel famously put it, "no crisis should go unexploited." But if people start thinking that the United States is out of the woods, business-as-usual priorities and the politics of gridlock will quickly reemerge.  

My concern, as you might expect, is that a new sense of complacency will derail any attempt to rethink U.S. foreign policy priorities and bring long-term commitments back in line with resources. Trade and budget deficits will persist, important domestic priorities will be neglected, and eventually other countries will wake up and realize that U.S. foreign policy didn’t change that much after all. And the opportunity to move toward a more realistic foreign policy will have been lost. We'll get there eventually, of course, but more slowly and painfully than we should.

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A while back I commented on the two imbalances of power that drive American grand strategy. The first is the gap between the United States and the other major powers, which makes Americans think they are responsible for managing much of the world and convinces them that they can do so with near-impunity. The second imbalance is the strength and political clout of a host of different institutions and interest groups whose common agenda is encouraging greater international activism on the part of the United States. In recent decades, the forces in favor of "doing more" have been better-funded and better-organized than those who favor greater restraint, which is one reason why we spend so much on defense and why we find ourselves entangled in intractable conflicts on several continents.

But when I read some early reports about the Obama administration’s health care plans, I began to wonder if the various forces that favor global activism are going to face stiffer opposition in the future. We are likely to have a sluggish economy for some time to come and the U.S. population is getting older. Virtually everyone agrees that serious health care reform is badly needed but will cost a lot. Plus, Obama's various economic recovery measures are going to saddle us all with record deficit levels. Us baby boomers are not exactly noted for our altruism, and my generation is going to put a lot of pressure on politicians to deliver the entitlements we've been promised. All of this means that budget dollars are going to be very tight, and the Pentagon is going to face tougher scrutiny when it brings in gold-plated requests. The Nation and Mother Jones may not be all that formidable a political opponent, but what about the AARP?

One of the great triumphs of Reagan-era conservatism was to convince Americans that paying taxes so that the government could spend the money at home was foolish and wrong, but paying taxes so that the government could spend the money defending other people around the world was patriotic. Ever since Reagan, in short, neoconservatives supported paying taxes to promote a U.S.-dominated world order, while denouncing anyone who wanted to spend the money on roads, bridges, schools, parks, and health care for Americans as a “tax and spend liberal." But if I'm right about the emerging fiscal environment, that situation may be about to change.

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I don't have strong views about this week's G20 summit. It clearly won’t produce a grand plan to revive the global economy, and so I'm mostly hoping it doesn't do any real harm. It's abundantly clear that there are genuine differences among the various members, which reflect both divergent historical attitudes and traditions and the very different economic circumstances that each state now faces. With bigger safety nets and greater fear of inflation, European powers oppose calls for big fiscal stimulus packages and are emphasizing the need for more regulation. The Obama administration is leaning the other way: acknowledging the need for some regulatory reform but emphasizing the need for more direct efforts to boost economic activity.  

These differences won't get resolved at this meeting; let's just hope that evidence of dissensus doesn’t spook the markets or energize the protectionist forces that are already emerging in various countries. A final communiqué that committed the parties to reject the latter would be most welcome.

The meeting is also Obama's debut appearance at such a gathering, and I'm thinking that he needs to walk a rather fine line. On the one hand, he'll want to show that he’s not George W. Bush, and to firmly reject the one-way approach to diplomacy that Bush practiced, especially during his first term. This is the easy part: given Obama's innate confidence, likeability, and penchant for listening to diverse views, he should have little trouble getting on with the other attendees.

But on the other hand, Obama also needs to show that he's no pushover, and that our economic problems haven't made the United States just one out of twenty. Leaders like French President Nicolas Sarkozy have a penchant for grandstanding, and may be eager to score political points at home by hogging the spotlight or by taking pot shots at the United States.   Here Obama needs to make it clear that the United States is still a global superpower with ample capacity to defend its interests -- including its economic interests -- and that even close allies will pay a price if they provoke U.S. disfavor. The U.S. economy is still the world's largest and most advanced, and it faces fewer long-term problems than many other G20 members. Key allies in the G20 remain dependent on American military power and on the collective goods that the United States still provides. Now is not the time to look or act (to use Richard Nixon's Vietnam-era phrase) like "a pitiful, helpless giant."

Obama's tough handling of General Motors shows that he's not afraid to play hardball when circumstances require. I hope he finds a way to remind the other nineteen leaders of that fact. But I also hope he does it with some subtlety. Like I said: He's got a rather fine line to tread.

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By John Mearsheimer

Frank Rich had an excellent column in the Sunday New York Times in which he suggested that President Obama's economic team is unsuited to deal with the financial crisis. "I fear," he wrote, "that too many of the administration's officials are too marinated in the insiders' culture to police it, reform it or own up to their own past complicity with it." Let's hope his fears are proven wrong.

But Rich's column points to a larger and possibly more disturbing feature of our predicament: very few of the country's economic experts foresaw the tsunami that is now upon us. Indeed, most of them thought that the global economy was working well and needed nothing more than some tweaking here and there. This is why Obama ended up appointing a team of economic experts who not only failed to see the storm coming, but in the case of Timothy Geithner and Larry Summers, promoted policies that helped cause it. Simply put, there were hardly any sagacious business people, economists, or policymakers who he could have turned to for help.  

Rich quotes a speech the president made last week that captures the essence of the problem. Talking about the controversial AIG bonuses, Obama said that they were a symptom of "a culture where people made enormous sums of money taking irresponsible risks that have now put the entire economy at risk." In other words, the problem was not just a few bad apples; the culture itself was rotten. That is a remarkable indictment of our economic elite. 

One could make a similar case against Obama's national security team. The two most daunting foreign policy problems facing the United States are the wars in Afghanistan and Iraq. It is difficult to see how we can achieve a meaningful victory in either conflict. The Bush administration started off brilliantly in Afghanistan in the fall of 2001 by toppling the Taliban from power without having to mount a large-scale invasion with U.S. troops. Afghanistan is the last place on earth that a great power wants to occupy. But before consolidating its victory in Afghanistan and capturing Osama bin Laden, the United States marched off to invade Iraq, which was supposed to be the first step in a radical scheme to transform the Middle East into a sea of democracies. There was even serious talk at the time about creating an American empire in the region.

The end result, of course, is that the United States got bogged down in a bloody war in Iraq, while the situation in Afghanistan has deteriorated to the point where the Taliban now controls more than 50 percent of that country, and the United States has turned into an occupier. Consider that there were roughly 2,500 U.S. troops in Afghanistan in December 2001, and there are now almost 40,000 U.S. troops plus another 20,000 NATO troops -- to which Obama plans to add another 17,000 U.S. troops. And while there is no question that the level of murder and mayhem in Iraq has been reduced over the past two years, the all-important constellation of political forces there remains so unstable that we cannot leave without risking that war will break out as we go out the door.

The Bush administration is principally responsible for these twin disasters, but the fact is that most of the Democratic Party's foreign policy experts -- certainly the more senior ones -- supported President Bush's decision to invade Iraq and to do massive social engineering across the Middle East. Consider, for example, Hillary Clinton, Richard Holbrooke, and Dennis Ross -- three key players on the Obama team. They were all strong supporters of the Iraq war, and they had little inkling that we would end up getting bogged down in Iraq or that we would squander our initial success in Afghanistan. In fact, not one of Obama's principal foreign policy advisors opposed the Iraq war, although the president did. It seems that almost all of the senior foreign policy experts in the Democratic Party have been "marinated in the [same] inside culture" as their Republican Party counterparts. What this effectively means is that Obama and the country will have to depend on a group of individuals who helped create the Afghanistan and Iraq disasters -- albeit in a small way -- to get us out of them. That is not a reassuring thought.

One wonders why our elites have failed us so badly. What went wrong? How could so many economic experts and so many foreign policy experts have been so mistaken about such important matters? Why weren't there lots of prominent economists and bankers standing on the rooftops warning that the economy was heading for the precipice? Why were all those Nobel Prize winners so clueless about the potential dangers of derivatives and de-regulation? 

Why were there so few people inside the Beltway warning that Iraq was likely to be a disaster and that it was a fool's errand to try to use the U.S. military to re-make the Middle East in America's image? Why was there a serious conversation about creating an American empire among adults who grew up in the latter half of the 20th century, when all of the European empires turned to dust? Why did those same adults, who saw the United States lose in Vietnam and the Soviet Union lose in Afghanistan, not seriously contemplate the possibility that the same thing might happen in Iraq? 

Many trees will be cut down to produce the paper that will be needed for all the articles and books that will be written to try to explain how the United States lost its collective mind shortly after the Cold War ended, when so many thought that our elites were the best and the brightest in the world.

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Safely here in Singapore, reconnecting with friends and associates at the S Rajaratnam School, as well as several international visitors. A few quick, if slightly jet-lagged impressions:

1. The economic meltdown is The Big Story here, for obvious reasons. Singapore has the highest trade/GNP ratio in the world, and has been very hard hit by the overall decline in world trade. According to the Straits Times former Prime Minister Lee Kwan Yew has warned that Singapore's economy could shrink by as much as 10 percent this year (though other estimates are not quite as gloomy) which would be unprecedented. The political ramifications have been limited by the fact that job losses have been concentrated on the sizeable expatriate community (life's no better for former financial wizards here than on Wall Street), but the effects of a prolonged recession could be more worrisome.

2. Like everyone else, Singaporeans with whom I've spoke are fascinated by Obama's ascendancy and intensely curious about what it will mean. So far, most think he's been terrific in changing the tone of America's engagement with other states, but whether he can deliver on substance remains to be seen. One call this is a friendlier version of Ayatollah Khameini's message to Obama: they'll judge him by his acts, not just by his words. But they like the words. And nobody seems to miss George W. Bush very much, if at all.

3. As one would expect, Singapore's security concerns are primarily focused on the local neighborhood (Indonesia, China’s growing role, maritime security, etc.) They chide us Americans for neglecting Asia over the past eight years, and think it will take some time and effort to do the deferred diplomatic maintenance. I agree, and cannot help thinking about how different our situation would be had we not squandered all that time, money, attention, and manpower and all those lives in the sands of Iraq. 

4. Final thought: I found myself wondering today whether Singapore might be something of a canary in the coal mine on the issues of energy security and adaptation to climate change. The city-state achieved its phenomenal growth by taking a very far-sighted and disciplined approach to economic development, and its leaders continue to venerate those qualities. Singapore ranks very high in per capita CO2 emissions and per capita energy consumption (it takes a lot of energy to run a modern economy in the tropics), and a rise in global sea levels would be a BIG problem for them. So I'd expect Singapore to be among the leaders in going green (both to reduce energy costs and to encourage get bigger countries to reduce emissions) and to be on the cutting edge in preparing for the environmental consequences that it may be too late to avoid. Worth watching...

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