How to Win in Afghanistan

“But we must never forget: This [war in Afghanistan] is not a war of choice. This is a war of necessity. Those who attacked America on 9/11 are plotting to do so again. If left unchecked, the Taliban insurgency will mean an even larger safe haven from which al Qaeda would plot to kill more Americans. So this is not only a war worth fighting. This is fundamental to the defense of our people”

US President Barack Obama, August 17, 2009 

 

WASHINGTON – So, president Obama proclaimed at the same time the will to fight and moral superiority by declaring that the fight in Afghanistan is not a matter of predilection; but the “only” choice for the United States, forced on America by historic necessity . Literally, according to this narrative, this war has been imposed on us, always reluctant warriors, by an implacable enemy bent on destroying the US. More broadly, Afghanistan is the “Good War”, as opposed to the invasion of Iraq, the “Bad War” nonsensically waged by George Bush, the president called at times “delusional” by many of his political opponents.The Good War

 

So, Bush did the bad stuff. We are going to do the good stuff, the righteous stuff which is about the real enemy: the jihadists ensconced in the mountains of Afghanistan and Pakistan.So, let’s make it clear to the world –says the President– that our motives are unimpeachable. We “have to fight” the Taliban and al-Qaeda, because they are plotting more nefarious acts against America from those mountains between Afghanistan and Pakistan. 

 

Crucial for US national security

 

 Based on how the President framed the issue, it also clear that this conflict is only marginally about the suffering of the war ravaged people in the region. This is about America’s national security.  While we may feel something for the plight of peoples subject to the brutality of the Taliban, quite frankly, if this were just an internal problem among tribes, with no real or potential international repercussions, such as another 9/11 plot, we would say a few pious things, exhort the parties to cease violence and then carry on with ordinary business.

 

But the President has declared that there is a thread that links Osama bin Laden, his followers, the Taliban and other assorted followers to an ongoing plot against America. And since the plotters have taken residence in that part of the world, we have to engage in this “war of necessity” until we shall dismantled the whole enterprise, so that it can longer cause us any harm.

 

War of Necessity?

 

Now, why would the President make such a huge, upfront commitment without anything whatsoever prompting him is unclear. Is it because, as some have suggested, that by declaring Afghanistan a “war of necessity” America automatically gains and gets to keep the moral high ground? So that the President can say to the American public and to the world: “What can I say, we did not want to do this. But, quite clearly it is a war of necessity. We had no choice?” This may be nice, if it were plausible and even remotely credible –let alone true. This one, as most other wars, is a war of choice. While it is true that al-Qaeda does represent an ongoing threat to America’s security and interests worldwide, a huge military commitment in Afghanistan is by no means the only possible option.

 

Why say this at all?

 

Again, why did the President make such a sweeping, upfront commitment is difficult to understand. And frankly, it is even more difficult to understand in the light of more recent developments in October and November that reveal a potential case of “cold feet” about this “war of necessity”. The US Government has been engaged in a reassessment process, so lengthy now to indicate possible vacillation and some degree of ambivalence.

 

After the clear “call to arms”, there has been an inordinately long period of evaluation aimed at determining the most appropriate course of action, while a diverse menu of strategies and war plans, along with media leaks as to who is in favor of this and against that, have been presented. All in all this created the impression that the issue is not just about “how” to run the operation; but –far worse–  confusion as to the real strategic objective.

 

Why we cannot win

 

Let’s cut to the chase: the war in Afghanistan cannot be won within the most likely political constraints that will tie down any US administration. And this is different from stating that this war is not winnable as a matter of principle. It is not winnable because the President does not have a free hand. He does not have unlimited time and resources to conduct the fight.

 

Just like Rome, America does not have unlimited resources

 

This war cannot be won for the same reasons why the late Roman Emperors could not indefinitely fight and hold back the Barbarians that were making more and more incursions into the Empire. Rome was exhausted. Up to a point it retained the advantage of disciplined, first class soldiers and superior technology, (by the standards of the time). What it did not have was infinite resources and the staying power of continuing the fight for ever, no matter what. And so, eventually the Barbarians burst through and destroyed a once mighty civilization.

 

Impossible to rebuild Afghanistan within a limited time 

 

Now, where is the analogy, as the Taliban are not in Canada, trying to invade America? The analogy is in the lack of resources and lack of staying power. A serious counterinsurgency in Afghanistan would require flooding the country with troops and calculating that it might take at least 10 or 15 years, perhaps longer, not just to fight the Taliban but to build a society with all its institutions, laws, legitimacy and a sustainable economy so that the Afghans would have a country to fight for and the instruments to do so. And the simple fact is that America has neither the stomach for such a lengthy and costly enterprise nor the money to finance it. Period. To think otherwise is engaging in dangerous fantasies.

 

Impossible to bring about “reform”

 

To envisage a shorter time line for the accomplishment of the administration goals is fanciful. As it is fanciful to admonish newly reelected, (by default), President Hamid Karzai  to get his act together, stop corruption and sweet deals with the War Lords. This is like imagining a talk with Gang Leaders in Los Angeles, telling them that if they shape up, then we may pardon them and offer them an appropriate place in society. Try that, and see what enthusiastic response you get.

 

Governance constraints will stay

 

And this is not to imply that President Karzai is a gangster. He is not. He is the closest thing to the best leader that a primitive, tribal, extremely poor, under resourced society can offer. But he is what he is: and that is not particularly good. By the same token, the idea that, before we could make a final decision on an Afghan policy we had to wait for the elections results would imply that the results of elections conducted in such a place with that low level of literacy, of voter knowledge and sophistication would really make a difference.

 

OK. Let’s be real. These days, who governs in Kabul makes a small difference. Sure, there can be different degrees of incompetence and corruption. But the underlying reality is of a horribly poor and mostly primitive medieval society, with a thin veneer of educated people and a mostly illiterate population with almost no economic prospects.

 

Afghanistan cannot be transformed within a reasonable time

 

And we want to “fix” this country as a way to win the war against the Taliban? As I said, given unlimited resources, stomach for human losses and a large amount of money, it may be doable. But we know that none of these preconditions exist. And let me stress that the last pre-condition  –money—is and will be a more and more pressing issue, given America’s fiscal predicament. America is deeply in debt. If we are serious about reducing it, we shall need to overhaul welfare spending, most likely reducing benefits to millions.

 

Difficult to justify the war in America

 

And we think that we can cut funds to seniors and at the same time justify billions for a war that, 9/11 notwithstanding, is really remote from the daily preoccupations of ordinary people? Impossible. And beyond this huge obstacle, let us keep in mind that, even if the war were fully funded, the impatient American public will want to see results and the troops back home by Christmas, as they always do.

 

Long, protracted efforts, with each individual casualty announced every day in the newscasts are not popular, even if the President tried to inoculate himself from criticism by declaring this “a war of necessity”. He may have said it. What others actually believe will be an entirely different matter.

 

So, let us agree that whatever the president and his national security team may have in mind, assuming that it is predicated on more troops and a protracted commitment, will not work.

 

What is the alternative?

 

So, what can work? Something that starts with the recognition that the power centers in Afghanistan are in the local communities, with the War Lords and other tribal leaders who have authority with the local people. Forget about Kabul. Try and get some deals with the War Lords and other local leaders. Give them tools, money, resources to make their people at least somewhat better off and find ways to reconcile differences among them in order to minimize the danger of civil war. If the deal for the average villager is a choice between a powerful Taliban versus the discredited authority of a distant Kabul, the Taliban have an inherent advantage, because they “are there”; whereas the central government is distant, mostly incompetent and corrupt.

 

Realistic targets

 

With this we give up any delusion to try and build a modern, democratic Afghanistan with a reasonably well function central government within a few years. And this is not out of cynicism; but out of realism. Afghanistan may eventually become a modern state. But this is an extremely ambitious objective, given the actual conditions on the ground, the lack of education, of resources and economic prospects.

 

The 2001 approach worked

 

As for the possible success of a “minimalist” approach, let us not forget that the 2001 campaign against the Taliban was successfully engineered and conducted following a very similar strategy manned by only a handful of skilled CIA operatives, a sprinkle of Special Forces and –most of all—suitcases full of cash liberally distributed in order to gain the friendship of otherwise reluctant partners. True, there were targeted US bombings of Taliban positions and large amounts of equipment also dropped from the air.

 

But fundamentally this was a low profile, extremely low cost operation that did the job. The CIA had nurtured friendships in Afghanistan well before 9/11. It had gained credibility with relevant Afghan counterparts and it convinced people to fight. This strategy created a coalition, fragile as it was, that routed the Taliban. This was a stunning success. (It is unfortunate that the image of the CIA has been subsequently tarnished when it became the scapegoat for the horrible Iraq WMD intelligence debacle. The operation in Afghanistan was brilliant).

 

Nation building on the cheap does not work

 

But then, after the defeat of the Taliban, we got involved in our own silly ideas of nation building –with no “real” money. So, we wanted to do big infrastructure projects, reconstruction, schools for girls, at the same time creating a viable central government. And all this was done poorly, halfheartedly, relying on incompetent consultants and with very little money.

 

I remember, in the months preceding the war in Iraq, Afghan officials coming to Washington, pleading, almost begging not to be abandoned. And we did abandon them, for all practical purposes. Of course, the main reason was that the Bush administration thought most superficially that Afghanistan was fixed, that it could subcontracted to the NATO Alliance and other assorted friends, while America was gearing up to the serious stuff: the take over of Iraq.

 

Afghanistan was forgotten

 

And we know the rest. The half baked Afghanistan operation was put aside, and it slowly started simmering and stewing. Over time, the growing mix of confusion and bad governance gave a new opening to the Taliban. Relying also on sanctuary in Pakistan, the Taliban had the opportunity to regroup and to exploit a reasonably fertile recruiting ground, given the many poor and disaffected Afghans who felt no loyalty for a new government that delivered almost nothing to them. So the CIA strategy of making friends and staying with them was abandoned.

 

Nation building, once more?

 

And now, at the end of 2009, after the abysmal failure of the nation building strategy in a country that is most inhospitable to the whole idea, we want to try this all over? It simply will not work. Not, as I said before, because it is inherently impossible, but because neither this President –nor any other US President for that matter– can retain the necessary political support to carry it out. Besides, let me repeat it: we are broke. Fighting a messy counterinsurgency that will costs billions is a luxury that nowadays we cannot afford –even if we put “war of necessity” on the invoice to the American public.

 

 

In the end: we can accomplish our goals

 

And so, if we cannot do the Big Plan, what we can we do in order to accomplish our primary objective of denying sanctuary to the Taliban? The goal of the Obama administration is to defang and rout the Taliban and al-Qaeda. This is a very good idea. The issue is what means can we pick to reach or at least to get closer to this worthwhile strategic objective. In 2001 the CIA found a low profile, relatively low cost strategy that proved to be quite successful.

 

I am not sure that we can pick the same old plan from the shelf and redo it all over. Too many things have happened since 2001. But it may be possible to re-engage the tribal leaders, to give them assistance, real tools, money and resources so that they will be motivated to defend their own people from the Taliban. We want to deny sanctuary to the Taliban in Afghanistan, so that it cannot be used as a launching pad for other operations against US interests. The tribal leaders can accomplish this objective, if they are sufficiently motivated. The plan of creating a viable, credible and popularly supported Afghan army and police force, themselves predicate on building up a credible and functioning central government, while theoretically possible, is far more difficult.

 

More modest goals  

 

So are we giving up on nation building and true democracy in Afghanistan? Yes, we are. At least for the time being. And not because we do not care. It is because it is too difficult and too onerous. Because it would take too long and because we cannot afford it. Is this cynical realism? It is realism alright. But not cynical.

 

And again, what is the alternative? The alternative is a dream of radical reform that would require a US open ended commitment that cannot be sustained. Reforming countries, rebuilding societies, all this sounds wonderful and surely there are plenty of dedicated people willing to throw themselves into the enterprise. But good will alone will not do it. In a context as complicated and as primitive as Afghanistan, we have to scale down our reformist ambitions.  If indeed the primary goal is to deny sanctuary and thus the ability to reorganize to the Taliban, there may other ways, as the successful 2001 campaign demonstrated.

 




Out of the Crisis Through Innovation

By Paolo von Schirach

November 13, 2009

WASHINGTON – Recently I watched on TV an interesting and intelligent exchange between two luminaries on what the future will bring to the economic fortunes of the US. Still, and quite surprisingly to me, in all the detailed, erudite back and forth, laced with projections, variables, the role of China, what will the matter be with Europe, Japan and so forth, one key word —innovation— was never uttered let alone discussed by the two.

No America without innovation

The idea that one can talk at great length about the fiscal and economic future of the now short of breath, battered US economy without any reference whatsoever to innovation –the key historic strength of the American economy– is truly baffling. While the current gigantic mess was caused by finance going crazy, the issue is not just about restoring the banking system. Looking into the future, even assuming a healthy, properly regulated financial system, the strength of America, its real strategic assetrests in being number one in many if not most leading technologies.

America’s primacy rests on enterprise

The US did not become the biggest, the most powerful, the most resilient and most flexible economy in the world by accident. While economic performance is due to a variety of factors that combine and mesh in often peculiar and unpredictable ways, clearly the US, in large measure, owes its primacy to its decisive lead in technological innovation and its related ability and talent to rapidly transform innovation into viable and commercially rewarding products.

Innovation is the foundation of economic might

An interesting The Wall Street Journal article on the rebirth of tinkering in several engineering schools in the US, (Tinkering Makes Comeback Amid Crisis, November 12, 2009), clarifies this key point. Indeed, after the 1950s, with the seminal work of MIT Nobel Prize winner, Robert Solow, it became apparent to mainstream economists that, while labor and capital accounted for about half of economic growth, the other half was due to innovation.

Indeed.

This being the case, it may be possible to infer that US economic dominance was due in large part to huge investments in successful innovation, while its more feeble performance –if we take into account trends that developed well before the financial crisis– may be attributed to diminishing efforts in this key, strategic area.

The financial sector created this mess, fast innovation will help us out of it

It is quite obvious that the current recession, the epic mortgage industry excesses, the overleveraging of banks, the collapse of Lehman Brothers and the crippling of AIG are not tied to the rate of technological innovation. This is true. But, being in the mess that we are now, after having nurtured a consumption focused economy that was supposed to be financed by ever increasing real state valuations, how fast we get out of this mess will be determined in large measure by the rate and quality of innovation that the US economy will be able to produce and bring to fruition through successful commercialization. 

Create opportunities

Put it differently, we have now a deep recession whose length will depend in large part by the ability or inability to recycle elsewhere millions of people who used to be employed in tertiary sectors that were sustained only by excessively inflated consumer spending. But which other sectors can offer new opportunities, even assuming (and this is a huge assumption) appropriate skills and training for the people idled by the collpase of consumer spending? 

Well, many argue that there are huge opportunities to launch new, large scale and profitable enterprises that will deliver “green technologies”. This may be quite unrealistic, at least in terms of the scale of these new enterprise and hence their ability to absorb millions of unemployed Americans. Still, even if we accept the most optimistic scenario, the “green technologies”, existing or experimental, are and will be the result of a large scale process centered on innovation and all that goes with it: the schools that teach, the students who learn and then become entrepreneurs, the business environment that is receptive to new ideas, the venture capitalists willing to bet on the success of humble start-ups, led by unknown would-be entrepreneurs.

Enter “Tinkering”

The story described in the above referenced The Wall Street Journal article, notes that there is a new fervor within American engineering schools. Many student want to “tinker”. They want to “do stuff”; “make new things”. There is a proliferation of outfits that essentially provide facilities with state of the art equipment that is made available to the aspiring inventors. Among such facilities: TechShop in Menlo Park, California, and NYC Resistor in Brooklyn.

It is affordable

One of the key factors that allowed the proliferation of these laboratories that offer facilities for a fee is that a great deal of the basic high tech equipment that is necessary nowadays to design and make state of the art products has become much cheaper and thus affordable. We may not go back to the heroic times of men of genius who came up with new stuff at home, using very simple equipment. Still, we are also going away from the assumption that quality innovation requires huge and expensive facilities that only the major multinationals and/or National Laboratories (such as those run by the US Department of Energy) can fund and afford; thus restricting R&D to a very specific environment, automatically shutting off the many, otherwise creative, individuals who do not have access. And this is a good thing. So, we are “democratizing” access to the tools of the trade.

Traditional R&D: Going Down!

And, it would seem, not a minute too early, for the trends in “established”, mainstream R&D are not looking good. While indeed in the 1980s and 1990s the temples of innovation cranked the good stuff out, unfortunately, these privileged locales for sophisticated R&D apparently lost quite a bit of steam since then. As mentioned in the above referenced article, US R&D spending grew by an average of 6% in the 1980s and 1990s; while it came down to only 2.6% annual growth between 2000 and 2007. Recent projections point to further shrinking in the years ahead. Barely a trickle of growth going forward. And this cannot be good.

Low R&D, bad news for the economy

Now, if these trends amounting to severe cuts in spending for innovation are not transitory, long term this would spell disaster for the US economy. As a developed, high cost country, the US cannot compete with Asian manufacturers on cost. The China story is well known and it does not need to be rehashed here. So, the only way in which we can compete again, especially as we try and devise strategies that will get us not only out of this nasty recession but that will place us again on a path marked by robust, sustainable growth, is by promoting and commercializing innovation.

But this implies being first in many areas, or becoming the best among many competitors. Indeed, if we can be market leaders in clean energy technologies, then we may have the chance of having customers not just here at home but in the whole world, as all nations are trying to find strategies that will diminish the use, impact and cost of carbon based fuels.

America needs to invest in innovation now

But the whole idea of a sustainable, green economy is based on the assumption that we already have an ongoing, large scale effort to get to those technologies. Whereas, if indeed the rate of investment in R&D has collapsed, as the data would indicate, long term we do not have a very good chance.

Now, this phenomenon of tinkering described in The Wall Street Journal story would appear to be a welcome “counter trend”, a development pointing in the right direction. We have people, smart students, who have an appetite for innovation and who are using facilities that a decade ago could not provide the same quality and level of resources. And this is good –and it should be encouraged. Still, this interesting and increasingly popular trend cannot conceivably be enough to fill the investment gap created by the collapse of R&D run by the major corporations.

In the end, it is true that our current economic troubles have been created by speculation, overleveraging and spectacular increases in the level of private debt. And it is true that the US, as a nation, has to be on a steady diet of lower consumption and increased savings, in order to improve the individual as well as the national balance sheets.

Fine.

America’s advantage needs nurturing

But, when the worst part of the crisis will be over, what will be the strategic drivers that will create “made in the USA” added value in this global economy? Obviously nobody knows for sure. But we can rest assured that without a robust level of investment in innovative, high value, new technologies we cannot regain much lost ground, let alone acquire new leadership positions. For the moment, with debt and all, we remain the largest world economy. But only for the moment.

If others invest and we do not, eventually they’ll take the lead. The phenomenon of these “high tech workshops” that attract large numbers of new users is really promising. But this young talent and America as a whole need far bigger investments if we do not want to join the ranks of those who used to be great.

The Obama administration has established health care reform as its top priority for 2009. As we go into the new year, it may be good to consider that, while health is fundamental, you can be both healthy and comparitevely poorer. It is certainly not beyond the reach of American ingenuity to deliver better health care to all citizens, while at the same time revamping the foundations of our distinctive wealth generating apparatus. Or is it?




US Foreign Policy in The Age of Penury

By Paolo von Schirach

August 29, 2009

WASHINGTON – Afghanistan is a huge mess. According to most informed experts, America, after its successful 2001 campaign that ousted the Taliban government, wasted more than six years doing almost nothing constructive over there; thus allowing the situation in a country terribly poor, terribly under resourced and chronically disorganized to fester and progressively deteriorate into real chaos. Opposition forces, Taliban and non Taliban, regrouped and became more aggressive. War Lords resurfaced. The opium cultivation and trade flourishes. The weak central government in Kabul lost control of at least forty per cent of the territory. Now, the resurgent Taliban and affiliates dominate in various provinces.

US-led reconstruction efforts have been misguided, poorly directed, and, on balance, ineffective in “winning hearts and minds”. The most recent Afghan presidential elections have been a messy affair. Whoever will win, the victory will appear suspect, given massive fraud, low turn out and the violence and intimidation that successfully prevented many people from voting in several provinces.

Of course, there is now a new US strategy, a renewed effort led by a credible counterinsurgency professional, General Stanley McChrystal, while former UN Ambassador Richard Holbrooke is now a high profile special envoy to the region. And finally, President Barack Obama himself clearly indicated in policy speeches that America will not let go.

More troops have been deployed to Afghanistan, with more to come. The civilian side of the operation will also be both radically overhauled and enhanced. USAID is now engaged in massive recruiting, in order to have a “civilian surge” that will add badly needed expertise on the ground.

So, can America finally get it right and “fix Afghanistan”? Well, the intention appears to be there. Actions have been taken and they seem credible –for now. So, reviewing these policy shifts, can we say that now, finally, everything is under control? Can we safely blame the Bush administration for these years of almost criminal neglect that allowed such a dangerous deterioration at every level?

Yes and no. It is a tricky situation. While the will may be there, in plain language there is no real money to pay for any of this. More broadly,  Afghanistan will give us the measure of America’s ability to conduct a major, multi-faceted international security and reconstruction effort in this new and in many ways unprecedented era of deep fiscal distress. All we are doing or planning to do in Afghanistan will have to rely on borrowed funds, just as most other governmental operations. Is this sustainable? And, if so, for how long? Of course, there is nothing new in financing a war through public debt. What is new here is that we are financing “everything” through debt and thus foreign military operations may soon be viewed as luxuries that we can no longer afford.

Regarding Afghanistan, the willingness to carry on seems to be there. But America’s long term staying power is another matter altogether, as it is contingent on two resources: one uncertain (will) and the other (cash) in short supply. The first one is subjective. It has to do with the actual resolve and willingness to see this through. Bloody counterinsurgency in a primitive and instinctively hostile country is difficult business any day. “Victory”, even in the most modest definition of the term, will require several years. While experts declare confidently that America’s resolve will carry into 2010, as Obama and the Democratic Party will need to show a united front on this “war of necessity” before the mid-term elections, it is quite obvious that we need a lot more than one year to fix this. Will the political resolve last beyond November 2010? Who knows….

And political resolve in front of uncertainty and mounting casualties will be affected by the other issue not at all directly connected to the war effort but very likely to affect it and indeed determine its long term viability. And the issue is financial resources –or lack thereof.

To put it simply: will the continuing US fiscal crisis –that is our huge and growing public debt– dampen America’s ability to conduct protracted foreign operations –operations that, important as they may be, have not been presented as existential threats?

At some point, when there is no money, something has to fall off the table. Foreign policy interests, and Afghanistan is a key one right now, are vulnerable; unless, as I said above, there is a consensus that this war is of vital importance to America’s survival. Of course, the Obama administration has correctly pointed out that a resurgent Taliban may once again offer sanctuary to Islamic fundamentalists who may use this base as a training ground and as a launching pad for more attacks against the US –just like 9/11. But, although the 2001 connection between the Taliban, Osama bin Laden and the Twin Towers is established; it is also getting old and, in the case of many people, probably stale if not altogether forgotten. So, a “Beware of another 9/11” war cry may not stiffen many spines at a time in which public opinion and law makers are concerned with foreclosures, unemployment and cuts in basic domestic services.

So, the question is: beyond the mid-term elections of 2010, will this administration have the ability to carry public opinion behind a war that is going to be long, bloody and costly; while America has to deal with this immense fiscal hole? The optimists assert that the cost of the war effort in Afghanistan, in dollar terms, amounts almost to a small rounding error, if compared to the size of the overall budget deficit. They say that, being in the hole for a trillion and a half or for a trillion and 600 billion are not that different; and so lack of money should not constitute an impediment to continuing operations. This may very well be true in the short term. This is a very fluid environment in which the Democrats solidly control power; while the Republican opposition is disorganized and unfocused and certainly at this point reluctant to attack the president on national security issues. But what will happen in a few years is anybody’s guess.

The simple point is that history shows that a Great Power experiencing terminal loss of economic might simply ceases to be e Great Power. Insolvency means that ambitions need to be scaled back. All sorts of face saving rationalizations may be devised to justify retreat; but retreat it will be, as lack of money, in the end is the most critical variable affecting the ability to project power and influence.

In the American Century, America did many things abroad. Many of them wrong or ill advised. But defeat, when it came, was political; not economic. We did not leave Viet Nam because we were poor. We left because the war was poorly conceived, horribly executed and extremely unpopular at home.

From now on, unless the relative impoverishment of America can be reversed, money increasingly will become an issue. On top of “Can we win this one?” others will add “Can we afford this one?” And this is new for America. Whether the issue on the table will be Afghanistan –and if are serious about it, it will have to be—or something else, the ability to fund military and other foreign operation on the scale we are used to will become a subject for increasingly heated debate.

Politics is always about the allocation of scarce resources. But, as the already scarce resources shrink significantly, the fight for a piece of them will become more intense and the strongest constituencies will win. Foreign and security policies, lacking a direct attack against the US, will be shortchanged. The open question is “how much”. In the case of Afghanistan it is easy enough for politicians to redefine success down.

The “De Luxe” outcome (whatever time it takes) would be Afghanistan as a successful democracy well on its way to economic development, with education and jobs available for most. Whereas, the “Low Budget” definition of victory is the acceptance of a weak and corrupt central government; cutting deals with local war lords; paying them off so that they will do the dirty work of keeping the Taliban away and poppy fields down to a more tolerable level.

Afghanistan this way will stay poor and messy, but our minimal goal of sanctuary denial to the Taliban may have been achieved, at least for a while. And if the Taliban will not give up? Well, in this case we shall revisit all this when this may happen. And guess what: uneasiness about an open ended long term commitment to Afghanistan (pointing to the “Low Budget” scenario as the direction we may be headed to) is already surfacing. Russ Feingold, a liberal Democratic Senator from Wisconsin, expressed concerns in an editorial in The Wall Street Journal, (“The Road Home from Afghanistan”, August 29-30, 2009). Depending on how things go, concerns can morph into outcries and vocal opposition.

So, depending on how much political will and how much money we have in hand, we may have to redefine our goals. My prediction is that, just like in the case of Britain and France after WWII, we shall redefine down “the national interest” so that it will be commensurate to how much cash is actually in the register.

And this de facto America retreat may be a real problem, not just for America; but for the world. As clumsy and misguided as America may have been in the conduct of its foreign and security policies, it is hard to believe that there are better under studies ready to take over and do better.

But how bad is the economic and consequently fiscal picture, the picture on which our future as a Super Power, including the conduct of our military and civilian operations in Afghanistan, depends so heavily?

So far the energies of the Obama administration have been focused mostly on containing the damage of the domestic economic crisis and on the complex battle to get some sort of health care reform passed.  But, as economists discuss all this, the real focus of Government action has been, not so much on investments in new growth, but on measures aimed at alleviating the pain. And these transfer payments, while important in supplementing depleted family finances, cost money, thus adding to our debt, as we wait for the recovery to take hold. While the Government clearly wants a stronger economy, a Democratic president and a Democratic Congress right now are bent on spending more money to help those mostly in need. So, the focus is on aid to the poor, unemployment compensation and, of course, extending health care coverage, among other things.

And almost all the other measures have consisted in spending massive amounts of money with the aim of fixing and stabilizing sectors in crisis. The banking sector is no longer sinking but it is still taking in water; as evidenced by the rapid depletion of the FDIC bank deposits insurance funds dedicated to guaranteeing depositors in case their bank goes under. Well, plenty of banks have gone under and many more are likely to follow. So, although we may not have more epic disasters like another Lehman Brothers or the danger of Citi requiring another major capital injection, things are still dicey. Then we have, of course, the gigantic auto rescue plan. And it will take years to see what will be the viability of the re-born General Motors.

All in all, the economic news is no longer dramatic; but the picture is hardly inspiring. There are cheerleaders who proclaim that we have touched bottom and that things are looking good, witness the nice performance of the stock market in the last few months. But a more realistic assessment would tell us that, while we may have indeed successfully averted disaster and a real depression, we are still sick, very sick. The recovery will be slow, with lots of uncertainties; while the bill for this gigantic rescue effort is massive. Of course, when you just managed to avoid death, the cost of care may not be your primary concern. But, as soon as life will get back to something resembling normalcy, the financial and fiscal picture will come to the fore. How are we going to pay for all this?

In the meantime, and this is the basic proposition I am making here, as we are trying to fix the mess and as we lick our wounds, nobody has really tried to gauge the impact of this epochal economic disaster on America’s future standing in the world.

Until the financial tsunami hit us in 2007 and 2008 we were “the” Superpower. Not just militarily but also financially and economically. While there were worrisome trends, such as a chronic trade and balance of payment deficit, America’s policies were backed by the incredible size of the economy and by the almost unsurpassed ability of American firms to reinvent themselves, to innovate and add value. America’s might was about aircraft carriers and air born troops, yes. But behind these assets stood Wall Street, Silicon Valley, a vast and world dominant information ad communication technology sector, 3M, General Electric, United Technologies, Pfizer, Du Pont, AIG and, once upon a time, mighty Detroit. America had most of “everything”: Olympic medals, record numbers of patents, Nobel Prize winners, billionaires, state of the art technologies, substantial investments in R&D.

Now we still have the largest military in the world, but neither we nor the rest of the world can be too sure of the size and strength of the economy that stands behind them. And, whatever the assessment of the current situation may be, nobody knows if our predicament is temporary or the inception of a terminal illness. Clearly, longer term, America’s place in the world will be determined precisely by such a trend. If we are on our way down economically, there is no way that we shall be able to sustain foreign policy commitments and the assets and the hardware needed to secure them –and that includes whatever we may wish to do in Afghanistan.

It was cheerfully said at the very beginning of the Obama administration that, while everybody agreed that America needed a drastic Government cash injection, the same sharp stewards of the economy were fully aware that they needed to put together very soon a credible plan that would show the determination to reduce public spending and the federal deficit in the long term. In other words: shock therapy now; followed however by fiscal sobriety later on, in order to prove to the international financial markets that America is not Mexico or Argentina.

And these statements regarding future policies were very wise. As a superpower we should really care about safeguarding the international perception of our ability to continue to be an economic powerhouse; because our ability to project power rests on the resources provided by a large and dynamic economy. So, this was the public relations pitch at the time:

“Listen up, World. OK, we had a bad patch; a very bad patch….But, hey, we are Americans. True to form, we shall pull ourselves together and we shall do whatever we need to do, not only to get back on our feet, but to beat expectations in doing so, showing you, the World, once more, that one should never underestimate American ingenuity, fortitude and resilience”.

Alright, this is what they said; and we believed it. The trouble is that this is not going to happen as announced. At least not within the initially envisaged time frame. As always, things turned out to be more complex and more difficult than initially estimated. Deep, deep trouble with the financial system. Tight credit conditions for many businesses still delay new investments. A deep housing crisis. Worse than imagined unemployment. And, worst of all, millions of consumers in tatters. Millions are unemployed. Many more millions have no cash left. Thus they cannot make the economic wheels turn. No cash equals not many purchases and thus anemic businesses.

Gigantic Government spending thus far has prevented collapse –and there is wide agreement that swift and massive action was necessary. The issue now is how much more do we need to throw into the pot and for how long more. Clearly no one wants to pull the plug too soon, lest the whole recovery would melt and we would have to start all over. But the Washington insiders along with Wall Street and international markets are also fully aware that the more we spend, the more debt we pile up and the longer it will take later on to reverse course and engineer a credible debt reduction strategy that will prove that America is both willing and capable to become once more fiscally and financially sound.

And with fiscal soundness, as we said, we regain flexibility and options in matters that are important, even though not immediately threatening, such as insurgencies in faraway places like Afghanistan. But in the meantime, at least for now, this obvious correlation between cash in hand and ability to conduct costly operations is virtually ignored. Nobody is commenting on the impact of our dire fiscal picture on the conduct of US foreign and security policies. In other words, given our concentration on the domestic agenda, nobody has put forward the following difficult question: “With what kind of resources can a superpower horribly in debt continue pursuing interests that may be vital and there again may not be, depending on how we look at them”? Can you exert power when everybody knows that, yes, you have the biggest war machine in the world, but financed with borrowed money? They can see your hardware and your marines. But at least some of them will start calculating how many more years of this you can afford, given the size of your fiscal burden.

As I said, at the moment, this issue is still under the radar. And, reviewing the international political scenario, there are not that many candidates who, contemplating America’s implosion, can credibly assert the mantle of international leadership. Certainly not Europe which does not have the inclination. Japan is not doing so well either. A vastly diminished Russia may have the desire; but not the matching capabilities. Emerging and more confident China is another matter, of course. But it will take a while, assuming its ability to sustain growth and social cohesion going forward.

Any dispassionate observer should conclude that America’s pre-eminence, despite many failures, on balance is a good thing. The problem is that we do not know if it will be possible to emerge from this horrendous economic disaster with genuine new strength and confidence. The world should hope that we will, as any aspiring world leaders are unlikely to do better than the clumsy –at times both presumptuous and naïve– but basically good United States of America.




The New American Recovery

WASHINGTON – “Have we touched bottom yet”? “Green shoots for the US economy”? These and similar questions popping up in the business media whenever there are some stirrings here and there are justified by our entrenched habit to think within the old logic of recovery-recession-recovery that used to part of the accepted “business cycle” conventional wisdom. All recessions –we have always been told—must end. And thus, at some point, we are bound to have the good old fashioned and always dependable recovery; with new investments, new sales, new employment, followed by more money floating around, thus more spending, and the resumption of our upward march to more growth and prosperity. Right?

No. This time it will not happen this way. Because we are comparatively much poorer and have thus fewer options. Remember that we got into this epic mess mostly because, as a nation, we believed in our fantasies of endless sources of wealth divorced from our real productive capacities. Unil the dream lasted we spent and spent an imaginary wealth, while in fact we were burning all our savings, eating our capital, our future income and then some at a fantastic speed. The end of the recession will reveal a weaker, somewhat withered and still incredibly debt burdened US economy. The good news is that this is not a terminal illness. Relative impoverishment and decline of once leading sectors can be reversed. But this requires resolve, clarity of purpose and determination.

Which is to say that we can come back, yes. But this will require a convincing long term, hard nosed transformational strategy aimed at seriously upgrading skills, the rate of innovation and the quality of productive assets. It will also require a serious overhaul of public spending, both in terms of its quantity and composition. We cannot continue to accumulate debt, mostly because of the dynamics of entitlement spending and assume that this will have no consequences. New competitiveness strategies have been discussed and debated; but as a nation we have yet to recognize their urgency and we have yet to enthiastically embrace them. The more we delay action, the longer it will take to see positive change.

If we do not take meaningful action, the American economy will not come back roaring. It will come back; no doubt; but weaker, and comparatively poorer on account of the severety of the damage inflicted. For a long time we spent lavishly with borrowed money and we invested little in human capital (education) and in innovation –the only key to future growth. So, today we have huge debts, a semi-destroyed services sector and not an awful lot that can be used as a strong base to rebuild and expand. Look, for example, at the severe beating taken by General Electric, in many ways still one of the best managed global industrial conglomerates, revered as the paragon of good planning and good management.

For at least a decade, we Americans lived in a dream world in which we thought that we were far more affluent than we actually were, even though we did not produce an amount of wealth that would support that level of spending. A huge chunk of that spending was financed through borrowing, justified by the delusion that appreciating fixed assets (our homes) would generate the additional funds that we could happily spend. Then the bubble burst and we know what happened. But this is not the worst part of the story.

The really bad part is that, as the ill effects of this gigantic hangover dissipate, looking at what is left within the wreckage of failed banks and withered retailers, we discover that we have comparatively few internationally competitive economic sectors capable of generating the genuine, real new wealth that will be necessary to rebalance our books and –longer term– keep us competitive with the rest of the world. Which is to say that, while we were busy inflating a huge retail and services sector catering to unsustainable levels of consumer spending, we neglected the real stuff: education, technology, innovation, new sources of energy and all what is needed to nurture and support it. Let’s say this clearly. We shall come out of this mess. But, unless we embark in a serious long term national effort, everything else being equal, we shall come out as a much poorer, debt ridden, less competitive America.

Indeed, as the spending party was going on, as we were buying (mostly imported) stuff with money that we had not earned, we let our school standards go south, thus cheating millions of young Americans who thought they were receiving an education; while we made them ineligible to get the good jobs that, in ordinary times, will be generated by the new knowledge economy. As a nation, we spent comparatively less on R&D; while we allowed the continuing, dramatic deterioration of our infrastructure, the basic supporting system of all modern economies. In the meantime the Federal Government increased its  spending thus significantly adding to our national debt. Fate had it that at the same time we also had the terrorist attacks of 2001 followed by a couple of expensive wars. While affordable in ordinary times, the cost of prolonged military engagement is clearly a further drain on  resources, resulting in net additions to the debt.

To be great again America needs more than a feeble cyclical recovery that, under present circumstances, will leave behind millions of Americans previously employed in service jobs that will never come back. These people will continue to be unemployed or underemployed for many years. They shall be a dead weight on the economy and society. And beyond the macroeconomic impact we have the personal tragedies caused by severe dislocation magnified by the lack of real alternatives.

In order to lay the foundations of new prosperity, America needs a new strategy. It needs a serious, multi-year effort (at least 10 years, probably more, of sustained investments) aimed at reconstituting its human capital through serious secondary school and University reform efforts, its R&D base, its enterprises and the ecosystem on which modern enterprises depend on in order to properly conduct business. As a minimum this should include: truly high speed internet that is at least as good as South Korea’s, redoubled efforts in ICT, nanotechnology, robotics, biotech. Then it needs modernized ports that cut down container handling time and thus cost, good freight railways nodes, a new air traffic control system, a real energy plan, (can we be do better than the corn based ethanol hoax?); not to mention billions and billions of dollars necessary to completely refurbish and upgrade the national network of highways and bridges that is literally collapsing before us, as we have done so little to maintain it in the last 40 years. All this will costs big money, of course, and we are already deeply in debt. But I think that most Americans, if told the whole story, would be more willing to accept debt generated to modernize the country, as opposed to debt generated to finance consumption.

Yes, at some point this year we shall touch bottom and the recovery will start. But it will not be the same as before. This deep recession is forcing us to take stock of an economy that, while (thankfully) still state of the art in some strategic sectors, is full of holes. Put it differently, the crisis and near death of the once mighty automobile sector was certainly not driven by Wall Street or by sub prime mortgages. But it may not be an accident that Detroit’s extraordinary level of management myopia and incompetence (known to the insiders for decades) was fully exposed to all only when the Potemkin Village of a reasonably prosperous America around it collapsed. It is certainly true that the crash of the US economy made things much worse for General Motors and the others. But what is truly extraordinary is that when Detroit’s leaders first came to Washington to ask for money in the Fall of 2008 they told law-makers with a straight face that theirs was a short term cash flow problem; that they had a good plan; that it was all under control. It is really worrisome that even then nobody saw (or wanted to publicly say) how badly run these companies were. It took a general worsening of the recession in 2009 to fully expose the damage and let the world finally see the appallingly bad conditions of these companies. Before their collapse, the line was that they had been unfortunately caught in the general downdraft caused by the recession, just like everybody else. Sure, all auto manufacturers around the world are in trouble; but not all of them got into this tempest already sinking under the weight of hundreds of billions of dollars of debt that could not be wished away. Toyota may not do so well; but it did not go belly up.

Leaving aside the unraveling of the whole financial system and the likelihood that its total collapse might have caused national ruin, the almost banal truth is that this is an economic crisis caused by stupendously overextended leveraging and consumer spending, sustained by lines of credit that in ordinary circumstances should not have been made available. Until the consumer believed that he could keep going, the cash registers of America were happily ringing. The wheels were turning and everybody was making money –or so it seemed. But it was a gigantic delusion, as the money spent at an extraordinary rate was mostly borrowed, with inflated home equity as the only collateral.

Now, what we have to face is that this was not about occasional excess here and there by some irresponsible people. This was a national disease that came to a halt only because credit stopped flowing. And we know the cascading effects. Mortgages not paid. Properties foreclosed. Home prices collapsing. And the simple fact that people with no cash and no credit cannot buy. Thus, all of a sudden, no more spending and the ensuing recession that will be much more painful because it will take much longer (even for the reasonably lucky ones) to get out of an extraordinary level of debt.

Sure, not all Americans are deeply in debt. Some are responsible and did not accept all the credit card offers or the home equity lines of credit cascading in their mail boxes. Some homes are paid for and thus not in danger of foreclosure. Growing unemployment notwithstanding, most people still have a job. But caution: all property values are affected by a declining market. Besides, many employed people are forced to work less and thus make less. Many are part time employees under duress. They used to have full time jobs and are now forced to be part time and this means less money in their pockets. And even the employed people have suffered portfolio losses given the collapse of the stock market. So, even the comparatively better off are not spending as they used to. Do not count on them to restart the consumer led binge.

And the impact on the economy of the millions of the worse off Americans deeply in debt will be huge for years to come. To the extent that most of them have understood the lesson and so are now willing to start paying off their debts and with difficulty begin reconstituting some savings, we can kiss good bye to a recovery driven by old fashioned, vigorous American consumer spending.

Drastic consumer spending cuts are bound to have profound consequences. Most Americans used to be employed in the services sector. And a big chunk of it was consumption or about consumption. It was retail, restaurants, entertainment, hotels, travel, package tours and all that went with it: the real estate, the suppliers and vendors, the brochure designers, the IT service providers and of course the armies of sales persons, accountants, managers, clerks, bus boys, janitors and landscape workers that supported it. It is very difficult to think that  these millions of jobs lost because of deep cuts in consumer spending will come back, because poorer Americans will not be able to spend that much in the future.

And we have not seen the end of the ripple effects of this disaster. As everybody is poorer, state and local governments have much less tax revenue, thus no cash. Hence staff cuts, while state budgets deficits go higher. Only three states, that is right, just three, are projecting budget surpluses for both 2009 and 2010: Montana, North Dakota and Wyoming. Good for them, of course. But small consolation for the rest of America, where most people live. Even if we leave aside the rather extraordinary case of California and its 26 billion deficit and the consequent insolvency that forced the state government to issue IOUs instead of real money, the fiscal crisis affecting all states simply adds to the mix of factors dragging down the economy. Leaving aside the real hardships caused by cuts in services, (cuts in education spending right at the time in which we need it most), we have the hundreds of thousands of state employees who suffer salary cuts or lose their jobs thus contributing to the overall decline of consumer spending. 

Given all this, if our hope is in the “green shoots”, in the rebound that is supposedly built in every business cycle of growth-recession-growth, we may have to wait a very, very long time. The lucky ones, that is those who still have equity in their homes and a job have to cut back because their 401ks have shrunk, while they need to pay off their huge credit card debt and their home equity lines. They are still going to be consumers, of course. But they will consume much less and in cheaper places. Hence the buoyant business for Wal-Mart and McDonalds. Down market is the place to go for large segments of the middle class who mistakenly believed for quite a long while that they had become rich, even though their incomes did not say so.

But this is the good news. That is this is about the segment of population that has enough resources left to climb out of the hole and overtime regain some solvency. And what about all the others? The millions of often not especially skilled unemployed who have lost their home and have a pile of debt? Can they come back? Some undoubtedly will. Never underestimate American resilience and ingenuity.

But millions more will not. They have been swept away by the end of bubble financed spending and they have no place to go to. And we know that retraining and personal professional reinvention is very difficult even in good times, while growing sectors like health care have a limited absorption capacity. Not all sale clerks can be recycled as nurse assistants.

This being the picture, if we agree that a cyclical recovery can repair only a part of the damage, with the net impact of millions of Americans impoverished and virtually out of the game, then we need something more drastic. America needs huge investments in productive sectors and basic retooling. But, for the moment, we do not see an agreement on a broad, truly understood and nationally embraced growth strategy, founded on education and innovation.

President Barak Obama seemed to have arrived in Washington swinging. He had the dream team of the brightest minds who had the big ideas and the new, bold, long term strategies. But, as we all know, governing in a still fractured and ideologically divided democracy is not easy. And things turned out to be worse than anticipated. The recession is worse than they thought. Unemployment is higher then they forecast. The national debt is growing more than they anticipated. The financial crisis absorbed a lot of energy, and then there was the GM and Chrysler bankruptcy, and so on. But now –whatever the reasons behind the choice of priorities–the focus is on social initiatives, such as health care reform. Whatever its merit, and it does have merit, health care reform inevitably will end up costing more than planned, with fewer savings than now forecast. And spending greater then anticipated, as in most large scale social services reforms aimed at expanding reach, is practically inevitable, even with the best of intentions.

Health care reform is laudable as it is about improving social conditions, (and consequently the economic conditions of many); but in the short and medium term, even if we (optimistically) assume that there will be savings for the national medical bills down the line, it will do almost nothing to improve American competitiveness.

In the meantime, the other legs of the stool: education reform, and a vibrant, aggressive new high tech and energy policy that may be able to spur both a reconstitution of human capital and US competitiveness do not get sufficient support. There is support; but not the dramatic, “national effort” type of support that would convey the unmistakable decision of a nation bent on rebuilding a competitive economy.

It is true that, all things being equal, we want a private sector-led renaissance. So, it is up to the private sector to do its job. But it is also true that the private sector has taken heavy knocks and suffers shortness of breath right now. Besides, even in good times, the private sector operates within a system of public policy incentives created by government. The Obama administration came along with Big Plans for the economy. But, beyond putting fires out, and this was a necessary precondition, we have not seen the Big Plans in action as yet.

And let us not forget that, even before Obama, the government, contrary to popular belief, always played a significant role in shaping our economic future. Indeed, here in America, the “Sanctuary of Private Enterprise”, government, through its enormous procurement, regulation, taxation policies and so on had a huge impact on the economy.  Washington can decide to support more or less basic science and R&D in diverse fields with impressive consequences. Let us not forget that the NASA led July 1969 moon landing that we are rightfully celebrating now, on its forty year anniversary, was a gigantic “public works project” that employed at some point hundreds of thousands of people, supported by hundreds of billions of (today’s) tax payers dollars. The US government led this effort.

Going forward, the network of the Department of Energy National Laboratories, (Los Alamos, Sandia, Lawrence Livermore, Oak Ridge and others), can have more or fewer resources to spur innovation and cross pollinate with universities and corporations. The same applies to NIH, (National Institutes of Health), NIST, (National Institute of Standards and Technology), run by the Department of Commerce, and the National Science Foundation. Likewise, if the Pentagon decides to support jet fuel made from renewable resources, this policy change, by itself, would create the biggest single customer for some new technologies. Ditto for decisions by federal agencies (and state governments, if they followed Washington’s lead) to switch their vehicles fleets to natural gas or to retrofit all their buildings in order to make them energy efficient. True, some of this is being discussed, planned and even done, as we speak.

But only some of it. Piecemeal. We do not have large, clearly articulated, recognizable national goals, themselves part of some sort of a “National Competitiveness Strategy”, by necessity led by Washington, that we can all sign on to and that may be able to energize the major retooling that America has to undergo in order to be competitive, prosperous and –most of all— in order to be reaffirmed once again as the choice destination of innovators and entrepreneurs from all over the world who see America as the fertile ground for their ideas and their industry.

President Barak Obama has a tough job; tougher than most of his predecessors. But he was elected because he was the candidate that wanted to discard the old ways; the candidate who truly understood the urgency of radically new approaches. Only a few months into his job, President Obama still enjoys a huge reservoir of favorable public sentiment. It is time for him to spell out the vision that will help America go back and do what it does best: create opportunity for most and a superior environment for innovators and entrepreneurs. Otherwise, the recovery produced by the “green shoots” will be feeble and America as a whole will be diminished.




What About China?

WASHINGTON – Nothing is more convincing than apparent material success. And China, just by looking at historically unprecedented rates of growth, in excess of 10 per cent, year after year, and looking at its trade and balance of payment surplus and at its mountain of currency reserves seems to deserve admiration for having apparently unleashed the creative potential of hundreds of millions. They have turned this country, asleep during the XIX century, later on torn by revolution and the messy end of the Imperial system, Japanese occupation, civil war and then oppressive communism, into the tireless, booming workshop of the world.

We look now at very confident Chinese engaged in their self-described “peaceful rise”. Already a few years ago, they discarded the Mao suits that suggested regimented little ants kept in line by a rigid police system. They openly engage in money making activities. They display western style consumerist attitudes. So much so that we are tempted to welcome them as our newly found spiritual brothers and sisters, clearly engaged in genuine capitalist enterprises.

The fact that China formally remains a “Communist” autocracy is glossed over. Compared to the economic triumphs of what appears to be capitalism, the lingering of the old system’s institutions seems unimportant detail. It means the clean up crew is late. They’ll come in due time and they’ll remove anachronistic remains of a bygone era. Or will they? Does economic growth provide sufficient evidence of an idelogical transformation that many take now as a given that requires no further proof? 

Indeed, some go as far as arguing that the old fashioned Yankee rugged, do-it-yourself capitalism and the Chinese single minded preoccupation towards growth are just different aspects of the real brand. We have now discovered a profound kinship with the Chinese, based on the simple, sure fire notion that those who are singlemindedly bent on making money must have their heart in the right place. You know: “right sort of values”.

And, anyway, who else is around? Soft, soggy socialistic Europe has no stamina and is destined to decline. It is overpowered by the combined toxins of a relaxed attitude towards work and the ever growing cost of a gigantic welfare state, tilted to favor the needs of an increasingly older population. Welfare now absorbs now most of the residual energy of an Old Continent that appears to have gotten “old” in every sense.

Japan, deeply wounded by its self-inflicted bubble economy and subsequent financial crisis of the 1990s never came back –manifesting a puzzling inability to react, thus revealing a deep social and political paralysis. While it may still have world class companies that do well worldwide, Japan is mired by an extremely inefficient institutional framework that weighs heavily on the productive components of an otherwise modern society.

And India is too complicated to be taken really seriously –at least for the moment. We should give credit to the smart entrepreneurs who have created important competitive niches for Indian industry. Yet, looking at the bigger picture, we see a country that is still mostly poor, rural and very disorganized. India is afflicted by gigantic inefficiencies and political institutions that, while democratic, are supremely unsuitable for taking fast action where it is needed: such as the modernization of the country’s ancient and totally inadequate infrastructure.

And the rest? Well the rest is just small fry.

So, upon quickly (and hastily) reviewing the world scene, we could conclude that it is just “us”: that is we the Yankees, and the Chinese. And, if we Americans want to make sure that we stay in the game of enterprise and profits, we better shape up: go back to work, fix what is broken and get on with it, just like the growth oriented Chinese.

So, here we have it. The vision of the new paradigm: “the American-Chinese emerging special relationship”, based on our (assumed) shared belief in the power of economic growth as the cure all, that will reshape the world.

Of course, until not too long ago, we had other models. But –the practical people say– they do not fit reality anymore. We used to have an “Atlantic Community” vision that shaped strategy and and determined our worldview during the Cold War years. We used to think that NATO, our military alliance with Europe, combined with our vibrant economic and trade relations with the reborn and self-confident Europeans, would not only provide the necessary counterbalance against the Soviets, it would also provide a two pronged machinery that would guarantee economic growth and guaranteed Western pre-eminence at the same time. In Asia we had a similar relationship with a new democratic Japan, rebuilt according to our post war specifications.

But now all this is history. The old Soviet problem that justified the NATO Alliance disappeared. Meanwhile, overtime, we lost confidence in the Europeans. The Europeans have proven to be too timid and weak and thus useless partners (witness their hesitant and almost laughable contribution to the war in Afghanistan). Economically, Europe is also feeble, if not weak. Not many leading sectors; while social justice concerns and welfare preoccupations override the imperatives about competing seriously in the global economic race. So, the practical people can say that Europe lost its relevance and geopolitical significance and that it is destined to become even less relevant in the years ahead.

But Asia is different. Asia is growing. There is a more diffuse sense of hope. More and more Asians are inclined to believe that they too can participate in the economic development game and improve their standards of living. And, in a neo-Confucian way, large numbers of Asians tend to believe that education and hard work can provide the tools to climb the social ladder and reach new social and economic heights, for previously excluded large segments of the society. This energetic fervor, compared to a relaxed and especially non vibrant Europe, has convinced many that we have entered a new era characterized by the Renaissance of Asia.

And China is the new Asian power. China, with its industrial might and its fleet of container ships loaded with toys, cell phones, bras, toasters, computers, electronic components and hair dryers that will populate the shelves of Wal-Mart –to the delight of American consumers who can buy goods at ridiculously low prices– is the spearhead of the new self-confident Asia.

Hence the need for America, in the light of the decline of its post-war allies, to rethink its priorities and devise a way to craft a new relationship with China, the country that has clearly reformed itself and that, “communist” labels aside, in practice at least, seems to have genuinely embraced capitalism, becoming thus “one of us”.

But is it really so? Do we have a linear narrative for China that says: “Away from Communism, wholeheartedly embracing the free market and pluralism”? Not really. Or, at the very least, not entirely.

To put it simply, as noted by the British journalsit and writer Will Hutton, in his interesting and insightful book, The Writing on the Wall, China and the West in the 21 Century, China is still in the middle of the river. It may come to our side; but it has not quite done so –and there is no guarantee that it will do so.

Its staggering success so far, is not based on having embraced capitalism and democracy. Its undeniable success is based on a uniquely Chinese, and arguably unsustainable, model that cannot provide the foundations for a modern capitalist society.

Capitalism, argues Hutton, is not just about rates of growth. A truly functioning, innovative capitalistic system is premised on, indeed it requires pluralism and the institutions, public and private, economic and non economic that would nurture and sustain it. And China, for the time being, has not created anything like the ecosystem necessary for a modern, polycentric, vibrant, capitalist society.

Indeed, the secret formula of real success is that economic success is largely predicated on the care and repair of non economic institutions. Genuine pluralism creates vibrant societies. Vibrant societies can create and sustain the genius of research, its applications and the consequent economic benefits. Economic success without the underpinnings of pluralism rests on an uncertain base.

The purpose of pluralism is not just to have an economy that responds to the market; but to have a society dedicated to the proposition of offering and expanding opportunity in a fair and balanced way. Thus sustainable economic success is a byproduct of genuine pluralism.

The legitimacy of democratic capitalism is based on the shared belief that the system, while imperfect, grants access to most and that it does not act arbitrarily. If not all people, at least most of them should genuinely believe that they have a shot, on the assumption that real “access”, real opportunity exists and that basic, fair rules apply to all and are respected by all. And openness and accountability are not just desirable extras when it comes to the economy. They become essential ingredients in economic enterprises that want to foster innovation and the exploration of new frontiers.

In China today we have mostly regimented enterprises mainly focused on the exploitation of low cost advantages. Current success notwithstanding, these Chinese enterprises may do well only until the present labor cost advantage holds. But, in their current form, they are quite unsuitable to become major players in a future environment in which the genuine innovators will get the top prizes. A system still featuring a large number of State Owned Enterprises run rather inefficiently with continuous political scrutiny, with funding guaranteed by state banks, does not represent a good capitalist model. It is both brittle and slow moving, and thus not capable of encouraging and channeling creative talents that thrive in a free environment.

And this is today’s China. This is not detract anything from the staggering success of the ingenious formula that for more than a generation managed to effectively combine the pooling of private savings into large investments in export oriented industries.

This worked very well indeed.

But, while the machinery managed to produce wealth and staggering growth, this is not the real brand of capitalism. This is a sophisticated system mostly based on state run enterprises that can perform only in as far as the cost differential with the West remains significant. Otherwise, for the moment at least, China does not have any world class players that can be and stay competitive on the basis of quality and innovation. And Hutton doubts that China, as currently configured, can create such world class players.

Alright, you may object. China has its flaws. But where is this “Magic Kingdom”, this “Happy Place of Balance and Moderation”, this good society of pluralism, opportunity, balance and creativity fueled by  healthy, forward looking innovative impulses, tempered by a deep belief in the need to preserve the commonwealth? Does it exist in America? In Europe? Well, right now, in the middle of the financial crisis that revealed horrendous, unsuspected gaps in responsibility, accountability and any notion of balance, nobody looks good. In fact, America’s idea of easy money, with super swindler Bernard Madoff as its standard bearer, looks especially bad. All true. Still, at least in terms of cultural heritage and aspirations, the West, and America in particular,  has pieces of this precious heriatage somewhere in its intellectual attic. 

Whereas China has none of this. The Confucian idea, assuming that this is what is supposed to replace the clearly outmoded communist model, however benevolent and aimed at instigating doing good, is not focused on the realization of individual aspirations. Its vision is still about the pre-eminence of the state and thus it is not ideally suited to foster diffuse enterprise on the part of many independent, innovative actors who work individually, albeit within a rules based system recognized and honored by all.

The Western Enlightenment, the intellectual construct that provided the moral justification and the underpinnings for democracy and free enterprise, with all its flaws, wanted to create a society founded on the proposition that individuals can self-govern within an accepted constitutional framework; while the system would allow self-expression in all spheres, including economics. Successful self-government is predicated on respect for the individual, but also on a shared belief in the need to create and defend a public good that will work as the shared foundation for all members of the society. With this connective tissue in place, then it is possible for individuals to unleash their creative talents and do what they are good at; thus fostering a flow of creativity that will benefit the creators and the market place that their ideas and products will serve.

The American research university, with all its various facets of research, connection with public institutions, ties with finance and commercial enterprises may be the best example of this vitality. Most of what goes on is unscripted. it is produced by spontaneous and free connections and exchanges among the various players. But the success of these exchanges is premised on believing in and practicing truly shared principles: such as respect for property rights, including intellectual property, the rule of law and the sanctity of contracts.

The plethora of complicated relationships, partnerships and agreements created and modified on a daily basis to advance research and its practical applications would be unthinkable without the existence and the respect for a rules based system that protects the individual players as well as the common good of a level playing field deemed to be fair and accessible to all.

Most of this does not exist in China. The system, if not entirely dictatorial, is certainly not pluralistic, nor clearly rules based. While there is increased freedom, including freedom of enterprise, this freedom is exercised within boundaries that are not aimed at protecting a public good but at guaranteeing the security of an entrenched power structure whose only legitimacy is in its ability to inspire awe through a clear threat of retribution against those who would challenge it. The strength of this power structure, the Communist Party, of course, is extended and reinforced by its impressive ability to deliver sustained economic growth and thus improved conditions for tens of millions of Chinese. But, ultimately, the Communist Party, however modified and upgraded, is in power not because of openly manifested consent; but because it has a monopoly of force, acquired long ago through violent means. 

As we said, so far, so good. The problem is that the economic growth created through this ingenious formula enabled and fostered by Deng Xiao Ping in the 1980s cannot be sustained indefinitely, as it is predicated on the indefinite expansion of an export led economy whose primary advantage is low cost.

After the low cost is gone, economies have to compete on quality. And quality is premised on innovation. Hutton argues that it is hard to foster innovation and creativity in science, technology, business models and industry in a society still constrained by a top-down dirigiste approach. Successful capitalism thrives because it can avail itself of a number of decentralized resources, each of them representing a different set of opportunities. Capitalism is in many ways chaotic, anarchical and wasteful. But the ecosystem and the incentives in which capitalism thrives foster innovative drives that cannot be easily replicated lacking the pluralistic, decentralized underpinnings of a rules based free society.

In other words, China, given its institutional make-up, would seem to lack what it takes to move up the value chain. It is all well and good to mass produce cheap stuff that will find eager buyers in western markets quite willing to buy inexpensive consumer goods. But, when the cost advantage favoring China will have withered, it is not clear how China will be able to be competitive.

Many just assume that China will make all the necessary changes and adjustments, in time developing a pluralistic form of government. In turn, this evolution would put in place what is necessary for a thriving knowledge economy. Hutton argues that we should all pray that this is what is going to happen and that the West should do its best to encourage this transformation. But this is not a given. There is nothing scripted here. Change from autocracy to pluralism is possible; but it depends on a number of variables, most of them intangible and not quantifiable. Will the ruling elites be willing to relinquish power? And, if so, on what terms? And will China be able to create not just the institutions, but also the genuine ethos without which they will be just empty vessels?

So, the notion that we have this de facto US-China duopoly based on the vitality of the two economies proves to be wrong. A modern, innovative knowledge economy requires more than industrial plants and a steady crop of scientists. A sophisticated knowledge economy now more than ever is in fact the byproduct of a society in which both the need to preserve the commonwealth and the need to allow a chance to individual self-expression are recognized and protected via pluralistic institutions. 

Hutton argues that even in the US overall standards have declined. The fabric of shared values is torn. The American idea whereby inequality of outcome is acceptable in as much as there is tangible evidence of equality of opportunity has been shattered by growing income gaps that, in practice, deny access to many purely on the basis of the accident of birth. So, America has got plenty of work ahead in order to repair its own pluralistic institutions and make them once gain fully believable and viable. Failure to do so would put in question the legitimacy of the whole enterprise. And this is not just about prosperity. It is about the institutions that make sustainable prosperity possible.

But China has an even more impressive task ahead of itself. In order to become a truly modern country, it needs to create a pluralistic system that in turn will allow it to continue its progress. And the challenge is huge, as there is nothing in China’s cultural tradition that resembles this model.

Again, we should wish China well and not do anything that would delay or impede this salutary transformation. But it should be clear to all that there is no certainty of outcome. In fact we do not even have the guarantee that the present leadership will have the wisdom to recognize the need to move away from autocracy. For China’s good and for all of us who want China as a partner, let us all hope that it will do so.




NATO At 60: Not Much Reason for Celebration

WASHINGTON – Quite a long time ago, while in London, I happened to walk in St. James’s Park at a time of some kind of Veterans celebration. There were hundreds of old men, marching in perfect order, medals tinkling on many chests. There was a military band. And they were all led by a soldier carrying a flag. And on the flag one could read: “Burma Star”. The whole thing was solemn and quite beautiful. And yet it was also sad and in many ways incongruous. They were remembering past service in Burma, (officially renamed Myanmar in 1989), a remote part of the world. Indeed so remote to be disconnected from the issues of the day. “Burma Star”? In the middle of London? Sure, the British have maintained a keen interest in matters pertaining to their Old Empire. But not much in remote, secluded, autocratic Burma. A country where Britain has not much clout or influence of any kind. And so I looked at the marching old men, with their medals, their band and their beautiful flag, thinking with some sadness about past glories that lost their relevance with the end of the Empire.

Well, the comparison may appear a bit stretched; but, soon enough, on April 4, the North Atlantic Treaty Organization, NATO, will celebrate its own sixtieth anniversary. Unlike the celebration featuring the British Veterans, this is about both the past and the present. NATO is the premier security institution binding Europe, the US and Canada and, as such, supposedly a key pillar of international order and stability. This celebration should not be just about past history but about the present and the future. It should be about renewed vows about existing commitments premised on shared values; and, as it happens, ongoing missions –Afghanistan being the most obvious. And NATO is arguably quite alive. In fact, in recent years it has expanded its membership welcoming many former Warsaw Pact countries and the Baltic states, among others. 

But, If so, what is the similarity between the melancholy echo of a dead Empire and NATO’ sixtieth? Very simple. The British Empire is gone. And equally gone is much of the spirit that supposedly was behind the creation of this Atlantic Alliance –the spirit that made it meaningful for many years. Today NATO may be technically alive; but it is not very meaningful in as much as the institution does not embody shared values, shared interests and –most importantly– a shared agreement on the resources to be dedicated by all members to the effort of protecting them against threats that may not be as self-evident as the Soviet Army Divisions that used to stationed in then East Germany. So, we have a military alliance with fewer resources and a certain ambiguity about its meaning and mission. Not exactly a revved up champion, ready to move.

Without an immediate, direct challenge that would test the cohesion of the members, this objective confusion does not constitute a threat to the continuing existence of NATO. We do a have a NATO today and, for all I know, we shall continue to have a NATO for quite a while. And all members would claim that NATO is very useful;  that it provides a proven and tried institutional forum for a transatlantic dialogue on security matters; that it has created channels of communication with Eastern Europe, with Russia and beyond, etc. Fine.

However, the problem is lack of substance. Unless all the members agree on what a real threat is and unless they follow up with real, tangible resources devoted to meeting it, NATO will be a place for meetings and discussions, possibly of some use, but not very relevant. And it should be quite clear that the reason why resources are not allocated to NATO is because it is not at all self-evident to many if not most members –absent and immediate, clear threat– that a strong and credible NATO, capable of projecting credible force, is truly the essential basis for their security.

The problem is that there is a basic equivocation about the motives that supposedly provide the underpinnings of the Alliance –an equivocation that goes back to the very beginning of NATO. Reading the Preamble to what was known at the time as “The Treaty of Washington” that established NATO on April 4, 1949, one would get the idea that NATO was all about getting together to preserve shared values:

The Parties to this Treaty……. are determined to safeguard the freedom, common heritage and civilisation of their peoples, founded on the principles of democracy, individual liberty and the rule of law. They seek to promote stability and well-being in the North Atlantic area. They are resolved to unite their efforts for collective defence and for the preservation of peace and security. They therefore agree to this North Atlantic Treaty”

But, while the values referred to in the Preamble at the time were in some measure truly shared, the real reason justifying the birth of this unprecedented Alliance linking Europe and North America was to create a credible deterrent against Soviet ambitions in Europe by ensuring that the United States of America would intervene in case of an attack againts Western Europe. And NATO, with all its flaws, by creating some kind of a united Western Front, supported and led by an integrated military command, did its job. So, while values were important, the real deal was a shared fear of the Red Army.

Well, we know what happened regarding the Soviet threat. So, as of the 1990s, the geopolitical reality in Europe having been dramatically altered –and entirely in our favor– via the dissolution of the old Soviet Union and of the old Warsaw Pact, was there a residual mission for NATO? And, if so, what would it be?

Quite frankly, a serious discussion about any relevant new post Cold War mission should have been premised by a check on the validity of the Preamble to the NATO Treaty quoted above. Absent an immediate threat, did the western democracies still feel the need to be tied together by a military alliance in order to safeguard their common civilizations? And again, what could be the future threats against which NATO should prepare itself? Admittedly, not very easy to make commitments about vague, below the horizon stuff that may not look the same to all members.

But, while probably quite useful as a way to ascertain continued relevance for an institution created to face a clear menace that no longer existed, this exercise was avoided. No one intended to seriously verify to what extent there really was any spiritual glue left holding together Europe and North America and whether or not this assumed kinship would make both sides devote real resources (and this means budgetary allocations for state of the art military assets) to preserve peace and stability, in a future post Cold War environment —an environment in which threats would not be necessarily existential, imminent or self-evident to all.   

So, the “stress test” (to borrow from an expression coined by the Obama administration in reference to a needed check on the health of financial institutions) was not applied to NATO. There being no immediate crisis, it was assumed that all was well, to pretend that we all agreed on the fundamentals; and that, while the Soviet Union had graciously removed itself from the horizon, we should keep working together for the preservation of our shared values through our commitment to this regional security institution. Fine. And how did it go?

Fast forward to Afghanistan. This is admittedly a complicated and in many ways botched affair, largely because of poor American leadership. After the initial success in the quick campaign of 2001 resulting in the removal of the Taliban, the US was distracted by new business. As of 2002, the US thought that Iraq presented a greater strategic challenge.

Focusing on Iraq, and the actual war that began in March 2003, America thought that it could safely “subcontract” Afghanistan to NATO and other assorted non NATO do-gooders. The idea was that the Taliban had been routed; thus, going forward, Afghanistan was all about governance, development and the training of policemen. Well, the Europeans under the NATO umbrella could take the lead on that. And so they did.

Except that they really did not. Living up to the sarcastic characterization of NATO as “No Action, Talk Only”, the Alliance proceeded to create initiatives not backed by resources. Some countries, such as Britain, Canada, the Netherlands, have done a lot; in varying degrees France, Germany, Poland and Italy have done something. All the others just showed up, with literally token this or that: some sent 20 soldiers, others 100 or so. And this may have been fine when things were relatively calm. But we know that the situation has unfortunately deteriorated –and quite significantly in the last few years. We know about a resurgent Taliban. We know about the sanctuary offered to them in lawless North West Pakistan.

This marked deterioration produced a needed reassessment of the effort required to stabilize Afghanistan. And the reassessment is premised on the notion that a safe haven for radicals in the mountains of Afghanistan and Pakistan is dangerous, not just because it may destabilize both countries, but for the security and stability of the region; while the harboring of radicals there may create future dangers for the security of Western Countries –and that would be the NATO countries, front and center.

This analysis has been done. And there is no serious disagreement about the diagnosis. The military commanders on the ground estimate  that there is a need for at least 30,000 additional troops to have a chance to stabilize the situation, itself an essential precondition to build more solid national institutions and hopefully economic development. Washington has admitted that mistakes were made and that allowing Afghanistan to fester in large measure contributed to the regrouping of the Taliban and their assorted allies.

While further analysis and a more detailed plan will follow, Secretary of Defense Robert Gates, under the direction of President Barak Obama, already ordered 17,000 additional US troops to be deployed to Afghanistan. So, there will be more US resources and a deeper engagement in the complicated effort of building a viable economy in Afghanistan. In all this, this continues to be a NATO mission. And what have we heard from the Allies in terms of additional contributions? Well, not much. At least not much in terms of concrete fresh commitments to the operation. And this means that the US urgency about Afghanistan is not shared among all the Allies.

And here is the problem I mentioned at the opening. NATO was and is supposedly based on common values and a shared world view which would include a shared understanding of what constitutes a major threat. This does not entail unanimity; nor should it imply America issuing commands and Europe obeying. But the approaches to this supposedly critical military engagement in Asia are remarkably different.

So different to be almost funny.

For example, to get a flavor of what is going on, one can go and check the website of NATO. Read all the headlines and one could not find the word “war”. Even the prominent announcement of a high level visit to Afghanistan by NATO officials fails to mention that this is where the Alliance is engaged in its most significant military operation. A distracted reader could think that this is part of some kind of diplomatic tour. One should read more than half into a speech delivered just a few days ago in Poland by NATO’s Secretary General Jaap de Hopp Scheffer to find the word “Afghanistan”. And, when mentioned, it is not referred to as a major issue; but as one of the things on the table, routine stuff. None of this indicates that there is a shared perception about urgency regarding this NATO military operation.

So, righly or wrongly, here in Washington we are discussing Afghanistan as a worrisome geopolitical threat because of all the implications for  regional security, stability in Pakistan and the need to avoid the recreation of another breeding ground for radical Islam in a country controlled by guerillas. In the US these are considered major, or at least, significant issues. Allowing Afghanistan to fester and to become chaos is deemed to be dangerous for world security and against the interest of the United States.

And the European Allies? What do they think? Well, we do not know exactly, but there is no major new action announced or planned. While the Obama administration recently announced this significant scaling up of American troops to be deployed to Afghanistan, the rest of NATO meager contribution to the common effort will not be significantly augmented. And this is the primary indicator of how strongly the Europeans feel threatened by that caldron of instability. Which is to say that, if the US wants to achieve some results in Afghanistan, it has to rely mostly on its own efforts and essentially forget about meaningful “burden sharing” with the European Allies. Yet, if this is so, if we disagree about the seriousness of this threat, it would make sense to have at some point a frank discussion about what is the real function of NATO. 

But this is unlikely. Indeed, serious differences about Afghanistan  notwithstanding, in a few days there will be celebrations for NATO’s sixtieth. They will be held in Baden-Baden and Kehl in Germany and in Strasbourg, in France. Chancellor Angela Merkel of Germany and President Nikolas Sarkozy of France, the heads of government of the European countries once enemies, now friends, will co-host the events. And there will be speeches and self congratulatory remarks about this long era of peace in Europe made possible, among other factors, by this resilient NATO Alliance. 

And, after a few days, the whole thing will be forgotten. This Alliance, lacking a real shared purpose, sadly, has become almost irrelevant; just like the old Veterans of the Burma Star. They were marching in London behind a flag that today, except as a revered relic of a glorious past, means absolutely nothing.




“An Opportunity Society” As The New Frontier

WASHINGTON – Right in the middle of this deep crisis, President Barack Obama is presenting bold, new long term strategic initiatives on health, education and energy. He is pushing this agenda forward while his administration is still struggling with the immediate issues of bank lending and foreclosures. Obama has stated that there is a clear logic in launching major plans right now, as these strategies –he claims– will help create more solid foundations for the economy and the society. And it is important to get started on these plans right now, as they will take years to produce effects. So, we have an emergency plan for the short term, seamlessly integrated into a new Grand Transformative Strategy for the long term. This agenda is an extraordinarily tall order for a system of government singularly unsuited, in normal times, to digest big stuff in a couple of gulps. But these are not normal times and the idea of the Big Plan, whatever its eventual fate, is moving along.

The key areas designated by Obama: health, education and energy are clearly vital and focus on them is warranted. What is not inherently self-evident is whether a massive public sector-led effort in these areas is the best course of action to achieve the ambitious goals of affordable health care, available quality education to all and aggresive development of a non carbon energy supply.

Some opponents argue that Obama right now should limit his action on reviving the economy. We know the list: fix the banks, help them deal with the bad assets, stem foreclosures. Big, bold plans for expensive, transformative change should be part of a separate national debate that should take place after we are out of this slump. Other asserted that Obama is cleverly taking advantage of this crisis to ram through the Congress and the public in general gigantic increases in public spending, labeled by the same critics as old fashioned welfare, without adequate discussion.

Leaving aside attempts to divine whether there is an undisclosed agenda and what it may be, let’s look at the situation. It is a fact that the Obama administration is confronting more than just another economic recession, however severe. This crisis of unusual strength is taking place in an increasingly unequal society that has also lost at least some of the prerequisites to maintain its productive and innovative drive.

And these are not trivial details.

The first point is that this recession is hitting an America in which the poor have not managed to improve their conditions even when the economy was growing and times were relatively good. For this reason, while all of us are hurting, those at the bottom are hit much harder than the rest. The assessment is that, whatever individual responsibilities may be, this lack of upward mobility for millions of Americans is due to systemic lack of opportunity that make it objectively harder, if not totally impossible, for the lower strata of society to climb up the economic and social ladder, even with the best of intentions. And when those at the bottom who have minimal access to opportunity happen to be racial minorities, then we are confronted with the old story of discrimination, (this time around an implicit discrimination, as opposed to the openly sanctioned and openly practiced old one). 

Indeed, when we notice that the poor stay poor largely because of lack of access to quality education and decent health care, then, present crisis aside, we can forget about upper mobility. For them it will not happen. And when we see that objectively for many “birth is destiny”, that is the social condition in which a child is born is the strongest predictor of his future station in life, then America is not the land of opportunity for tens of millions who happen to be mostly traditionally disadvantaged minorities. For this reason, the current severe recession invites reflection on how to improve a society increasingly split between those who have chances and opportunities and those who do not.

Point two is about the foundations of America’s economic might. While the devastation of traditional manufacturing, exemplified by the debacle of the US auto sector, causes concern, an even bigger concern is raised when it is not clear what a “Plan B” will look like and whether it will be broad enough to carry the entire nation into the future. The lesson of the last few years is that we have lost basic manufacturing, because our cost structure is too high compared to the cost of the emerging economies of Asia. Fine, many say. Not to worry. We leave apparel, toys, pots, alarm clocks, toasters and hair dryers to the Chinese, as we consolidate our leadership up market in biotechnology, health care, electronics, space, aviation, software and related services. This is an obvious shift for a high cost society with highly developed human capital and many centers dedicated to innovation. 

However, success for this strategy is predicated on a few assumptions. A key one is that the overall level of education in America will be high enough to produce the sophisticated and highly skilled labor force capable of manning and running complex, knowledge intensive enterprises. And this means good if not excellent education not just for the elites but for the broader labor force. And here we are failing. Public education is substandard; and the urban minorities usually get the worst kind. So, we are not preparing the human capital for the future, while millions of uneducated young will be marginalized. Another one is that the overall burden of national health care costs should be bearable as a percentage of overall wealth, while at the same time creating access to health care for the more than forty million Americans who have no coverage. And yet another is that we shall be able to curb our consumption of imported hydrocarbons, as a matter of both cost and national security.

In brief, this seems to be the underlying rationale for the bold Obama approach. We are facing this ugly crisis. But, as we are dealing with it, we also want to lay the foundation of a New Economy and of a New, more equitable, Society, based on increased access to knowledge and thus opportunity.

Having said that, and even assuming agreement on the analysis, the question is: can a Washington-led effort re-engineer America? Can we create new programs aimed at building those steps that can be used by the poor to get out of poverty? And, most importantly, noble intentions aside, can government do all this and do it efficiently and effectively?

The temptation is to say: “Yes”. We tried the government-is-the-problem, so let’s go ahead with private sector-led stuff –and it did not work so well. We let the private sector free and it did not invest. It invented ultra sophisticated financial tools that brought enormous riches to those in charge of the system and almost nothing to everybody else. And then the whole thing collapsed. And so, can we safely conclude that free market capitalism “failed” and that the government, by default, if for no other reason, has to take the lead?

This is an enormously complicated question. And there is no absolute right answer. The best answer that I can give is that it is fine, in the present circumstances, for government to take the lead. But much of the success hinges on our shared understanding of government’s role in the long term. If we agree that these are special measures due to special circumstances and that later on we shall revert to a healthier private sector taking the lead, this would be fine. But if the notion instead is that now we discovered that the public sector is qualitatively better at guiding economic development, we may be in serious trouble. Plenty of evidence shows that, by and large, the State does not do a good job, except for limited areas, (funding of basic research comes to mind, for instance, as this is an area in which the private sector is not well suited at taking the lead).

Ideally, it would be nice to hope that the Government can help create a more level playing field in which there will be meaningful equality of opportunity for most if not all people; thereafter allowing them to express themselves as best they can. It is good for the Government to actively remove obstacles to opportunity. But if this noble effort should morph into the creation of protected groups or classes and the distribution of extra this and extra that to the disadvantaged, deserving categories, this would be a perversion of the initial intent and it would result into bureaucratization and the end of individual initiative and successful enterprise. There is plenty of evidence showing that large public policy programs aimed at solving problems end up institutionalizing them, creating permanently dependent constituencies that do not go away.

Long ago, Frederick Jackson Turner provided an interesting interpretation of the old American ethos. “American Individualism” was grounded on the peculiar experience of the colonization of the American West. By default, if nothing else, individuals or small groups struggling to get someplace in the wilderness had to be self-reliant and had to base their chances of success on personal will power, determination, hard work and ingenuity. When the Era of the Frontier came to an end, Turner wondered as to what this change would mean for the American ethos. When the big job at hand is no longer to lead the covered wagons caravan further West in search for good land, so that the first settlement could be established, what will become of an America shaped by experiences grounded on individual resilience? If indeed the defining feature of the American psyche and approach to life is rugged individualism, how would this “patrimony”, born out of the frontier experience, adapt to an urban society in which complex dialogue and mediation among diverse interests will be needed, rather than the trade mark “do-it-yourself-as-no-one-else-is-here-to-help” approach?

This important question was posed by Turner at the end of the Epic of the Frontier, more than a hundred years ago. He wondered what would become of America. What would happen to the self-starting spirit, to the can-do approach to anything? As Turner put it later, in March of 1920, “The future [….] alone can reveal how much of the courageous, creative American spirit, and how large a part of the historic American ideals are to be carried over into that new age which is replacing the era of free lands and of measurable isolation by consolidated and complex industrial development and by increasing resemblances and connections between the New World and the Old. (Emphasis added).[….] What has been distinctive and valuable in America’s contribution to the history of the human spirit has been due to this nation’s peculiar experience in extending its type of frontier into new regions; and in creating peaceful societies with new ideals in the successive vast and differing geographic provinces which together make up the United States[….]

Turner described a society and a culture shaped by the accepted –indeed revered– national myth, (even though this was not the actual experience for many) of the all conquering individuals who settled wild lands, relying on their wits. The American pioneer was not “the explorer” of the European experience. The American pioneer was not Magellan or Amerigo Vespucci. He was the common man, driven by a desire to go and settle in a new place. He had no financial backers. He was neither rich nor particularly well educated. What he had was will power and ingenuity.

To the extent that this national myth of individual resourcefulness and risk taking spirit had value as the intangible yet strong motivating force that would drive Americans onward, could this myth survive after the quest for open space in the West was over? And if frontier individualism would not survive in its original form, could it be transformed into something else, equally vital, yet more suitable to changed circumstances? Or was it the fate of America to rejoin the spiritual heritage of Europe?

Turner himself expressed the wish that Americans would be able to transform the physical reality of the Frontier and the challenges that it had presented to the would be colonizers into a new notion of frontiers of knowledge and new discoveries in science and technology and more. A good idea it would seem. And, to some extent it would appear that America followed this adaptation. From the physical frontier, we moved to the frontier of innovation, technology and new science. From the covered wagons we got to the Bell Labs, Silicon Valley, the internet and the human genome.

In all this, as compared to the European experience, the State and public resources, according to the accepted national narrative, played a relatively minor role. It was all about individual creativity and resourcefulness. Hence the somewhat simplistic notion that all that is good in America is done by the private sector, while the government is incapable, inefficient and wasteful; so it better stay out of the game. (Remember Ronald Reagan’s favorite joke?: “We are from the Government…..We are here to help”. And this supposedly preposterous assertion linking “Government” and “help” sounded extremely funny to his supporters).

In light of this heritage and the accompanying national myth of the individual as the engine of creativity and growth, the Obama approach, while motivated by this national emergency, appears wrong, misguided or even blasphemous to many. “Obama wants to make all of America just like France, or at least just like California, whose stupendous state budget deficit is the outcome of a failed statist philosophy”. “Obama is a socialist”. And the more colorful characterizations assert that “we are going the way of Argentina”, or (less plausibly) “of Zimbabwe”.

Indeed, citing Turner’s thesis, Daniel Henninger of The Wall Street Journal, wrote an insightful editorial on December 4, 2008, (“America Needs Its Frontier Spirit”) that opened with this admonition:

The greatest danger in the current economic crisis is that the United States will lose its historic appetite for risk. The mood now is that risk taking got us into this mess. Risk, though, is the quintessential American trait that built the nation –from the battle of Bunker Hill to the rise of the microchip. If we let risk give way to a new ethos of commercial reserve and regulatory restriction, the upward arc of the US ascendancy will flatten. Maybe it already has.”

Henninger wrote that Turner had recognized that the “frontier spirit”, while uniquely American, was not all good. The fierce individualism that was its trade mark and dominant feature was “working for good and evil“. And we have seen plenty of both with positive and negative consequences. The rise of the great steel entrepreneur, later on turned philanthropist (Andrew Carnegie); but also of the Robber Barons, the speculators and the criminals (Bernard Madoff, by acclamation, gets the latest sleaze prize).

But is this reflection on what was or is the American ethos relevant to today’s circumstances? It is very relevant to the extent that we agree that people are motivated and driven by certain values that are transmitted by the prevailing culture. Turner wondered what would happen to the spirit of the frontier after the end of that epic age. He hoped that it would move to other fields of endeavor. And, to a large extent, this really happened. But the outcome is of a society that is both, highly innovative and fractured, flexible and adaptable and thus hospitable to the daring; but mercilessly cruel to those trapped in a world of poverty and ignorance. For them the verdict is as severe as it is unfair: “As they could not summon their individual resilience, well, they were doomed to failure. They did not make it; and it is too bad”.

The open question for the leadership of a modern industrial democracy in which a high level of sophisticated knowledge is the ticket to participate, is whether we can accept the old fashioned frontier time philosophy whereby “those who want can and will do”; and the others, well the others did not have what it takes to go through the wilderness and Indian lands. They did not make it.

The Obama administration appears to appreciate the good aspects of the old heritage that created a society in which individual ingenuity is at the root of growth. But it also sees the negative consequences of excessive individualism: a fractured society in which those who can go ahead, while many others sink or are condemned to perpetual marginalization, largely because of the circumstances in which they are born. The trick here is to “fix” the flaws of individualism without destroying it in the process.

Indeed, individualism stirs the free human creativity that produces Apple and Federal Express. Regimented, bureaucratic industry and endless bargaining with the unions produced Rick Wagoner and a slumbering General Motors, a corporation that does not even have the minimum level of self awareness to know when the business is dead. While Obama and his advisers correctly talk about systemic flaws that require real reform, it should be our hope that they will keep in mind that, in the end, the future competitiveness of America will still rest on the ability to keep and nurture a spirit of creative enterprise that has few competitors in the history of the world.

Right now, in the midst of this severe recession, the frontier spirit is not shining. There is an understandable backlash against unregulated capitalism managed by manipulators who concocted incomprehensible financial instruments and peddled them to many like the all curing snake oil of old, while the regulators were looking the other way, because they were supposed to allow the free market to do its own thing.

Looking at the destruction of wealth and at the dislocation for millions that occurred mostly under the stewardship of an incompetent Republican Party distracted by its excessive preoccupation with the war on terror and by the all absorbing Iraq adventure, one could easily agree with President Barak Obama’s conclusion that the old way of doing things (unregulated markets) has been tried and it did not work. Hence the need to try something else. Very true.

What happened under George W Bush was a disaster that has shown what level of damage blind faith in individualism, this time around  “working for evil”, (whether we knew it or not), can bring about. But, agreeing that the damages of the past were caused by reckless deregulation and lack of any kind of oversight, does not provide a clear indication of what may be a better way. Right now, with the engine of capitalism broken or at least stalled, it is appropriate to use the levers of public policy to inject some life into the system. But is this a temporary remedy or a brand new course? If it is temporary and expedient, so be it. Someone has got to do something. But if this is the prelude to the return to old 1960s and 1970s ideas of Big Plans that will fix Big Issues, then a cautionary note should be introduced.

The Frontier Spirit may not provide good guidance at this time, at least not until it can be refurbished as a genuine force for good. But there is no evidence that state run, social democratic policies work any better in the long haul.

In the 1960s and 1970s the European industrial democracies thought that they had improved and refined capitalism. The Great Society programs here in the US had similar aims. You could have both, a private sector and a public sector, free enterprise mitigated by good regulations and welfare programs that would embrace and sustain everybody. Progressive taxation would finance the whole machinery. In the European experience, thoughtful technocrats, the High Priests of the Mixed Economy and the Welfare State, would watch over and fine tune the system, making sure that all would thrive, enjoying the fruits of carefully orchestrated economic activities.

In Europe in particular, the central element of this whole idea was a sincere belief in the concept of “The Plan”. A good and wise allocation of national resources needed a careful plan, so that there would be no waste and no disruption; thus optimizing the allocation of scarce capital. In theory all this sounds quite good. In practice, it is odd that the concept of “The Plan”, sincerely embraced by the Social Democrats, was in fact the absolutely worst component of Soviet style communism. Simply stated, even assuming the best intentions and the best people working on it, “The Plan” does not work. And this is mostly for two reasons.

First, a Plan is normally based on assumptions that prove to be inaccurate or wrong, while the Plan is too rigid, not allowing for course corrections. The second reason is that any attempt at forced allocation of resources according to The Plan, is not optimal and in fact quite wasteful. But worst of all, the notion that we all have to work according to a script denies in practice the expression of individual creativity and smothers that risk taking feature that Turner and others indicated as the distinctive feature of American style enterprise. In fact, America has been and still is the destination of many disgruntled would be entrepreneurs from Europe or Asia who moved here because they believed that here they would find more fertile ground for the flourishing of their ideas and enterprises.

In the end, this crisis will pass. looking at the aftermath, the Obama administration is right in asserting its desire to address systemic weaknesses in education, health care and energy that, if left unattended, in the long run will weaken America and diminish its chances to be truly competitive in the global economy. While, in principle, this is a good idea, wanting to do the right things is not necessarily an indicator of future success. Then, what do we do?

It would be wise for a reformed and sobered up private sector to stay away from the attempts at demonizing Obama as a northern version of Hugo Chavez bent on ruining the country, and engage with this administration in devising the best way to use public policy and/or mixed models of public private partnerships in an innovative and productive way. The stakes are high. If we are successful in providing the necessary tools to those that have been excluded, we have now the chance to transform America into a modern, vibrant “Opportunity Society”. And this is something that both left and right should be able to agree upon. As Turner said, there can be different frontiers. Why not make “Expanded Opportunity” the new one?




Obama’s Big Plan Needs a Truly Loyal Opposition

WASHINGTON – Let’s give President’s Obama budget proposal and bold blueprint for addressing and hopefully fixing a number of serious problems the benefit of the doubt. Let’s assume that his approach is well crafted, thoughtful and that the goals are both noble and reasonable. Let’s also stipulate that his assessment about past irresponsibility by both the private sector and government is correct. Fine. So we all agree on this. But does it follow that his complex plan is the best course of action and, more importantly, that it is indeed going to work as intended?

This is the problem. And, unless we indulge in ideological posturing letting prejudice and bias prevail over reason, all of us should humbly admit that we do not know the answer.

Given the mess we are in, right now the general mood is to give this plan a shot. Of course, the mood is due to the depth of this crisis in which the previously exalted free market capitalism got us into. There is no doubt that the irresponsible lunacy and recklessness displayed by the leading lights of the private sector is largely accountable for this new swing favoring government solutions to the large issues.

When the face is capitalism is Bernard Madoff, (the swindler), or Rick Wagoner, the hapless head of General Motors, the chief executive who presided over the final sinking of the automotive version of the Titanic, it is easier to listen to a new political leader who tells us that ramped up government activism will provide both the answers and the proper modalities to implement policies aimed at both reviving America and propelling it to new heights.

And in truth, with the economy in deep trouble, a banking sector on respirator, the housing market in the abyss, where else can we turn? The government seems to be a plausible alternative; even though we are aware that this new massive effort is going to increase an already gigantic deficit, with consequent increases of the national debt and more money to pay more interest to all the bond holders for years to come.

So, can we say that the pendulum swung back to where it was in the 1960s and the 1970s? Are we back to the optimism surrounding “Great Society” like interventionism? And if, so, is such optimism not so much in the public sector’s leadership but in its competence to manage large public policy programs and huge budgets warranted? Again, right now, the issue can be framed as: “Yes, we may have some legitimate doubts about government efficiency. But compared to what”?

Indeed if the auto sector CEOs are the face of capitalism, one is tempted to believe that anybody, including petty dictator Hugo Chavez, may be better than this brotherhood of supreme incompetence. And if you add to the line up the leaders of Wall Street, with that unholy mix of greed, thievery and stupidity, this may invite favorable comparisons with Zimbabwe’s leaders.

Remember that this is America. We were supposed to be the ultra-sophisticated leaders of free market capitalism. We were teaching the world. We invented the “Washington Consensus”, that high minded prescription to be fed to sick third world countries, consisting of fiscal discipline, budget cuts, privatization and –last but not least— the best of the best: “Private Sector-Led Growth”. And countless governments were invited (forced?) to pray at the altar of the Free Market and to publicly renounce Satan (i.e. “State Owned Enterprises” and other such evils).

And now, how do we look? We, the Keepers of the Faith? The Guardians of the Temple? Oh well. Contemplating this ruin, Maestro Alan Greenspan, until recently the object of almost religious reverence, just like a child with a broken toy in his hands, is speechless. The only thing that he could meekly articulate in defense of his hands off approach during his tenure as Chairman of the Fed is that he really, really believed that the private sector was perfectly capable of assessing and pricing risk. Well, he (along with many others, of course) was incredibly wrong. The very notion of risk, let alone any realistic pricing thereof, had vanished. Hence the overleveraging orgy which destroyed the financial sector and anything it touched.

In the 1980s Ronald Reagan successfully argued that the dysfunctions affecting the US economy were mostly due to too much government, too much regulation and too many taxes. He argued that the legacy of the Great Society was a bloated and incompetent public sector, supremely unsuited to manage anything. Hence the need to starve it. And he won the argument. (Ironically, the one component of public spending, defense, that Reagan wanted to increase, owing to the imperatives of national security, lived up perfectly well to his caricature of “fraud waste and mismanagement”. The Defense Department embarked in a gigantic and thoughtless shopping expedition. No real plan, no priorities, no streamlining of the procurement system. So, we got a stronger military, no doubt; but at an immense cost). 

But the winning deregulation philosophy of the Reagan years and the aftermath got us into the Wild West of no rules and no boundaries. And the hands off approach was justified by the notion that the private sector and the infallible market would wisely allocate capital to the benefit of us all.

Well, the developments of the New Millennium proved that this was not so. Everybody was wrong. And all the guardians of the system, the Securities and Exchange Commission and all the other regulators, were more than wrong, they were negligent and inept.

So, here comes Barak Obama telling us that we need to fix things. Everything else being broken or almost bust, government will have to step in. Of course, Obama’s plan is not confined to fixing capitalism, but to use some of its resources to make our society more just. And this is not just a detail.

And here we set the stage for old and new ideological battles. Should government be in the redistribution business? What is fair? To what extent those at the bottom are victims of injustice and lack of opportunity or victims of their lack of abilities?

Well, the large debate between government role and individual responsibility will never end; and rightly so, as circumstances change and roles should adjust accordingly. If such debate were conducted in a responsible fashion, it would be healthy. But if it all degenerates into an ideological food fight, a useless cacophony conducted only to score points before the next election, the real issues do not become any clearer and nobody wins.

Having said that, let’s focus on the fact that the most immediate dilemma confronting us today is not about philosophy. It is really about implementation tools and capabilities. The anti-government Republicans (and not just the Republicans) of the 1980s argued two things. Number one, the government has no business in meddling in the economy. Number two –and this is really the point— government, even with the best of intentions, is inherently incapable of delivering a good product in a cost effective manner. Bureaucrats are just incapable of understanding large issue and thus they cannot manage them.

Plenty of evidence to support this point, at the time.

Again, today the context is different, as we have massive evidence of private sector failures. In Ronald Reagan’s times it could be said: “Give the private sector a chance”. Today the simple rebuttal is: “We gave the private sector a chance. And look at what they gave us: the worst crisis since the Depression”.

While this is true, the failures of Wall Street do not automatically authorize us to be reassured that, in the meantime, government reformed itself and that it is today up to the task of administering gigantic new programs and new spending. While government can and should be more efficient, where is the evidence that it has become so?

Or was it just the fault of the Republicans who governed until yesterday? Can we say that the Republicans poisoned the well and made it impossible for the federal bureaucracy to do its job? Sure, to some extent atmosphere counts, as it affects morale and thus performance. But can we safely say that a major change at the top, with a brand new Democratic leadership in charge, is enough to change not just the mood but the degree of competence and thus the ability to execute?

In the intelligence realm, can we say that the massive failures that led to the inability to detect the 9/11 plot, and later on to the gigantic blunder regarding the weapons of mass destruction in Iraq, was all George Bush’s fault? Likewise, the inept response to Hurricane Katrina, was it all due to the wrong leaders giving the wrong commands? Sure enough, sub par leadership made things worse, but it can not explain everything.

So, in the end, this is the issue. President Barak Obama wants to do a great deal. Looking at his plan for action, as outlined in the Budget blueprint just made public, there are two sets of possible critiques regarding this renewed faith in Government’s activism. The first one is that, no matter how bad the private sector has been in protecting the general welfare, government is still worse.

The second one, (and in view the most troubling) is that even assuming that the policies are correct and just, government is just not capable of executing because it lacks the intellectual and the institutional tools to act swiftly, intelligently and to produce the intended results. Needless to say, those who oppose interventionism as a matter of principle, are already salivating and ready to pounce on each and every blunder, big or small, that will prove that government (…I told you so, didn’t I?…) is inept.

But, if this becomes a gigantic ideological brawl, nobody wins. We got ourselves in a deep mess. President Barak Obama is the new steward of the common welfare. He has a recipe. Maybe flawed and imperfect; but it is a plan. And he will use the public policy tools that he has inherited, imperfect as they are, to implement it. The question before us all is: do his opponents really want him to fail to prove that he was philosophically wrong, or do they want to engage in a dialogue aimed at improving both the plan and the tools to the extent that it may be possible as we move along? Things being as bad as they are, Obama’s presidency can be a historic turning point for America. It would be wise –and, yes, patriotic– for the opponents to criticize and to present their ideas, as they see fit; but to do so constructively, with the sincere intent to lend a hand.




America: Global Ambitions and No Cash

WASHINGTON – Almost lost within the avalanche of news about more and more rescues: the banks, the auto sector, homeowners, and…welll… everybody else, (followed ominously by deeper and deeper Wall Street dives), was the announcement that the Obama administration has decided to send additional US troops to Afghanistan: 17,000 to be exact. Now, this falls short of the 30,000 additional troops requested by military commanders on the ground; but it is a nice installment. And it should not come as surprise, as Obama repeatedly indicated during the campaign that Afghanistan was and is the place we should focus on; while stating that the Bush administration had squandered resources in the misguided Iraq campaign.

The commander of the Afghanistan NATO force, US General David McKiernan, indicated that these reinforcements are welcome and badly needed, in the light of the precarious and, in fact deteriorating, security environment. And so it goes. The US has already 38,000 troops in Afghanistan. Now the additional 17,000 and probably more to come, depending in part on the draw down timetable from Iraq where we have about 140,000 troops.

And how is the rest of NATO, (that is wealthy Europe), plus assorted non NATO friends, doing in terms of deployments in Afghanistan? Not so great, in terms of numbers. The total non US force in Afghanistan comes to about 19,000, coming from 42 countries. While this is unfair, as some countries (UK, Canada, the Netherlands, France) contribute a lot more than others, let’s average this grand total. So: 19,000 divided by 42. Well, it comes to 452 soldiers per ally. Again this is not a correct representation of country by country contributions. Some allies have sent dozens, others thousands. Still the overall disproportion is immense. Soon the US shall have almost 70,000 soldiers; while the others –42 countries– do very little for a mission deemed to be important by all. Let us note that, while all countries are experiencing significant financial constraints, the Afghanistan deployments disproportion goes back quite a while. It is a matter of political will, rather than resources constraints. (No matter how messy Afghanistan is today, let’s imagine for a moment the consequences of a US decision to scale down its military commitments to the average of all the other countries who have contributed forces. Would this be a good thing for regional and global stability? More on this later).

So, we have significant new US commitments for the “good war” in Afghanistan. Still, while here in Washington we are contemplating a budget deficit that is approaching banana republic levels because of stimulus spending and assorted bail outs, how are we planning to pay for these new military deployments? 

Let’s move to another scenario. On January 10, 2009 there was the solemn and in many ways moving commissioning of the “George Herbert Walker Bush”, or CVN 77, the last Nimitz class aircraft carrier named after “Bush 41”, that is the first president Bush, father of president George W. Bush. The outgoing president “Bush 43”, his son, presided over the ceremony honoring his father just a few days before leaving office. So, the expensive “George Herbert Walker Bush” starts sailing the oceans in the year of the “Great Crisis”. This 78,000 tons nuclear powered ship, built by Northrop Grumman, with all its airplanes and helicopters and its complement of cruisers, frigates and all the rest that make up a carrier group, is the finest product of US technology, while embodying US power. Indeed, as Secretary of the Navy Donald Winter said during the ceremony: “The impact of a new carrier is global. For no other ship represents to the world the power of the United States the way this does…..” Indeed…

So, add another few billion dollars to the defense procurement bill (although stretched over a number of construction years) and, of course, from now on, the few hundreds of millions for the annual operating cost of this sailing airbase and the other vessels accompanying it, with thousands of airmen and sailors on them.

And now, the same scenario, from a different angle. Answering a reporter question on February 13, 2009, regarding the chances of buying large numbers of the (very pricey) F-22 Raptor, the new generation fighter jet, Pentagon spokesman Geoff Morrell gave us a hint that the Defense Department is aware of the fact that money is becoming scarce and tough choices are ahead. Maybe we cannot have all the weapon systems that we want:….”….Fundamentally –Morrell said–, the Secretary [Secretary of Defense Robert Gates] is looking at the things I laid out for you, I mean, the notion that we need to make hard choices in this economic climate, we need to […] look for cost efficiencies and we need to be more joint in how we acquire…..”

So, is there a common thread in any of this? Not easy to discern one, really. The first two examples –more troops in Afghanistan, the commissioning of a brand new carrier– would indicate that America has money. The prudent reply of the Pentagon spokesman regarding future procurement of major weapon systems would indicate that, because of the fiscal crisis, there will be painful procurement cuts. 

Well, and so, what does it mean? It means that, unless we reestablish fairly quickly our economic strength, at some point trillion dollar plus deficits and a country in a deep recession will collide with global foreign policy ambitions, a huge defense budget and the desire to send around a world a powerful symbol of US might. Unless Obama is successful in leading America in an effort that will fix this mess, sooner rather than later we shall get to the point in which the superpower status and international role played by the US will be undercut by lack of money. 

Ordinarily, (that is excluding for a moment all the extraordinary federal spending just launched and its impact on federal finances and on the national debt), the Pentagon is used to taking a huge chunk of all discretionary federal spending, that is all the spending that is not committed to transfer payments such as Social Security, Medicare, etc. But, given this deep crisis of uncertain duration, how long can this last? The answer is not so simple. Allocations for national security are  a combination of available cash and the setting of policy priorities. If a country has money it can decide to have or not have significant military spending. But if a country has fewer and fewer resources then the policy choices become more limited. As the French say: “C’est l’argent qui fait la guerre“, “It is money that makes war”. And this is not to recommend war. It is simply to recognize that without money to fund a modern military that is supposed to be large enough to constitute a credible deterrent and to be effective as a policy tool when it is so decided, the US cannot continue to be a superpower.

Military spending, however misdirected and often misused, is a large component of US credibility as a world leader. Without military power or with very diminished power, who will listen to America? Well, the proponents of “soft power” would argue that there are other, indeed better, ways to influence international affairs through trade, dialogue and diplomacy. I am not so sure. The governments of the countries that send a few hundred troops or less to Afghanistan do not seriously expect to influence policy. The European Union has no military power to speak of and thus nobody pays any real attention to its proclamations.  

One school of thought about the roots of “decline” focuses on  “Imperial Overstretch”. A great power, keen on preserving its strategic global interests, starts spending too much on national defense at the expense of other productive investments. In the end, because of this underinvestment, its basic economic strength is sapped and –paradoxically– there is less capital to be allocated to defense spending. Hence the need to retreat and the loss of global status.

Well, in the case of the US it could be argued that a few years of expensive wars in Iraq and Afghanistan have absorbed much national wealth. This is true. But, while the cost of these wars is significant, it is clear that the current serious recession is not due primarily to the cost of military adventure, however expensive. It is due to national profligacy and plain old “living beyond one’s means”.

The Obama administration wants to accomplish many things, all of them strategically important: stop the bleeding, kick start the economy through emergency packages, create a plan that will reestablish fiscal discipline and budget balance in the long term, (through a radical reform of entitlement programs), and maintain US global leadership.

This is an immense challenge. It would be great for America to accomplish all this. But it would be even better for the world if America could pull this off. Those who rejoice looking at America in big trouble should ponder what viable alternatives to US global leadership there may be. Unless people seriously believe that Europe’s “soft power”, with the attendant unwillingness and inability to support a military effort in Afghanistan with more than token troops, will provide a stronger and more effective leadership model.




Education is the Real Stimulus

“The educational foundations of our society are presently being eroded by a rising tide of mediocrity that threatens our very future as a Nation and a people”

A Nation at Risk, 1983

WASHINGTON – This ominous quote comes from an important report issued back in 1983 by an ad hoc commission. It told us to fix the US education system, unless we wanted to see societal decline. Well, what does that warning have to do with our current economic predicament of 2009, caused by irrational financial risk taking, overleveraging and over consumption? Not much, at least not directly. But the quality of our public education system will help determine our options, once the crisis will be over. In other words, once this mess will be behind us, with better educated people we shall have a much broader spectrum of chances to re-start, innovate and compete in the global economy than without them. Starting today to repair a public education system –that actually got worse since that 1983 report– may have nothing to do with immediate stimulus, and tomorrow’s unemployment rate. But it will have a lot to do with America’s future competitiveness and ultimately with its status in the world: still a superpower, or an exhausted, semi-impoverished country? 

Fast forward to 2019. Ten years after the Big Crisis, the Housing Disaster and the Financial Meltdown. What kind of America will we have then? How strong? How rich? How self-confident?

Who knows. One narrative could feature a humbled and diminished America. The country whose people thought that they could forever spend money that they did not have, finally had to make peace with the unpleasant reality of a diminished status. “We are not as rich as we thought. We are deeply in debt and unable to produce more than modest value. Thus, we have to scale down and live more modestly. We used to be market leaders in most sectors. Well, this is no longer so. We cannot compete on price with Asia. And the sectors where we could compete on quality have shrunk, because our rate of innovation is no longer what it used to be. Hence the need to lower our prices and thus our profit margins. Besides, being poorer, we had to scale back our international commitments and our world leadership role. No way that we can afford the largest military in the world. And without muscle and little money to spread around, it is a lot more difficult to get the attention that we used to get in the past. Given our lack of means, we are no longer a superpower.”

But there is another possible narrative. Having realized that the Big Crisis was about the delusions of easy money coming from nowhere that would somehow “create” the funds for an expensive life style, America went back to the basic art of wealth creation. What were the magic ingredients that had allowed America to dominate in so many sectors? Well, it is rather simple: “The production of cutting edge, state of the art, new knowledge; itself founded on quality schools and state of the art education. The willingness of many to use this knowledge creating a system geared towards constant innovation; while this innovation drive took full advantage of an “echo sytem” –laws, intellectual property protection, availabity of venture capital–that made it relatively to easy to bring inventions to market and to scale up fast; thus rewarding financially innovation, risk taking and enterprise”. This is what America had in the past –in great abundance. If this national trait of a flexible society geared towards entrepreneurial risk taking can be rekindled, then lost ground can be regained.

However, in this new globalized, highly competitive world, featuring now new actors who have developed important skills, we need to sharply refocus on one element in the old mix that has become exceedingly important.

And this is: “education”. A good education foundation is the prerequisite for developing cutting edge new knowledge, itself the essential premise for the creation of new, money making enterprises. Well educated people will understand more things and will be better able to push the envelope. Hard to imagine a competitive society led by under educated people.

When we got the Sputnik scare in the 1960s, (the Soviets appeared to be way ahead of us in space and thus in ballistic missile technologies, threatening our very survival), rightly or wrongly we thought that we needed to make a heroic national effort to regain our lost edge in science and technology. If the Soviet Union had the opportunity to surpass us in space, then may be they could do this in many other sectors, thus overwhelming America because of their technological prowess. Fast progress in science became therefore an issue of basic national security. Well, today, even though we do not have a hostile Soviet Union to deal with, we have to contend with all the other innovators world wide. They press on and our edge and ability to compete is eroded. Many, witness China, for the time being, compete on cost, not on quality. Still, as we cannot match their prices, we have to create new sectors in which we can compete on quality.

The call to enhance our skills in science and technology that was meant to galvanize America in the 1960s should be refashioned and applied to our present circumstances. Except that the stakes, if anything, now are higher. The situation today is comparatively worse than what it used to be then. This is because overtime our education system has become worse, while education standards have improved among our competitors. Among the more developed economies, America routinely is close to the bottom in all comparative surveys of academic standars for secondary school pupils.

America’s secondary public education, with due exceptions, is now anywhere between mediocre and bad. Many poorly educated young people do not go to college. Therefore they can compete only for menial, low skills, low pay jobs. Many others do go to college. But, as the general college population starts with lower levels of basic knowledge, the standards have been lowered.

So, we have low standards, lower expectations and mediocre preparation that will translate into a mediocre work force, at a time in which the emerging knowledge economy requires much higher proficiency even for entry level workers who must be computer literate and capable of mastering and managing complex systems and controls of higher and higher sophistication. The inability to turn out workers and professionals capable to meet these new challenges is a recipe for progressive erosion of our competitiveness and eventually national decline.

The tricky thing about such a decline is that many may not see it, because it does not occur everywhere at the same time, touching all at every level. America is not an even society. Some segments of the economy still do very well. Meanwhile, the rich and the super bright, have and will continue to have access to first class education in (mostly private) high schools and then in the elite good and super universities. And they will get the good jobs in the well oiled international corporations that do nurture innovation and innovative talent as a matter of course. For them there is no impending crisis. But all the others do not and will not do so well. They are today and will be tomorrow the product of declining standards and mediocre instruction and thus they will be less knowledgeable, less innovative and less valuable. Comparatively speaking, they will be less competitive vis-à-vis an international workforce that has become more skilled in the meantime.

If we look at our past, rightly or wrongly, one attractive element of the accepted and cherished National Mythology is the one of America as “Land of Opportunity”. Supposedly, this is the country where anybody, given drive and determination, can do anything they want; regardless of their humble beginnings, lack of connections and lack of funds. This might have been true, to a degree, in the past. Most American millionaires were self-made. Many did not have a great education. Indeed, a good idea, plus spunk, persistence and belief in their abilities propelled many improbable characters to great success. And for all the others, including poor, uneducated immigrants, the old mass production model, with its immense scale, almost guaranteed a decent life as a factory worker to people with little education. American world dominance allowed high wages for many and thus that extra income that allowed working class children to aspire to something more.

But now, quite apart from the current gigantic recession that was precipitated by the housing crisis of 2007 and 2008, America’s technological superiority is no longer. And thus we need to recreate a major national commitment to education as the essential prerequisite, the yeast that can give the would-be innovators the extra knowledge and intellectual tools that will foster inventions thus propelling the broader society, and not just some segments, into the big leagues.

In other words, whatever the short and medium term benefits of any 2009 economic stimulus package, and/or other targeted interventions in housing and banking aimed at kick-starting the stalled American engine, these types of injections, while critical at this time, are not game changers. But a concerted effort to re-engineer and radically upgrade our education system would be a game changer. Overtime, it would improve the quality of the building blocks of any innovative economy: that is the people thinking new ideas; the people planning, making and selling new things or new services.

And there is more. In this globalized economy, everything happens very fast. Even before this recession, the time to adjust and make changes had become much shorter, while the negative impact of lack of competitiveness comes about immediately and hits harshly. Faced by the onslaught of new competitors, businesses relocate, outsource functions, or shut down entirely. And this happens all of a sudden, with little warning and not much time to fashion whatever transition may be possible. And lack of competitiveness hits the least sophisticated sectors. And they tend to employ mostly those with average skills or at the bottom of the economic pyramid. And in America these tend to be disproportionably the chronically marginalized. They are the African Americans or the Hispanic immigrants, legal or illegal, who came here for the entry level jobs. In a better society, their initial status at birth should not be a sentence to perpetual poverty or semi-poverty. Fair access to good quality education should provide the ladder that would propel many upward. “You start low; and you cannot help that. But you go to school; you get a good education and thus you have access to an entirely new, broader and more appealing range of options”.

And this is where our future ability to compete meshes with the goal of a more inclusive society. Education is both the key to competitiveness and the foundation on which we can restate the enduring validity of the mantra of America as an “Opportunity Society”. Without access to quality public (that is affordable) education, then the concept of “opportunity”, while still true for some, becomes meaningless. For most of those who start at the bottom, birth becomes destiny. “As you are born poor, you will most likely stay poor”. And the equation birth = destiny is what defines most underdeveloped societies that stay underdeveloped in large part because they are unable to educate people and thus develop their human capital. The poor are not poor because of some tragic predestination. They are poor because they lack access to education, knowledge and therefore options.

Which is to say that a real, sharp, massive effort on revamping education creates not just a more competitive society but also a better, healthier society in which upward mobility, in practice denied by bad schools that produce only ignorance, becomes a concrete reality.

We have heard worried warnings about education in the past. As mentioned at the beginning, back in 1983, way before the ill effects of this neglect had become so apparent, seminal work such as the Report ”

A Nation at Risk: the Imperative for Educational Reform came along. This was the report of President Ronald Reagan’s