Trade with China
Soviet domination of China would be a potentially mortal blow to the free world. A weak China invites Russian aggression; therefore it is in our interest to bolster the Chinese economy.
China may now be at an important turning point. The People’s Republic is in desperate shape economically and its leaders are finally acknowledging that they could use help from the West. The internal convulsions of the period when Mao and the extreme leftists tried to run the world’s largest country on revolutionary rhetoric have now ended, at least temporarily. The present Chinese leaders are trying to tackle China’s greatest task—modernization—in a more sensible way. They openly acknowledge that they can learn from the West. The success or failure of their effort over the next few years to bring some measure of modernization to the Chinese people may determine whether China continues in its more moderate stance or reverts to revolutionary chaos, isolation, and belligerence. It is obviously in our interest that the Chinese remain open to Western ways. The boost that trading with the West, especially with Japan, gives to their modernization plans will be crucial to the decisions they make about their future path. That is why we are justified in giving MFN status to China and denying it to the Soviet Union. The Soviet Union threatens us; China, as of now, does not.
Whether dealing with China, the Soviet Union, or Eastern Europe, we should ensure that the bottom line in our trade policy is its impact on our geopolitical objectives. We should make a deal with the Soviets only when it involves a significant diplomatic or political payoff for us. As much as possible, we should seek arrangements that allow us to withdraw advantages if the Soviets do not keep their end of the bargain. We should not put our faith in their future goodwill. We should use our economic power to give the Eastern Europeans an option and to encourage them to pursue independent and nonadventurist foreign policies. We should use our economic power to help build a less vulnerable China and—by making it in their own interest to do so—to encourage the Chinese to follow the path of moderation.
Trading with the communist countries can backfire on us if we do not use our power in a very precise, surgical manner, on a case-by-case basis. Still, we must be willing to take some risks in the hope of creating a more peaceful and prosperous world. If we do not use the tremendous advantages our economic power gives us, or if we throw those advantages away by giving trade away, we will be squandering one of our most valuable resources in World War III.
Aid for Our Friends
The task of harnessing our economic strength to our foreign policy goals is quite different when we deal with allies instead of adversaries.
From 1946 to 1976 the United States provided over $180 billion in foreign aid for 137 nations around the world. Much of it was wasted, some of it did not advance our interests, but on the whole it was a massively expensive but worthwhile investment in our goal of building a peaceful and better world for ourselves and all peoples.
The most dramatic use we made of our economic power came in the wake of World War II, when we helped Europe back onto its feet with the Marshall Plan. Britain’s Foreign Secretary Bevin said our aid was “like a lifeline to sinking men.” With it, we did more than prime the pump for European economic recovery. By showing the Europeans how important they were to us, we catalyzed the energies of an exhausted continent. Our generosity toward Germany, Italy, and Japan enabled them to make the transition from enemy to ally without resentment toward us. Never before had a victorious nation financed its defeated enemies back into competition with it.
We acted as trustee for all of Western civilization in those crucial years, and the dividends that have accrued for all mankind have proved the worth of our investment. Then we were helping industrial nations recover from war. Now our aid has a broader range of purposes.
First, American aid must be used to strengthen the economic base of nations, such as South Korea, to which we provide military assistance. Second, we must aid nations that face a threat from within, which need foreign aid to stabilize their economies and thus deny the revolutionaries a “cause” that will enable them to overthrow the government. Third, we must continue to be generous in providing purely humanitarian aid to victims of natural disasters such as earthquake, famine, and flood. Disaster victims suffer regardless of the kind of government they have, so they should be helped regardless of the sort of government they have—as we recognized when we sent relief to earthquake victims in Romania in 1977. In the case of a ruthless communist regime such as that in Cambodia, however, we should ensure that our aid goes directly to the people, not to the government to keep itself in power. Fourth, two-thirds of the world is underdeveloped; we have a practical as well as a humanitarian stake in aiding its development. But this stake is shared by the other advanced nations, which should also share in the tasks of development. Those nations we helped rebuild after World War II should now help others to build. Fifth, aid can sometimes be used to great effect in achieving specific diplomatic gains, as it was in bringing about the Egyptian-Israeli accord in 1979.
When I first traveled in the Far East in 1953, some of the “old China hands” told me, “Give every Asian a bowl of rice and there will be no communism.” This was not true then and it is not true today. Poverty does not produce communism; communism produces poverty. Communists can find other issues besides poverty to exploit. But advancing countries are less vulnerable than stagnant countries, and even if communism were not a threat to the world, helping people escape the bonds of poverty would be something we should do because it is right, just as helping people preserve freedom is something we should do because it is right.
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We cannot aid all nations equally and we should not apologize for singling out for special economic assistance countries whose security is particularly important to us. The Soviets are not shy about providing aid where they think it will best advance their purposes. Outside the communist world, almost half of Soviet economic aid between the years 1954 and 1976 went to four countries: India, Egypt, Afghanistan, and Turkey. In each of these countries the Soviets had a tremendous geopolitical stake. Egypt provided the first foothold the Soviets had in the Middle East, although they have since lost influence there. Afghanistan has now fallen under their control, and Turkey is developing into a major economic battleground.
Before World War I Turkey was known as the “Sick Man of Europe”; now it is almost a terminal case. Inflation has been running at nearly 100 percent, unemployment at 20 percent, and Turkey’s foreign exchange earnings have not been enough to cover its oil bill. Yet with Turkey desperately in need of our aid, Congress, because of pressure from the Greek lobby, cut it back. There is an old saying: A Turk will burn his blanket to kill a flea. If we anger the Turks further with our spiteful behavior, they may burn their bridges to the West. The Soviets are waiting for this to happen. As we have cut back our aid to Turkey, they have stepped up theirs, providing over $1 billion in recent years. They will not hesitate to fill the vacuum in Turkey if we bow out. Cuba is costing the Soviets $3 billion a year and Ethiopia has cost them at least $2 billion already, but they are willing to bid high for countries they want.
In providing economic aid there are three rules we should follow.
First, just as a banker does a borrower no favor by making a bad loan, we do countries no favor by providing aid that only perpetuates inefficiencies. We should not insist that recipients adopt our political system. But we should tie aid to sound economic policies, insisting that it go for projects that have a good chance of success. By being firm about this, we can help developing nations learn the easy way lessons that other nations have learned the hard way about what works and what does not.
Second, we should resist the clamor to channel more of our aid through multinational agencies such as the World Bank. The charters of these organizations do not allow them to discriminate among nations on a political basis. It hardly serves the United States’ interests to pay a third of the bill for the World
Bank while the World Bank provides a fifty-year 1 percent loan to Vietnam in spite of Vietnam’s continued aggression against its neighbors. The answer is not for us to pull out of the World Bank, but we should recognize reality and concentrate more of our available aid money in bilateral programs where we can use it effectively to advance our foreign policy purposes.
Third, we should use our aid to further our policies, and to further the cause of peace and stability in the world. It should not be simply a handout to whatever country needs it. Countries that slap us in the face on issues of vital interest to us—by refusing to support us, for example, on an issue like Iran’s seizure of American hostages in violation of every principle of international conduct—should not expect us to ignore this when they ask us for aid.
In the long run one of the greatest advantages we derive from the economic power of the West may come not through our direct use of it, but through the attraction it holds for people around the world. Although many Third World leaders are more interested in guns than in butter, some are not. President Gaafar Nimeiry of the Sudan spoke for these others recently when he said, “We say to the Soviet Union and its allies: ‘Get your hands off Africa. The continent needs tractors, not guns.’ ”
In 1958, speaking in London, I said, “What must be made clear and unmistakable for all the world to see is that free peoples can compete with and surpass totalitarian nations in producing economic progress. No people in the world today should be forced to choose between bread and freedom.”
The free nations have demonstrated their superiority in achieving and exporting economic progress. The danger now is that we have not proved as effective in protecting freedom as the Soviets have in advancing tyranny. When the leaders of frail countries around the world see that we are determined to hold the ring against the Soviets militarily, then the economic attraction of our system will have the conditions it needs to work its magic.
Preserving Economic Power
A major strategic goal of the Soviets in World War III is to weaken and destroy our economy. Conversely, if we are to prevail in World War III, one of our first priorities must be to keep the American economy strong, sound, productive, and free.
Short of actual war America’s economic power cannot be destroyed by the Soviet Union. But we can destroy it ourselves. The primary danger in this regard is not from recession. However painful, recessions are ills from which the patient recovers. Rather, the major danger is from the creeping anemia of taxation, regulation, nationalization, socialization; of governmentitis; of what in recent years has come to be called “the English disease.”
Before World War II British intellectuals nurtured the doctrines of democratic socialism; they were enormously influential in spreading those doctrines around the world. After World War II British politicians increasingly put those doctrines into practice. The result should be a warning to the world, and especially to the United States.
Labour Party leader Aneurin Bevan once said of Britain, “This island is almost made of coal and surrounded by fish. Only an organizing genius could produce a shortage of coal and fish in Great Britain at the same time.” After years of socialist economic management there were shortages of both. By 1976 the government was spending $63 out of every $100 circulating in Great Britain. Nationalized British industries were turning belly-up in world markets everywhere. Until recently personal incomes were taxed at rates up to 83 percent, up to 98 percent for “unearned” income. As a result, incentives were eroded and many of Britain’s most productive people left—65,000 professionals in 1975 alone—creating a “brain drain” that further debilitated the economy. Britain’s nationalized health service is a disaster. At the end of 1974 over half a million people were on waiting lists for “noncritical” surgery. In 1979, with the economy tumbling toward chaos, Conservative Party leader Margaret Thatcher pledged to turn away from smothering statism and return Britain to the era of individual incentives. Britons voted for the change she promised, and Prime Minister Thatcher has an enormously difficult but urgently important challenge to restore Britain’s economic vitality.
Unless we too reverse the trend, the United States is headed toward socialism in everything but name.
When the communist world is turning to the West to save it from its economic follies, it is absurd for the West to be lurching in the other direction. Yet the United States has been doing just that. The promise of statist remedies for every real or imagined social ill holds an irresistible appeal for both populists and demagogues. Demands that government “do something” may bring relief in the short run. But the cumulative impact of all these government interventions will be to destroy the base on which all else is built.
Even John Maynard Keynes, the architect of liberal economics, warned that a level of public spending over 25 percent of GNP would have dire consequences. The budgets of our state, local, and federal governments now amount to 32 percent of the gross national product, up from 21 percent as recently as 1950. The federal budget alone for 1980 is bigger than the gross national product of all but three of the world’s 159 other nations. The 1980 budget for the Department of Health, Education and Welfare—nearly $200 billion—was more than that of any other organization on earth except for the governments of the United States and the Soviet Union. The big growth has not been in defense, but in social programs and income transfers. In real, constant-dollar terms, despite the enormous increase in the Soviet threat, the government is spending less on defense in 1980 than it did in 1960. In the twenty-five years from 1950 to 1975, by contrast, federal expenditure on social-welfare programs rose, in 1975 dollars, from the equivalent of $32 billion to $169 billion; from 26 percent of the federal budget to 54 percent.
The government now consumes more goods, spends more money, employs more people, and is more heavily in debt than any other segment of our society.
As government grows, bureaucracy grows, and the strangling web of government rules tightens around everyone else. The United States today is overlawyered, overlitigated and overregulated, and every year it gets worse.
It now costs the federal government $6 billion a year just to operate its regulatory agencies, a seven-fold increase since 1970. Former Treasury Department official Murray L. Weidenbaum estimates the cost to the public of complying with federal regulations at $121 billion a year—more than $500 for every man, woman, and child in America.
There are crippling hidden costs as well: in ideas not pursued, businesses not started, inventions left undeveloped because the government has been suffocating the entrepreneur under an avalanche of paper. Innovation is the spark that fires economic growth; productivity is the engine that drives prosperity. Overregulation kills both.
American productivity—that is, actual output per worker-hour—is still among the highest in the world, but its rate of increase has shown alarming declines. For the years 1947-1965, productivity rose at an average annual rate of 3.2 percent a year. By the mid-1970s, this had dropped to 1 percent a year; in 1979 output per worker-hour was actually falling. Productivity is the cushion between prices and wages; it determines how fast the standard of living can rise. Without a rising level of productivity, we will be doomed to standing in line in a standstill economy.
We need to take the regulatory shackles off the entrepreneur, spur innovation, and provide incentives for people to save so that business will have the huge sums it needs to invest in order to rebuild the nation’s industrial plant and restore our competitive position in the world economy.
Erecting tariff and trade barriers to keep lower-priced foreign goods out of the U.S. market will provide short-term relief for American producers and long-term disaster for the American economy and consumer. The only sound approach is to give American companies a chance to become competitive again by removing the shackles of excessive government regulation, and by providing incentives for U.S. industry to modernize and replace obsolete equipment. Our present tax system is a major culprit in the decline of productivity in the Am
erican economy. Any proposed tax relief for corporations is immediately attacked by political demagogues as helping the rich at the expense of the poor. This is economic hogwash. What all people, poor as well as rich, need first of all is a job, and if our tax system continues to discourage incentive and reward indolence, jobs will become increasingly hard to find as American industry inevitably becomes noncompetitive at home and abroad.
We must above all else bring inflation under control. Vermont Royster points out:
inflation is counter-productive to every other aspiration, including the needs of the poor, the black, the sick, the young. It undermines our economic prosperity. It costs us our position in the world. It weakens our ability to defend ourselves or our interests abroad. It puts its heaviest burdens on the poor and the middle class. And—here is the tragic irony—it puts beyond reach those very social programs, such as a workable national health plan, so avidly sought by those who profess themselves “liberals.”
Inflation can only be overcome by attacking the problem at its roots: too much government, mortgaging the future by spending beyond our means, overregulation, inflationary monetary policies, tax policies that penalize initiative, disincentives for saving and investing, and low productivity. What will not work is treating the symptoms of inflation by imposing wage and price controls.
On August 15, 1971, I did something that went against my every instinct about what is good for the American economy: I imposed a ninety-day nationwide freeze on wages and prices, to be followed by a gradual return to decontrol. History told me that while controls might be politically popular, they would be economically disastrous. Imperial Rome imposed wage and price controls in A.D. 300. They proved unworkable and were a contributing factor to Rome’s economic decline. A contemporary historian wrote that “the people brought provisions no more to markets, since they could not get a reasonable price for them and this increased the dearth. . . . ”
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