Op-Ed: America First policy needs a Churchillian 'jaw-jaw,' not 'war-war'
- U.S. trade and budget deficits must be reduced
- Smart diplomacy to cut costs of America's military engagements
- The rich EU and East Asia should sort out their own problems
Advocates and would-be practitioners of America's "full-spectrum global dominance" have yet to explain how that can be done with an economy whose stagnating productivity and a low labor supply have limited its potential (and noninflationary) growth to 1.5 percent.
They also have to demonstrate how such a policy can be paid for while the country struggles with public sector budget deficits of 5 percent of GDP, public debt of $20 trillion and net foreign liabilities of $8 trillion.
Maybe they think that America can just keep printing the greenbacks to no end?
That's what the economic historians tell us we have been doing ever since Washington refused to raise taxes to finance the wars in Korea and Vietnam. These are the events they take to date the beginning of a long agony of the global economic and financial order based on the dollar-exchange system (a form of a "modified" gold standard).
With friends like these …
President Richard Nixon was doing a great America First job when he administered a coup de grâce to that system in August 1971. Shutting America's gold window was the only way to stop the assault of our European friends and allies on Fort Knox, as they were rushing to dump the dollars at a bargain basement price of $35 for an ounce of the fine yellow stuff.
It was not enough that their dollars came from systematic trade surpluses with the U.S.; they also wanted America's gold – in addition to a largely free American military protection they enjoyed during those cold, cold war years.
I also wonder whether our bellicists know that the G7 originated with a French-German attempt to "persuade" the U.S. to stop its America First monetary policy based on free-floating exchange rates. Germans did not like that at all: Their large trade surpluses were pushing up the relative price of deutschemarks (DM), threatening German export sales and playing havoc with European currencies unable to keep up with a soaring DM.
As a result of that, the first ever G6 summit (U.S., France, West Germany, U.K., Japan and Italy) in November 1975 at the Château de Rambouillet (France) was all about "convincing" the U.S. to "stabilize" the dollar – instead of asking Germans for appropriate economic policy changes. And "stabilizing" the dollar meant sharply raising interest rates and throwing the American economy into a recession. Luckily, the U.S. did not oblige.
We now see a replay of that. German-led EU complaints about Washington's attempts to realign its tax code, review its damaging trade agreements and seek a more balanced world economy is just another "stable dollar" dispute, dressed up in a new garb of American "protectionism," "nationalism," "isolationism," and an alleged farewell to the "value-based" foreign policy.
Speaking to the G20 business forum in Berlin last Wednesday (May 3), the German chancellor Angela Merkel (the chair of the next G20 economic summit in early July) was extolling "globalization," an "interconnected world" and "inclusive growth," while taking a dig at the U.S. for its intention to review trade policies.
China, by contrast, was rhapsodized for its "openness to the world;" Beijing also got the chancellor's "best wishes for a successful Belt & Road Forum" on May 14-15. The Chinese are returning the compliment by praising the German advocacy of a free-trade platform for the next G20 meeting.
Of course, there was not a word about the drag on global economic growth caused by German and Chinese trade surpluses of $290 billion and $470 billion, respectively.
Keep America's deficits down
None of this should come as a surprise to those advising the U.S. president. It should just reinforce Washington's resolve to restore America's badly damaged economy.
A good place to start would be bigger investments in health care, education and technological advances to raise the stock and the quality of human and (physical) capital. That would revive the collapsing productivity, offer a meaningful future to 37 percent of our people currently out of the labor market and raise the economy's potential and noninflationary growth to 3.0-3.5 percent – the range we kept during the decade of 1991-2001.
The U.S. also needs better structural, trade and defense policies. Here are some thoughts on that.
Self-financed tax cuts the Treasury envisages are a fairy tale – unless structural and trade policies can plug the leakages caused by U.S. imports running at a whopping annual rate of 7 percent in the first quarter of this year. Think of the jobs and incomes this is killing in the United States.
Could that get worse? That's guaranteed: The EU and East Asia – which account for more than 80 percent of America's trade deficit -- continue to rely on their export-driven growth models.
They keep attacking American "protectionists" (?!) while rubbing their hands in glee in anticipation of tax cuts we cannot afford. Growth leakages through our trade deficit were running at an annual rate of 6.9 percent in the first three months of this year.
So, if nothing is done about trade, we can expect that the fiscal stimulus will push external deficits closer to a trillion dollars, with the public sector budget gap widening to 5-6 percent of GDP this year and next and public debt rising to 120 percent of GDP. I wonder who will get the "You are fired!" notice with that kind of record.
America's foreign military engagements are also a big drain on the economy. Europeans and Asians are wise and rich guys; they should be sorting out their own security problems.
During a German TV show last February, Martin Schultz, a credible contender for heading Germany's next government, was shouting at a former U.S. ambassador to Berlin that "Ukraine was a European problem." The U.S. should "pull out of it," he intoned, and "let the Europeans take care of that."
The ambassador complained about "anti-Americanism" (sic), but I wish he told the Germans: Wonderful, go right ahead and don't ask us to pay for it -- as we just did, according to the budget draft sent to Congress last week, in addition to Washington's underwriting of billions of dollars of IMF loans for that "European problem."
Washington should also let North Korea's neighbors China, South Korea, Russia and Japan help the Koreans make peace and clean up the Peninsula's nuclear trash.
Last week, China, Japan and South Korea were holding finance ministers' meetings in Yokohama, pledging "friendship and close cooperation" while blasting America's "protectionist" policies.
China, Japan and South Korea account for 23 percent of world GDP. They now have a combined trade surplus of $750 billion – most of which will be added to their net foreign assets. But the $1 billion the U.S. volunteered to pay for the missile defense system (THAAD) to protect South Korea and Japan, in addition to all other military expenses to confront the Pyongyang nukes, will be part of America's budget deficits, public debt and net foreign liabilities.
Investment thoughts
If credibly and consistently pursued, America First is a correct policy approach to restore the country's economy and Washington's standing as a viable leader of the Western world.
The U.S. needs to plug trillion dollar trade leakages to rev up growth and to finance tax cuts in order to avoid soaring budget deficits and public debt.
Smart diplomacy – the Churchillian "jaw-jaw" – should help to scale back America's unbearably expensive, (arguably) unnecessary and strategically unsustainable global military engagements.
Can we bet on that? Or, rather, can we bet that President Donald Trump understands that his days in office are numbered unless he drastically reduces trade deficits and the costs of the military overreach?
Maybe the president's meeting with the Holy Father on May 24 will be helpful to realize, in the splendor of Michelangelo's Sistine Chapel, that he is facing an early "existential" moment of his presidency.
The other bet is much safer and needs no divine intervention: America's monetary authorities will cooperate to keep the economy afloat -- as long as the price stability allows.
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