Austerity vs. Growth: A Prescription for The Path Less Traveled

Wealth Management Frontier, Fall 2012

"The public is an idiot," declared French General, the Marquis de Galliffet, as he stared down a rebellious 19th-century Paris. One can imagine Andrea Merkel, Germany's president and embattled fiscal hawk, echoing the sentiment after Europe, led by a new generation of insurrectionist French, rejected spending cuts for stimuli in the name of eurozone recovery.

It was a populist if decisive dismissal of Merkel and the cudgel of her austerity doctrine. After years of slashed budgets and high interest rates, voters in May turned out a slate of leaders with a pro-growth agenda built on renewed public spending. In non-eurozone Britain, meanwhile, Prime Minister David Cameron's own dose of fiscal restraint had delivered nothing but prolonged recession and rising inflation. Once lauded as the eurozone's salvation, austerity is now blamed for hastening its dissolution. "When one steps back and looks at the dynamics in play," argued a post-election blog post in The Economist, "it becomes clear that the robotic push for national-level austerity across the euro zone is undermining integration and thereby exacerbating the process."

News of austerity's demise has yet to reach the United States, however. There, the policy divide has only deepened as the nation enters the home stretch of a coarse and polarizing presidential campaign. Republican Party contender Mitt Romney, having chosen the libertarian-leaning Paul Ryan as his running mate, has transformed the race from a political battle over how to reignite the economy to a Chautauqua-style lecture circuit about the proper role of the state, particularly as it relates to entitlement programs. Democrats, led by the incumbent President Barak Obama, are struggling to revive a Depression-era tradition of activist government; Republicans, meanwhile, would shrink the federal government until it could be "drowned in the bathtub," as anti-tax crusader Grover Norquist has put it.

The argument for immediate fiscal consolidation goes like this: America's federal debt, the estimated $16 trillion in outstanding obligations issued by the U.S. Treasury, is equal to just over 100 percent of its gross domestic product. Social Security, Medicare and Medicaid, which account for two thirds of the federal budget, will soon implode under the weight of baby-boomer retirees. Foreign investors will lose their nerve, unload their trove of U.S. Treasury bills and collapse the economy.

Sadly, this doomsday scenario is not terribly far-fetched. It is altogether possible that investors may one day become net sellers of U.S. federal debt, perhaps even in haste. Such a reckoning is a distant prospect, however, and would be more effectively forestalled through targeted public spending and easier, not tighter credit. The public may be an idiot in some matters, but it is not alone in rejecting spending cuts and high interest rates for a sick economy. A half-decade since the global economy began its spectacular collapse we are still, more or less, all Keynesians. The point is whether pro-growth enthusiasts, be they Obama or France's new president, the Socialist François Hollande, are wise and courageous enough to put on the brakes and start swinging the budget axe once growth becomes reality. The question begs a hearing now, before the age of easy-money finally slips below the horizon line, changing everything.

With the amount of central government debt among OECD nations averaging more than 55 percent of gross domestic product, and with aging populations placing their public health and pension systems under enormous strain, it is vital for the developed world to unwind a generation of leverage. To do so during a time of retrenchment and high unemployment, however, would stifle growth along with revenues, eroding whatever investor confidence deficit reduction might have engendered. Twice in the last four years, in spring 2008 and again in 2011, for example, the European Central Bank raised interest rates in response to a temporary rise in inflation driven by arcing commodity prices, smothering a prospective eurozone recovery. As Nobel Prize-winning economist and New York Times columnist Paul Krugman admonished, "The ECB famously overreacted to a temporary, commodity driven bump in inflation, raising interest rates as the world economy was plunging into a recession.... By all means, let's balance our budget once the economy has recovered - but not now."

In September 2011, an International Monetary Fund report based on data going back thirty years concluded that fiscal austerity lowers incomes in the short term, largely for wage-earners, and increases long-term unemployment. The stress and pain of consolidation intensifies if, as is the case among eurozone member states, central banks are unable to deflate their currencies to enhance export competitiveness. If several countries simultaneously cut spending and raise interest rates, according to the report, "the reduction in incomes in each country is likely to be greater, since not all countries can reduce the value of their currency and increase net exports at the same time."

In response to the argument that fiscal tightening assures investors of a state's creditworthiness, thereby priming it for increased investment and domestic demand, the IMF study concluded that "on average, the effects [of consolidation] are contractionary, with no evidence of any surge of consumption and investment."

As if in validation of the IMF's warning, investment bank Morgan Stanley this month reported that a renewed contraction in eurozone economic growth "seems more probable" due to "additional austerity measures [and] a continued funding squeeze." Conversely, it credited loose monetary policy for assisting much of the eurozone and Britain to finance budget deficits at low interest rates. "This has enabled fiscal policy to act as a stabilizer and remain growth-supportive," according to the analysis.

However discredited in Europe, a plurality of Americans have made fiscal restraint a rallying cry in the campaign to unseat Obama. Despite pressure from a Republican-controlled Congress, the President has not only resisted the Merkel doctrine, he has urged his German counterpart to stimulate consumer demand in her own country to fuel export sales from the eurozone periphery. In response, the German finance minister encouraged "Herr Obama" to get on with the reduction of America's public debt which is "higher than that in the eurozone."

For many fiscal conservatives in America, that is enough to make deficit reduction the nation's top priority even at the cost of an unemployment rate hovering at just over 8 percent. Otherwise, they warn, the bond market will demand higher returns in exchange for investing in U.S. public bonds. In fact, private as well as public investors have been hungrily buying up treasuries at miserly yields almost since the financial crisis began. Some are even accepting negative rates - effectively paying Washington for the privilege of holding its bonds in the hope that one day the government will see fit to give them their money back.

Even a downgrade of U.S. government debt, issued by rating agency Standard & Poor's in August 2011, could not dissuaded investors from betting on, rather than against, Washington's ability to make good on its obligations. Nor does the Federal Reserves' policy of "quantitative easing," under which the central bank has purchased trillions of dollars worth of federal securities, seem to bother the bond markets. Given the economic crisis in Europe, the seemingly endless malaise in Japan, and the illiquid debt markets of China and the Persian Gulf states, there are few places for investors to park their money that provides the security of America's high-volume capital markets. That, plus the U.S. dollar's pre-eminence as the world's reserve currency, allows Washington to borrow and spend its way to recovery almost with impunity. But for how long?

Eventually, the eurozone will recover. If a leitmotif in this spring's elections was the repudiation of austerity, so too was popular support for the eurozone generally, as isolationist candidates were sidelined. The fragility of their institutions duly exposed, eurozone elites must now construct a regulatory framework worthy of a global currency. Recapitalizing the European Investment Bank, for example, would stabilize debt markets and make funds available for so-called "project bonds" to finance fresh infrastructure. (The European Commission estimates that an investment of €230 million could generate €4.6 billion worth of projects.) Member states have endorsed in principal the creation of the so-called European Stability Mechanism, essentially a bailout fund that would provide a firewall against contagion from stricken member economies. Germany, now the de jure economic and political epicenter of Europe with all the responsibility such status confers, will inevitably ease credit to lubricate domestic demand.

Just as Europe will rise intact from the ashes of the current crisis, So too will emerging markets regain the momentum they conceded to low-wage China even before the financial crisis shut down their primary markets overseas. Having mistaken export receipts as an end, rather than a means of modernization, developing economies produced the same goods for ever-dwindling returns. To elude the middle income trap, they must nurture local consumption and diversify sources of growth. Saudi Arabia, for example, having leveraged its fossil fuels resources to develop upstream industries like petrochemicals production, is now investing in mineral extraction and invigorating its financial sector. Neighboring Abu Dhabi is retooling itself into a regional hub for university and post-graduate education while its sister emirate, Dubai, is finally rebounding from its 2010 property collapse.

That leaves China. Having averaged double-digit growth for three decades, the Chinese economy is losing steam. Its overheated property market, fueled by the same easy-credit terms that inflated asset bubbles in the developed world, could collapse with ruinous effect. Rising wages are eroding export competitiveness and a growing number of manufacturers are relocating their factories abroad. Until now, China's leaders have skillfully reconciled the demands of modernization with their insistence on political and intellectual control. But their margin for error has narrowed precariously and the presumption of China's successful evolution into a stable, developed economy can no longer be taken for granted.

There is one thing, however, that Beijing is doing right, with potentially huge consequences for the global economy: it is reforming its currency into fully convertible unit of exchange. In June, Joseph Yam, the former head of Hong Kong's de facto central bank, suggested it should consider dropping the local currency's thirty-year link to the dollar and re-pegging it to the Chinese renminbi. The dollar link, he said, obliged Hong Kong to outsource monetary policy to Washington, which contributed to the former British colony's soaring inflation rate and property prices.

Yam's remarks, which The Financial Times described as "a sign of China's increasing economic dominance in Asia," was also an early inflection point in the diminution of the dollar's role as the world's reserve currency. Over the last eighteen months, Beijing has opened overseas exchange centers in Hong Kong and Singapore and more are planned as trading volume soars. China is now the world's second largest economy and its gross domestic product is expected to exceed U.S. output by 2020. It is only natural that an internationalized renminbi would rival the dollar as the world's fiat currency, which would end the era of dollar hegemony and with it the U.S. government's entitlement to low borrowing costs.

To argue that weakened and highly indebted economies can spend their way to recovery without courting default is not to suggest, as did America's last Republican vice president, that "deficits don't matter." It is both possible and desirable to heal stricken economies without draconian spending cuts that are likely to extinguish the host they were meant to restore. That is the lesson from Europe, and Washington ignores it at its peril. Only then can the U.S. prepare itself for the truly daunting new age to come, one in which the writ of dollar dominion is no longer redeemable.

This essay was co-authored by David Young, CEO Anfield Capital Management, and Stephen Glain

By Choosing Arms Over Diplomacy, America Errs in Asia

The New York Times | International Herald Tribune 2011-12-15 Washington HAWKS on both sides of the Pacific greeted the Obama administration’s decision last month to fortify, rather than throttle back, America’s vast influence in East Asia as a defining moment in a looming confrontation between the United States and China. In the rush to militarize the world’s most important bilateral relationship, however, two questions have not been answered: Are the disputes that roil Asia more effectively resolved through armed might or diplomacy? If the answer is diplomacy, where is American statecraft when it is needed?

With the economy in disarray, President Obama chose a costly instrument in deciding to expand the American military commitment in Asia by deploying a Marine contingent to Australia; the move will only help insulate the Pentagon from meaningful spending cuts and preserve the leading role the military has played in foreign policy since the 9/11 attacks.

In looking to the military, Mr. Obama was embellishing an old policy course. For more than a century, the Pacific rim of Asia has seen a number of unnecessary American wars and interventions, beginning with Washington’s imperial thrust through Guam and the Philippines, its role in suppressing the Boxer Rebellion in China, and its 40-year-long Open Door policy (a demand that trading rights in Chinese coastal cities be shared among industrial nations that had sought zones of influence). In 1949, after Communist forces prevailed in China’s civil war, President Harry S. Truman chose not to engage the new People’s Republic but to contain it alongside the Soviet empire — with which Mao Zedong soon aligned, earlier entreaties to Washington having been rebuffed.

Having dismissed a diplomatic opening along with advice from some of his own China experts, Truman militarized Sino-American relations on China’s borders by extending aid to the French in Indochina and then by endeavoring, disastrously, to reunite the Korean Peninsula by force, in response to North Korea’s effort to do the same by invading its southern neighbor. The agonizing stalemate that followed foreshadowed America’s doomed intervention in Vietnam.

Mr. Obama, like his predecessors, seems now to be embracing a militarized policy with regard to China, the sinew of which is a global network of military bases that has changed little since the peak of the cold war. Far from reducing its profile in Asia, the Pentagon has been quietly enhancing or reconfiguring its capacity there in recent decades. For example, it has been building up forces on the United States territory of Guam, a far-reaching strategic enclave in the Pacific much like the British island of Diego Garcia in the Indian Ocean. Pentagon strategists say the aim is to “dissuade, deter and defeat” regional aggressors. And in recent months, the Defense Department has been developing a strategy for Asia called “AirSea Battle,” an instrument with which American military power can address “asymmetrical threats in the Western Pacific,” an implicit reference to China.

Washington justifies its Pacific buildup by citing China’s increasingly menacing claims on the region’s contested waterways. But there has been no serious American-led effort to resolve such disputes through bilateral or multilateral diplomatic rounds.

Indeed, America’s top diplomat has become the chief civilian advocate for military answers to diplomatic challenges. Speaking in Honolulu last month, Secretary of State Hillary Rodham Clinton called for “a more broadly distributed military presence” in Asia. While in Manila, she appeared on an American warship and reaffirmed the nearly 60-year-old security pact between the United States and the Philippines. She also has endorsed the creation of an American-led regional trade pact that pointedly excludes China for the present, a remarkably petty snub compared to the way her legendary predecessor George C. Marshall offered (without success, in the face of Stalin’s suspicions) to include the Soviet Union in the postwar reconstruction plan that now bears Marshall’s name. And this month she visited Myanmar, where the Obama administration has assiduously worked to neutralize a corrupt and repressive government in favor of democratic reform; in the grander strategic game, this, too, could be read in Beijing as a tactic to weave the country — which has been Beijing’s ally — into an American noose around China.

Since the end of the cold war, senior diplomats and general officers have coalesced in support of a central military role in the formulation and execution of foreign affairs. This role is a consequence of the growing imbalance between America’s diplomatic and military resources, and it shaped lamentably militarized responses to the Balkan crisis of the 1990s, the 9/11 attacks, the reconstitution of Iraq and now the rise of China. Mrs. Clinton may declare herself, as she did in an October article in Foreign Policy and again in Honolulu, to be for “a substantially increased investment — diplomatic, economic, strategic and otherwise” in the Asia-Pacific region, but this ignores the fact that the country’s diplomatic capacity has been cruelly cut back over the last two decades, particularly in relation to the Pentagon’s.

In fact, the Pentagon can be expected to keep outspending the State Department at an enormous rate — even in the unlikely event that Congress musters the courage to impose draconian budget cuts, as the law requires, in the wake of the deficit-reduction super committee’s collapse. Currently, Washington is allocating about a dozen dollars for defense outlays for every dollar it spends on diplomacy and international assistance. In Honolulu, Mrs. Clinton also celebrated the “opportunities and obligations” in Asia that are ripe for exploration after the immense expenditure of American blood and coin in Iraq and Afghanistan. That recalls the way the country’s policy making elite saw fresh dangers as well as opportunities in Asia after America’s withdrawal from Vietnam — an earlier example of Washington’s cyclical preoccupation with perceived threats from one end of the Eastern Hemisphere to the other.

So long as Congress insists on lavishing funds on the Pentagon at the State Department’s expense, there will be no shortage of perceived monsters to hem in or destroy. Witness the new species taking form in Asia.

Stephen Glain is a journalist and the author of State vs. Defense: The Battle to Define America’s Empire.

China "encircled by the United States." Author interview on "The Jeff & Mike Show.

The Jeff & Mike Show, WSTL-FM, San Diego  2011-11-11 Click here to listen.

"The Pentagon does not want to lose control:" Author interview with PRI's The World about State vs. Defense

Public Radio International  2011-11-3 Click here to listen.

Stephen Glain on US Militarism

The Browser 2011-6-11 American presidents may not want to send troops into battle or militarise foreign policy but, in the end, most of them do. The author and journalist explains how this happens, and why it’s not even the military that's to blame.

I was reading the Foreign Policy excerpt of your book, about the huge imbalance between the civil and the military arms of the US government. For example, the Pentagon has more lawyers than the State Department has diplomats.

It also has more band members than the State Department has diplomats. That’s become so clichéd I decided to use lawyers instead.

Also, while people are talking about cutting social security, the Pentagon exceeds its budget by $300bn.

Yes, and has repeatedly failed to account, every year, for hundreds of billions of dollars – sometimes even more than a trillion dollars in expenditures.

These are important points, but ones at which a lot of people just shrug their shoulders…

I was surprised, in the past, that when I sat down to drinks with friends and talked about this, it failed to resonate. Now I’m out hitting the talk shows and there does seem to be something of a response, but I think that’s largely symptomatic of the economic condition the country is now mired in.

I was wondering what made you feel outraged enough about the situation to write a book about it. Was it your experience as a reporter for The Wall Street Journal in Asia and the Middle East?

What compelled me to write about this process of foreign policy militarisation was seeing the enormous amount of military resources that the US has established overseas, sometimes, literally, in my backyard. For example, when I was in Korea, I had an apartment not far from the main army base in Itaewon in Seoul. Then I went to Japan, where the US also has an enormous presence. Before that I was in Hong Kong, and every now and then the ships would come in for liberty call. It was a slow process. My tenure overseas coincided with the collapse of the Soviet Union. Before that, I had accepted the Cold War orthodoxy, that these military commitments on the part of the US were necessary in order to contain the Soviet bear. After it imploded, it took me several years of reporting about arms sales to allies, about joint development programmes, of seeing these incredibly intrusive bases, for me to understand the paradox of maintaining these huge deployments in the absence of a clear threat. It gradually became clear to me that this was not only a craving for dominion, but dominion for its own sake.

Then, when I went to the Middle East, I encountered a somewhat different iteration of it. But it was obvious that to the average person anywhere in the world, if they were going to meet an American, it was increasingly likely that they would be wearing a military uniform. To Americans that’s not necessarily disturbing, because we’re blessed with an incredibly professional, highly educated, highly trained, highly motivated military, which we don’t see as a threat. But if you’re Korean or Japanese, or if you’re European, chances are you have a different perception of what a military bureaucracy is capable of doing. So I knew that we were sending a potentially negative signal in not just maintaining our Cold War military bureaucracies, but intensifying them worldwide. That’s really what informed my decision to proceed with this book.

I should also point out that I grew up near Camp Pendleton, which is the largest US marine base in the world, and most of my friends were the children of active duty marine officers. So I grew up with an enormous amount of respect for them and what they were doing. I never bought into this notion that there is something malign or pernicious about the military. It’s more about the way civilians in Washington are abusing the military and its people, like these kids now doing their third or fourth tours in Afghanistan and Iraq.

The first book you’ve chosen is David Halberstam’s The Best and the Brightest, which dates from 1972. The reviews describe it as “the epic true story of how America got involved in Vietnam” or “the Iliad of America’s doomed involvement in Vietnam”. It really does sound like one of those books that everyone should read.

I read this book when I was living in Asia, and it was my first memorable encounter with investigative journalism in the service of creating a historical narrative. It’s a book that is not only very compelling, and staggering in its scope and its conclusions, but the perfect example of a revisionist history. It was contrary to everything I thought I knew about the events that it accounted for, which was basically the Kennedy years and early Johnson administration and how they dealt with Vietnam. It also introduced me to the personalities who are not well known to most Americans, but who became, as a result of Halberstam’s telling, real heroes to me. These are the China experts who worked for the US State Department, who were in China in the 1940s and 1950s. They worked with both the communist Chinese and the nationalist Chinese and cabled back, very courageously, that the nationalists were corrupt and that though the communists were communist, they had a greater legitimacy in the eyes of the people and therefore we should work with them. For me, reading this in my late 20s/early 30s was quite a revelation, and it’s why I hold the book very close to my heart. Rereading it when researching my own book, State vs. Defense, was a real pleasure, because I was reading it with the benefit of 20 years of experience as a correspondent.

What light does it shed on US militarism, specifically?

It shows how a president, however reluctant to engage militarily or to militarise foreign policy, finds himself getting swept along by events or political imperatives that he can’t control. Kennedy did not want to escalate the US presence in Vietnam – he was very clear on that score. But he was concerned that if he did not make some kind of gesture – perhaps by sending slightly less than half what the generals were insisting he send – he would be portrayed as being soft on communism, and that that would compromise some of his other initiatives, like civil rights. It’s interesting how every time the US had a crisis on its hands, or a foreign policy challenge, the heads of state were reluctant to get involved, but gave way to political pressure, usually from the right. That pressure was either well intentioned and sincere or simply a political tactic to put the president on the defensive. Obviously this was not the case with the most recent President Bush’s rush to war, which was very much his own inspiration.

What about Obama? He’s also remained more involved in foreign wars than I would have expected from his comments on the campaign trail.

On the campaign trail he said Afghanistan was the good war. He may have believed that. He almost certainly understood that he would have a better chance to be elected if he established his credibility as someone who is prepared to intensify the conflict in Afghanistan. It’s another specimen of how this pressure works, just a more subtle one.

Let’s go on to House of War by James Carroll. This is about the Pentagon, but it’s a personal take: Carroll’s father was a general.

Yes, and this gives it an intimacy which other books of this genre don’t necessarily have. He does a great job of twinning his own experiences and memories with the towering personalities of the Cold War, like Curtis LeMay. LeMay figures very heavily in my book, because he is the ultimate militarist who was also in the military. In my book I am very careful to point out that most of the militarism that goes on in Washington is done by civilians, because we still have a civilian-led military. The book is very well written – it’s a very uninhibited account of what it was like for him growing up and, through his father, being part of the Pentagon bureaucracy. It’s very subversive. I read it before I was serious about writing the book that would ultimately become State vs. Defense, and I thought to myself, “Why should I write a book about foreign policy militarisation when Carroll has done such a great job of doing it?”

You say it’s subversive. Give me an example.

He’s talking about LeMay, and it has to do with the Gaither_Report, which President Eisenhower commissioned, in part to protect his own right flank from anti-communist hawks in Congress. We’re talking about Eisenhower here, the hero of Normandy! So he commissioned an investigation into accusations that America had fallen behind in missile production. Carroll takes us into the room where some members of the committee are interviewing LeMay. They say, “Here’s your scenario. You just received an urgent message that Soviet bombers have flown past the distant early-warning line in Canada, and they’re about to launch an attack. How many bombers can you get off the ground before they come under attack themselves?”

And LeMay says, “None, because it is my policy to maintain my own intelligence sources. The minute I think the Soviets have scrambled I am going to retaliate pre-emptively.” Which of course would be a great act of insubordination. It’s not the military that orders attacks, it’s the president of the United States. I was struck by just how cavalier this individual was when it came to something so vital and what it said about the system, that it could produce someone who would act so rashly.

So in your book are you very anti-Donald Rumsfeld?

Yes, my book is quite harsh on Rumsfeld, because he was the architect of Iraq and he’s a perfect example of a militarist who was a civilian, when he was in the process of militarising US policy after 9/11.

And like LeMay, very cavalier?

Cavalier and contemptuous of the people around him. It was appalling the way he humiliated his own generals. He would wire-brush subordinates if their reports were not up to his liking. That’s one of the leitmotifs of my book. Every time that there is a president or a secretary of defence or a senior official who is driving the country towards war against a perceived threat, there is always someone in the bureaucracy – whether it’s a diplomat or a military attaché, or a spymaster – sitting in an embassy where the perceived threat is apparently emerging, saying, “No, this is not a major threat and we should not be getting involved in this.” That’s when you see the disconnect between how the world is and how Washington perceives it. Rumsfeld’s perception of the world was completely at odds with the way it was, and unfortunately that is a myopia that is way too common in this town [Washington DC]. It’s one of the reasons why the US keeps getting into conflicts and quagmires that it could have avoided had it just listened to its area experts. That’s a theme that resonates in The Best and the Brightest, and Legacy of Ashes, which is the next book on the list.

And in this regard, things didn’t improve much between Vietnam and the aftermath of September 11, 2001.

I was in Washington writing a book when 9/11 happened. I was personally stunned at the level of ignorance about the Middle East, the complete misinterpretation of what the attacks were all about, and the extent to which it was a willful ignorance, spread largely by domestic politics. That just became a barrier to any kind of thoughtful inquiry as to what the attacks meant, and more importantly, how to respond to them.

When you say people completely misunderstood 9/11 what do you mean?

It’s still unfashionable to say this, but when George Bush addressed Congress he said the terrorists hate us not for what we do, but who we are, our democracy, our values, our way of life. But anybody who Googled Bin Laden would have seen that the first entry was his 1996 fatwa or declaration of war, against what he called the “Zionist crusader alliance”. That tells you right there that it’s not about American democracy, it’s about American policies. US support of Israel was one of those policies that so outraged Bin Laden. The other thing was the US residual force of troops in Saudi Arabia after Operation Desert Storm, which Bin Laden, like a lot of Muslims, regarded as an apostasy. And because it was the Saudi monarchy that abetted that deployment, that put the monarchy within his crosshairs as well. Ditto US support for secular dictators like Hosni Mubarak. You can argue about whether or not these policies are legitimate and in America’s interest. But to suggest that they somehow did not play a role in Bin Laden’s motivation was duplicitous. It created the environment where such a massive and misplaced military response to 9/11 could happen. A “War on Terror”: In retrospect, it sounds ridiculous. But it made something as reckless and disproportionate [as the American response to 9/11] possible and even fashionable. Because if they’re attacking our way of life, we have no choice but to resist.

So were you just horrified when they announced they were going into Iraq?

I’d spent a lot of time in Iraq, and I’d seen what the sanctions had done to these extraordinary people. I believed then, as I do now, that it was an absolutely inhumane thing to do, to punish 24 million Iraqis while enriching Saddam and the kleptocracy that had congealed around him. But when it became clear that the US was going to war in Iraq, it became obvious to me that it was not about the Iraqis. It was about remaking the Middle Eastern map in a way that would make Israel more comfortable. That was quite a revelation. I don’t think I’ll ever really recover from that.

Did your next journalistic assignment involve Iraq?

Once my first book was completed I was hired by The Boston Globe. One of the things that I took on my own initiative was to cover how the White House was going to handle the post-conflict side of the Iraq war, the rebuilding. That’s when I got a pretty intimate look at how Rumsfeld was neglecting it, and how he was locking out the civilian side. He was obstructing NGOs from doing what they normally do in the run-up to a war, which is to try to pre-empt a refugee crisis and cholera outbreaks, and to make sure there is no deprivation. He pretty much kept the NGOs from doing their jobs. Also, I remember interviewing a former ambassador to Egypt, who informed me that he had just been tapped by Colin Powell to help assist in the shadow interim government, so it was going to be his job to oversee the foreign ministry. There were a couple of dozen of these people, all of whom had considerable Arab expertise. Within days it was announced that Rumsfeld had vetoed Powell’s team. It showed just how out of control this man was, but it was also just another example of Washington discrediting or neglecting the very people who know a lot about the parts of the world we profess to be a great national security concern.

This is partly a legacy of McCarthyism, I suppose. If you’re an expert on a country, then you can’t be trusted, because your allegiance might lie more with that country.

Yes, the idea of divided loyalties, or “gone local”. One thing I learned in researching my book is that you cannot exaggerate the damage that Joe McCarthy did to American statesmanship. Maybe if it hadn’t been him, it would have been something else. But his shadow still looms. Now it’s not communists, it’s Muslims.

So on to Tim Weiner’s Legacy of Ashes, which is about the CIA. Let me read you a bit of the summary from the Publishers Weekly review: “Is the CIA a bulwark of freedom against dangerous foes or a malevolent conspiracy to spread imperialism?” This book concludes that “it’s a bit of both, but mainly a reservoir of incompetence and delusions”.

Yes. This book reads like the Keystone Kops. It’s amazing how often the CIA just blundered, going from one screw-up to the next, despite having some very intelligent people. But I once listened to Tim Weiner giving an interview and he said something very profound. He said every president since it was created under Truman has abused the CIA. Too often it’s used to prove a presumed fact, a fact that has been created for domestic political purposes, and completely queers the pitch from the outset. If you’re not encouraging conclusions that may differ from your own presumptions then you’re fated to commit the mistakes of so many American presidents and heads of state everywhere. Also, while the CIA got it wrong on the Bay of Pigs, they also got it right sometimes. A perfect example of that is the US plot under Eisenhower to overthrow Mohammad Mosaddegh, the Iranian prime minister. We’re still living with the legacy of that plot today. There was a station chief in Tehran who disputed John Foster Dulles’s notion that Mosaddegh was a Soviet stooge. He was not. He was neutral. There’s an example of the CIA calling it like it was. Ditto, Richard Nixon and Henry Kissinger’s war on Chilean president Allende. The CIA was saying, “No, this man is not a proxy of the Soviets. He’s popular, he’s legitimate, and we should not be seen as trying to undermine him.”

So is the book quite balanced?

I think it is. Tim Weiner covered the hell out of the CIA and the whole national security bureaucracy. It’s very well sourced. I have a friend who works for the CIA, and she said they were very good about providing him with as many documents as he requested, to the extent possible. They were just stunned at the scathing treatment he gave the CIA. But to his credit, he asked for the documents, he gave them a fair hearing, and then he rendered his verdict. I’m very sympathetic to his notion that the CIA is abused, just like the military is abused by civilians.

So on the weapons of mass destruction in Iraq: Did the CIA know there weren’t any?

From Weiner’s account, the CIA was not coming up with what Cheney wanted to hear. When the vice-president makes a special trip to Langley [CIA headquarters] to sit down with senior researchers and analysts and demands to know what they’ve got on WMD, that’s a perfect example of abusing the CIA. Even the most redoubtable agent can withstand only so much political pressure. So Cheney got what he wanted.

Let’s talk about your next choice, American Rasputin by David Milne.

This is a wonderful book. I came across it because I read a review and it became clear to me that Walter Rostow, the subject of the book, was a singular personality in the panoply of foreign policy militarisation. It’s a very good read. I believe it’s David Milne’s first book, and he just knocks it out of the park. He opens with this amazing anecdote about Robert McNamara. It was his last day in office as secretary of defence – he was going on to the World Bank, and he was already broken down emotionally because he realised that his legacy was going to be as dubious as it is. There was Walter Rostow, giving a briefing on how the US should intensify and accelerate the bombing runs in North Vietnam, and finally McNamara just stands up and says, “You’ve been telling us this for the last three years, and it hasn’t done a thing.” He uses all sorts of blue language and he finally collapses and begins to weep in the Oval Office, with the most powerful men in the world all assembled. It’s just a searing image, and he does a great job in crafting it and making it come to life.

But Rostow wasn’t a cynic, was he? He was an idealist who did a lot of damage, in the mould of Graham Greene’s The Quiet American.

Very much so. He ends up, indirectly, being responsible for the murders of hundreds of thousands of people. Milne does a great job of sketching out how an incredibly bright man can be such a dullard when it comes to the consequences of waging war without listening to people on the ground. For example, there’s one bit when he goes with General Westmoreland on a fact-finding tour to Vietnam. By the time they get to Honolulu, they had already decided to intensify the bombing. Before they got to Saigon, they had already rendered their verdict.

Your last book is Perils of Dominance

The author, Gareth Porter, makes some very interesting points, backed up by his source notes, that put things in a different perspective for me. For example, he points out how utterly weak the Soviet Union was, throughout much of the Cold War, relative to the US. And how defensive its posture was, relative to the US. How it lacked the technology and weaponry that could have allowed it to do the kinds of things that people like Curtis LeMay said the Soviets could do just by snapping their fingers. Again, he does a great job of showcasing the extent to which the Soviet threat was hyped. He also effectively debunks some of the other shibboleths of the Cold War, like the Sino-Soviet bloc. That’s a perfect example. At a time when Dulles is saying, “We’re locked in a mortal struggle with the Sino-Soviet bloc,” Porter shows that Mao and Stalin were hurling the most crude epithets at one another. If there was going to be a war at all, it wasn’t going to be between the US and the Sino-Soviet bloc, but between Russia and China.

You said at the beginning that you’re finding more resonance for your views. Are you optimistic about things becoming more balanced between civilian and military in future?

It’s hard to reverse a spending imbalance with a ratio of 12:1. For every $12 we spend on defence we spend $1 on diplomacy. There’s just no appetite in Congress to give the State Department the resources that they need, and, to be honest, the State Department is in need of an enormous amount of structural and institutional reform. I’ve had very thoughtful, worldly men in military uniform, say, “Look, we hear it loud and clear and we agree with you. We’re tired of having to shoulder the State Department’s burden, but they’re not up to it.” Which segues into another conversation, which is how do you fix the State Department in such a way that if you do give them more money, it won’t be wasted or allocated in an inefficient way.

What about the appetite in Congress for reducing spending on defence?

They’re cutting defence spending right now, but that’s because they don’t have the courage to go after our entitlement systems. Their hearts are not in it. They’re not doing it because they want to, they’re doing it because it’s the lesser of two evils. They’re talking about significant cuts, but they’re not talking about dismantling the American empire, because the vast majority of lawmakers would not acknowledge that we have an empire. There is something about these foreign deployments in Korea, Japan and Europe that is just so deeply entrenched. It’s not just American constituencies that have an interest in maintaining them, it’s also the host countries. They like having the US in their back pocket. They contribute to the economy, they’re the source of a huge black market. It would be politically difficult for them to kick the Americans out. They may take some serious whacks at the defence budget, but until they start talking seriously about dismantling these Cold War-era deployments, which are the foundation of the empire, I just don’t see any prospects for change.

If you were in power what would you do?

I would put our allies on notice that the days of unconditional US hegemony are numbered. We’re prepared to help you develop your own deterrent against whatever threats you face. I would tell NATO, you’re going to have to develop expeditionary capability without our help. We’ll help you, but in four years’ time we’re out the door. The other thing I would do is appoint our best Sinologists to figure out how we’re going to disentangle all of these claims and counterclaims to the strategic seaways of Asia, which have become such a touchstone for potential conflict between the US and China. Because I would hate to be the one to tell the mothers of America that their sons or daughters died defending Mischief Reef in the South China Sea from Chinese encroachment.

Given that America is so strong in soft power and winning hearts and minds – my Vietnamese history teacher at Harvard used to say that while America lost the war there, you could say it won the subsequent peace – that there would be more emphasis on non-military solutions to conflict.

You would think so. At a time when we’re facing a relentless challenger in the form of China, which, for now, is peaceful, you’d think we’d want to cultivate our diplomatic resources. You can’t win a war with China. It’s just madness to even consider it. But because the all-volunteer military in this country has been so successful, we’ve effectively segregated the military and the civilian realms. We don’t know what they do, we don’t know the sacrifices they’re making, but we appreciate that we don’t have to make similar sacrifices. So we give them all the money they need. They leave us alone, and we leave them alone. That’s a really pernicious legacy of this wildly successful professional military of ours.

Interview by Sophie Roell

Nation Conversations: Roane Carey and Stephen Glain on Egypt's Muslim Brotherhood

The Nation 2011-8-26 Click here to listen.

State vs. Defense: An Interview with Stephen Glain

Small Wars Journal 2011-8-24 Building on the earlier works of Andrew Bacevich’s Washington Rules and Robert Kaplan’s Imperial Grunts, Stephen Glain’s State vs. Defense provides a thought provoking, compelling historical revision to United States Foreign Policy. Well researched, his findings demand consideration as we try to understand who we are, where we have been, and where we want to go in the future. His initial interviews sparked controversy at Foreign Policy and Salon, and we asked him to join the conversation at Small Wars Journal in order to talk through his specific thoughts and recommendations for our nation. Regardless of your individual views on the subject, I would ask that you consider Steve’s voice and critique. This book is high on my recommendation list. - Mike Few, SWJ editor.

Your book, State versus Defense, builds upon the concept that the United States, as the world’s only superpower, is an empire with a militarized foreign policy securing the periphery. What life experiences led you to this conclusion?

It’s hard to live in Asia and the Middle East, as I have as a journalist, and not be struck by the scope of the U.S. military’s presence overseas and the depth of its influence on American foreign policy. While in Asia, to cite just one example, I saw how the Pentagon worked behind the scenes during the 1997-1998 currency crisis to ensure a generous response by international institutions for the sake of its strategic allies. In the Arab world, U.S. embassies have become more fortress-like listening posts and flag billets than sources of diplomatic and cultural outreach. Now that the Pentagon has its own funding authority, it can sidestep the State Department in establishing close relations with foreign governments. Whether or not that is a good thing, there’s no denying that it further marginalizes the diplomatic side of the profile America projects abroad.

I might add that the notion of American empire and militarization is hardly notional for foreigners like the Okinawans, who for generations have dwelled alongside a sprawling Marine base, or among residents of South Korea’s Jeju island, who are challenging plans to build a major naval installation there ostensibly on America’s behalf. At the same time, the indulgence by Washington of autocrats who accommodate U.S. bases even as they bully their citizens at home - most recently in Bahrain, for example - fuels the assumption that American empire is not only real but malign.

In 1932, George Kennan, tasked with providing an analysis on the Soviet Union’s future, concluded that “the system falls to pieces.” You offer that Kennan hypothesized long before World War Two that the ideology of communism was not a real long-term threat to the United States. Moreover, your central argument involves the misinterpretation of George Kennan’s “The Long Telegram” as a spark for increased American involvement in other’s internal affairs. Was the threat of communism and the Cold War manufactured, and is it more accurate to state that in the 1950’s, this containment morphed from a realist, physical containment of Sovietism into Europe and the Middle East to a much more ideological containment of “Communism?”

James Forrestal, Truman’s Secretary of the Navy and a tragically deranged man, used to speak of communism as a cult. One could say the same thing about the obsession among U.S. security planners with the Soviet threat, which for the purpose of the U.S. and its allies was confined largely to Eastern Europe. Throughout the 1950s and early 1960s, Washington embarked on a massive buildup of strategic weaponry at a time when it was clear from U-2 surveillance data that the Soviets had no corresponding capability. Its nuclear stockpiles were negligible and it’s intercontinental bombers either lacked the range needed for a returned mission against the continental U.S. or were too slow to evade its air defenses. Despite this, Air Force General Curtis LeMay quietly promoted the idea of a pre-emptive first strike against Soviet targets even as he indulged in alarmist warnings about American vulnerability, famously expressed as bomber and missile “gaps” between the two Cold War combatants. The discrepancies indeed existed but in America’s favor, as LeMay knew.

So the question becomes: did LeMay, a very smart man and one of America’s most effective field marshals, “manufacture” Cold War fears to enrich his service branch or because he sincerely believed it was in America’s interest to strangle the Soviet Union in its crib? Certainly LeMay rung generous outlays from Congress for his Strategic Air Command when the other services were bled white by Eisenhower’s New Look. He also pioneered the Pentagon tactic of wooing lawmakers from multiple states and districts with assembly contracts in pursuit of favored weapons programs. But the single-minded LeMay, the polar opposite of the nuanced, worldly Kennan, also believed passionately that what the Soviets lacked in strategic capability today they may develop tomorrow. And unlike Kennan, LeMay believed Moscow was more likely than Washington to use such power preemptively. As I argue in State vs. Defense, largely based on the Pentagon’s own declassified studies, just the opposite was true.

During the Cold War, United States intervened in varying degrees and mixed results throughout the world to include unconventional warfare to remove leaders in Guatemala, Cuba, and Iran, small wars in Vietnam and Korea, and advise and assist missions in El Salvador and the Philippines. The conventional notion is that these missions were necessary to promote democracy and capitalism abroad, and the neo-conservatives believe that these actions were a natural expansion of Manifest Destiny. You take a contrarian view suggesting that “imperial America was itself a needless extravagance.” What do you think our Founding Fathers would say of the Cold War, and how are our actions during this time period different than the initial American expansion through French, Spanish, Mexican, and Native American lands to the Pacific Ocean?

The Federalist Papers and George Washington’s farewell address are replete with cautions against the corrupting elements of a standing army, to say nothing of foreign expeditions and intrigues. Even twentieth-century American statesmen like George Marshall and Henry Stimson were opposed in principal to the maintenance of a peacetime army. (Marshall would grudgingly concede to conscription and the need for forward bases as the burden of containment.) Geostrategically, America is among the most blessed of nations, with two peaceful borders to its north and south and the world’s two largest oceans to its east and west. It enjoys an abundance of natural resources and a large domestic market. Nearly alone in the history of great power politics, it can strike anywhere in the world from its homeland with only minimal risk of a proportionate response. As Abraham Lincoln put it, an existential threat, were it to emerge, would most likely do so at home and not from “some transatlantic military giant [able] to step the Ocean, and crush us at a blow.”

Nevertheless, our imperial jurisdiction was indeed extended well beyond America’s shores owing to a paranoiac-messianic complex that is equal parts James Forrestal and Paul Wolfowitz. There is an uninterrupted trajectory from the Truman Doctrine to the 1992 Defense Planning Guidance, which makes it a core U.S. interest to pre-empt the emergence of a “peer-competitor”, and in State vs. Defense I try to illuminate the inflection points between them.

The title of your book immediately suggests a false choice between the State Department and the Defense Department, the pen or the sword. However, the history leading to increased military intervention is much more complicated and nuanced by many interdependent choices including dismantling State, USIA, and USAID at the fall of the Cold War. Is it more accurate to state that our current dilemma of using military power as the main arm of foreign policy is due to a lack of preparedness, forethought, and corresponding policy and strategy in the last twenty years?

Absolutely. Of the many personalities cast in State vs. Defense as militarists, only two of them - Douglas MacArthur and Curtis LeMay - were of the military. Conversely, many of the flag officers who appear in the book, men like Marshall, Dwight Eisenhower, Colin Powell and Anthony Zinni, distinguished themselves as great statesmen as well as field marshals. In many ways, the culprit behind American militarization is domestic politics and those who would use foreign policy as a means of settling parochial scores. Thus McCarthyism, having emasculated and demoralized the nation’s diplomatic core, left the country with no one to debunk the canard of a Sino-Soviet bloc, the irrational fear of which consumed security planners and red-baiters alike until as late as 1968, when Russian and Chinese troops were skirmishing along the Ussuri River.

Another enabler of militarization is the habitual failure among American leaders to listen to their area experts - diplomats, military attaches and spies - about the nature of threats perceived or concocted by political tribes in Washington. While researching the book I was struck at how often the White House, having neglected its eyes and ears on the ground, not only reached for the military option but in doing so foreclosed on opportunities for a lasting peace. This was certainly the case in the run-up to the Korean War, when the Truman administration rebuffed reconciliation efforts by Communist China for fear of arousing the powerful, pro-Nationalist China Lobby.

Nearly ten years ago, the United States was attacked by a handful of religious extremists representing a fringe terrorist group, Al Qaeda. Subsequently, we engaged in the punitive action of regime change in both Iraq and Afghanistan morphing into what Gian Gentile refers to as “armed nation-building” and others term modern counterinsurgency. How do you feel that the United States should have responded after 9/11, and what are the consequences of our most recent interventions?

For starters, President Bush should have explained the motivation behind the attack as laid out by Osama bin Laden himself in his 1996 fatwa against what he called the “Zionist-Crusader Alliance.” In it, Bin Laden clearly states that his war on United States is in response to its support of Israel, its deployment of some 5,000 U.S. troops in Saudi Arabia, its decade-long embargo on Iraq and its support of what he regarded as apostate Arab regimes. A statesmanlike response to the events of 9/11 would have been a candid admission that, yes, we were attacked for our policies, but they are the policies of this nation and no attack or threat of attack will make us waver in support of them.

Instead, the President disingenuously told Americans they had been struck as part of a global war to destroy their way of life. He also bizarrely associated Iraq, Iran and North Korea as an “axis of evil” and greatly overstated both their capacities and their intentions. By defining the 9/11 assault as the first shot in a third world war, rather than the opening of a new front in an old one, Bush created the culture of fear that would allow him to greatly enlarge our national security bureaucracy and wage war on several fronts at once, including his misadventure in Iraq. I fear that the needless invasion of that country and its disastrous aftermath created a new generation of anti-American jihadis just as Washington’s uninspired policies in the Middle East provoked Bin Laden.

Looking forward to China, our closest near-term security threat, Fareed Zakaria recently suggested that we are in the equivalent of economic Mutually Assured Destruction (MAD) that may deter future military conflicts. Do you agree with his analysis, and is the threat of China one that is overblown and could become a self-fulfilling prophesy?

China was not our largest creditor ten years ago and, most significantly, it is unlikely to be our largest creditor in ten years’ time. The Chinese know the U.S. dollar is a diminishing asset and it is likely to continue depreciating along with the credibility of our lawmakers in Washington. No doubt Beijing, like Wall Street, is gaming out ways of reducing its exposure to the dollar without destabilizing the world’s $4 trillion foreign exchange market. If there are only so many Swiss francs China can buy for dollars it can convert its reserves into tangible assets like real estate. Either way, we console ourselves with the MAD theory of Sino-U.S. economic relations at our peril.

Strategically, there is nothing in three thousand years of recorded history to suggest China will assert itself militarily worldwide, particularly given how successful it has been wooing resource-rich developing states through commercial means. China clearly regards itself as the once-and-future overlord of Asia, however, which puts it on a collision course with the Pentagon. Here, Washington and Beijing are talking past each other in a rather ominous way. The Americans say they welcome China’s peaceful ascent while refusing to concede its authority over the Asian littoral, to say nothing of its deep-water seaways. The Chinese, meanwhile, claim dominion over the South China Seas and other disputed waters while implying they expect nothing less than the kind of regional hegemony Washington carved out for itself in the Americas throughout the nineteenth century. Absent a vigorous diplomatic effort to reconcile these discordant positions, I fear some kind of Sino-American conflict is inevitable.

In the future, in lieu of a return to isolationism, what foreign policy would you recommend to the President? Should the United States continue to promote and foster democracy and capitalism abroad, and what is the appropriate mixture of soft and hard power should we apply? Furthermore, what organizational changes must State and USAID make in order to become efficient and effective?

The conceit that developed nations should graft their governing cultures and values onto developing ones went out with France’s mission civilisatrice and even that did not succeed much beyond cuisine. In allowing our political and economic systems to become corrupt and dissolute, our soft power has gone flabby and our hard power has become omnipresent, the source of a geopolitical welfare state. Washington should devolve the responsibilities of its security commitments in Europe and East Asia to its allies there. That means withdrawing combat divisions from abroad and reintegrating them with their units back home. It should invest heavily in its stateside training facilities such as the Marines’ Air Ground Combat Center at Twenty-Nine Palms (with accommodations for accompanied tours), and it should engage in regular transpacific exercises in support of its allies in Asia.

Washington must also know that China, as the world’s second-largest economy with three millennia of history as a regional power, will seek to impose its own Monroe Doctrine in Asia and it must acknowledge its limits in opposing this. Attempts to “contain” China would result in a decidedly asymmetrical contest that would exhaust America’s already depleted accounts but which Beijing could sustain at relatively low cost to itself. To preempt such a conflict, the White House should appoint a multi-agency negotiating team to resolve the thicket of competing maritime claims in the West Pacific and East Asia that make the region a tinderbox for conflict.

Domestically, the White House should accommodate the State Department’s request for several thousand new Foreign Service Officers in relief of a diplomatic core that is under-funded and overwhelmed. The number of its diplomats and support staff is only ten percent greater than what it was a quarter century ago, when there were twenty-four fewer countries in the world and U.S. interests were concentrated in Europe and Northeast Asia. At any one time, a third of U.S.-based Foreign Service jobs are vacant, twelve percent of its overseas positions are unmanned, and its ratio of unaccompanied tours has risen to a fifth of the total. Foreign language proficiency, a core competency of the service, has languished due to funding gaps. Salaries have been slashed, and stingy retirement benefits have undercut retentions rates.

At the same time, the State Department and USAID should undergo its own Goldwater-Nichols-like reformation, the touchstone of which would be the creation of diplomatic fiefs symmetrical with the Pentagon’s overseas combatant commands. Until the State Department’s senior-most officials have regional representation and authority on par with their four-star counterparts, interagency cooperation will remain illusory and the State Department will continue to be marginalized in the foreign policy-making process.

Finally, as it considers the geopolitical shift from a unipolar to multipolar world, the White House should solicit and respect the analyses of its area experts unimpeded by political pressures from Capitol Hill. When the opinions of veteran diplomats and seasoned intelligence officers must compete with those in the petty echo-chambers of Washington, it creates space for the kind of ruinous expeditions that have all but replaced statesmanship at the mantle of American leadership.

Author Q&A: Book Club, U.S. News & World Report

U.S. News & World Report 2011-8-19 Click here to read the interview

Author interview: Maureen Cavanaugh, KPBS radio

KPBS Midday Edition, 2011-8-18 Click here to listen

Author interview: Ian Masters, syndicated host

Background Briefing  2011-8-18 Click here to listen

Author interview: Morning Joe, MSNBC

Morning Joe, MSNBC 2011-8-16 Click here to listen

Author interview: Leonard Lopate, WNYC

The Leonard Lopate Show August 9, 2011 Click here to listen

Author interview: Fox5, Washington D.C.

Fox5 2011/8/4 Click here to listen

US Spending on Arms Is Senseless

The National 2008-04-15 15:24:10Comity in this most bitter of American presidential campaigns is as routine as interplanetary alignment. But there is at least one thing all three candidates agree upon: the US is not spending enough money on national defence. Welcome to Planet Washington. Both Hillary Clinton and Barack Obama, the Democrat candidates, and John McCain, the Republican contender, have pledged to spend more on the US military than the Pentagon’s current $518 billion (Dh1.9 trillion) annual funding request, which is equal to four per cent of gross domestic product. If you toss in related, off-budget expenditures – most notably for the wars in Iraq and Afghanistan, which are funded separately as emergency appropriations – the figure could be as much as twice that amount. The US now accounts for more than half the world’s outlays on national security. The combined defence spending of China, Russia, Cuba, Iran and North Korea, the usual suspects trotted out by Pentagon officials on the rare occasions they are asked to justify their budget requests, is estimated at $206bn. Since the 9/11 terrorist attacks, there has been no serious opposition to the wanton subsidy of a Cold War-era US arsenal that is all but irrelevant to the country’s asymmetrical security threats. With a recession looming and the all-in bill for America’s two wars estimated at $1tn to $3tn, voters have had little to say about record-high defence bills beyond a bromidic vow to “support the troops”, as if the welfare of American soldiers and Marines were an end in itself rather than a means to protect US interests at home and abroad. Lawmakers, assiduously courted by the Pentagon and defence contractors by locating factory lines for new weaponry in their districts, are equally passive in the face of the largest military budget since the Second World War in inflation-adjusted dollars. A riff through the Pentagon’s $100bn procurement budget is like sitting in on the war counsels of the Truman years. At a time when the US faces no conventional threat, a thoughtful electorate and responsible legislators might ask the following questions: Why does the US need two next-generation fighter-bomber programmes, the $200bn F-35 and the $70bn F-22, the latter of which was designed in the early 1980s to dogfight Soviet jets that were never developed? Does the US Navy need to spend $65bn to upgrade and expand its fleet of attack submarines, Cold War relics that were tasked to trail Soviet ballistic missile subs, a mission that no longer exists? Of what use is the proposed $15bn DDX destroyer, rife as it is with cost overruns and delays, against terrorist cells? Does the deployment of some 370,000 troops overseas really make America safer? Was it not US bases in Saudi Arabia (and Washington’s unequivocal support of Israel) that provoked Osama bin Laden’s attacks on American soil in the first place? What exactly are 100,000 troops doing in Europe – waiting for the Warsaw Pact to reactivate itself? Ditto the 70,000 soldiers and GI’s in Japan and South Korea, two of the world’s richest economies with the capacity to provide their own deterrence against real and potential threats. It has been nearly two decades since the collapse of the Soviet Union. The Chinese economy, although robust, is generations away from being a credible threat to US dominance of air and sea. (Only a lunatic would consider waging a land war in Asia.) The American people should demand a defence budget appropriate to the threats arrayed against them. As it stands, what they’re getting now is a welfare state for the manufacture of outdated weaponry and a jobs mill for their fungible representatives in Congress.

Today A Villain of Wall Street, Tomorrow A Hero

Has Wall Street changed? Will legislators in Washington impose modesty and restraint on an industry notorious for possessing neither? Can they banish greed from a system that just more than a year ago brought the global financial system to the brink of collapse?Certainly the nation’s top investment banks, at least those that remain, have shifted down to suit the risk-aversion trend. No longer are traders loading up on synthetic derivatives and cluttering their balance sheets with unknowable levels of debt. With the help of record-low interest rates, investment-grade corporations are deleveraging by raising cash to pay off bank loans. Just in time for the holidays, corporate heads are engaging in their own secular acts of contrition. Over the past three weeks, Goldman Sachs and General Electric have expressed regret for feeding a speculative pyre that became an inferno. There is a sense among the more thoughtful of Wall Street princelings that it is better to work with Congress than to oppose it openly. On any given day, the Acela Express, the elite rail service that links Washington and New York, is filled with corporate executives eager to make their case against the kind of reform some liberal legislators are demanding. But beyond that there is an implied culture of invulnerability on Wall Street, a knowing sense that populist politicians, like military generals busily planning for the last war, are looking backward while financiers incubate The Next Big Thing that will reshape the world. Washington is reactive, say corporate execs. It responds to a financial crisis with a new set of purpose-built regulations, despite the fact that asset bubbles are as distinct from one another as snowflakes. In contrast, the Street – which has, by the way, migrated from its original home in Manhattan’s gritty downtown section to glamorous midtown, alongside the top-flight boutiques and cafes of Rockefeller Centre – is innovative, bold and visionary. Like the scientists who split the atom, traders are not about to give up on their more exotic confections just because they are capable of great destruction. After all, junk bonds were once rogue products and became respectable in time. Besides, say the finance lords, market meltdowns are incidental to the Street’s capacity for community enrichment. A generation ago, the interest rate on a US$100 million (Dh367.2m) bond issue to build, say, a municipal water and sewage system was a whopping 3.5 per cent. Today, thanks to financial innovations such as interest rates swaps, which allow issuers to lock in spreads at a fixed rate, the interest on such a transaction would be a mere $500,000 or so. And now Congress, in its primitivism, would introduce “reforms” that would deprive local government of such efficiency. Or take year-end bonuses, which last year averaged $13.8m among the top 100 executives in the US. Excessive? Not so much, the Street reminds us, when you consider that the chief executive of a top investment bank routinely works 18 hours a day, every day, to keep his institution afloat in an age where huge trades, conducted in micro-seconds, can turn entire markets upside down. The average longevity of a Morgan Stanley partner, it turns out, is only four years and 10 months. With an attrition rate like that, why should a managing director strategise for the long term when his knees are likely to give out in just a few years? Why not grasp for the big carrot on a short stick and squeeze what you can out of every trade and underwriting deal? And the controversy over ratings agencies? Certainly – begins a rare Street mea culpa, followed by a world-weary appeal to reason – there are conflicts of interest when firms like Moody’s Investors Service and Standard & Poor’s are remunerated by the very companies they are appraising. But by all accounts, the process is transparent. Prospective investors have only to search the internet to learn the agencies’ methodology. Besides, what is the alternative? Congressional oversight, as has been suggested in Washington? Intervention by the very deliberative body that is incapable of funding itself without generous assistance from the People’s Republic of China? Are politicians prepared to assign investment grades to companies and then take responsibility when those decisions prove to be ill-advised, even disastrous? What distinguishes Wall Street from Washington is not virtue, an attribute sorely lacking in both power centres, but candour. In the 1980s, investment bankers referred to themselves as the Masters of the Universe. In fact, they are more like the mythological gods of ancient Greece, all-powerful and yet blemished by the human characteristics of avarice and arrogance. Like Zeus and Aphrodite, the Goldmans and GEs seduce mortals, and they occasionally pay a price for their conceit. Just as the Greeks saw in the gods they created their own qualities, both inspirational and loathsome, the deities of Wall Street represent an ideal we embrace in prosperity only to demonise in penury. [gallery]However fashionable it is to bash the lords of finance, they know that when the cycle finally turns, they will once again be celebrated as heroes. They also understand that this is one claim their counterparts in Washington, gridlocked as they are by petty parochialism and stratospheric indebtedness, can never make.

US Desperately Needs A Viable Industrial Policy

A little more than a decade ago, South Koreans who wanted to buy a home appliance had few options other than patronising the boutique stores owned by the country's top three electronics makers. There was little in the way of competition; the relatively high prices were more or less fixed and the quality was uniformly poor.Imported wares were rendered unaffordable to all but the wealthy by high duties, or locked out of the market altogether by non-tariff barriers. Alternatively, there was the black market, but only for those with contacts inside the huge US military base in downtown Seoul.It was hardly a consumer-friendly culture, which is just what the government wanted. The fewer the items to buy, the greater the incentive to save and the larger the pool of capital available for the nation's large conglomerates, the foundries of a great export machine. The Samsungs and the Hyundais concentrated on foreign markets, not domestic ones, and they invested their revenue into more factories and raw materials for the production of more exports. That, in a nutshell, was the corpus of South Korea's industrial policy. It was transparently mercantilist and patriarchal, enabled by the traditional East Asian respect for authority. For a time, the so-called Asian model for growth worked beautifully - for Korea, as well as Japan before it, just as it is working well for China today.The US had an industrial policy in the wholesale rejection of industrial policies. Instead, it embraced something called the Washington Consensus, a liberal orthodoxy of free trade and lightly regulated markets that organically winnowed away inefficient enterprises. Whereas the Asian economy was planned, the US economy evolved naturally in faith with the cultural conceit of rugged individualism and contempt for federal control. It, too, worked for a time. The Great Credit Collapse of 2008 and the Asian Currency Implosion of 1997-1998 exposed the critical - and as it turns out, antipodal - flaws in both systems. While Asia emphasised industrial might at the expense of financial flexibility, the US did just the opposite. Asia's reservoir of liquidity is still under-served by primitive credit markets and its monetary authority is inhibited by a Pavlovian impulse to rig currencies. The US, meanwhile, is paying a stiff price for its high-finance fetish. Having allowed services, property speculation and exotic investment vehicles to replace manufacturing as the driver of growth, or at least the illusion of it, Americans are more adept at online shopping than they are at building things. True, the US remains one of the world's top manufacturers, but the trend is clear. The "supply side" revolution - the Reagan-era line that lasting prosperity could be purchased with a strong dollar, tax cuts and financial deregulation - shooed factories abroad and made debt finance the coin of the American realm. The value of US debt - public, corporate and household - amounts to 350 per cent of GDP, a burden disturbingly similar to the one that Japan confronted after the 1990 collapse of its real estate bubble, which was followed by a generation of flat growth. "Our model for what's happening in the US is Japan," says Fareed Mohamedi, the chief economist for PFC Energy. "This is a 10-year debt workout." Is it time for a US industrial policy? Some economists and politicians, including the US President Barack Obama, think so. Entrepreneurs make a strong case for government help in developing germinal green technology. Beyond that, however, there is little known precedent for the re-industrialisation of a post-modern economy. Short of fixing wages, subsidising raw materials and erecting import barriers - which would be illegal under international trade law - it is difficult to see how the US could replenish a desiccating industrial landscape. What Washington could do - for the good of society as well as the economy - is guarantee high-quality, affordable health care, education and public transport for all its citizens. Should that swell an already overstretched public dole, so be it. America's free-market pretensions notwithstanding, the US economy is lousy with subsidies, be they defence budget handouts to arms makers, bailouts for car makers or credits for farm combines. Employee-based health insurance has proved itself to be an abysmal failure, so much so that the once mighty General Motors is characterised as a "health-care company that makes cars". American secondary schools are in crisis and US students are rapidly falling behind other nations in mathematics and the sciences. Transportation grids are in disrepair and grossly favour the very hydrocarbon fuels from which the rest of the developed world - and China for that matter - is trying to wean itself. It may be too late for the US to resurrect itself as a labour-intensive industrial powerhouse, but it may also be that a healthier, better educated and more mobile workforce is all the industrial policy it needs.

Will Gallant Obama Enter the Raptor's Lair and Slay It?

The National 2008-12-16 19:37:21US President George W. Bush has shown us how much easier it is to wage war, even an unnecessary one, than it is to control the US defence budget. From 2001 to this year, defence spending rose to US$480 billion (Dh1.76 trillion), an increase of 60 per cent. Include off-budget expenditures for the wars in Iraq and Afghanistan and that figure swells to $670bn. The US spends more on national security than the rest of the world combined, with an annual outlay slightly larger than the GDP of Turkey, the world's 17th-largest economy. If there was ever a prime target for cost cutting in the world's most indebted economy - particularly in this recession - it is America's bloated defence budget. But will Barack Obama, the president-elect, pull the -trigger? If Mr Obama wants to demonstrate to the world his commitment to budgetary discipline in the face of fierce political pressure, he must do just that. He must venture into the lair of the Raptor and slay it. The F-22 Raptor war plane, produced by Lockheed Martin, is an engineering marvel. Among its many tricks is to pivot horizontally as it surveys the horizon for targets. It is also, as its name suggests, a dinosaur, designed to match the best Soviet fighters never built. Since it was developed in the late 1980s, the US government has spent $65bn manufacturing the F-22, which -- depending on how many are produced -- costs between $140 million and $345m, according to the US government accountability office. (The Pentagon's other "fifth generation" warplane, the F-35 Joint Strike Fighter is a bargain at $70m a unit.) The air force is lobbying for $9bn to build 60 more F-22s over three years, for a total fleet of 243. The air force says it needs the aircraft to counter the threat from... well, no one is sure, really. Robert Gates, the secretary of defence, who has been asked by Mr Obama to remain at his post, opposes further investment in the programme. There is nothing in the Russian or Chinese air arsenals to match the F-22, assuming they would ever be inclined to try. So far, the only battle the Raptor has fought has been with budget hawks, and it has won them all. If the fighter has no peer for manoeuvrability in the skies, neither is there anyone in Washington to rival the marketing instincts of its maker. In developing the aircraft, Lockheed Martin was careful to spread its supplier network across many legislative districts, meaning 25,000 workers owe their livelihoods to the Raptor at a time when the US economy is expected to contract. Senior legislators, Republican and Democrat, support the F-22 for the sake of the jobs that would be lost to production cuts -- making it a $65bn jobs mill. If only this situation ended with the F-22. The US defence budget is packed with outdated weaponry that could have been discarded decades ago were it not for nest-feathering politicians. Donald Rumsfeld, Mr Gates's predecessor and a formidable Washington operator, tried with little success to transform the Pentagon's cold-war arsenal into a lighter, more flexible fighting force. He, too, tried to ground the Raptor, only to be outmanoeuvred by politicians. Now it is Mr Gates's turn. Fortunately, his new boss seems to be far more interested in the federal bureaucracy, including its military budget, than did Mr Bush. If the president-elect can't pull the nation's defence spenders into line, no one can. The question is whether Mr Obama will have the courage to choose fiscal temperance over political sanctuary.

EU Finally Puts On A Show That Is Worth Watching

The National2009-11-01 22:31:16 In case you missed it, the EU has done something completely out of character. It has become interesting.

Consider the countervailing developments that shook the EU last month. In a referendum, Ireland conclusively endorsed the Lisbon Treaty, an administrative reform plan that supporters say will make the common market more efficient. The Irish "aye" pressured David Cameron, the British parliamentarian who is due to become the prime minister next year once he undergoes the formality of an election, to declare whether he sides with extremists in his Conservative Party who oppose British membership of the EU.

Mr Cameron, who has implied he would dismantle at least some of Britain's EU commitments, has led the offensive against the former prime minister Tony Blair's bid to become the union's first president, an office provided for under the Lisbon Treaty. (The presidential seal, a yellow swoosh on a blue field, looks like something a superhero would wear on his cape. This begs the question: could "Euroman" be far behind?)

Economically, EU states are splitting ranks as countries such as Germany and France display signs of recovery while others, such as Spain and Ireland, are still sucking wind. At the same time, several of the EU's powerhouse members continue to pile on debt to stimulate growth. France, for example, has just announced a budget deficit for next year worth 8.5 per cent of GDP, while Germany has indicated it will begin to dismantle the €50 billion (Dh270.56bn) stimulus package it launched in January. The European Central Bank (ECB) has suggested that unless Europe's debt-engorged economies agree to shed their large public shortfalls, it will be obliged to raise interest rates to keep inflation within the 2 per cent limit ordained by the 1992 Maastricht Treaty that established the euro.

Norway, rich in oil and a non-EU member, last week became the first European country to raise credit rates, a reminder that inflation may be less remote than many economists once averred and a warning that the 16 EU states that share the euro, a currency bloc that does not include the UK, may pay a price for failing to co-ordinate their fiscal policies in the global downturn.

That appeared to be the subtext of remarks made this month by Jean-Claude Trichet, the president of the ECB, about the consequences of an "uneven" recovery in euroland.While assuring investors that the bank's base interest rate would remain at its record low level of 1 per cent for the time being, Mr Trichet also said eurozone inflation was likely to turn positive "in the coming months". Lest reporters doubt the resilience of his delightfully dry sense of humour, the ECB chief also restated his faith in Washington's official "strong dollar" policy - reaffirmed to general hilarity by the US Treasury last week - despite the dollar's 17 per cent decline against the euro this year.

Suddenly, the dull business of European integration has become a rollicking feast of tension, intrigue, and self-parody. Anyone concerned that the departure of Mr Blair, with his Bill Clinton-like craving for love and attention, would starve official Europe of the odd prurient thrill can breathe easy. (Raise your hand if you think Silvio Berlusconi, the Italian prime minister, had lost his subtle, ironic touch.)

Now we have forceful Europeanists such as David Miliband, the British foreign secretary, who warned in the Financial Times this week that splitters such as Mr Cameron were "dangerous to Britain, dangerous for our influence, dangerous for our interests". And in case anyone is wondering, Mr Miliband, 44, "is not a candidate" and is "not available" for that EU president's seat.

Who would have thought that on the 10th anniversary of the birth of the euro that the EU in general and monetary union in particular would incite such passion? Did not the euro protect Europe from an Icelandic-style currency collapse? Has it not served as a popular safe haven for investors in these uncertain times? The terms of Maastricht may seem draconian to Eurosceptics as member countries are forced to relinquish control over monetary policy. But what is the alternative? A withering cycle of competitive devaluations of the kind that prevailed in the 1930s?

What, after all, was so special about those drachmas, pesetas, and liras? If the Germans can give up their precious deutsche mark, that potent symbol of Teutonic redemption, why can't the British dispense with their pound? If anything, the world should welcome the expansion and internationalisation of the euro, which despite its success remains very much a regional unit of exchange. At a time when the dollar's long-term prognosis is for continued weakness - official US sentiments aside - the need for a viable alternative to the world's fiat currency is not only preferable but necessary for global monetary stability.

Will Mr Cameron indulge the reactionary wing of his party and wrench Britain from the continent? Will the ECB pre-emptively lower the boom on the EU's Keynesian revival? Will Mr Miliband be voted off the island? Stay tuned for the next new episode of "Lost in Euroland".

AIPAC's Achilles Heel

Al-Sijill
2009-08-02 22:29:15A friend of mine, a retired public servant who has worked under four US presidents, told me recently he was afraid the White House was making a mistake by openly confronting Israel over the issue of Jewish settlements in the West Bank, particularly this early in the process. "These guys in the White House may be too smart for their own good," he told me. "They think that just by snapping their fingers they can get [Israeli Prime Minister] Bibi Netanyahu to stop settlement expansion. I'm afraid they're going to get rolled on this one and that will imperil the prospects for everything else they're trying to do." Such concern reflects a healthy respect for the power of the so-called "Jewish lobby" despite suggestions it has been outmaneuvered by the supple President Barack Obama. Certainly the successful bid early this year to deny Israel critic Chas Freeman a top White House intelligence job is proof that the "lobby" is very much at the top of its game. Hawkish supporters of Israel, of course, deny that a Jewish lobby even exists and imply those who believe otherwise are anti-Semitic. This is nonsense. In a city like Washington, where everything has some kind of political representation - there is even an "Association of Associations" on 17th Street - it would be unnatural if Israel did not have its own advocates in place. But the caricature of the Israel lobby so common among its critics - a singularly pernicious and monolithic group dedicated to the restoration of Eretz Yisrael, a "greater" Jewish state that extends from the Nile to the Euphrates - is equally inane. Like Israel itself - diverse ethnically and chaotic politically - the Jewish lobby is a conurbation of parties that, given the deep divergence of opinion about what's good for Israel, are often pitched against each other. Not only is this cluster of competing groups not a political monolith, it is not even monolithically Jewish. The wellspring of Congressional support for Israel is fed as much by fundamentalist Christian groups like Christians United for Israel - led by the execrable Pastor John Hagee - than it is right-wing Jewish groups like the Conference of Presidents of Major American Jewish Organizations. Catalyzed by the promise of Christ's apocalyptic return to Earth after the land of Israel has been restored in its entirety to the Jewish people, groups like CUFI are a source of unyielding support for Israel's hard-liners and they form a tight alliance with the American-Israel Political Affairs Committee, the most well-known and powerful of Jewish pro-Israel groups. AIPAC is vast - it operates with an estimated budget of some $60 million and boasts some 100,000 dues-paying members - and it is indeed pernicious. Its staff writes key provisions of legislation and it was largely responsible for the US economic and diplomatic embargo on the Palestinians Territories after Hamas' 2006 election victory. Its annual conference in Washington is a multi-day affair attended by the country's most powerful politicians and businesspeople, who emote like trained seals about the centrality of America's "special relationship" with the Jewish state. The carnival-like atmosphere brings out the worst in everyone - the Prophet Isaiah and his dark prophesies is something of an AIPAC mascot - including those not ordinarily associated with the Likud end of the political spectrum. Even Mr. Obama, in the AIPAC speech he delivered while campaigning for president last year, obscured himself with puffs of fire and brimstone. AIPAC's dominance is not uncontested, however. There is J Street, founded last year as a moderate alternative to AIPAC militarism. Last month, the group's executive director was invited to attend a meeting of prominent Jewish leaders at the White House July 14, a measure of its growing influence in an issue arena still dominated by the hawks. (Another measure of J Street's credibility is its growing list of enemies. The right-wing magazine Commentary has called it "anti-Israel" and "contemptible.") There is also Americans for Peace Now, which has been lobbying Congress for a more measured approach towards Arab-Israeli peace for years. But like J Street, APN's passion and principles are no match for AIPAC's political muscle. AIPAC has an Achilles heel, however, and it plays out like something out of the 1967 Khartoum conference. By aligning itself so conclusively against the only steps that might lead to a more stable Middle East - No talks with Hamas, No land for peace, No negotiations with Iran over its nuclear ambitions - it has defined itself as an obstruction to peace that might alienate those who support Israel but who are weary of its obstinacy. As the turbulence in Iran suggests, militancy is no longer in fashion, which plays to the famously empathetic Obama's strength. It also leads us back to my friend's observation about the White House's approach to the scandal of Jewish settlements. By forcing such a delicate issue on an Israeli leader as vulnerable as Netanyahu, Obama might be attempting to spark a political crisis in Tel Aviv from which a more reasonable successor may emerge. But as the last eight years of Bushism revealed, regime change rarely goes according to plan and often backfires. To outflank the Likudniks, Obama should seek first to deliver an Arab heavyweight to the negotiating table with an assurance of White House support for the essence of the 2002 Arab initiative. If a Bashar Al Assad were to make a public tribute to Yitzhak Rabin and his "calculated risks" for peace, it would box Netanyahu into a corner so dark that no lobby, monolithic or otherwise, could ever find him. Full Article (in Arabic) (.pdf)

China Risks Living Down to Its Enemies' Stereotype

The National
2009-07-26 17:37:12There is China, and there is China. The China of the imagination – the looming aggressor and future rival to US hegemony – was quite busy last week. It figured heavily in a bid by politicians to save the F-22 fighter jet from the budget knife. (Wiser heads prevailed; the programme was cut.) It was the impetus behind an agreement, announced in New Delhi, in which Washington will transfer advanced weapons technology to India, and it lent a sense of urgency to appeals from Geek Nation for a revived manned space programme. This China, according to alarmists confined in Washington, not only has the means of developing a fifth-generation fighter jet by 2020, but also a reason for doing so. (After all, if Beijing really wanted to harm the US, it could simply unburden its massive foreign exchange reserves of dollars. But let’s not clutter the narrative with facts.) Should this fictional China ever choose to invade, say, the strategic hamlet of Barstow, California, close security ties with India could mean the difference between victory or defeat. Meanwhile, enthusiasts for a new round of moon shots (motto: “to financial irresponsibility and beyond!”) mutter ominously of Beijing’s yawning lead in a new space race. Of course, no one likes to refer to China directly as an existential threat. For one thing, it’s bad economics to antagonise your banker. For another, tarting up China as a superpower rival is something of a stretch, given how it has no ability to project force – no deep-water navy, no in-air refuelling capability, and so on – and it seems in no particular rush to develop any. Still, security planners looking for a threat to inflate have no better options, so China, or at least its doppelganger, will have to do. This is unfortunate, because it obscures how badly the real China has been behaving of late. Over the past month or so, Beijing has been weaving itself into a self-parody of Sinophobia. This month, it arrested the China-based country representative of Rio Tinto, the Australian mining giant, on hazy charges of espionage. As Chinese authorities have been tight-lipped about the nature of the accusations – the Australian prime minister, Kevin Rudd, was forced to ask the US commerce secretary to raise the issue with Beijing during his recent visit there – the affair has raised speculation that the arrest is simply payback for Rio Tinto’s clumsy abandonment last month of a planned merger with Chinalco, China’s state-owned metals company. Chinese mercantilism, never far below the surface, is reasserting itself. Beijing is the subject of a growing list of trade disputes, from Australia’s claim that Chinese aluminium smelters are dumping product at below market rates to US and EU complaints about alleged tariffs on imported raw materials. The flurry of allegations follows China’s recent announcement that it would strictly enforce its “buy Chinese” policy as a condition of its US$585 billion (Dh2.15 trillion) economic stimulus package, part of a worldwide outbreak of economic nationalism that began, disgracefully enough, in the US. Beijing is leveraging its enormous demand for renewable energy, not by opening its market to foreign competition and providing contractors with the best product at market prices, but by identifying it as a strategic industry to be insulated by tariff and non-tariff barriers. Steven Chu, the US energy secretary, and other senior trade officials have complained to Beijing that contracts for such projects as wind farms have been handed almost exclusively to Chinese firms, despite participation in tenders by western leaders in wind-turbine manufacturing. So lavishly is China subsidising its local clean-energy industries, it has inspired a new phrase – “green protectionist”. Even as Beijing coddles local business, it offends neighbours by tormenting its own citizens. The clampdown this month on China’s Muslim population in western Xinjiang province has outraged Turkey, a close trading partner and ethnic cousin of the country’s beleaguered Uighurs. While the US and EU have been predictably docile in the face of China’s repression, Turkey has forcefully condemned it. Ankara has even threatened to abrogate lucrative defence deals, a move that would certainly concentrate minds in a government that has been under a global arms embargo since it lethally put down pro-democracy demonstrations in 1989. In the 20 years since that bloody reckoning, China has navigated its way through an often hostile global economy with great skill. Its people are allowed unprecedented levels of economic freedom and millions have been lifted out of poverty. Beijing has, at its own pace and on its own terms, liberalised and internationalised its economy and it is now reaping the dividends with an anticipated 8 per cent growth rate this year. Now, it is squandering its credibility as an emerging global leader by reducing itself into a caricature of the farcical China – the one that opportunists in Washington have such an interest in perpetuating.