The Pandemic Depression
The Global Economy Will Never Be the Same
Among the many traumas inflicted by the nightmare of Vietnam has been the realization—for many Americans the shock of recognition—that foreign and domestic policy have merged into a seamless web of interlocking concerns. It is now almost impossible to identify any issue, condition or interest of national significance which is not affected by international trends and circumstances, and which does not in turn affect some aspect of the foreign policy of the United States. For students of public affairs long concerned with both elements of our national posture this may be a truism which hardly bears repeating. However, I regret to observe that most citizens, including most specialists in foreign or domestic affairs, have not yet adapted their insights and prognostications to this integrated view of the world; nor have those of us in public service been effective in foreseeing and planning to deal with the domestic implications of foreign policies, some of them already now in effect.
As a result, much of what is called domestic policy in this country reduces in the main to feverish counterpunching by Federal, state, and local governments reeling under the effects of some foreign initiative whose domestic implications were unforeseen or weighed lightly in the policy balance. This is not to say that many of our problems are not home-grown. Crime, pollution, racial tension, and many other elements of our national malaise would be with us even if the rest of the world disappeared. I would assert, however, that many of our most intractable problems—particularly in the economic sphere—and, even more, our heretofore feeble capacity to deal with the full range of our difficulties, are traceable in large part to a chronic blind spot with respect to the link between foreign and domestic affairs. Until we move to correct it, neither our foreign nor our domestic policies are likely to be commensurate with our potential. We will continue to suffer, particularly on the domestic front, from the disease Tocqueville diagnosed as the most dangerous flaw in great democracies, the inability "to persevere in a fixed design." Without this ability we stand little chance of completing the renovation of domestic and foreign policies vital to our survival as a great and enlightened world power.
It is ironic that the United States, the world's leading innovator in so many fields, should be so late to address itself to the fundamental identity between foreign and domestic policy. However, the reasons for our tardiness are clear enough. We were born in a time of determination to avoid the foreign "entanglements"—a euphemism for almost constant warfare—which had so long dominated our European forebears. We were preoccupied for well over a century with the intensely domestic business of exploring, settling and exploiting an unknown continent. The sheer scale of our economic success shielded us from the overwhelming dependence on international trade characteristic of most European countries, and permitted us to take a more aloof attitude toward the political squabbles which arose in large part from European economic interdependence. In addition, of course, we benefited from geographic isolation and from the fact that in Europe the hundred years beginning in 1815 were significantly less plagued with international strife than any previous century since the dawn of the nation-state.
The First World War and its aftermath ushered in a period of new American activism in foreign affairs, but the decision to reject a role in the League of Nations and the blanket of isolationism which the nation drew over itself in succeeding years served only to reinforce the standard American view that domestic and foreign matters were not to be confused in immediacy, importance or even in moral tone. The role of domestic governance was to govern as little as possible. The role of foreign policy was to keep us out of war. The Smoot-Hawley Tariff Act symbolized the extension of this attitude to the economic sphere, despite the obvious opportunities for growth in international commerce as the Industrial Revolution matured throughout the North Atlantic community. This autarchic stance was relaxed somewhat under the harsh imperatives of worldwide Depression, but the strength of the suggestion that the United States could avoid involvement in World War II demonstrates the power of this national instinct.
With respect to American governmental procedures, there was nothing to shake the proposition—enshrined in the Constitution—that domestic policy was the only fit pursuit for the representative bodies of a democracy, while foreign policy was an entirely separate endeavor, in the charge of the President, shrouded in mystery, and maintained as a segregated preserve for those few high priests anointed for the purpose. For these luminaries such problems as farm subsidies or urban strikes were as remote and inexplicable as a Mars landing.
The revolution in American perceptions of the relation between foreign and domestic policy did not begin in earnest until the Korean conflict. World War II had been the most searing foreign experience in the nation's history and totally transformed the popular conception of national security and its protection, but it did little to change the citizen's understanding of the domestic stake in international decisions short of total war. It sustained the traditional idea of war as an all-out struggle between uniformed forces for national survival, the support of which had a valid first claim on all national resources. As such, war was totally distinguishable from peace, and the concept of extended periods in which the two would coexist was not plausible. Even the wave of internationalism which swept over the country at war's end did not severely shake the domestic-foreign distinction. The political and economic power of the United States, greatly expanded by the war effort and seemingly infinite when contrasted with the devastation elsewhere, dominated the negotiations in that fertile postwar period of international institution-building. Accordingly, the institutions which emerged were very largely directed toward maintaining collective security by national action in international causes, and toward rebuilding national economies so that the world of nation-states could proceed as before. Whenever the slightest hint arose of an international role in domestic policy—as in the case of the issue which produced the Connally Amendment on the jurisdiction of the World Court—the United States was quick to repel the intrusion.
It was in Korea that the American notion of war came into dramatic conflict with reality and the wall between foreign and domestic policy began to crumble. The country found itself engaged in an extended struggle in a relatively remote corner of the world in which its total fighting capacity was not mobilized, its most destructive weapons were not used, and it was prohibited by its own policy from invading the territory of its principal adversary. In short, for the first time we were engaged in a limited war for limited objectives and employing limited means. War had been transformed from an all-embracing national imperative into a selective instrument of foreign policy, to be applied in regulated doses to one small geographic area while the rest of the world remained at fitful peace. Collaterally, domestic life went on, but with some sacrifices in the form of higher taxes and minor scarcities in some consumer goods.
Still, Korea did not provoke the debate on national priorities which seems to me the healthiest product of Vietnam. The reason was simple: there was no widespread conviction that the Federal government should be making large investments in the domestic well-being of the country. It is sometimes difficult for us to remember that even ten years after Korea the Kennedy administration pointed with pride to the fact that the only significant discretionary budget increases it had proposed had been in the area of national defense. It was not until the Democratic landslide of 1964, after 20 years of the cold war had dulled our appetite for overkill, that the pent-up demands of a society disgusted with the quality of its own existence began to be expressed in a new conception of the role of government—a conception which authorized about 180 new Federal domestic programs in the next two years.
At the same time, and after two decades of mindless escalation of our involvement, the President decided upon forcible entry into a kind of war foreign in all respects to American history and understanding. To all the ambiguities of Korea, Vietnam added the even more unsettling uncertainties of guerrilla warfare. The moral and political questions of American involvement were not immediately at issue. Most Americans—true to our tradition that foreign policy initiatives are handed down from authority rather than borne upward by popular demand—trusted their government to determine where it was right and necessary to use force. The few of us who spoke out against the war in those early days were largely ignored.
It soon became apparent, however, that Vietnam deprived both citizenry and leadership of even the minor compensations of wartime. Despite the most complete news coverage in history, it was impossible to keep track of the military situation according to any conventional standard of measurement. The political coherence of our South Vietnamese allies was quickly exposed as a sham, and each successor régime was confirmed as being more backward and repressive than the last. And as time passed the war that had begun with a cause of dubious justice proceeded through a series of unsound military and para-military strategies, which proved disastrously inconsistent with the nature of the problem and the capacities of the local government, and evolved into a seemingly endless nightmare of death, destruction and regularly televised national failure.
It is pointless to recount the simultaneous upheavals which beset our body politic during those years. The multiple assassinations, the riots which laid waste our great cities, the racial and communal strife, the deposing of a President, the rending of a great political party—all these were integrally related to the Vietnam disaster, but all were more broadly tied to the struggle over priorities, particularly over the balance between investment of national time and treasure in foreign and domestic endeavors. Much has since been written about the domestic forces which bear on foreign policy. I will try in what follows to pose some of the issues raised for domestic policy by present and prospective foreign policies.
For the average American the phrase "foreign policy" still means Vietnam. His attention is diverted from time to time by events in the Middle East, in China or in the Soviet Union, but his attitude toward the world and toward his national government is largely shaped by what happens in that tormented corner of Southeast Asia which has so long suffered the violence first of French and then of American protection. Most of us know the terrible toll in lives and treasure which lies behind this notoriety. And most of us are tempted to believe that, if the war ends, so too will the damage it has done.
But the corrosive influences of Vietnam will outlast even the Paris Peace Talks. Some are apparent already, more ominous and perhaps more visible to those of us with domestic responsibilities. Most important has been the impact on the generation spawned by Vietnam: it is a generation united by disillusion and not only by age, which cannot believe that any government is capable of any act motivated by genuine desire to improve the lot of the people. The reader who feels this is overdrawn is invited to walk, as I have, through the neighborhoods of our great cities. He will find that this disillusion pervades all ages, income classes, philosophies and occupations. Conspiracy theories abound and gain widespread credence no matter how ludicrous or implausible. Wholesomeness and trustworthiness are defined in terms of distance from governmental influence. Contrary evidence in the form of hopeful domestic achievements—more schools, more health care, clearer air, etc.—is smothered by the dead weight of doubt and guilt induced by Vietnam. Until we are free of this albatross it is highly unlikely that any transformation of the American domestic scene is possible even if the financial resources could be found. What remains to be seen is whether credible and committed leadership can restore the self-respect of a people so sorely diminished in their own eyes. This is the most fateful and challenging legacy of Vietnam.
But there are, of course, many other measurable legacies with respect to the capacity of government. Most obvious is the inflationary recession which has multiplied the misery in our cities at the same time that it has sapped our capacity to cope with it. Here again, the original failure was rooted in inability or unwillingness to anticipate the domestic consequences of a foreign policy decision. In 1966, President Johnson determined to try to finance both the explosion in Federal domestic programs and the Vietnam war without an increase in taxes. The Congress accepted and helped to implement this strategy. The calamitous nature of the foreign policy decision is obvious, and the long slide of the domestic economy—through super-heating, rampant inflation, super-cooling, stagnation, and limping recovery with continued high inflation—has been widely documented.
However, even the most perceptive analysts have not yet commented upon the loss of confidence in the efficacy of a government which launches a "War on Poverty" in 1965 but finds the number of people with poverty-level incomes rising in 1971 after investment of more than $4 billion in anti-poverty funds. And this loss has not been limited to confidence in the Federal government alone. It extends to the states and the cities and beyond them to the community and neighborhood institutions which were consciously and so hopefully created as vehicles and vanguards of the effort. Those of us in cities can report first-hand the frustrations of operating manpower training programs only to have the unemployment rate nearly double in two years; encouraging housing construction while interest rates soar out of sight; raising the level of social services while economic conditions double the welfare rolls and triple the costs in less than five years; or struggling against the scourge of heroin and drug-based crime while the horrors of Vietnam transform thousands of returning veterans into unwilling carriers of today's most dreaded social disease.
Too often, the lesson drawn by both public and government is that the error lies in the effort to eliminate poverty. The truth is that no such effort on the domestic front could have been successful while this nation pursued the foreign policy of the past six years—and this truth penetrates far beyond the question of Vietnam to the most basic principles of international ends and means. Indeed, it is probably true that the domestic ambitions implicit in the 1965-68 wave of social legislation are inconsistent with current concepts of baseline general purpose forces even if the Vietnam struggle ended today, since that struggle will probably account for only about $9 billion of the $79 billion in defense authorizations requested by the President for fiscal year 1972. My point is not that the current baseline posture is necessarily all wrong—though I have serious reservations about many aspects. It is that the merits of this posture are inseparable from our domestic economic and social strategy. Hard choices will flow from recognition of this relationship, but they are unavoidable if we are to rebuild the credibility and capacity of government from the ashes in which we now find them.
This point is dramatically illustrated by the gathering crisis posed by Vietnam withdrawal. We are beginning to awaken to the special problems created by the fact that the number of military discharges has doubled in the last five years—to more than one million in 1970. Unemployment among returning veterans runs well above the national average, and hopes for solid employment, though harder to measure, are probably similarly elevated and therefore more cruelly dashed. Especially for our cities, this flood of deserving, ambitious, usually skilled manpower represents an enormous opportunity—and one we are attempting to use through special counseling, job placement, training and other programs. So far, the most persuasive evidence of Federal awareness and willingness to help is the new Emergency Employment Act, revived after last year's presidential veto, which provides for 90 percent Federal funding of 200,000 public sector jobs across the country, with special consideration to be given to Vietnam veterans.
It is worrisome, however, despite this hopeful legislation, to see so little attention paid to the wider question of which this is a part—the question of conversion to a peacetime economy. Defense-related employment in this country has already dropped by more than two million jobs in three years. The portion of our labor force in such employment has fallen from ten percent in 1968 to about 7.4 percent Yet the Federal government spends its time trying to shore up Lockheed, not to transform it into an engine of domestic change. We have neither the innovative foreign policy thinking which would provide an intellectual basis for limiting defense-related employment to, say, five percent in future years, nor do we have the economic and social planning needed to divert national resources to domestic ends while maintaining overall growth and softening the effects on those businesses and workers who will bear the brunt of the transition. This is more than a failure of vision. It is a failure of national will. Until we correct it, we will go on patching and mending until our national fabric gives way.
Beyond Vietnam there are countless foreign issues likely to have major domestic effects. Of most immediate importance are probably the SALT negotiations which, as I write, seem poised between torpor and glacial advance. The resulting suspense is attributable to the fact that the rate of advance in the technology of nuclear weapons is anything but glacial. Some experts are dubious about the possibility of reliable limitation agreements in an age of Multiple Independently-Targetable Reëntry Vehicles (MIRVs), but none would venture that limitation will become easier in the next wave of weapons and few would counsel delay. Such limitations would, of course, free resources for other uses, since we will be spending about $20 billion for strategic defense in 1972 under the President's recommendations. However, the more important effect of limitations would be psychological, and it would pervade every aspect of our national life. Simply put, limitations would offer an opportunity for a cleansing and rededication of the national spirit, so long committed to the balance of terror which was and is the heart of the cold war. They would provide hope that the most basic and troubling paradox of life in postwar America—the nuclear sword of Damocles suspended in the name of peace—might slowly disappear. No prudent man believes that the threat of nuclear holocaust can be removed overnight, but it is difficult to overestimate the salutary effect of any reversal in the trend toward more menacing weapons more menacingly displayed.
The extent of national yearning for a lessening of tensions among great powers was revealed in the reaction to the President's announcement of his impending visit to mainland China. Admirable as it was, it was long delayed by the conventional political wisdom which held that it would be political suicide for the party and the man who did it. I suspect that the truth is just the reverse. It should be a substantial political plus. Already there are signs that the gesture has let light and air into corners of the national consciousness too long shrouded in darkness. What is being asked of the President now, and rightly so, is what do we have to say to the Chinese? What is our vision? What are our intentions and priorities in the world? How far are we prepared to go to ensure a just peace?
The same questions, in somewhat more technical form, are stimulated by our foreign economic policies, all of which have direct and immediate domestic consequences. After more than 30 years of championing a movement toward free trade which has revolutionized world commerce, we have become frightened and insecure about our ability to compete in world markets. Rather than devise innovative incentives and new forms of adjustment assistance to ease dislocations, we have turned our back on the General Agreement on Tariffs and Trade; imposed restrictions on numerous goods and a general tax on imports which may encourage the formation of hostile trading blocs; imposed restrictive non-tariff barriers; and generally lost the initiative toward mutual tariff reductions which had been so successfully maintained by the Kennedy Round. The domestic results are clear: higher consumer prices, fewer improvements in quality, unrealistic wage demands, and—despite futile attempts to repeal world trade—greater and greater consumption of foreign goods. As this is written, it is too early to tell how the President's new economic policy announced August 15 will affect these trends. However, the fact that the new policy was considered necessary is dramatic evidence of the problem.
The situation on the international monetary front is even less tidy. The introduction of Special Drawing Rights in 1968 clearly had a large and useful effect on the management of international reserves. The momentous decision to discontinue conversions of dollars to gold is too recent for the long-term effects to be clear. Nevertheless, the summer reversal in the downward trend in interest rates, traceable in large part to exchange fluctuations in Europe, had a disruptive effect on our domestic economy only recently and tentatively awakened from the long night of 1969-71. Surely the travail of the past three years must have taught the wealthy nations of the West how interrelated their currencies and economic potentials are and must be. It has become the essence of good domestic monetary policy to develop joint and reliable mechanisms for making and sustaining sensible international monetary policy. Both the stimulus which produced the President's abrupt announcement that gold conversion would be suspended and the unilateral nature of that decision reflect the current absence of such mechanisms.
To understand the extent of the challenge before us, we must look briefly at the domestic side of the national equation. The most important single vehicle for mutually consistent foreign and domestic strategies, as well as the best barometer of commitment to various choices, is the Federal Budget. Money alone solves nothing, of course, and money wrongly applied can be worse than nothing. However, few serious students of domestic affairs would argue that any genuine progress can be made toward solution of the massive problems facing us at home without a very substantial increase in the allocation of public funds to this end. Many authorities would argue that discernible progress in the cities alone carries a price tag which would grow quickly to $20 billion per year.
It is less immediately apparent why this money must come from Washington. The basic reasons are three. First, we are long past the notion that the normal workings of the private economy will produce the levels of concentrations of investment necessary to make a major improvement in the general quality of life. Such improvements depend upon the ingenuity and capacity of the private sector, but we know that they will be applied in full measure only with substantial stimulus, incentive, and even risk capital from the government. This has been true of every major social advance in our history—from the Erie Canal to the communications satellite—and there is no reason to expect the contrary now. Second, it is very clear that states and localities are without the engines of revenue growth necessary even to keep up with the costs of rendering present levels of service, let alone to finance innovations. Cities in particular, shackled to slow-growing taxes on narrowing tax bases, and forced to deal with soaring workloads born of national social dislocation as well as with the demands of increasingly militant employee unions, will be fortunate to avoid chaos as they piece together patchwork compromises to deal with annual budget crises caused by the mismatch between slowly rising revenues and rapidly rising expenditures. Finally, the scale of effort required to redirect a substantial segment of our national research and development effort as well as our productive capacity to these domestic priorities will require a focal point with national scope and vision. Strong as the state and local role in that process must be, it will not have the coherence necessary to gain shape and momentum in the absence of a strong Federal role.
The short-run economic realities further dictate that new funds for domestic purposes come largely through reallocation of current and projected Federal expenditures. We now collect a total of about 31 percent of our gross national product in national, state and local taxes and fees. It is true that some other highly developed nations collect substantially more. However, we are only slowly coming to grips with an economic malaise which has already raised unemployment to unacceptable levels, subjected our citizenry to the double-edged horror of inflationary recession and nearly drowned virtually every unit of government in the nation in a flood of red ink only partly assuaged by a rash of increases in state and local taxation. A Federal tax increase at this time would jeopardize recovery, as the President implicitly confirmed when he proposed substantial tax relief in his August 15 package. Neither is it realistic to pin our immediate hopes on what economists call the "fiscal dividend"—the margin of revenues produced by economic growth over and above those required to meet mandatory increases in levels of expenditure under current programs. A careful analysis by Charles Schultz and his associates suggests that, even without the President's proposed new tax credits, there is little hope for any such margin through fiscal year 1974, and that only a relatively small margin appears possible by fiscal year 1976. In the real world, therefore, immediate increases in domestic expenditures probably must come largely from cutting the present Federal financial pie rather differently.
Traditionally—and symptomatic of our past priorities—domestic expenditures, other than veterans' benefits and self-financing income-maintenance payments, have been treated as a residual in the Federal Budget. That is, they have been limited by the difference between what is regarded as a tolerable Budget total and the financial requirements of defense and related policies which were seen as a prior claim. A look at the current Federal Budget shows the result. The President proposes therein to devote about $86 billion to defense and other international expenditures; about 38 percent of the $222 billion he proposes to spend during the fiscal year ending June 30, 1972. However, a further $99 billion is earmarked for income-maintenance payments and interest on the national debt. Thus, about 80 percent of the Budget is spoken for before a single discretionary domestic program has been considered. Furthermore, in domestic as well as defense-related programs there is a natural tendency to finance traditional priorities, such as farm subsidies, which consume the bulk of what is left.
There is no great mystery about the most workable vehicles for financing the reconstruction of domestic America. The most pressing needs are three:
(1) Federal takeover of those activities—the most critical of which is welfare—which are national in scope and origin and beyond the capacity of any state or locality to meet.
(2) A prompt, reliable, and permanent link between state and local governments on the one hand and the Federal income tax—the most effective equitable means of raising public revenue—on the other.
(3) Federal support of a nationwide health insurance pro gram to protect all Americans from the overwhelming costs of modern medical care.
Much more is needed of course—physical reconstruction, advances in educational techniques, national research on addiction, and many more—but these three instruments would go a long way toward providing resources on a scale commensurate with the task.
There is no question that all these will be fearfully expensive. And it is true that financial management will not allow their adoption without basic changes in the pattern of Federal Budget allocations. Thus, new investments on the scale of $20 to $30 billion will require very hard choices, not only between military and domestic expenditure, but also among such areas of domestic concern as health, education, housing, agriculture and urban aid. This means new national policies, foreign and domestic. Most of all, this means final recognition that there is no longer any real separation between those policies.
The rhetoric of "domestic priorities" could become just as misleading and dangerous as our earlier preoccupation with foreign requirements. Suggestions that the United States somehow resign from the world are just as short-sighted and indefensible as the most paranoid obsession with threats from abroad. Both positions are totally inconsistent with a world of great and growing interdependence. The mere statistics reporting growth in international trade, travel and communications are ample refutation of the childish thought that we can renounce worldly things and retire to refurbish our own corner of the planet.
What we must realize is that isolationism is no longer a viable option. Quite apart from moral objections, it simply will not work as a policy unless we are willing to give up the full range of political and economic objectives, foreign and domestic, which we have striven so long to achieve. The only real nuclear power in the West cannot withdraw from that role without the gravest possible risk of political dislocations which could engender anything from nuclear conflict to massive new waste of resources on nuclear arms. The greatest trading nation in the world cannot choose autarchy without creating chaos in the world economy. The staunchest supporter of the United Nations and other international organizations cannot weaken that support and expect the system to continue to contribute to the process of peaceful change in the world which is so much in the common interest There is no acceptable statement of our basic national interests at home which is consistent with wholesale abdication abroad. No amount of concern for our domestic dilemmas should be allowed to disguise this fact.
The challenge, then, is to develop policies which address both foreign and domestic needs, and, even more important, which take into account the effects of action in one area upon the other. This does not imply any lessening in the depth and importance of our foreign policy concerns. We must continue the search for arms control while maintaining a strategic posture adequate to deter possible adversaries and to reassure friends. We must maintain sufficient general purpose forces to protect our interests around the world. We must settle on foreign economic policies which expand rather than shrink international trade, stabilize rather than disrupt the international monetary system, increase rather than handicap access to foreign markets for American goods, and cushion the impact of economic dislocations at home. These pressing international concerns will continue to demand substantial investments of time, energy, and money.
However, these investments must be made in a new context of conscious concern for competing domestic priorities and for the domestic effects of foreign initiatives. Ideally, the debate on military appropriations should contain an element of discussion of the domestic costs and benefits. Similarly, domestic policies toward, for example, wages, prices and interest rates should be examined from the point of view of foreign effects and implications. Until it seems natural that we address foreign problems with full and immediate attention to their domestic implications, we will continue the awkward, groping conflicts which so often characterize our domestic policy.
However, the national agenda must contain much more than a change in the style and content of debate. The principles of foreign policy which have sustained us for 25 years are in severe disrepair. The mid-sixties wave of domestic innovations has fallen far short of its grandiose goals. Not only are these ideas in question, but the entire business of active government is in disrepute. Until we can mend the citizen's conception of the relevance of national policies and the effectiveness of the structures responsible for applying them, we will lack the element of popular commitment necessary for success in any field. Until then, we will be evidence of the truth of Tocqueville's prophecy.