In recent years, American policy at home and abroad has seemed more pressed by events and less sure of its responses than at any time since the late 1940s. Since World War II, the guiding ideals of policy have been neo-Keynesian "full-employment" at home and neo-Wilsonian leadership abroad. It is difficult to count the achievements unimpressive. Along with an unparalleled domestic prosperity, America's leadership and power have coaxed the world into a structure of collective security and liberal economic interdependence-a pax Americana that has been, on balance, the happiest era of this troubled century. The present disarray of American policy arises from two broad trends that have increasingly undermined both its domestic and foreign achievements. The first is the apparently relentless acceleration of domestic inflation-a process that involves increasingly violent swings of the business cycle and a progressive stagnation of real growth and competitiveness. The second is the deterioration of American power abroad and, with it, the disintegration of the pax Americana.

Blaming the ineptitude of incumbent policymakers is always tempting and in recent years perhaps unusually plausible. In longer perspective, however, America's difficulties seem long-standing and cumulative rather than adventitious and random-the result less of inept and inexperienced tactics in one administration than of increasingly inadequate strategies through several. From this perspective, improvement depends not so much upon fresh leadership, per se, as upon a hardheaded reexamination of the mix of strategies long used to maintain American goals at home and abroad.

Escaping from the inadequacies of current policies requires, first of all, understanding why they no longer work. The two fundamental problems-domestic inflation and foreign weakness-have numerous independent causes. One feature, however, they share in common: overextension. Both at home and abroad, American ambitions seem to exceed present American resources. In addition, economic policy and geopolitical position have been growing progressively interconnected. Failure in one sphere reverberates in the other. Lack of control over domestic inflation makes maintaining the postwar international system, and our position within it, more and more difficult. At the same time, restoring stable prosperity to the domestic economy seems increasingly unlikely without modifying the American role in the international system.

For American policy in its present weakness, this interdependence has thus become a vicious circle of reinforcing failures. How can the cycle be broken without a retreat from the liberal economic order abroad or a radical decline in prosperity at home? For a start, why has the United States been suffering from inflation and how has that inflation been connected to our position abroad?


America's basic inflation rate has risen higher in each business cycle of the past two decades. In 20 years, prices have increased roughly 177 percent and are now increasing at an annual rate of 12.5 percent.1 Moreover, the causes are rooted in the character of our political economy. While inflation also grew to serious proportions in the late 1940s and through 1951, the domestic rate was kept down through the Eisenhower era and remained low until the later 1960s. The onset of the current inflation is commonly traced to the policies of the Johnson Administration, in particular to its combination of the Vietnam War with the Great Society. Actually, the inflation of domestic prices began to show up in 1965, well before Vietnam expenditures began having serious effects on the economy.2 In any event, the roots of Johnson's expensive military and social programs are clearly to be found in the Kennedy Administration-in its rearmament and ambitious reassertion of American leadership abroad and its energetic pursuit of neo-Keynesian policies at home. Concern with growth and leadership, of course, hardly began with Kennedy; but earlier postwar Presidents pursued the same goals with more concern for the limits of fiscal resources.

If any single development may be said to have opened the door to the renewed inflation of the 1960s and 1970s, it was Kennedy's fiscal policy. More precisely, it was the fiscal policy that Kennedy espoused and Johnson achieved. With his famous tax-cut proposal of 1963, Kennedy promoted the "full-employment budget," a notion that calls for government deficits whenever the economy is running at less than its hypothetical full use of plant and labor. Ever since Johnson pushed through the Kennedy tax cut in January 1964, full-employment budgets have been the governing principle of fiscal policy. And since 1964, the federal budget has been in deficit every year but one.3

Analysts, of course, differ endlessly over the underlying causes of inflation. Nearly every modern society has rapidly rising expectations and aggressively powerful interest groups. Most contemporary economies are thus predisposed to inflation. Blaming inflation on government deficits is rather simplistic. A government budget embodies the aggregate demands of the political system. A government deficit reflects the whole society's excessive claims on its resources. It may also reflect deeply rooted structural distortions that prevent the economy from generating the resources demanded.

All this being said, it is the duty of government to govern, not merely to reflect passively the overall claims of its citizenry. A budget is essentially a checkpoint, where the state is meant to make rational choices in the general interest. Since, in practice, the full-employment budget idea virtually mandates fiscal deficits at nearly all stages of the business cycle, common sense suggests that enshrining such a doctrine at the center of policy can be expected to encourage inflation-in either peace or war. When such a fiscal policy is accompanied by America's traditional easy money policy, as it has been throughout the period, inflation is inevitable.

An inflationary policy, ratified by a complaisant monetary policy, does, of course, have advantages. Not only are governments free to pursue a variety of goals with less need to decide among them, but inflation helps keep resources more fully at work. In the short run, inflation encourages employment, particularly if prices rise faster than wages and thus reduce the real cost of labor. As the public gradually loses its "money illusion," however, wages and salaries begin to gain on prices. Continuing high employment requires more and more inflationary stimulus. Full-employment policy becomes a race between the government's printing press and the public's imagination. Inflation is thus difficult to stabilize, but tends relentlessly to accelerate.

To call the generous fiscal policy of the past two decades a "full-employment" policy is, of course, somewhat misleading. The full-employment-budget idea does provide a rationale for a looser fiscal policy. It legitimizes the political system's unwillingness to bring its goals into balance with the level of real resources. But the unbalanced expenditures that result may only incidentally be motivated by considerations of employment. Governments in countries with substantially lower inflation rates than the United States are, in fact, no more tolerant of unemployment than American liberals. Unemployment in the Federal Republic of Germany, for example, has traditionally been substantially lower than in the United States. But the goals of the German government, including an expensive welfare system as well as the full employment of its work force, have been pursued without the combined budget deficits and easy-money characteristics of the American economy.

Since government policy is the efficient if not the ultimate cause of inflation, changing government policy is also the essential cure. Governments are constantly "declaring war" on inflation. But all other things being equal, a political system generally prefers inflation to its cure. Not everyone benefits from inflation, of course. A conservative domestic coalition may arise to force a sufficient limit and precedence among goals to fit the real resources available. But as the economy grows more and more habituated to inflation, the costs of ending it grow increasingly severe for the particular interests of more and more groups. Hence, short of some extreme explosion that appears to threaten property itself, domestic coalitions seldom have lasting success in halting inflationary policies.

For most countries, the major check on domestic inflation lies in the need to defend the value of the currency. In an open world economy, if one country's inflation rate exceeds that of others, its surplus money begins to flow to less inflationary countries where money is in shorter supply and real interest rates are higher. The inflationary country suffers a balance-of-payments deficit and its currency begins to weaken against other currencies. Since remedies like devaluation or currency controls are self-defeating for most states, inflationary countries are finally forced to rein in their domestic fiscal and monetary policy sufficiently to reduce their inflation rate to the international norm. Typically, government policy oscillates between responding to domestic pressures for higher spending and international pressures threatening the value of the currency. Hence, the "stop-go" policies characteristic of Western economic management, and the "stagflation" that is their normal consequence.

Unfortunately for the control of inflation in America, the United States was long exempt from the need to defend the dollar. Under the international monetary system set up at Bretton Woods, the central banks of other countries were supposed to hold our exported dollars as part of their monetary reserves. The dollar was not supposed to be able to devalue. As a result, successive American governments, acting on these assumptions, were never forced to limit government goals for the sake of the dollar, even though the United States ran balance-of-payments deficits continually throughout the 1950s and 1960s.

The dollar's role as "world money" and the continuing American balance-of-payments deficit linked America's domestic inflation to the international system in a special way. Under the arrangements of Bretton Woods, a good part of America's inflation in the 1960s was, in effect, "exported." The excess dollars created to stimulate full employment or pursue internationalist goals migrated abroad to less inflationary economies with higher real returns on money. Not only did many billions of exported dollars end up in foreign central banks, but many billions more helped form an offshore-dollar capital market centered in London. In other words, America's exported inflation was either absorbed into the national money supplies of our creditors or else went to form a huge pool of capital available to finance the burgeoning "international economy" of multinational lenders or borrowers. Under these circumstances, not only did the external system impose no real discipline upon our domestic economy, but American inflation began to exacerbate inflation elsewhere.

Under the Bretton Woods arrangement, however, certain checks were supposed to limit this process. The United States was supposed to keep adequate reserves of gold and foreign exchange to meet the demands of its creditors. But by the end of the 1960s the international dollar markets had become so huge and volatile that our capacity to meet demands for convertibility at the going exchange rate had become a polite fiction, sustained by the not-so-polite arm-twisting of our allies.4 The dollar was almost forced to devalue in early 1968, when Johnson was still energetically pursuing his expansive foreign and domestic policies. It was rescued for a couple of years thereafter by Europe's domestic political troubles and the consequent inflationary boom, as well as by the Federal Reserve's belated but savage attempt to tighten the runaway American money supply. By the time Johnson left office, domestic inflation was diminishing and the dollar was stronger.

Nixon tried to consolidate and extend this pause through the early years of his first term, but without precipitate withdrawal from Vietnam itself or a return to anything like the relatively low pre-Vietnam military expenditures.5 Restraint under such circumstances was neither effective nor popular, as the congressional elections of 1970 made clear. Nixon's instinct for political survival dictated his vigorous "reflation" of 1970 and 1971. Much of the renewed inflation again flowed abroad. The massive balance-of-payments deficit that recommenced at the end of 1970 made the dollar's depreciation inevitable.6 In August 1971, with world currency markets in turmoil, Nixon seized the initiative and devalued the dollar.


Nixon's solution to the balance-of-payments crisis marked a major shift that dominated American economic and foreign policy throughout the rest of the decade. The Nixon solution made America's domestic prosperity directly dependent upon its external power. In effect, Nixon's policy was a nationalist or "mercantilist" revolution. To understand how it has worked requires a brief look at the American economy through the rest of the decade.

The Kennedy and Johnson Administrations had acted as if the dollar's weakness was a temporary inconvenience, to be financed on a short-term basis until the underlying strength of the American economy could reassert itself. Both firmly resisted any notion that the international position of the dollar required restraining domestic policy or limiting foreign commitments. By Nixon's time, the international constraints common to other states finally came to be felt by the United States. Unless Nixon decided to limit American goals-which, like his predecessors, he declined to do-the dollar was clearly fated to devalue. In effect, the United States gave up trying to reconcile its political goals at home and abroad with its obligations as the manager of the world's monetary system.

Since a great deal of American prestige had gone into defending the dollar from devaluation, Nixon was concerned with finding a new ideology to justify its collapse. The United States could not appear a "pitiful, helpless giant" in the international monetary arena any more than in Vietnam. American economics proved more than equal to the challenge. According to the new official line, the arrangements of Bretton Woods had been unfair to American interests. The United States had been exploited by its allies. The generous arrangements of the immediate postwar era that had encouraged Europe to form a trading bloc, with the United States providing both monetary and military stability, had become frozen into a pattern of anti-American economic discrimination. Since Bretton Woods had precluded American devaluation, even after the European and Japanese recovery, the dollar grew "overvalued," with dire consequences for the American economy. The most obvious consequence was thought to be the steady decline of the American trade balance after the mid-1960s, a decline that in 1971 brought us the first trade deficit since the nineteenth century.7 Washington's prescription was clear: the United States should give up trying to defend the dollar. It should adopt a posture of "benign neglect." If Europeans would not revalue their currencies upward, the United States should devalue.

Armed with this rationale, Nixon and Treasury Secretary John Connally were able to present the dollar's collapse of August 1971 as a major American victory. Devaluation was, as noted, a nationalist revolution in American policy and did bring many short-term advantages. The victory was, to be sure, over America's own rich allies, and the new policy presented the Europeans and Japanese with a basic dilemma. They could let the value of the dollar fall, which would make American goods cheaper on the world market and thereby harm the competitiveness of the export industries upon which they were heavily dependent. Or they could support the dollar by continuing to absorb it into their reserves, which would continue to expand their own money supplies and import American inflation into their economies.

Their problem, however, was not so much Nixon's initial devaluation. The dollar was most certainly overvalued in 1971 and some depreciation was in order. Unhappily, the 1971 devaluation was to prove not a drastic once-and-for-all treatment but the beginning of a long addiction to depreciation. Nixon's rationale, by focusing on the arrangements of Bretton Woods and the particular costs of the Vietnam War, ignored the fundamental and continuing cause of the dollar's overvaluation, namely the American economy's persistent inflation. As long as that inflation continued, no single devaluation could be expected to resolve the dollar's weakness. Instead, the dollar could be expected to depreciate over and over again. Rather than a newly stabilized dollar, the world would be presented with a floating, or rather a sinking, dollar. With such a policy, moreover, America's domestic inflation could be expected to grow worse. By renouncing its obligations to the Bretton Woods system, the United States removed the international system's belated check to domestic inflation. In effect, Nixon's perpetual devaluation was the international analogue to Kennedy's domestic full-employment budget. In both cases, the American political system jettisoned a major barrier to its inflation.

The predictable consequences soon occurred. Nixon's expansionary policies continued. Arthur Burns' Federal Reserve accommodated.

The boom helped greatly, perhaps decisively, in Nixon's reelection. Domestic wage and price controls masked the domestic price of inflation until 1973, but the other sign of inflation, the huge balance-of-payments deficits, continued even after the 1971 devaluation.8 The United States, in other words, resumed exporting a large part of its inflation to the rest of the world. As this inflationary wave reverberated throughout the industrialized countries, along with a simultaneous boom, the prices of raw materials naturally began to rise sharply. And at the same time, long-term trends in supply and demand had made world food and oil prices, long artificially depressed in the United States by government policies, ripe for explosion. A failed Russian harvest proved the trigger for food prices; the Organization of Petroleum Exporting Countries (OPEC) oil cartel was on hand to seize the opportunities in oil.9

In due course, Nixon's inflationary boom evolved into a recessionary hangover. The cyclical downturn of 1974 and 1975 turned into a deep recession, exacerbated by food and oil prices that reduced real income and sucked away demand from other products. While recession brought temporary relief from price inflation, the inflation rate at the cycle's lowest point-1976-nevertheless remained more than five times higher than when Kennedy came into office in 1961.10

Despite its early disasters, the Nixonian policy was carried over into the Ford and Carter Administrations. By 1976 the United States had launched a second Nixonian boom, fueled by the usual mix of arms spending and expanding entitlements and sustained by the familiar combination of fiscal deficits and an expanding money supply. The consequences were equally familiar-accelerating inflation reached a new cyclical high-from the six-percent peak of 1976 to the 16.8-percent peak of 1980.11 Furthermore, American policy actively pressed the dollar's depreciation. Thus, after falling 33 percent against the West German mark from 1970 to 1975, the dollar fell an additional 26 percent from 1975 through 1979.12

On the face of it, this combination of domestic inflation and external dollar depreciation appeared to work rather well, particularly from the short-term perspectives of politicians and their economic advisers. The 1976 boom lasted until 1980 and proved the longest in postwar history. Until late 1978, no serious attempt was made to curb domestic inflation. Indeed, depreciation of the dollar abroad compensated for the lost equilibrium at home.

After 1973, the Nixonian formula had acquired another element: the refusal to adjust the real economy to the new world oil prices. To do so would have meant reducing domestic demand for oil and other imports sufficiently to bring our trade into balance. This would have required letting domestic oil prices rise to the world level or imposing a serious quota and rationing system. Instead, government controls kept domestic oil prices low and foreign oil was imported without stint. Thus, while other industrial economies chopped overall domestic demand, the United States enjoyed a boom. From 1973 through 1979, other industrial countries stabilized or actually cut back their volume of imported petroleum. The United States, by contrast, increased its import volume by 34 percent.13 Adjustment to the new world oil price took place through inflation. Since foreign as well as domestic oil prices were denominated in dollars, the real price of oil, insofar as it remained the same, kept falling with the depreciating dollar and the inflating price of industrial goods.14 To add insult to injury, the falling dollar steadily depreciated the oil-producers' financial assets.

The regularly depreciating dollar also helped boost the competitiveness of American products at home and abroad. In addition, a floating dollar meant there was no need for control on flows of capital abroad; thus, what happened was not only the usual huge outflow of American capital, but along with it an extraordinary international expansion of American financial institutions. American banks, with access to seemingly endless liquidity, became the principal mechanism for "recycling" oil profits.15

Thus, in nationalistic terms the Nixonian strategy appeared to have many advantages in the short term. But in the longer term its disadvantages have become all too apparent. Much that has been counted as domestic growth seems questionable. While a decade of accelerated inflation and depreciated currency produced considerable gains in foreign trade and the overall gross national product, it also appears to have weakened the economy's vitality, as savings, investment and productivity increases declined to levels substantially below those of most other industrial countries.

Even the international growth of American banks may, in due course, prove a greater liability than benefit. Much of the expansion is the "recycling" of borrowed oil funds to underdeveloped countries. Some of the flow has undoubtedly financed real growth in Third World countries. But much of it has financed unrealistic levels of consumption, including a prolonged failure to adjust to new energy prices. The increasing shakiness of the world's financial structure is the obvious consequence. Attempts by U.S. banks to unload the spiralling Third World debts on the International Monetary Fund or the OPEC countries have understandably met with only limited success.16 While unsound financial structures may be propped up indefinitely, no one will have any trouble explaining the causes of a major world financial crash, should one occur within the next decade. Meanwhile, any serious attempt to reduce world inflation, and hence the liquidity available for unproductive lending, will greatly increase the danger.


This Nixonian policy, carried over in the Carter Administration, was nationalist or "mercantilist" both in its objectives and in its dependence upon using American political power to shape international economic relations. American domestic prosperity was linked to continuing devaluation at the expense of both the rich allies and OPEC. Throughout the decade, Europeans and Japanese remained caught in their original dilemma. To their manufacturers, a regularly declining dollar seemed a permanent beggar-thy-neighbor devaluation. To their central bankers, supporting the dollar imported inflation. To those threatened by high world-energy prices, American profligacy reinforced both the cartel and the upward pressure on prices. To oil-producers themselves, falling dollars meant taking an asset that depreciated in the bank in exchange for an asset that appreciated in the ground. And to anyone concerned about inflation in the world, American policy seemed an unquenchable fount of excess money. Hence the increasingly tense and competitive relationship between the United States and its economic partners since Nixon and Connally's revolution.

Paradoxically, the Nixonian strategy depended upon the continued cooperation of those partners. For the American capacity to escape retaliation from inflation at home and depreciation abroad depended specifically upon the continuation of American monetary or dollar predominance within an integrated international system. And, given its growing economic disadvantages to others, that monetary hegemony, in turn, increasingly depended upon America's broader geopolitical power.

Three dimensions of this American geopolitical primacy were particularly critical in sustaining the Nixonian economic policy:

(1) American influence over Western Europe and Japan to prevent serious retaliation against exported inflation and a continually declining dollar;

(2) American influence over the Middle East to restrain OPEC from raising oil prices to compensate adequately for American inflation and the declining dollar; and

(3) American détente with the Soviet Union sufficient to inhibit direct Soviet challenges or Soviet support for others inclined to challenge American influence and power in the Middle East or among the noncommunist industrialized countries.

To take up each condition briefly:

The ability to depreciate the dollar without retaliation after 1971, like American dollar hegemony in the latter days of the Bretton Woods system, depended essentially upon America's political and military relationship with Western Europe. For the Europeans, resolution of the dilemma posed by the dollar's continuing devaluation lay in building a protected economic bloc. So radical an assertion of independence, quite apart from its political difficulties and economic costs among the Europeans themselves, was hardly compatible with Europe's dependent relationship as an American military protectorate. While progress toward détente, and toward a German settlement in particular, clearly reduced American leverage over Europe, no amelioration of tension was likely to change the fundamental military realities, at least not until the Europeans were prepared to pay for a more independent military posture.

As discussed above, the American economic strategy that evolved after Nixon included a refusal to adjust the real economy to the new oil prices. The actual adjustment came through an inflation and dollar depreciation that steadily lowered the real oil price to the United States. The success of such adjustment depended, of course, on the oil-producers not regularly raising the dollar price of oil sufficiently to compensate for the inflation. That OPEC did not raise its prices adequately after 1973 until 1979 was the consequence not only of a temporarily surfeited petroleum market, but also of American power in the Middle East. America's overwhelming ascendancy in the region began after the October 1973 War. Egypt's break with the Soviets effectively expelled the Soviets from participation in the regional balance. With Kissinger's shuttle diplomacy and the scuttling of the Geneva talks, the United States took over management of the Arab-Israeli dispute-ejecting not only the Soviets but the Europeans as well. For several years diplomatic control of the Arab-Israeli dispute gave the United States considerable leverage. In addition, the key oil-producing nations saw themselves as heavily dependent on the United States for their basic security.

In 1973, Kissinger began a policy of heavy arms sales to Iran and the following year to Saudi Arabia. Each was to be not only a huge source of profit for the United States but also a "surrogate" for American power. Relations with the Iranian regime grew so close that the United States became, in effect, the Shah's partner in the modernization of Iran. With these special relations, which both the Shah and the Saudi ruling family desired, America's regional influence helped deter any drastic rises in OPEC's oil prices sufficient to compensate for American inflation and currency depreciation.17

Bipolar détente had less direct but nevertheless significant effects for American economic strategy. Détente reinforced the status quo in Europe and tended to do the same in the Middle East. Since both regions were too central to the vital interests of the superpowers to permit much room for dramatic maneuver, détente robbed potential rebels against American ascendancy of the Soviet support they might normally have expected. In summary, until the late 1970s, the Nixonian economic strategy had the political power it needed in the two regions of the world critical to its success.

The refurbishing of America's world position during the Nixon and Ford Administrations that sustained economic strategy was highly conscious, well-articulated, and for a time brilliantly successful. Unfortunately, it has also proved extremely vulnerable. By the end of the decade, as we know, bipolar détente was a shambles, American predominance in the Middle East had collapsed, and relations with Europe were worse than at any time since the war. Among its other effects, this geopolitical deterioration spelled the beginning of the end for the Nixonian economic strategy.

Why did the American position deteriorate so rapidly? Actually, all parts began to deteriorate together. The most spectacular "loss" for American power was the collapse of the Shah's regime in Iran, a profound social and cultural upheaval full of implications for the Muslim world as whole. The United States was singled out as the revolution's principal enemy, mostly because it had taken such an extended, visible, and direct role in the Shah's domestic system. The United States became the scapegoat for a century or more of accumulated Persian resentments against the West. Khomeini's revolution also raised disturbing questions about the dangers of imposed technocratic "development" for either the domestic stability of any developing country, or for world order in general. Iran also revealed the vulnerabilities of American "hegemony on the cheap," with "surrogates" substituting for direct American power. And, as the subsequent Iraq-Iran war threatened chaos and destruction to the entire oil region, the dangers of dumping arms in unstable parts of the world grew increasingly vivid.

America's détente policy with the Soviet Union also proved highly vulnerable. While détente, stretching back to the late 1950s, had seemingly reached its apogee under Kissinger, its foundations had been eroding in Kissinger's later years. The first strategic arms limitation (SALT) agreement outraged congressional conservatives. Anger multiplied as Russian military strength was seen to be growing and, with it, Russian assertiveness in the Third World. Insatiable Soviet imperialism, it was thought, was mocking the premises of détente. By 1975, Kissinger himself had complained bitterly over the incursions of Russia and its Cuban surrogate into Angola.

The Carter Administration, despite its eccentric early disarmament proposals and its awkward preoccupation with human rights in the Soviet Union, nevertheless made a major diplomatic effort to follow the logic of bipolar détente through SALT II negotiations. But the steady growth of anti-Soviet opinion made ratification of any SALT II treaty increasingly improbable. To save the treaty, the Administration felt constrained to appease the forces hostile to it. To seem legitimate before those forces, SALT II had to be presented as a victory over the Soviets, rather than a new step toward mutual accommodation. Since nothing could compel the Russians to accept terms sufficiently unbalanced to be presented as an American "victory," the Carter Administration put itself hopelessly on the defensive before its domestic critics.

The self-defeating contradictions of Carter's policies became painfully obvious during the Afghan crisis in late 1979. The Administration took the invasion as an aggressive challenge to America's Middle East position and a general betrayal of détente. To show strength and punish the Russians, several years of Western "bridge-building" were finally dismantled in short order. While the Administration's conservative domestic critics were thus preempted, the SALT II treaty was also doomed.

Predictably, the United States also put itself sharply at odds with its European allies. As unenthusiastic about Soviet incursions into vital oil regions as the Americans, Europeans were prepared to condemn the invasion, warn the Russians about Pakistan and the Gulf, and make matters in the region itself as difficult for the Soviets as possible. Europeans also hoped to take advantage of Muslim outrage over Afghanistan to deflect the Iranian revolution from its anti-Western preoccupation, and were thus disinclined to join in American sanctions against Iran. But Europeans were not willing to let Afghanistan become the occasion for a return to the cold war in Europe itself. Rightly or wrongly, the Europeans felt they had more to lose than to gain from an end to détente in their own region. Thus, whereas the United States saw Europe as a place to put pressure on the Russians as part of a global game, Europeans believed Europe should, if at all possible, remain a safe zone insulated from the confrontations inevitable elsewhere.

In effect, the Europeans came to have their own distinct interests in détente. From de Gaulle's time onward, they had done their best to prevent Western-Soviet relations from being managed exclusively by the Americans. Among other things, a détente policy of their own now gives Europeans room for maneuver against too much American domination, in the economic sphere particularly. To be sure, European diplomacy toward the Russians takes place within the context of their fundamental "Western" orientation. Not even de Gaulle ever intended some dramatic reversal of alliances. Militarily, the states of Europe remain American protectorates, but nevertheless determined to keep the price for that protection within reasonable bounds. Anyone familiar with European views of American foreign economic policy does not find that determination altogether surprising, particularly in a period of extreme transatlantic tension over what has seemed a ceaseless American exploitation of dollar hegemony.

Keeping down the price for their American protection requires maintaining "normal" if wary relations with the Russians within Europe itself. In addition to this broad geopolitical imperative, détente brought Western Europe numerous commercial advantages, made life easier for East European states, and had many human benefits. Thus, to have expected the Europeans to jump to the new tune, to break their carefully cultivated regional relations with the Soviets, was to court a rebuff. Indeed, a certain degree of heightened Soviet-American tension outside Europe was not altogether unwelcome to the Europeans. It seemed to give them leverage for a more independent position, insofar, that is, as amateurish American diplomacy and aggressive Soviet adventurism did not plunge the world into a war.


As might have been expected, the deteriorating American position in the Middle East and Europe began to have significant consequences for American economic policy during the Carter Administration. The decline of the Nixonian pax Americana forced a retreat from Carter's essentially Nixonian economic policy. In both Europe and the Middle East, 1979 proved a critical turning point.

The European-American polemic over economic policy grew steadily worse as the Carter boom continued. By the fall of 1978, the virulent criticism from European governments, and what already seemed a dangerous tendency toward exaggerated swings in the world currency markets, forced an apparent American retreat. The Federal Reserve seemed prepared to apply restraint on the money supply and the Treasury organized an elaborate set of arrangements to defend the value of the dollar.18

Within a few months, however, American economic policy had slid back into its habitual easy posture. The result was the collapse of the dollar that began in the summer of 1979 and extended to the winter of 1980. So severe were the dumping of dollars, the explosion of gold prices, and the decline of the domestic bond market that some catastrophic flight from the dollar began to seem a serious possibility. In effect, these market reactions represented a sort of European-Arab revolt against American economic policy. Foreign holders of dollars began to exercise their financial power in a fashion that compelled an American retreat. During 1979, Europeans also managed an apparently successful revival of their perennial project for a European Monetary System. In effect, a reinvigorated Franco-German coalition imposed a distinct monetary regime on the rest of continental Western Europe, a "zone of stability" that began to set in place structures that could be used to erect a separate Europe-centered economic bloc, with a reserve currency to rival the dollar.

Arab disaffection, as well as the effects of the Iranian revolution in shrinking the oil supply, also became evident in the vital sphere of oil prices. From the summer to December of 1979, OPEC managed to agree on the first major increases in real (inflation-discounted) oil prices since 1973, an accomplishment repeated again at the end of 1980.19 Nothing reflected more clearly the decline of American geopolitical power over the Middle East.

The consequences for the American domestic economy are, of course, familiar to everyone in this country. In mid-1979, the Federal Reserve began a policy of unprecedented restraint on the money supply, and the President, within a few months, began calling for a balanced federal budget. By April 1980, interest rates had reached 20 percent and the long-delayed cyclical downturn finally hit with exceptional severity. The second quarter saw a decline in industrial production even worse than in the recession of 1974-75. While economic prospects brightened over the summer of 1980, particularly as money grew less tight before the election, the start of a new and sustainable Nixonian boom in 1981 seems unlikely. Whatever the predispositions of the Reagan Administration toward arms spending and tax cuts, the continued virulence of American price inflation, combined with the heightened dangers of foreign retaliation, should preclude a return to the old pattern.

Neither oil nor currency markets are likely to tolerate passively a new burst of American inflation. The Iraq-Iran war quickly dissipated any oil glut following the 1979 price rise, and thus prices were again rising substantially in the latter part of 1980. Under these conditions, OPEC would have little difficulty in sustaining sharply higher prices, should American inflation accelerate and currency depreciation resume. Europe, meanwhile, has been heading into a cyclical downturn of its own, a development that should quickly translate any American domestic inflation into downward pressure on the dollar. In short, world economic conditions, in themselves, make it highly dangerous for the United States to resume dollar depreciation. To do so risks not only runaway inflation at home, but rapid deterioration of the international system, with incalculable political repercussions.


If the Reagan Administration is constrained to renounce the Nixonian pattern of behavior, how will it avoid the monetary restraint of the past year, in other words, a continuation of stop-go and stagflation? To flourish without the Nixonian strategy, the United States will have to find some fundamental new economic formula for achieving domestic prosperity without generating inflation.

Analysts who cannot agree on the causes of inflation are unlikely to agree on its cure. Inflation obviously has deep roots in the structure of our whole political economy. But in the cure as in the cause, government policy is the critical checkpoint. The federal government's own easy money policy used to finance budget deficits plays a crucial role. Whatever else may be needed, inflation is unlikely to end until the government stops running large fiscal deficits through all phases of the business cycle. Long-range remedies cannot be expected to make progress in the face of persistent, relentless inflationary stimulus from the government's own spending and finance. Ending inflation must start with ending those government policies that have been fueling it.

In particular, the perpetual budgetary disequilibrium financed by an easy money policy must stop. As recent years ought to have made clear, not to mention British Prime Minister Thatcher's experiment, controlling the money supply alone cannot be efficacious without concurrent budgetary constraint. Bringing American budget deficits under control will presumably require an extremely bitter and divisive struggle within the political system. Not only will there be an intense battle over the domestic component of the budget, but, inevitably, a reordering of priority between domestic and foreign goals. The task is complicated by the strong pressure in recent years for a major American rearmament. To put its fiscal affairs in order, the United States will either have to sacrifice more at home to pay for its international position, or it will have to scale down its world commitments.

However conventional and commonsensical such an analysis may be, its conclusion is highly unsatisfactory politically. Indeed, over the past two decades a great deal of economic talent has been devoted to avoiding just such a conclusion. On the one hand, demands for domestic American spending are urgent for all the reasons common to advanced societies everywhere. On the other, America's security is plausibly linked to international stability, and that stability to a wide range of American military commitments. The United States, moreover, has grown deeply habituated to both the pleasures and pains of world responsibility, as well as to the convenient foreign escapes the world role provides for domestic economic and social disequilibria. Resistance to change in what might be described as the imperial status quo is thus structured all across the American political spectrum. Nor is resistance confined to the United States. While our rich allies and OPEC would doubtless welcome an end to American inflation, most, even in OPEC, would not like a corresponding American withdrawal from international burdens.

Rather than face such divisive and dangerous choices, any Administration naturally will try to sustain the juggling act of the past 20 years. Some new infusion of "will" and competence, or magic new economic formula, will be sought out to cure the growing disproportion between America's ambitions and her resources.

If the recent campaign is any indication, the Reagan Administration's evasive fantasies will lie with "supply-side" economics and a reassertion of foreign policy activism. Ironically, both are reminiscent of the Kennedy Administration. In present circumstances, however, neither is likely to provide much respite from the underlying policy crisis.

Supply-side economics is the latest version of the hope that inflation can be cured through rapid growth. Unlike the neo-Keynesians, who seek growth by stimulating demand, supply-siders seek growth by stimulating supply. Many of their recommendations are praiseworthy. A sensible revision of tax laws to encourage saving and investment is doubtless long overdue, and the government's mania for regulation badly needs curbing. In due course, such policies may well increase efficiency and production and thus provide more supply to satisfy a level of demand that is now inflationary. But the problem of inflation is not only long-range, but also immediate. Deregulation and tax changes are unlikely, in themselves, to generate at once the magical flood of new resources needed to eliminate current inflation. And unless inflation can be curbed in the short run, it is unlikely to be cured in the long run. A good case can be made, after all, that our high and accelerating inflation has itself become the principal drag on long-range investment and growth. As long as inflation is rampant, unsettled economic and social conditions themselves profoundly discourage personal saving and long-range business investment.

In summary, as the government's own undisciplined spending remains the principal efficient cause, inflation cannot be curbed without addressing directly the problem of the government's budget, that is to say, the existing structure of domestic and foreign goals and commitments. Without eliminating the government's perpetual deficits, supply-side economics will prove only one more in a long line of postwar gimmicks.

Along with economic gimmickry, recourse to foreign policy has been our government's other conventional escape. Along with its new version of Kennedy economics, the Reagan Administration will doubtless be tempted to restore a Nixonian foreign economic policy. Since the present policy dilemma over inflation is made urgent by America's geopolitical decline, a restoration of American external power is bound to seem a highly attractive alternative to domestic budgetary battles and strategic foreign retreats. Decline in America's geopolitical primacy was, after all, a major campaign issue.

The new Administration has arrived in power with two broad theories about America's foreign decline and how, therefore, to reverse it. What might be called the Administration's Literary Right sees the decline in recent years as a pusillanimous failure of will to compete with the Soviets, a diffidence combined with wishful thinking about Soviet intentions and an excessive tenderness toward the outrageous claims of the Third World. The other major theory, understandably popular in Kissingerian circles, blames American decline on a radical falling off of competence in the management of foreign policy after 1976.

Hopes for a quick restoration of American power rise from these analyses of the decline. Moral and military rearmament, it is believed, can restore American primacy. With restoration, Nixonian economic policies could also presumably revive. OPEC could be intimidated and Europeans overawed. Time would be made available for expansive supply-side economics to bring about structural improvements. Inflation could be cured through abundance rather than restraint. Foreign power would once again come to the aid of domestic economics. How realistic are such hopes?

To begin with, while the Nixonian economic policy has helped several sectors, it also brought inflation rather than real prosperity, as our present condition makes clear. But quite apart from its questionable economic expectations, the case for a restoration of American global predominance depends upon an unrealistic and excessively partisan view of why American power has declined. While the Carter Administration, like most others, doubtless had its inadequacies, the geopolitical decline that underlies the current impasse is not some fortuitous collection of accidents and tactical mistakes, nor the consequence of a pusillanimous disposition in high places. The contradictions manifest in Carter's foreign policy were long-standing. They reflected a persisting American failure to develop a basic strategy appropriate to the logical evolution of the postwar world. The point needs to be addressed before returning directly to its economic consequences.


Many of Carter's awkward tergiversations in foreign policy reflected the effort to sustain already obsolescent American perspectives of the 1960s, carried over in Kissinger's flashy reconstruction of the 1970s. These views have become the "mother errors" in American foreign policy. They include not only the inadequate foreign and domestic economic policies that have already been described at length, but also an unrealistic view of détente and an unrealistic view of transatlantic relations.

To start with détente: neither Carter, nor Kissinger before him, thought through adequately the consequences of a détente policy toward the Soviet Union. Just as Kissinger wanted hegemony on the cheap in the Middle East, so he expected détente on the cheap in the world at large. Both expectations represented wishful thinking doomed to disappointment.

Ever since the 1960s, détente had rested upon America's increasing acceptance of Soviet nuclear parity. Predictably, nuclear parity would alter decisively the American capacity to deny the Soviets influence in the world at large. Since the growth of Soviet strategic nuclear power had manifestly been accompanied by expanding Soviet conventional capabilities for intervention beyond their traditional sphere, strategic parity pointed toward a troubled period of local challenges and negotiations. It was unreasonable to acknowledge the Soviets as our strategic equals without expecting them to demand a greater influence in local affairs throughout the world. But in regions of vital interest to the West, like the Persian Gulf, Soviet adventurism could easily deteriorate into direct superpower confrontation. Under these circumstances, it was essential for the United States to do its best to limit the opportunities and raise the costs of Soviet meddling. In a world of rampant nationalism, much of the effort, to be effective, would have to be diplomatic, economic and political.

There was also an inescapable military dimension. The Russians were particularly likely to lose their heads in a world where the conventional military balance was shifting decisively against the United States. It was hardly the time for a drastic drawing down of conventional American military strength. Since, with parity, neither side could credibly resort to strategic threats over peripheral challenges, local military and political power would logically grow more decisive. But Nixon and Ford, caught in the backlash of the Vietnam War, gradually cut real military spending, particularly after 1972. Most cuts fell on conventional arms, particularly after the end of the draft in 1973. Carter tried to reverse the trend, but still without the draft20. But as Carter's budgets illustrated all too clearly, major additions to defense expenditures could not easily be reconciled with the fiscal discipline needed to control inflation.21 No amount of patriotic rhetoric or fiscal legerdemain could make the dilemma disappear.

Carter's political problems were compounded by the general overselling of détente, typical perhaps of all postwar Administrations but particularly egregious in the Nixon-Ford era. Nixon and Kissinger, like Kennedy and Johnson before them, had a strong tendency to talk as if détente would resolve the world's problems. Such expectations not only belied the probable effects of parity on Soviet-American competition throughout the world, but also exaggerated the capacity of either Russia or the United States to influence global events. In reality, both superpowers were growing relatively less important among states. Even had they wished it, they could not have run the world between them. Their diminishing power, moreover, while not diminishing their competition, did change its context and form. As the superpowers declined, the international system of cold-war blocs gradually gave way to an arena of volatile nationalist states. Alignments grew more conditional and wary. Double-dealing was to be expected.

No Administration in the 1970s took on the task of giving the public a proper set of expectations about Soviet-American relations. No one provided a new strategic idea to replace the bipolar containment of the Acheson-Dulles era. Hence a new public consensus was never created around a realistic view of America's diplomatic and strategic position following strategic parity. The United States was thus doubly unprepared for parity. The public had unrealistic expectations from bipolar negotiations, while the military was woefully unadapted to cope with the new situation. As the public inevitably felt deceived in its expectations about the Russians and outraged at American weakness, it turned against SALT and détente itself. Foreign policy without a firm base in public support gradually lost its legitimacy. An increasingly confused and unpredictable public opinion oscillated between impossible expectations and unreasonable anger. With political leaders providing no clear and realistic conception of national interest, foreign policy soon became captive to vigorous special interests.

This inability to lead the American public toward accepting a more complex world must be counted as the major failing of American foreign policy in the 1970s. Like the failure in America's foreign economic policy, it was a failure at home rather than abroad. The fault lay not with the Russians, who, on the whole, behaved as might have been expected: they kept their strategic agreements without ceasing to be as cautiously aggressive as they have always been. The fault lay with an American leadership that expected more from superpower détente than it could reasonably deliver, that failed therefore to endow the American public with a realistic view of the world and failed, finally, to equip American forces properly to deal with that world.

The consequences were by no means limited to Soviet-American relations. The same inability to grasp the evolving character of interstate relations began to poison transatlantic relations as well. Superpower détente based on nuclear parity called for a basic rethinking of the constituent strategic principles within the Atlantic Alliance. Soviet-American nuclear parity would inevitably put in question the credibility of the American deterrent for Western Europe. A new American attitude toward independent European deterrents was in order, along with a reshaping of NATO.

Reshaping, however, hardly meant ending the Alliance. Under almost any conceivable circumstances European deterrence is greatly reinforced by its American connection. But it meant recognizing that the American deterrent would no longer be considered, in itself, sufficient for European security. Increasingly, collective nuclear security based on American power would have to be supplemented by European national strength. Kissinger, while talking a good deal about adjusting to a more plural world, had, in fact, done his best to sustain America's European hegemony in its most traditional form. The Carter Administration, in the same vein, had actually reinforced American opposition to nuclear "proliferation" and thereby came perilously close to a major quarrel with the European allies over commercial nuclear development.22 In summary, America's European policy revealed the same inner contradiction as its détente policy. A strategic policy with the Soviets that inevitably lessened the value of the American nuclear protectorate for Europe was combined with a strategic policy in Europe that presupposed its undiminished continuation.

American hegemony has been acceptable to Europe since World War II because it has provided security not only for Europe's own territory, but also for Europe's access to raw materials and markets in the Third World. At the same time, as America's combination of inflation, dollar depreciation, and failure to adjust to high energy prices increasingly offended the interests of both the Europeans and the oil-producers, Europeans also grew increasingly skeptical of America's ability to defend their interests in the Third World. Instead, as has already been said, American policy seemed bent on destroying détente in Europe to compensate for America's weakness in the world at large. Thus, as American relations deteriorated with Russia and the Middle East, they also deteriorated with Europe itself. The causes were not only the long-standing economic frictions, but a growing divergence of security interests.

In summary, the present crisis in American foreign policy, like the crisis in domestic economic policy, has been gathering through several Administrations. As Europe and Japan have revived and the Third World developed, the international system has grown more plural. With strategic parity, the superpowers have themselves grown more equal. These changes have inevitably affected America's world position. They represent not so much the decline of America as the revival of the world.

They do not, moreover, represent the defeat of America's fundamental postwar policy. On the contrary, with its goals of European recovery, superpower détente, and Third World development, American world leadership has encouraged the very evolution that has led to its own relative decline. While, from one perspective, such a policy may seem foolish or irresponsible, from another, it seems not only generous but eminently practical. In this latter perspective, the United States lacks the temperament and institutions to impose a permanent imperial order. And despite America's continuing vast resources, a reviving world is unlikely to tolerate any imperial system for more than a few decades. To base America's future as a nation upon its episodic career as the dominant world power would have been a very bad bet historically.

Nixon economics, to be sure, was a mutation in that postwar policy. America's domestic prosperity came to depend upon the exploitation of her geopolitical primacy. A predictable evolution of events since the late 1970s has now shaken that primacy, with a resultant discomfort to domestic prosperity. To try to restore primacy would be, in effect, to try to reverse the geopolitical trend of the past two decades. Such a policy, if pursued seriously, carries great risks for ourselves and for the world. Among the greatest and most immediate risks is the predictable effect of such a foreign policy on domestic American inflation, as a look at the current budget makes clear.


Prospects for fiscal balance deteriorated markedly in the final days of the Carter Administration. In early 1980, the President was calling for a balanced budget. By the end of the year, estimates of the deficit for fiscal 1981 were running up to $60 billion.23 Reagan came to office pledged to end Carter's inflation and stagnation. By early March, the outlines of the new program had been sketched.24 Despite the new President's great popularity and the public's widespread concern over inflation, opposition has been gathering. The budget debate will become a major political battle. That is as it should be.

Problems of budgetary control go to the very heart of the nation's character and capacity for rational government. A budget is a mirror of the political system and the society beyond. A budget perpetually out of balance indeed suggests ambitions in excess of resources. But where does the excess lie in the American budget? While the subject is obviously vast and controversial, some crude but compelling generalizations may nevertheless serve to illustrate the broad issues. Along with supply-side tax cuts to induce investment and growth, the Reagan proposals demand drastic reductions in domestic spending and sizable increases in military spending. In effect, the burden of fiscal adjustment is to fall on domestic programs. No doubt all capitalist countries have grown self-indulgent and any serious attempt to bring American inflation under control will require a determined campaign to cut domestic expenditure. Among the advanced industrial democracies, however, the United States does not appear exceptionally profligate in the sums it devotes to domestic purposes.25

Expecting to balance budgets largely by deep cuts in domestic programs therefore presupposes either that the American government can provide services more efficiently than other governments, or that the American people are less demanding than those of Europe. Neither presupposition seems well founded. The country's size and diversity, reflected in its Constitution and general political and economic culture, make an exceptional degree of bureaucratic efficiency improbable. And without the violent shock of a major war, the American public is more likely to resemble its European cousins than the disciplined and downtrodden Russians.

America's comparative military spending is another matter, as the following table makes clear:


United States 5.2 percent

United Kingdom 4.9 percent

France 3.9 percent

Federal Republic of Germany 3.3 percent

Italy 2.4 percent

Japan 0.9 percent

??Source: The Military Balance, 1980-81, London: International Institute for Strategic Studies, 1980, p. 96.

Is America's defense budget too large? Controversy over this subject has raged for several decades, and is unlikely to be resolved here. Much of the traditional argument concerns itself with the usefulness of particular weapons systems-manned bombers, mobile missiles, aircraft carriers, etc. Over three-quarters of military expenditures go for "conventional" forces. A large proportion of those expenditures either go to manpower, or are tied closely to the level of manpower.26

Different foreign policies obviously require different military resources. The proposals and pronouncements from the Reagan Administration suggest it may be flirting with restoring America's world primacy. Such a policy, turning back the geopolitical clock to the mid-1960s, would be very expensive. But even the Carter Administration, presumably devoted to détente and a more relaxed international view generally, nevertheless felt America's present international role and commitments required augmenting military expenditures substantially. Was the Carter defense budget also too large?

Most of Carter's increases went for conventional forces.27 Behind the increases lay the Administration's perception that, in a world with greater Soviet reach and so many new powers, trying to hold the same commitments with stretched forces increasingly risked embarrassment and danger. Experiments with "hegemony on the cheap," using surrogates such as Iran, were reckoned to have turned out badly. In short, even the Carter Administration believed the United States insufficiently armed for its commitments.

Should this widely held belief be true, saving money on defense, if it is to occur rationally, requires some new formulation of national interest that reduces American commitments, and not merely the forces used to meet them. To reduce spending in a world where power is increasingly widespread, the United States will have to concentrate its own military responsibilities, while relying on a more effective diplomacy to seize the advantages of leverage. Such a course assumes the existence of regions where American interests are no longer worth the resources needed to underwrite their security, or where indigenous forces are themselves able to take a significantly larger share. Are there such regions?

Any inventory of American commitments in the world is bound to note the central place of European defense and the anomalous relationship between the United States and the West European states. For three decades, from a third to a half of the entire American defense budget has been devoted, directly or indirectly, to forces to defend Western Europe in a massive conventional war. In the 1981 fiscal budget, the cost is reckoned at some $81 billion.28 In effect, the United States assumes the primary responsibility for managing the continent's conventional defense. Hence an American commander for NATO, a fleet in the Mediterranean, large tactical air units, and ten divisions either stationed in Europe or able to get there in time for the decisive battles.

America's commitment to manage Europe's ground defense was undertaken in 1950, when American strategic superiority made a European land war improbable. At the same time, the weakness of the European states made their own self-defense problematical and American reassurance essential to their recovery. This American commitment to a mass army for Europe has now continued for over 30 years, with little or no account taken of Europe's economic and political recovery. While the reasons for America's profound interest in Europe's fate may not have changed since 1950, by any objective measurement of relative resources the United States plays a disproportionate role in European defense. Meanwhile, the Soviet Union has achieved nuclear parity, which inevitably undermines the credibility of our foreign commitments. And the United States itself has given up the draft in the face of a deep public antipathy to military service, a development that obviously limits our ability to provide a reliable mass army for a continental war.

America's huge annual bill for NATO reflects a fundamental political problem within the Alliance. Today the major countries of Western Europe are among the world's half-dozen richest and most powerful states. But NATO's structure still suggests a relationship appropriate to the Romans and their auxiliaries, or Napoleon and his satellites. This Napoleonic model means that we actively manage Europe's forces and hence are constrained to keep a preponderant conventional force of our own for the European theater.

In place of the present Napoleonic structure, a more traditional balance-of-power alliance seems in order. Shifting responsibility for managing European ground defense to the Europeans could, in theory, save the United States a substantial budgetary sum. It can be estimated, for example, that disbanding six of the present ten U.S.-NATO divisions would alone bring, within three years, an annual saving to the defense budget of some $30 billion.29 Saving on any such scale could go a long way toward ending America's regular fiscal deficits. For the years 1977, 1978 and 1979, for example, the annual deficits were $45 billion, $49 billion and $28 billion respectively. In the coming budgetary battles, with painful domestic sacrifices being called for, potential savings of this magnitude are unlikely to escape notice. Among other things, such savings would make it much easier to find the resources to counter Soviet adventurism in the Third World.

American leaders have been trying to shift NATO burdens to the Europeans since the early days of the Alliance. Despite Europe's great increase in resources, the United States has never succeeded. Every Administration has had the same quarrel. Carter's celebrated argument over three-percent increases was only the most recent in a long series. America's poor record suggests the need for a new approach. Without pretending here to elaborate the details of a new Alliance policy, certain broad orienting principles may at least be suggested.

The first has to do with the relationship between the American contribution and the American role. As long experience indicates, major European powers only grudgingly contribute more to arrangements that keep their defense under direct American control. Within an alliance, military power and political independence tend to go hand in hand. Of the three major European states, France has increased its defense budget the most in recent years, Germany the least. France, it may also be noted, is the only West European country that has already moved to a traditional alliance relationship. In short, the most probable way to get the Europeans to take a much larger share of the burden of NATO is to let them run it.30 At the very least, it seems time for a European commander to head NATO. Certainly the reintegration of French space and arms into the military alliance, if this could be achieved, would in itself be worth several American divisions.

A second orienting principle follows from the first. In the end, transformation of the Alliance cannot be limited to its non-nuclear aspects. Soviet-American nuclear parity logically calls for a stronger independent European deterrent. The issue will be forced upon us in any event. Ground defense cannot be separated from control over tactical nuclear weapons. Distinctions between tactical and strategic nuclear weapons are inevitably breaking down in the European context. Since the days of the multilateral nuclear force, American attempts to give Europe more deterrence without more independence have been ingenious but unsuccessful. If we wish Europe to rely more on its own resources, we will have to be prepared for more powerful and independent European nuclear defense.

To be serious about transforming NATO, a third orienting principle would also be needed. The United States should stop using Europe's hesitations and divisions as a pretext for America's own inaction. European states are pluralist democracies. Public opinion is deeply divided over many issues, but no more so than in this country. Politicians out of power often take irresponsible positions, a defect not unknown on this side of the Atlantic. It should not be assumed, however, that Europe's major states could not reach working agreements on anything so relatively obvious as their own common defense against the Soviets. European political leadership, after all, is not notably less responsible than our own.

France and Germany form the necessary core of any European construction. They have learned to harmonize their efforts over a wide range of vexatious domestic economic concerns. They, along with the British, have large and efficient military forces, flourishing arms industries, and formidable military experience. Obviously the French, as well as the Germans and British, are loath to trade present arrangements giving them American-subsidized security for a more responsible, expensive, and constraining role in managing European defense. And Europe's smaller countries would prefer a distant and distracted America to the more active leadership of their own big neighbors. Under the circumstances, for Washington to use evidence of disunity as an excuse for preserving the status quo is always plausible, and playing countries off against each other all too easy. But if we grow serious about reducing the cost of our NATO commitment, we must assume that Europe's big powers will act as responsible states and must ourselves not try to prevent them from doing so.

Increasingly, our choice is not a free one. Reflections on these Alliance questions cannot be separated from the pressures of our present economic predicament. Against the risks of change in NATO must be weighed the certain international deterioration implicit in a continuing American inflation. Reforming America's European commitment would, of course, be only a step toward curing America's inflation, not a panacea. But without some such major breakthrough in military spending, prospects for real improvement seem dim. The present frustration of America's domestic and foreign policy may be expected to continue, and transatlantic relations to grow ever more acrimonious.


In conclusion, it may be useful to put both our European relations and our inflation in a broader historical context. Inflation not only permeates our political and economic system at home but, as has been discussed at length, has inextricably entwined itself with our policy abroad. Intuitively, many people see inflation as the manifestation of long-standing national hubris. This way of thinking grew popular in the late 1960s when the explosion of inflation and the agony of Vietnam were sensed as symptoms of a sort of national disequilibrium, of an ambition for leadership and benevolence grown extravagant and wanton.

In 1968, Americans elected an avowedly conservative government. The Nixon Administration spent its early years trying to restore economic balance at home while talking of a more realistic disposition of American power abroad. But it lacked the political strength, and perhaps the moral stamina, to persevere. It abandoned domestic economic restraint and used American power abroad to permit a seemingly painless inflation at home. In the face of growing Soviet power, it abandoned its halfhearted attempts to coax Europe into a new role and, instead, relied more and more exclusively on superpower détente. An adventitious and unstable supremacy in the Middle East underwrote a shameful delay in facing the energy crisis at home.

Seen in this historical perspective, Nixon and Kissinger's apparent foreign successes of the early 1960s take on a different look. Their pax Americana appears less a firm restoration than a nostalgic fantasy. Worse, it represents a false turning and a missed opportunity. While the old predominance was superficially confirmed in Europe and extended to the Middle East, the United States lacked the resources to sustain its positions. This lack of resources to meet all domestic and foreign ambitions, in turn, led to an exploitation of the international economic system increasingly intolerable to our allies and of questionable benefit for the United States. Manipulating the international system became the substitute for painful adjustments at home. Instead of domestic strength being the foundation of overseas power, diplomacy subsidized domestic prosperity.

Sadly, the breakdown in American foreign policy can be traced not to a failure of America's long-range strategy, but to the failure to exploit its success. America's historic policy was to restore Europe, not to conquer it. By the 1970s, European power had, in fact, recovered to the point where the United States should have played its "European card" in the interests of a new world balance. Unhappily, at a critical historical moment, American statecraft proved unable to press its own historic policies to successful completion. Instead, it wandered into a cul-de-sac of unsustainable pretensions in the world and wanton inflation at home. Not until the external system began to unravel in the late 1970s was there much support for domestic regeneration. Thanks to Khomeini we had Volcker. But, as the past decade ought to have made clear, equilibrium will not return to our economy at home without a more realistic balance of power abroad.

1 Economic Report of the President, 1981, Washington: GPO, 1981, p. 289. See also Bureau of Labor Statistics, Statistical Information Service for most recent Consumer Price Index rate.

2 Consumer Price Index, Economic Report of the President, 1967.

3 Actually, the federal budget has been in deficit since 1961, although Kennedy's earlier deficits were justified by conventional counter-cyclical policy.

6 Economic Report of the President, 1972, p. 297.

7 Trade balance computed on census basis. Computed on a balance-of-payments basis, the United States had a trade deficit in 1935. See Survey of Current Business, March 1972, p.38.

8 Economic Report of the President, 1972, p. 351.

9 Contrary to the popular impression, severe inflation preceded the oil-price rise by several years. Nixon's inflation did not "cause" the cyclical rise in oil prices, although it did help trigger the explosion of 1973. It also made real adjustment much more difficult.

10 Consumer Price Index, Economic Report of the President, 1981, p. 293.

11 Consumer Price Index, Economic Report of the President, 1978, p. 318 and Economic Report of the President, 1981, p. 293.

12 International Economic Indicators, U.S. Department of Commerce, Washington: GPO, December 1980, p. 58.

13 For volumes of oil imports, see International Economic Indicators, U.S. Department of Commerce, Washington: GPO, December 1980, p. 39.

17 See footnote 14. Despite the much higher prices, world oil consumption has not declined absolutely, nor have reserves risen significantly. With shortages widely expected in the mid-1980s, it becomes increasingly difficult to argue that the oil price is too high. See Robert N. Dunn, Jr., "Exchange Rates, Payments Adjustment and OPEC: Why Oil Deficits Persist," Princeton Essays in International Finance, December 1979.

19 See note 14. Between June 1973 and June 1974, OPEC prices jumped from $1.50 to $9.50 a barrel. The second big jump did not take place until November 1979, when prices rose to $24.00 a barrel. August 1980 saw OPEC set the price at $30 a barrel (for Saudi Arabian light crude). See International Financial Statistics, January 1981.

23 David A. Stockman as quoted in Peter Behr and Lee Lescaze, "Reagan Economists Urge Swift Spending, Tax Cuts," The Washington Post, January 8, 1981, p. A4.

24 A progressive series of supply-side tax cuts were to reach an annual sum of S100 billion by fiscal year 1983. These would, it was hoped, restore prosperity which would, in turn, augment federal revenues and cut transfer payments. Widespread deregulation was also expected to encourage long-range growth. To compensate for short-term losses of revenue, cuts of some $49.1 billion in civilian expenditures were proposed for fiscal year 1982, with the total to rise to $79.7 billion in 1983. Large increases in military spending authorizations, however, were requested on March 4, but the impact on 1982 was estimated at only $4.8 billion. In general, tight monetary policy was counted upon to dampen any inflationary impulse from fiscal policy. The Fed would be helped, it was hoped, because the new Administration's manifest determination and competence would lower "inflationary expectations." See America's New Beginning: A Program for Economic Recovery, The White House, Office of the Press Secretary, February 18, 1981. For military requests, see The New York Times, March 5, 1981, p. A1.

25 Government expenditures for social security programs as percentages of GNP for selected countries were, in 1977, as follows: Canada: 14.6 percent; France: 26.5 percent; Federal Republic of Germany: 26.5 percent; Japan: 8.7 percent; Sweden: 30.7 percent; United Kingdom: 17.1 percent; United States: 13.7 percent. These figures are based on data provided by the International Social Security Association.

26 A precise breakdown of expenditures for conventional and strategic forces is complicated because major programs such as Research and Development, Central Supply and Maintenance, Intelligence and Communication, Administration, and General Personnel Activities encompass both. Nevertheless, Strategic Forces, in comparison with programs strictly defined as conventional (General Purpose Forces, Airlift and Sealift, Guard and Reserve Forces), present at most 15 percent of the total. See Department of Defense Annual Report, FY 1980, Washington: GPO, 1981, p. 321.

27 Whereas from fiscal year 1977 through fiscal year 1980, expenditures for strategic forces increased from $9.4 billion to $10.8 billion, expenditures for General Purpose Forces jumped from $40.2 billion to $50 billion (current dollars). Department of Defense Annual Report, FY 1977, p. A13; FY 1980, p. 320.

28 A precise cost for U.S.-NATO forces cannot be provided since most force elements have more than one purpose, and, in any major confrontation with the Warsaw Pact, all U.S. forces would be made available. Nevertheless, a recent U.S. response to the NATO Defense Planning Questionnaire estimates the cost of forces formally committed to NATO to be approximately $81.1 billion or around 51 percent of the total defense budget for FY 1981. The "formal commitment" figure is derived by adding the total cost of $57 billion for "forces rapidly available to NATO" (General Purpose Forces forward deployed in Europe and U.S.-based forces ready to deploy solely for the defense of Europe), and a sizable fraction of the total cost for "multi-purpose forces," i.e., $24.1 billion out of $74.8 billion. (General Purpose Forces that would be used in a NATO conflict but made available for other conflicts: Strategic Reserves, Strategic Forces, Intelligence and Communication facilities). Department of Defense estimates, 1981.

29 Congressional analysts assume an immediate annual saving of $2.28 billion for each NATO division disbanded, with double the annual savings possible from reductions in infrastructure and equipment costs within three years. The figure of $2.28 billion assumes a saving of $1.35 billion from the combat element (at full strength); $450 million from the sustaining increment (estimated at 75 percent of full strength); and $450 million from the tactical-support increment (estimated at 60 percent of full strength). Such calculations are inevitably complex and approximate and are presented only to give a rough idea of the magnitude of present costs. The figure of $30 billion in the text presupposes cutting six divisions, but not U.S.-NATO naval or tactical air forces. After the cuts, four divisions would remain for NATO purposes, presumably to cover one of the two sectors on the central front for which the United States now has direct responsibility. Basic data for the projections can be found in The Armed Forces Planning Cost Handbook, Washington: GPO, October 1979.

30 With 3.9 percent and 4.9 percent, respectively, both France and Britain had, in fiscal year 1979, a larger percentage of GNP in defense spending than West Germany, with 3.3 percent. For fiscal year 1981, West Germany increased its defense budget by 6.2 percent, France by 17.9 percent. At the end of 1980, the German inflation rate, at 5.1 percent, was roughly half the French.

To say that Bonn spends a smaller proportion of its GNP on defense is not to say that it lacks impressive military forces. West Germany has 495,000 men under arms, and a well-trained reserve force of 750,000, meant to be capable of being mobilized within 72 hours. Within that period all combat units up to brigade level are to be combat ready. Bonn's military force probably seems more formidable when seen from Moscow than from Washington. See The Military Balance 1979-80, London: International Institute for Strategic Studies, p. 94; 1980-81, p. 96; Défense Nationale, January 1981, p. 168; German military figures, courtesy of the German Information Center, N. Y.



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  • David P. Calleo is Professor of European Studies at the School of Advanced International Studies, The Johns Hopkins University. He is co-author of America and the World Political Economy and author of The Atlantic Fantasy, The German Problem Reconsidered and the forthcoming The Imperious Economy.
  • More By David Calleo