Two years ago, the sun began to shine on the Western democracies. The collapse of the communist system, first in Eastern Europe, then in the Soviet Union, brought about a general euphoria that reached deceptive proportions. Now the situation has become dark and chaotic. In the Persian Gulf, Iraq’s invasion of Kuwait led to a confrontation which resulted in a crushing military defeat for Saddam Hussein without, however, removing his regime from power. Although the risks of military confrontation have been sharply reduced, the volatility of the region still presents major risks. Until a regional settlement is reached that is both political and economic, the potential for an explosion remains very real.
The breakup of the Soviet Union is a spectacular victory for the ideals of Western freedom and democracy, and, in particular, a victory for the US as the standard bearer of these ideals. It also may have unpredictable and dangerous consequences. The bold nuclear arms initiative announced by President Bush should make the world a safer place. However, it is impossible to predict the social, economic, and security impact of the breakup of the Soviet empire and the collapse of the Soviet economy. Every day, another plan is brought forward to “stabilize” the Soviet economy, each one a fantasy. No Western plan will be worth the paper it is written on until the various Soviet republics have decided on their political relationships, until they have sorted out their individual currencies, their banking systems, their internal and external security arrangements. This could take years: one cannot create a currency stabilization fund without a currency.
Nor can one speak of economic assistance to the Soviet Union without recognizing that the amount of capital which may be required is entirely beyond the capacity of the West to provide. West Germany may well have invested between $500 billion and $1 trillion in East Germany by the end of the decade. If this is required to bring a relatively advanced country of 17 million people up to Western standards over a decade, what will it take to bring fifteen republics of over 200 million people into some form of relative competitiveness when they are now fifty years behind the East Germans? For political as well as humanitarian reasons, the West must provide as much food, medicine, clothing, and other basic necessities as possible this winter. The original request for food amounted to $1 billion. It then grew to $7 billion and now stands at $14 billion. This is only the beginning. Another immediate concern will be to help the Soviets in the servicing of their external debt of over $60 billion. A default on this debt is imminent and would create serious new economic problems.
Over the longer term, a practical measure to assist the Soviet economy might be to increase the price of gold by international agreement gradually to, say, $500 per ounce; this could enable Russia, as the world’s largest gold producer, eventually to provide a gold-backed currency that would be accepted internally and externally. It would also have the advantage of revaluing significantly our own domestic gold reserves. Ultimately, the transformation of the Soviet empire into a group of free republics could result in a huge new market for the West which could be a boon for the world’s economy. However, over the next few years, it may not be possible to avoid social and economic chaos in the former Soviet Union, no matter what we do, with potentially dangerous consequences to the West, starting with Western Europe.
The political reactions to the breakup of the Soviet Union are already apparent in Western Europe. The prospects for European political union are fading, notwithstanding the economic integration that will take place in 1992. No European currency or central bank is likely until the end of the decade, if then. It is impossible to predict whether Europe will conform to the nationalistic visions of Charles de Gaulle and Margaret Thatcher or to the federal visions of the European Community in Brussels and of Jacques Delors. Greater economic stability would come about with a united European economy and currency to counterbalance the yen and the dollar in a free-trading world system; a setback to the political and economic union of Europe will be a setback for all of us.
We have stumbled into a world situation almost as unpredictable and dangerous as any we faced during the cold war. The dangers now, however, are of a different nature. We have derived great and justified comfort from our new cooperative relationship with the Soviet Union. Now there is no Soviet Union and only uncertainty has taken its place. Who will help us to maintain peace in other, more unstable regions around the globe, and who will also encourage a free and fair trading and investment system around the world? Maybe a new Europe ten years from now, but certainly not today. Not if one looks at the performance of the EC during the Gulf crisis, or in the Yugoslav crisis, and at its failure to provide for Eastern Europe. Neither does Japan seem prepared to assume these kinds of responsibilities.
For the foreseeable future, although the Atlantic Alliance will continue to be the cornerstone of our foreign policy, the US will have to become more self-reliant. Seen from this perspective what has happened to America for the last decade is particularly worrying. The United States is still the world’s preeminent superpower. For it to remain so will require military and financial strength, industrial competitiveness, and the highest level of intellectual capacity. Other than military strength, none of these requirements is in evidence today. In order to achieve them, we must be able to put energetic domestic policies into effect; we are not able to do so now, either at the national or at the state and local level.
Last year’s budget agreement in Washington was a reflection of the power of every possible special interest to prevent a real change in our country’s addiction to borrowing for consumption instead of investment. Amid all the fuss about a $500 billion five-year reduction in the budget deficit, very little notice was paid to the fact that, even after this supposed reduction, the national debt will still increase by 50 percent from its 1990 level of $3 trillion to more than $4.5 trillion in 1995. In 1980, the debt stood at $1 trillion; it tripled in the next decade, and will have quadrupled in fifteen years. So a little more than two hundred years after we achieved political independence, our financial independence has come to an end.
It is also worth noting that, throughout the debate over the budget, which was full of the rhetoric of “soaking the rich” and “protecting the middle class,” there was no attempt to deal with underlying problems: our loss of industrial competitiveness; the inadequacy of our public investments; the failure of our public schools; the inadequacy of the capital available to our financial institutions; the losing fight against drugs and crime. The budget agreement locked the administration and the Congress into a fiscal straitjacket until 1993, which makes it practically impossible to put into effect the basic policy changes that are both necessary and appropriate in the new international situation.
It is easy to understand why neither the administration nor the Congress was eager to refer to these issues. For the last decade, they have combined to sponsor the most gigantic spending and speculative binge in the country’s history. By cutting taxes and increasing defense spending while simultaneously failing to slow down the growth of entitlements, they have nearly bankrupted the richest country in the world. They have, simultaneously, devastated state and local governments and the basic needs these local governments are supposed to provide. This is the real price we are paying for the 1980s. In New York City alone, if the federal government had maintained its aid at 1981 levels, the city’s 1991 budget receipts would have increased by $2.4 billion. This would have been enough to close most of the looming city deficit and eliminate the need for some of the thousands of layoffs, service and construction cutbacks, and tax increases which will do enormous damage to the city. What is true of New York is true of every other major city and state in this country.
What is urgently needed now is a national administration that would be elected on the platform of a specific recovery program, and would be able to put that program into effect. The current paralysis in government cannot be allowed to continue. Although I am a Democrat, and I believe that the Democratic Party, if it adapts itself to the realities of the 1990s, is more likely to come up with a program to my liking, I would cheerfully support President Bush and the Republican Party if they were to propose one. Whatever the case, next year’s presidential election must be concerned with the role of government in an advanced industrial democracy such as ours.
The US today is the only superpower with the military and economic strength, together with the political stability, to enable it to exercise influence anywhere on the globe; and of all the major powers today, it has the most benign tradition so far as its geopolitical history is concerned. The war in the Persian Gulf and the instability in the Soviet Union make it clear that we have to maintain an unquestioned military capacity to deter aggression and react to it, if need be.
However, if we do not deal with urgent domestic problems which have long been neglected, we will not be able to exercise our influence as effectively as we have to. We cannot indefinitely maintain military forces with other people’s money. We cannot argue that we have sound foreign policies but that we are somehow deficient in dealing with our domestic problems. There is no dividing line between domestic and foreign policy today. The US has to maintain a global position in which our national security strength is directly related to our economic power and to our social cohesion at home. The success of tomorrow’s leading industries will depend on our investing not just in plant and equipment, but in knowledge and technology. This will require national commitments to improving education as well as to research and development; and unless Japan and some European countries change their way of doing business, some variant of a national industrial policy may well be needed to maintain a strong American position in key industries.
On the financial side, it is likely that there will be a worldwide shortage of capital. The commitments required for the development of Eastern Europe and for the stabilization of the new Soviet Union, of China, and of other parts of the Third World will require much more capital than the developed world is capable of generating. German and Japanese surplus capital will no longer be as readily and as cheaply available to finance American deficits as before. We will have to create capital through higher savings and rates of productivity; the capital will have to be cheap in order to provide a competitive advantage; and it will have to be available to export to other countries. We need a strong dollar with low inflation and low interest rates to achieve our objectives; not a weak one.