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Reviving U.S. Power Abroad from Within

Authors: Richard N. Haass, President, Council on Foreign Relations Peter G. Peterson, Chairman, Peter G. Peterson Foundation Bernard Schwartz, Chairman and CEO, BLS Investments, LLC James Bacchus, Chairman, Global Trade and Investment Practice Group, Greenberg Traurig Grover Whitehurst, Director, Brown Center on Education Policy, Brookings Institution Edward L. Morse, Managing Director, Head of Commodity Research, Credit Suisse Doris M. Meissner, Director, U.S. Immigration Policy Program, Migration Policy Institute
Interviewer(s): Robert McMahon, Editor
December 30, 2010

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[Editor's Note: This is part of CFR's Renewing America initiative , which examines how domestic policies will influence U.S. economic and military strength and its ability to act in the world.]

The year 2010 drew to a close with the United States facing a burgeoning fiscal deficit and deepening political partisanship. The country's inability to confront its debt problem has been seen by some as a national security threat, while other primarily domestic issues were being linked to a decline in global competitiveness.

Seven leading experts offer ideas for rejuvenating the country and boosting its global standing. Peter G. Peterson, CFR's chairman emeritus, emphasizes budget reforms. Bernard L. Schwartz highlights the advantages of a major infrastructure program. James Bacchus notes the importance of expanding the U.S. trade agenda. Grover Whitehurst calls for recasting the federal role in advancing education. Edward L. Morse links domestic fossil fuel supplies to energy security. Doris Meissner urges concerted political action to enact "the well-known policy answers" to immigration reform.

At stake, says CFR President Richard N. Haass, is whether the United States will have enough "resources for national security, whether the American political and economic model will regain its lost luster, and whether Americans will be able to hold their own in an increasingly competitive world."

Richard N. Haass, President, Council on Foreign Relations

The foreign policy plate is full by any measure. A partial list of challenges facing the United States as 2010 gives way to 2011 includes the war in Afghanistan; a bellicose North Korea with nuclear weapons and an ideological Iran that appears intent on developing them; a Pakistan unable or unwilling to confront the world's most dangerous terrorists; a divided Iraq and uncertainty over whether U.S. forces should remain there after December 2011 if in fact they are asked to; the issue of how best to revive and steer negotiations between Israelis and Palestinians; and what to do to prevent war in Sudan, respond to a changing Cuba, manage a rising China, and slow the warming of the planet.

None of these rises to the level of the national security challenge presented, say, by Nazi Germany and Imperial Japan at the mid-point of the previous century or the Soviet Union in the wake of World War II. But there is an overriding national security challenge that arguably does: the ability of the American economy to generate the wealth needed to sustain U.S. global leadership along with the ability of American politics to generate policies to do the same. At stake is whether the United States will have at its disposal adequate resources for national security, whether the American political and economic model will regain its lost luster, and whether Americans will be able to hold their own in an increasingly competitive world marketplace.

[T]here is reason to address in a fresh way the perennial "guns vs. butter" debate about priorities and the allocation of resources; it may be prudent to focus more on internal challenges today so that the country is in a better position to meet external challenges tomorrow.

Because of the salience of these and related questions we at CFR have decided to place a special emphasis in 2011, our 90th anniversary year, on the theme of Renewing America. The comments collected here from a distinguished set of experts -- on the deficit and mounting debt, trade, immigration, energy, infrastructure, and education -- may at first glance appear to reside largely in the realm of domestic policy. But these issues can and do affect this country's capacity to act in the world. In addition, there is reason to address in a fresh way the perennial "guns vs. butter" debate about priorities and the allocation of resources; it may be prudent to focus more on internal challenges today so that the country is in a better position to meet external challenges tomorrow. This may be an unexpected stance for someone associated with the Council on Foreign Relations to advocate, but the reality is inescapable: The United States can only be as strong abroad as it is at home.

Peter G. Peterson, Chairman, Peter G. Peterson Foundation

Absent significant changes, the current long-term structural deficits will lead to unprecedented and unsustainable public debt levels that threaten the basic competitiveness and solvency of the country, risk a major economic crisis, and undermine America's global leadership role.

These debt levels would result in ballooning interest costs, which would eventually become the largest expense in the federal budget. Such interest costs buy us nothing, crowd out desperately needed investments in our future, and endanger our vital social-safety-net programs for the most vulnerable in our society. These safety nets must be preserved, particularly given how critically important the programs are to so many in America.

With the retirement of 78 million baby boomers [over the next 20 years], largely unfunded entitlement programs such as Social Security and Medicare, when combined with interest costs, account for all of the projected and unsustainable long-term growth in federal spending. These programs must be reformed and, in addition, defense savings, reductions in vast tax expenditures, enforceable budget controls, tax reform, and revenue increases must all be on the table.

Because of unprecedented deficits and our meager private savings rates, we are also becoming dangerously dependent on foreign lenders whose interests may be quite different from ours. These massive foreign debts raise increasingly important economic and political sovereignty questions.

[W]e must prepare for the future by consuming less, saving more, and investing more if we hope to adapt to this new global competition and maintain our status as the world's most innovative and vibrant power.

In turn, most advanced economies are also experiencing similar demographic forces and face vast, unfunded entitlement programs. Thus they, too, are confronting projected public-debt levels that are several times what major international financial organizations consider prudent. In other words, a global debt bubble is growing. Were this massive bubble to burst, it would have very destructive consequences for the entire world economy.

There is remarkable agreement among economists, political leaders, and businessmen that we must prepare for the future by consuming less, saving more, and investing more if we hope to adapt to this new global competition and maintain our status as the world's most innovative and vibrant power.

We are told we must become an investment economy. There is also remarkable agreement about where we should invest. We are told math and science, education, research and development, and our infrastructure are crucial elements. However, there is much less discussion of how we will pay for these added investments, given our daunting debt outlook.

There has always been an implicit connection between economic power, military power and what we might call foreign policy power. In previous times, America's economic exceptionalism has never been in question. Today, it is very much in question. And since perception is crucial in foreign policy, it is very much in the interests of the foreign policy community to get involved in persuading the president and Congress to confront our unsustainable, longer-term structural debts.

Bernard Schwartz, Chairman and CEO, BLS Investments, LLC

Nothing would do more to revitalize the American economy, strengthen U.S. national security, and improve the quality of life for the American people than a multiyear, public infrastructure investment program. And in the short term, nothing would do more to create jobs and stimulate economic growth. For these reasons, the Obama administration should make such a program its next bipartisan priority.

From 1950 to 1970, the country devoted 3 percent of GDP annually to spending on public infrastructure. Since 1980, it has spent well less than 2 percent, resulting in a huge accumulated shortfall of needed investment. Not surprisingly, a variety of infrastructure bottlenecks -- traffic-choked roads, crumbling water systems, clogged ports, an antiquated air transportation system, an inadequate passenger and freight rail system, and an unreliable electrical grid -- are now impeding economic growth. The Department of Transportation, for example, reports that freight bottlenecks cost the U.S. economy $200 billion a year.

Public infrastructure investment makes private investment more competitive globally by eliminating bottlenecks and by lowering the cost of transportation, electricity, and other core business expenses.

Even in the area of information technology, the United States trails other economies in the deployment of essential infrastructure, ranking sixteenth in the world in broadband penetration, according to the International Telecommunications Union. Perhaps even more worrying, there is growing evidence that uncertainties about the reliability of energy, water, and transportation systems are discouraging investment in some parts of the country, hindering new business investment and job creation.

Correcting this infrastructure investment deficit is critical to increasing U.S. competitiveness. Public infrastructure investment makes private investment more competitive globally by eliminating bottlenecks and by lowering the cost of transportation, electricity, and other core business expenses. It is also essential to the development of new growth industries. Many of the new growth sectors of the economy in energy, agriculture, and clean technology require major new or improved infrastructure. Finally, it is estimated that for every billion dollars of investment in infrastructure as many as thirty thousand direct and indirect jobs may be generated.

Some will argue that with already large deficits, we cannot afford a major infrastructure investment program. That is shortsighted. Such a program can easily be financed at today's historically low interest rates. By leveraging private capital through the bond market and through a national infrastructure bank, an investment over five years of $150 billion of public and private funds could produce a nearly $1 trillion infrastructure program. As is the case with any bank, loan repayment funds would be recycled into additional projects. Most important, it should be emphasized that this would be an investment program that would entail real investment in our future as opposed to support for current consumption. Unlike ordinary government operating expenditures, infrastructure investment increases tax revenues and creates new wealth, thus paying for itself over time as a result of increased productivity, stronger growth, and increased tax receipts.

James Bacchus, Chairman, Global Trade and Investment Practice Group, Greenberg Traurig

President Barack Obama seemed to discover international trade in 2010. This raises hopes in the United States and elsewhere that real progress may actually be made in lowering worldwide barriers to trade in 2011.

As one more means of jumpstarting the sputtering American economy and creating more American jobs, the president announced this past year a goal of doubling exports in five years. New export incentives and aggressive export promotion will continue in 2011.

But the president may be beginning to realize -- if he did not before -- that trade is not only about exports; it is about how exports and imports can combine in an international division of labor to create more overall prosperity for the entire world. Creating such prosperity requires much more than merely export incentives and export promotion; it requires increased market access everywhere.

This is why, in the past, Democratic and Republican presidents alike have made securing more market access by lowering tariff and non-tariff barriers to international trade the bipartisan cornerstone of U.S. trade policy. And this is why Obama will be driven to do the same in 2011.

By far the best way of creating more market access worldwide for American goods and services -- and more American jobs through more trade -- is by lowering trade barriers worldwide among all WTO members.

He got a head start toward yearend when the United States and South Korea resolved their longstanding differences over auto trade. This could lead to congressional approval early in the new year of the long-delayed free trade agreement between the two countries. Approval of the trade agreement with South Korea could also pave the way toward approval of long-pending free trade agreements with Colombia and Panama.

This in turn could open the political door, at long last, to renewed American leadership in breaking the deadlock in the decade-long Doha Development Round of global trade negotiations among the more than 150 member countries of the World Trade Organization. By far the best way of creating more market access worldwide for U.S. goods and services -- and more American jobs through more trade -- is by lowering trade barriers worldwide among all WTO members.

Although it is not at all clear where "Tea Party" Republicans stand on trade, Republican control of the U.S. House of Representatives in the new Congress should ease the way for all of this politically and could give the president yet another opportunity for achieving bipartisan success in the new year.

Clearly, much of the American focus on trade in 2011 will continue to be on China. Obama has resisted congressional pressures to take unilateral trade actions against China that may be inconsistent with WTO rules. In the new year, he can be expected to continue a policy of combining negotiation with selective litigation in dealing with a host of commercial issues between the two countries. The new WTO case launched just before yearend against Chinese wind power subsidies likely foreshadows more legal disputes with China and other countries involving green subsidies, export restrictions, standards, technical regulations, and other new and proliferating forms of protectionism.

Grover Whitehurst, Director, Brown Center on Education Policy, Brookings Institution

Education pays, on average, both for nations and individuals. Thus nations whose students excel on international assessments such as PISA and TIMSS or whose populations have higher levels of educational attainment typically have faster growing economies than nations that underperform educationally. China and India, among others, are making strategic investments in education as a key to their economic futures. Likewise, within countries, adults with more years of schooling typically have better-paying jobs and are less likely to experience unemployment. The current unemployment rate in the United States for those without a high school degree is about three times that of college graduates.

In this context, there is reason for concern about the United States, which has dropped to the second tier of countries in terms of attainment of college degrees by young adults and has remained about average in student performance on international assessments.

A federal role in education that creates the conditions under which people can choose the education they want based on good information about the likely consequences may be our best path forward.

Whereas the concerns about the U.S. education system are reasonable, the policy responses have been simplistic, perhaps even counterproductive. At the K-12 level, the federal government through the No Child Left Behind Act imposed on local school districts accountability for student proficiency in reading and mathematics in grades three through eight, with the goal of every child being proficient by 2014.

The Obama administration proposes to revise the law to focus on every high school student being college and career ready. At the postsecondary level, the administration wants the United States to regain the world lead in college attainment rates of young adults by 2020. Whether the goal is for every child to be proficient, college ready, or a college graduate, there is something akin to Soviet-era grain production quotas in these federal mandates in that they are unrealistic, disconnected from the means of attainment, and certain to produce distortions in production.

As the nation addresses its educational future, it should keep in mind that:

  • Education isn't a zero sum game -- the United States doesn't necessarily lose if China and India improve their education output dramatically.
  • "On average" returns to education mask large differences among countries and individuals. Many well-paying and satisfying jobs don't require a college education and some countries perform very well economically with education systems that do not prioritize college attainment for all.
  • Top-down reforms that flourish elsewhere are likely to flounder here because authority over schools is legally dispersed and because all the key leadership positions in the U.S. Department of Education are political and churn constantly.

A federal role in education that creates the conditions under which people can choose the education they want based on good information about the likely consequences may be our best path forward. If such a role is not central, it is at least essential and currently unfulfilled.

Edward L. Morse, Managing Director, Head of Commodity Research, Credit Suisse

The year will open with significant challenges for U.S. energy security. Rising oil prices, restrictions on deepwater drilling, and a likely absence of bipartisan support for energy and environmental legislation will mean increased focus on the Environmental Protection Agency (EPA) for energy policymaking. If the Obama administration wants new legislation, it should offer faster drilling in return for Republican support on an environmental agenda, opting for second-best solutions based on natural gas as a bridge fuel pending greater technological progress on renewables and nuclear power.

This past year's BP Macondo oil spill created a major setback. President Obama had just ended an offshore drilling moratorium in the hopes of legislating a bipartisan energy and environmental package. But the BP blowout hurt deepwater oil production with onerous licensing and the president's re-imposition of the drilling moratorium.

With legislation at a political standstill, EPA rulemaking could have an enormous impact on U.S. energy security.

The administration should relinquish its ideological attachment to renewables, and focus on the country's vast oil and gas resource base as bridging fuels to a more environmentally secure future.

A revolutionary outcome of recent high energy prices was the tapping into enormous shale gas and related oil resources in the United States. What threatened to be a growing natural gas deficit has turned into an increasing surplus, with plans to develop liquefied natural gas exports. Oil production also increased. North Dakota alone is now growing at 20,000 barrels per day each month. Other areas of the country, including Texas, Colorado, and California, could see total oil production grow by 2-3 million barrels a day by 2020, an enormous market-based lift to energy security.

EPA decisions on water use and shale fracking fluids could create obstacles to this extraordinary growth in U.S. hydrocarbon production. On the other hand, the administration should relinquish its ideological attachment to renewables and focus on the country's vast oil and gas resource base as bridging fuels to a more environmentally secure future.

The EPA will also be rulemaking over power generation emissions and could accelerate the retirement of the aging U.S. coal fleet encouraging the use of natural gas. Thus, the EPA has become the agency to deal with tradeoffs between environmental integrity and fossil fuel use for the next thirty years. Cleaner gas might not be as clean as renewable fuels, but it is a lot cleaner than coal.

Internationally, a new era of cooperation should open with Russia and China. Russia, the world's largest oil and gas exporter, is already becoming friendlier to foreign investment and to U.S. firms. Russian companies need foreign capital and technology to tap into deepwater and shale resources and want better access to U.S. markets. The United States and China, the two largest energy consumers and polluters, have common interests in stable markets and a mutual need to harness new energy efficient technologies by working together in bilateral public-private partnerships.

Doris M. Meissner, Director, U.S. Immigration Policy Program, Migration Policy Institute

Among America's defining characteristics is its history as a nation of immigrants and the world's most successful immigrant society. By most measures, immigration continues to be a critical resource for the United States in the 21st century.

Immigration was pivotal in keeping pace with job creation until the recession, filling gaps in the workforce across the skills spectrum and fueling entrepreneurship. Immigrants established one-quarter of Silicon Valley startups. They include powerhouses like Intel, Sun Microsystems, and Google that have been recent drivers of the nation's science and technology leadership, a cornerstone of American economic power. Immigration infuses U.S. society with a unique dynamism that is revitalizing social, cultural, and political institutions.

Immigration is also a dimension of soft power in U.S. foreign policy. Foreign student education and cultural exchange programs build international understanding and prosperity. Refugee resettlement reinforces principles of political freedom and social justice. The ethnic diversity of American society embodies respect and openness to other cultures and generates commercial and economic opportunities in a competitive global marketplace.

At the same time, communities all over the country are experiencing rapid change and uncertainty in incorporating diverse new populations that bring different languages and cultures. They challenge deeply held assumptions about the identity of these communities as well as the nation.

[Broken and outdated policies] have bred anxiety, anger, and divisive politics that are placing at risk the comparative advantages immigration provides.

Unprecedented levels of illegal immigration in recent decades have exacerbated widespread public antipathy toward today's immigration and are a disturbing sign of broken and outdated policies that have been ignored too long. These conditions have bred anxiety, anger, and divisive politics that are placing at risk the comparative advantages immigration provides.

Modernizing our immigration laws and systems requires action on two fronts: First is addressing the problem of illegal immigration, which then clears the way for designing policies suited to a world where competitiveness relies on increased mobility, and leading by example advances American interests at home and abroad.

The policy answers to the problems of illegal immigration and enabling the integration of newcomers are well-known. They include strong border enforcement and travel security measures; mandatory electronic verification by employers of the legal status of workers; updated visa criteria and numerical flexibility for employment-based immigration; and earned legalization for law-abiding unauthorized immigrants.

The impasse is political. Breaking it requires bipartisan action and tough choices. Immigration can help sustain America's leadership in a new century, if we harness its advantages and minimize its inherent tensions. However, the longer the overhaul takes, the longer we endanger a core attribute of our success and strength as a nation.

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