America Shines as Apostle of World Economic Growth

One of Washington’s favorite 1988 themes was “burden sharing.” The idea will probably stay around in 1989. Its adherents argue that our rich allies in Europe and Japan should pay a bigger share of the Western world’s defense costs.

The American complaint is that Japan and others have been “free-riding” under the U.S. defense umbrella. Worse still, the complaint goes, America’s budget and trade deficits have resulted from this free ride. Heavy defense spending has swollen our budget deficit while, freed of the defense burden, Japan and Europe have been able to compete better with American companies, thereby contributing to our trade deficit.

There is some truth to parts of the burden-sharing argument, though some of the conclusions drawn from it are faulty. The 1981-88 surge in defense spending added about $300 billion to budget deficits and, along with rapid growth of spending on Social Security and other government retirement programs, pushed up interest rates. The higher interest rates pulled in foreign investment that, until 1985, made the dollar much stronger. The stronger dollar made it more difficult for American companies to compete in world markets.

The stronger dollar and its harmful effect on American competitiveness was one of the major unanticipated negative effects of large budget deficits. The budget and trade deficits have come down, and the rate of dollar-buying by foreigners has slowed.

Despite lower budget and trade deficits, their persistence entails some dangers.The biggest risk is that the global preoccupation with the twin deficits and the defensive U.S. demand for more “burden sharing” will mask the recognition of some immensely important long-term achievements by America and its allies.

Since World War II the United States has spent hundreds of billions of dollars on direct and indirect aid worldwide. The primary aim was to contain the spread of communism. The Marshall Plan, the North Atlantic Treaty Organization, foreign-aid programs and--until 1971--easy access to U.S. markets on preferential terms all contributed to strengthening the economies of Europe and Asia.

Now we see ourselves as victims of our own success. The economies that we helped grew so much stronger, especially in Asia, that their exports to us now exceed our exports to them by more than $100 billion a year. And some, especially Japan, are turning around and investing in America with purchases of Treasury securities, land and buildings.

American ambivalence about the economic success of our allies has resulted ina protectionist trade bill and overblown scare talk about foreigners “buying into America.” Foreigners own about 10% of U.S. assets while America owns about the same share of foreign assets. Japan’s share of U.S. assets is about 2%--well behind the shares of the British and the Dutch.

Economic success on a level that included some investments in America apparently was not what Americans envisioned for our allies when we embarked on generous postwar aid programs. Feelings of altruism and generosity toward our allies have given way to charges of free-riding and downright ingratitude.

The start of the new year is a good time to reflect on some questions about our long-run achievements and goals for the world economy. Did we really think that America’s unprecedented economic and military strength right after World War II would last forever? Our aid strategy suggested that we did not want it to last, and, if that was true, our allies had to grow faster than we were growing in order to close the gap. Did we expect to decide unilaterally how far the gap could close? Would we not prefer that the strategy of encouraging economic growth worldwide succeeded? Is it so bad, in the richest country in the world, to be getting rich a little more slowly than others? (Yes, America is still richer than Japan. Doubters should live in Japan for a while.)

The other immense policy success that America should be celebrating in 1989 is the return on the much-maligned Reagan defense build-up. An extra defense outlay of $300 billion appears to have persuaded the Soviets to forgo, at least for now, another round of the arms race. If 1987’s intermediate-nuclear-force missile reductions in Europe and 1988’s Soviet troop reductions signal a cooling of the arms race that allows us to cut defense spending by just 2% of our gross national product for a decade, we’ll save about $1 trillion in 1989 dollars.

The most significant event of 1988 in the world’s major capitals--Washington, Moscow and Tokyo--was the collective realization that economic strength has become more important than military strength. It follows from this realization that, for both America and the Soviet Union, the economic challenge from Japan is more significant than the U.S.-Soviet military contest of the last several decades.

The fact that U.S. policies over the past 45 years have had a great deal to do with establishing the primacy of economic over military power should be a source of great satisfaction even though it presents us with a new set of challenges. The policy has been good for our allies, and ultimately it will be good for us. It has been a major disaster for the Soviet Union, a prime example of “imperial overreach,” impoverished by excessive military spending. Fortunately, for the Soviet Union and the world, Mikhail S. Gorbachev appears to have recognized the grotesque error of trying to run an economy without incentives for efficient production while draining away a huge share of resources for military use. The leftovers have supported only a third-class living standard for Soviet citizens.

If our friends are successful and our enemies unsuccessful in a new world of economic primacy, what is there in it for us? Plenty. Facing an economic challenge is invigorating, especially when you have at hand America’s great human and natural resources. The competition is tough. We’ll win some and lose some. But economic competition surely beats military competition or, worse, a war. Then everybody loses. That was the expensive lesson of World War I. Forgetting it resulted in an even more expensive lesson barely a generation later.

American leadership for more than two generations since World War II has been aimed at encouraging worldwide economic growth and competition, a positive-sum game. The signs of success all around us should be reminder enough that this is no time to give up.