The Bear’s Lair: The costs of Wilsonism

To a British ear, President George W. Bush’s Inaugural speech Thursday was quintessentially Wilsonian, but from not one but two Wilsons – Woodrow, messianic World War I president of the United States and Harold, dirigiste socialist 1960s British prime minister. Woodrow’s faith in the ability of the United States to solve all problems abroad was combined with Harold’s faith in the state’s ability to solve all problems at home. The question is: what’s it all going to cost?

Woodrow Wilson believed that it was the United States’ mission to bring democracy to the world, failing to recognize in Central Europe that redrawing map boundaries on the basis of imagined ethnic affinities, while ignoring deep religious and cultural divides, was only storing up trouble for the future, in Yugoslavia’s case eighty years of future and counting. Bush appears to have extended this vision to the world as a whole.

Harold Wilson believed that intense government investment in education would produce a “white heat of technology” directed by his government and led by Yorkshire-accented scientists in lab coats, which would revolutionize British productivity and the British economy as a whole. Minus the Yorkshire accents, that appears to be the Bush domestic agenda, too.

The interesting question, however, is not the ethical one of whether Bush’s approach is a “good thing” or the political one of whether it will play in Peoria, but the economic question of what effect Bush’s stated policy would have on U.S. and world economic performance, should it be put into action.

We are talking primarily of the costs of a world in which the United States is deeply unpopular. To some extent, U.S. unpopularity is inevitable; the richest and most powerful country will always be unpopular – as Lord Salisbury, ruling the previous world hegemon, said in 1898 “I never seek to ascertain whether we are popular; the answer is writ in red in every quarter of the globe.” However, if the United States seeks to impose its vision of democracy on the world as a whole, by military force or by encouraging opposition groups against non-democratic regimes, the mild grumbling of envy will be replaced by something much sharper.

The rest of the world values “freedom” too, but that is a word whose meaning differs sharply depending on where you’re standing. One of the causes of the American War of Independence was sheer British incomprehension that the colonists regarded the liberty of Boston smugglers to flout British revenue laws as more important than the political, economic and religious freedoms already inherent in the British constitutional set-up.

To take an extreme example, the 1930 Horst Wessel Lied, anthem of the German Nazi movement, also invoked the ideal of freedom: “…The streets free for the Storm Troopers. Millions, full of hope, look up at the swastika; The day breaks for freedom and for bread. …Soon will fly Hitler-flags over every street, Slavery will last only a short time longer.” Just as freedom for a Nazi storm trooper meant the freedom to fly Hitler-flags everywhere and persecute Jewish shopkeepers, so freedom for an Islamic militant means freedom to proselytize his religion by force and arrange suicide bomb attacks against local Americans or Israelis. An American invasion force, or even an American education initiative, which attempts to restrict the local definition of freedom will meet all the resistance so famously organized by Washington, Jefferson and the Adamses – you do not need to be Patrick Henry to believe that “Give me liberty or give me death” is a very fine way to go.

“Good fences make good neighbors” and a sound foreign policy respects the rights of foreign peoples to organize their lives as seems best to them, however bizarre it may appear to a Lockean U.S. democrat. Violating this principle imposes costs, economic as much as political. These are of three types: (i) the direct economic costs of an activist foreign policy, (ii) the foregone costs of trade or investment that might have happened in a world un-poisoned by prejudice, but are now prevented by anti-Americanism and (iii) the direct costs of anti-American actions by “rogue states” emboldened by international support.

The direct costs of an activist foreign policy are substantial. The Iraq war has stretched U.S. military capabilities to their limits, and it seems clear that another such venture, while substantial forces remain in Iraq, could not be taken on without a major expansion in U.S. armed forces. The costs of such an expansion would certainly run to $250-300 billion a year, since either military pay would need to be substantially increased or a draft would need to be instituted, in order to attract the manpower that was required.

Because of U.S. unpopularity, it would be unlikely that any of this cost would be borne by U.S. partners – even Tony Blair’s Britain has suffered politically for the Iraq venture, and Blair has made it very clear he would oppose any further expansion of the U.S. role. Thus the size of the U.S. government would expand by at least 2 percent of gross domestic product; this in itself would reduce U.S. economic growth by only about ¼ percent per annum (assuming the regression effect between governmental size and economic growth holds true in this instance) but the tax and interest rate increases needed to balance the budget would substantially worsen its short term effect, even if there was some recovery in the longer term.

An expansion of the United States’ international presence that took the form of increased international aid, or increased support for the World Bank and International Monetary Fund, could be done much more cheaply – additional resources of $50-60 billion per annum, maybe ½ percent of GDP, would make a big difference here. The problem is that such an increase would not necessarily lead to the burgeoning of freedom and democracy throughout the world; indeed, increased resources for the World Bank and IMF would probably worsen democracy’s chances, because of those institutions’ economically and politically counterproductive mindset.

The principal short term cost of increased anti-Americanism might well come in the bond markets. Currently, the U.S. budget deficit of around $400 billion per annum is financed by purchases of U.S. Treasury securities by Asian central banks. While some reserves-rich countries, such as Taiwan, are reliably pro-American, others, such as China, are not. Even in Japan, recently a staunch backer of U.S. foreign policy (and reliable investor in T-bills) if the next election focuses partly on the Koizumi government’s support of the United States, in a period when the U.S. is unpopular, it could easily produce the same result as in Spain, an opposition administration which, while perfectly sensible in general, was elected on an anti-American platform and thus would indulge itself in low-cost “disses” of U.S. interests – such as investing Japan’s foreign exchange reserves in Euros, a move to which the U.S. could hardly greatly object. Should this happen, the inevitable result would be a further sharp decline in the dollar and a sharp rise in U.S. interest rates, both of them severely damaging to the U.S. economy.

In addition to its effect on the bond markets, another likely result of U.S. unpopularity would be an upsurge in protectionism, since the United States has been a major supporter of free trade, on which subject its influence would inevitably be reduced by isolation. Further, it’s likely that protectionist forces would strengthen within the United States if the country’s international relations became strained. Should this happen, there would be a major effect on the world’s economic growth trajectory, which would be likely to have a particularly unpleasant effect on the economies of emerging markets in South Asia and Africa, which are more dependent on international trade than the relatively autarkic, resource-rich countries of Latin America. Impoverishment of Pakistan and Bangladesh, in particular, both Islamic countries with large populations and poor economies, could hugely worsen the terrorism problem.

Finally, there is the danger from emboldened anti-American demagogues, who would be more likely to get elected in an anti-American world, and more likely to survive in a world in which they could call on worldwide anti-American resistance to any attempt to topple them. Strategically, the greatest danger is from rogue nuclear states, in North Korea. Iran or elsewhere, although to be fair any attempt by such a state to detonate a nuclear device against the United States would presumably cause a pro-American backlash around the world, even if the U.S. was “crusading.”

However, anti-American economic activity would be much more likely to meet with world support. The two areas where such activity might be effective are the Middle East and Latin America, both areas where anti-Americanism is already by far a majority view among the local populace. An oil embargo, for example, might well be instituted by the anti-American Hugo Chavez in Venezuela, but there can be little doubt that it would be enthusiastically supported by any Saudi Arabian government that was democratically elected or feeling the wind of democratic change.

Similarly, a simultaneous default on international debt by anti-American governments in Brazil, Mexico, Indonesia and Turkey (all of which are either anti-American now or could be by 2007) would cause a huge wreck in the international financial system and bring the New York banks, the World Bank and the IMF to the verge of bankruptcy.

One can think of other examples, but the point is clear.

In summary, the economic effects of a U.S. freedom “crusade” are almost certain to be highly unpleasant. Fortunately, it’s likely that Bush’s inaugural speech will prove when the chips are down to have been mostly empty rhetoric. In which case, he should fire his speech-writers.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long ’90s boom, the proportion of “sell” recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

This article originally appeared on United Press International