Biden's 'Foreign Policy for the Middle Class'

"Jake Sullivan, President Biden's national security adviser, delivered a speech in April about economic and foreign policy that deserves more attention. Mr. Sullivan crisply laid out a critique of what he regards as the excessively market-oriented policies of recent decades and offered an alternative, a "foreign policy for the middle class."

His speech reflected fundamental changes in the American economy and political order over the past three decades. After the fall of the Berlin Wall and collapse of the Soviet Union, the Clinton administration (in which I served) was confident that the emerging global order of market economies and democratizing nations would benefit the U.S. and the world.

For a decade, events seemed to vindicate this view. The American economy grew vigorously, and the gains were shared broadly. U.S. manufacturing stabilized during the 1990s. Real wages grew, and, despite a surge in worker productivity, the U.S. ended the decade with as many manufacturing jobs as it had begun.

Then the bottom dropped out. Between January 2001 and the onset of the Great Recession in December 2007, the U.S. lost 3.4 million manufacturing jobs, about 20% of the total. By the end of the recession, another two million were lost. Most of these losses were permanent, devastating many small towns and rural areas.

These developments helped fuel the populist revolt that began with the tea party and culminated with Donald Trump's election. They also challenged assumptions that had guided both political parties for a quarter-century. Support for free-trade agreements weakened, symbolized by Hillary Clinton's shift on the Trans-Pacific Partnership, an ambitious multinational pact she backed as secretary of state but repudiated during her presidential campaign. President Trump imposed tariffs on Chinese products entering the U.S. market.

With this history in mind, Mr. Sullivan led with a key assertion: Past policies have "hollowed out" America's industrial base. At the heart of these policies were assumptions that markets always allocate capital productively and efficiently, that the type of economic growth doesn't matter, and that economic integration would make nations more responsible and open and the world more peaceful and cooperative.

Each assumption turned out to be partially false, he argued. When certain types of investments yield positive externalities -- such as building an ecosystem of innovation -- their benefits won't be fully captured in market prices, which reduces investment in these sectors below optimal levels.

All growth is not created equal. Michael Boskin, chairman of George H.W. Bush's Council of Economic Advisers, once said: "Potato chips, computer chips, what's the difference? A hundred dollars of one or a hundred dollars of the other is still a hundred dollars." But the difference is obvious: Potato chips have consumer value but no strategic significance, and a sharp reduction in their availability would have no negative effect on other economic sectors.

Nor, Mr. Sullivan argued, had economic integration yielded the expected results. China's accession to the World Trade Organization gave it all the advantages of access to America's open markets without liberalization or democratization. The result: a "China shock" that hurt millions of American workers, the growth of China's subsidized state sector, a turn back toward outright autocracy in Beijing -- and a hardening of anti-Chinese sentiments across the American political spectrum.

At the heart of the response Mr. Sullivan proposed is a "modern American industrial strategy" that would invest public funds in sectors essential to economic innovation and national security -- semiconductors, critical minerals and energy -- as well as in traditional public goods such as infrastructure. "Our objective is not autarchy," he said, "it's resilience and security in our supply chains." The point of new trade agreements is no longer tariff reduction but promoting national objectives -- security, sustainable economic growth and the creation of good jobs that allow workers to support their families.

In effect, Mr. Sullivan has updated Alexander Hamilton's 1791 "Report on Manufactures," adapting the first Treasury secretary's strategy of promoting domestic manufacturing through protection for key industries, coupled with robust public investment.

This shift has been challenged in Democratic circles. Former Treasury Secretary Lawrence Summers worried that the administration's "extreme preoccupation with manufacturing," its subordination of consumer costs to other considerations, and its embrace of "aggressive economic nationalism" won't serve long-term U.S. interests.

It's hard to know whether events will prove Mr. Summers right. But it's clear that political support for the market-centered approach of the immediate post-Cold War era has weakened in both political parties. What will replace it? Donald Trump's "America First" or an alternative that leaves room for international alliances and institutions without sacrificing the interests of U.S. workers?

Mr. Sullivan deserves credit for setting out an organized response to the question. If others have better ideas, it's time to present them so we can begin the debate our future requires.” [1]

Where is the place of tiny Lithuania in all of this? Down the drain, Lithuania, you go… Investment is moving to America. Custom duties are preventing Lithuanian exports from competing in America’s market if some investment will be crazy enough to stay in Lithuania. Duties are needed to keep American workers happy. Lithuanian politicians killed the possibilities for Lithuanian firms to work in market of Belarus, China and Russia.

 

 1. Politics & Ideas: Biden's 'Foreign Policy for the Middle Class'. Galston, William A. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 31 May 2023: A.15.