HAAS HAS IT BACKWARDS

Council on Foreign Relations is a Cause of Not a Solution for U.S. Problems

Council on Foreign Relations President Richard Haas is now on the speech circuit announcing his retirement after twenty years and saying he will now work on solving America’s biggest problem - America.

That’s right. Haas claims America is the most potentially dangerous country in the world right now. I don’t entirely agree, but I do understand his concerns and share many of them. What bothers me, however, is the fact that Haas and the Council have been major perpetrators of the policies and attitudes that have gotten us into the mess in which Haas says we find ourselves.

He came to Washington about when I did in 1981. At that time, the United States was a creditor country, meaning that the rest of the world owed it more money than it owed the rest of the world. Its international trade was roughly in balance although it was no longer the export king it had been in the preceding thirty years. Even more impressive was the fact that the gap between rich and poor was quite small. America was among the most equal of nations in terms of income equality and in-equality with a Gini coefficient of about .361. By 2015 that number had risen to about .462, a huge jump in Gini terms that put the U.S. in the club of countries with the highest income inequality. Today, the Gini has improved to about .410 but that still leaves the U.S. in the very high income inequality ranks. If we look at income distribution within the U.S., the rich have been getting steadily richer since 1980 with the top 1 percent of the income distribution receiving about 14 percent of total income compared to about 7 percent in 1980.

In the global market place, the U.S. has managed since 1980 to shift from being a creditor to being the greatest debtor nation of all time with about $32 trillion of international debt or almost 1.5 times our annual GDP of about $25 trillion. As Warren Buffett has noted, this enormous debt must be financed. Let’s pick an interest rate of say 3 percent (well under the current rate of about 5 percent). At that rate, the United States must pay about $1 trillion to foreign interests before the new year even begins. That equals about one seventh of the entire annual U.S. budget.

But, don’t worry too much about debt and deficits said Haas’s Council on Foreign Relations (CFO) in a formal study released in 2019. It continued by noting that the U.S. trade deficits help to drive global economic growth and provide low cost goods that enable more and wider consumption by U.S. middle and low income citizens. Of course, it did not calculate what the low cost of imports might mean for the amount of taxes citizens might have to pay to cover the interest on the accumulated U.S. trade debt.

I do not mean to attack Haas as a person. He alone is not the problem or even the cause of the problem. However, he perfectly represents the Council on Foreign Relations which is the High Church of the globalist American establishment that has gotten us into a very dangerous place over the past forty years.

COUNCIL ON FOREIGN RELATIONS

The roots of the Council go back to September 1917 when President Woodrow Wilson gathered a group of 150 scholars called The Inquiry to advise him on how to win the war and then establish a lasting peace in its wake. This group, headed by close Wilson advisor “Colonel” Edward House, developed the fourteen points that Wilson eventually used as the basis of the subsequent peace negotiations at Versailles. As the peace negotiations proceeded, The Inquiry became aware of a group of bankers and industrialists who called themselves The Council on Foreign Relations and who met to analyze and discuss the potential impact on business and global economics of a peace treaty. The Inquiry saw an opportunity to marry its work with that of the Council, and on July 29, 1921 the Council was formally incorporated in New York with Elihu Root, former Nobel Peace Prize winner and former Secretary of State and Secretary of War named as the Honorary Chairman. The first issue of its Foreign Affairs magazine appeared in September, 1922 and it quickly became the most authoritative U.S. voice on international affairs. In the late 1930s, the Ford and Rockefeller foundations began pouring money into the organization and it evolved into the most influential and powerful voice on foreign affairs and policy in the United States and perhaps in the world.

Both the retiring President (Richard Haas) and the incoming President (Michael Froman) perfectly reflect the American elite that has long run the Council and long played an extraordinarily powerful role in shaping American foreign policy. Both came from upper middle class families, went to elite colleges and universities (Oberlin, Rhodes Scholarship to Oxford for Haas, and Princeton, Oxford, Harvard Law Review where he met a guy named Barack Obama for Frohman). and then quickly went into government - Departments of Defense, State , and National Security Council for Haas, and National Economic and Security Councils, State Department, Department of the Treasury, and U.S. Trade Representative for Frohman. Neither speaks a foreign language or has lived abroad, and neither has any significant non-government or non-policy experience. Both epitomize the key American foreign policy thinkers and makers of the past forty years.

Here are some examples of the key CFR players over the past twenty years of Haas’s Presidency. The Chairman is David Rubenstein, a co-founder and co=chief executive of the Carlyle Group, a private equity investment group. A Vice Chairman is Jami Miscik who is the CEO and Vice Chairman of Kissinger Associates. Laurence Fink, Chairman and CEO of the big investment bank Black Rock, James Gorman, Chairman and CEO of Morgan Stanley investment bank, Tim Geithner, former U.S. Secretary of the Treasury (long time government employee) is now CEO of the investment group Warburg Pincus. In short, the Council is a good representation of who’s who in America. But the vast majority of its members have no actual, personal experience of life or of doing real, non-financial, business outside the United States.

Every person who has ever been the U.S. Trade Representative has been or is a member of the Council. Interestingly, only a very few of them had experience of international trade negotiations or of actually engaging in international trade or even of doing anything international before becoming the Trade Representative. Only one of them was or is fluent in a foreign language.

WHAT HATH OUR ELITE WROUGHT

Because of their relative ignorance of the world beyond America and of international trade and business, most of the USTRs, and indeed most leading U.S. foreign policy officials have been guided in their policy development and negotiations by the views of academics and pundits who inevitably establish a broadly accepted analysis that becomes the “conventional wisdom” any contradiction of which will result in harsh criticism and certainly not in invitations to become a member of the Council on Foreign Relations or of any other prestigious group.

Few Americans today realize that free trade and globalization were not the policies that made the United States rich and powerful. Even fewer realize that virtually all other countries who have become rich and powerful have done so as the United States did - by hugging the doctrines of mercantilism and protectionism. From 1816 until 1948, the United States maintained high tariffs on a large variety of imports and heavily subsidized new industries such as the telegraph, the railroads, the steel, aircraft, chemical, internet, artificial intelligence, and a host of other industries over the past two hundred plus years. This was not at all unique. It simply meant following in the footsteps of the UK, Germany, France, the Netherlands, Switzerland, and Sweden.

The United States only abandoned mercantilism after WWII when it had become by far the largest, richest, and most competitive economy on earth. In this environment, leading U.S. economists joined their U.K. brethren in calling for removal of tariffs and free trade. Reduction of U.S. tariffs and the opening of U.S. markets to imports was a powerful tool for supporting U.S. efforts at securing the new peace, establishing the UN, supporting the Marshall Plan and the recovery of Asia from the war. The main focus of the United States became international rebuilding from the devastation of World War II and then, very quickly, the Korean war and containment of the Soviet Union and Communist China. Free trade became a tool to be adopted for the geo-political purposes of expanding and defending the free world, not necessarily for maintaining or improving the competitiveness of the U.S. economy or the economic well being of American corporations and their workers.

In this environment, academic theories based on the two hundred plus year old thinking of Adam Smith and David Ricardo were combined with modern computer model technology to create a new quasi religion called globalization to which the American elite prayed and by which it swore. To work at all the models had to make a variety of really silly assumptions (no costs to close or open an industry, eternal full employment, no economies of scale in industries like steel, autos, aircraft, etc. and much more) that caused their predictions almost always to be far wide of the eventual actual result. (Remember, Ross Perot talking about the “great sucking sound” of lost jobs that would be caused by the North American Free Trade Agreement with Mexico? The models said their would be no such sound. But there was.) Nevertheless, if you did not pray at the alter of free trade and globalization, you were deemed to be lost in nether darkness.

A second key characteristic of our elite over the past fifty odd years has been a deep conviction that a policy of free trade and globalization that embraced China would inevitably turn it into a model of capitalism and democracy or at least of very relaxed, nominal communism. President George W. Bush stated at one point that free trade inevitably planted the seeds of freedom and democracy. His father, President George H.W. Bush had reacted to China’s June, 1989 massacre of 500 or so students demonstrating for democracy by immediately sending his National Security Advisor to tell Deng Xiaoping not to worry, that George Bush was his best friend in the world at that moment and would “keep the boats from rocking too much.” Bill Clinton campaigned for President on the slogan of “no dictators from Baghdad to Beijing”. But once having become President, he quickly shifted to a modus operandi that he called “positive engagement” that effectively encouraged U.S. businesses to trade with and invest and produce in China. He made me Vice Chairman of his Commission on Trade and Investment in the Asia-Pacific Region and urged it to find ways to enhance U.S. trade and investment in the area.

The second major blind spot of our elite has been its incredible inability correctly to read the nature, the intent, and the modus operandi of the Chinese Communist mind. Deng Xiaoping famously commanded his team to “bide your time and hide your light.” Why does a leader make that kind of remark to his followers? To ensure that they act politely? I always interpreted it to mean that Deng and the Party were ultimately out to get me. But the American elite, both Democrats and Republicans ignored the comment as, in the wake of the collapse of the Soviet Union, they celebrated the “end of history.”

The Chinese Communist Party (CCP) has never really hidden the fact that its ultimate objective is to displace the United States as the global leader and to undermine the democratic system.

Deng himself spoke of the possible “need for a new Cold War.” In 1998, Beijing began building the “Great Firewall” aimed at de-coupling (yes, it was China who wanted to de-couple, not de-risk, but de-couple) the internet in China from the Worldwide Web. Was that a signal of hostility? Bill Clinton didn’t think so. He laughed it off, saying that building a firewall against the internet would be like trying to past Jello to the wall. Our elite essentially ignored the action. Understand, that in 1998, Washington was negotiating with Beijing to enable it to join the World Trade Organization (WTO). Then U.S. Trade Representative Charlene Barshefsky declared that getting China into the WTO would be a great boon for America because China would have to remove its very high tariffs on imports while America’s tariffs were already quite low. Ergo, claimed Barshefsky, U.S. exports to China would soar while China’s exports to the U.S. would remain the same. As it turned out, Barshefsky could not have been more wrong. But why did she and the Clinton administration and the American elite imagine that in the wake of building a Great Firewall, China was going to just simply remove all of its trade barriers? Did they not realize that a whisper from Zhangnanhai (the residence of top CCP members) was far more effective at halting imports than mere tariffs? Why did President George W. Bush’s USTR Robert Zoelleck speak of the free world wanting China to be a “responsible stakeholder in the liberal, rules based global system”?

In 2012, Document number 9 was circulated within the CCP and more or less directly responded to Zoelleck, Barshefsky, and the American international affairs elite. It condemned in no uncertain terms freedom of the press, judicial independence, constitutional democracy, universal human values, and civil society. China scholar Rush Doshi notes in his recent and outstanding book, The Long Game, that China has indeed been playing a long game against the west and especially the U.S. and he underlines that our China and Asia experts have missed or misunderstood the game.

Finally, in 2015, Beijing published its new five year economic plan entitled Made in China 2025. This plan stated directly that China intended to be the dominant player in semiconductors, artificial intelligence, telecommunications, bio-tech, and so forth. It further said that China would do this by in various ways subsidizing and protecting these industries in China from excessive foreign competition. This did finally, open some western eyes. Indeed, on March 3, 2018, The Economist, the flagship publication for the English speaking economics elite and a promoter of free trade since the 1840s, announced in its cover story that “the west has made the wrong bet on China.” The article admitted that all the talk of “democratization via globalization” and of China becoming “a responsible stakeholder in the liberal, global system ” had been and is nonsense.

DECLINE OF THE AMERICAN MIDDLE CLASS

Not mentioned in The Economist article, but very much in the American public mind is the decline of the country’s middle class and its formerly rock solid global financial position that has occurred over the last forty five years of globalization and creation of Chimerica. In 1980, wealthy Americans actually paid taxes and working class Americans earned enough money that a family of eight could make out well on a single modest salary and send all the kids to college. I know this because my family did it.

Ronald Reagan, under whom I served as Counselor to the Secretary of Commerce, was dead set on reducing taxes, especially those on the rich like himself. He launched a round of tax reduction that has carried on for forty odd years and helped make the United States the biggest debtor nation ever seen. Consequently, the well off of America hardly pay taxes and as a result of the globalization promoted by the country’s elite like the members of the Council on Foreign Relations its workers no longer earn enough to be classified as middle class or even working class. Professional economists are loath to admit it, but the free trade they have all been promoting for the past seventy years has concretely demonstrated the validity of the Stolper-Samuelson principle that free trade between rich and poor nations will inevitably lead to a sharp decline in the wages paid to workers in the rich nations. Thus disappeareth the middle class.

CONCLUSION

The American elite is ignorant and shallow. It has been leading America astray economically and strategically for at least the past fifty years and has not yet faced up to its ignorance and short sightedness. If Haas truly wants to save America, he needs to go back to its future.