U.S. can and must rebuild economic muscle

By Lee Hamilton
Sep 22 2008

 The notion that foreign and domestic policies are entirely separate is fanciful. America's domestic strength and dynamism is the foundation upon which its capacity to act on the world's stage rests. Our preeminence in world affairs is not sustainable without a strong economy here at home.

Worryingly, we have witnessed the economy's vital signs take a turn for the worse. Budget deficits are spiraling upwards, our annual trade deficit is over $730 billion, the dollar's volatile, and collapses at Bear Stearns, Fannie Mae, Freddie Mac, and AIG have brought government intervention.

The U.S. is the world's leading debtor, has the world's largest current account deficit, and is the world's leading importer. How long can we continue down this road and remain the global economic leader?

All of this, of course, can be overstated. The trend lines are unfavorable but not irreversible. Still, America's relative strength is not what it was. We are now the second–largest market in the world (the EU is first). The dollar's primacy is no longer assured. Our dominance in world capital markets has slipped.

These economic woes have clear foreign policy implications. If we were less dependent upon foreign oil and gas, we would not be so tied to events in the Middle East. Over decades, the great failure of U.S. foreign policy has been the absence of an effective energy policy.

If we did not have such a substantial trade deficit with countries like China — which finance our debt and provide much needed capital through sovereign wealth funds — we would have more freedom of action in economic affairs. Chinese central banks' holdings of Fannie Mae's and Freddie Mac's bonds influenced the timing and structure of the U.S. Treasury's bailout.

So, we must address vulnerabilities in our economy that brought us to this point: dependence on foreign oil, abysmal domestic savings rates, spending far beyond our means, consumption outpacing production, liabilities totaling $455,000 per household, reliance on foreign sources of capital to keep the economy afloat, the country's diminishing innovative capacity, failing primary and secondary schools, poor infrastructure, spiraling health–care costs, unsustainable entitlement spending, and the stagnation of middle and lower class wages, aggravating income inequality.

These can and should be reversed. If they are not, this economic decline will surely continue.

In the short term, we will continue economic stimulus, bailouts and various government interventions to get our economy moving. In the longer term, there are no quick fixes. There will be painful adjustments ahead with some combination of tax increases, spending cuts, and more carefully targeted spending.

This is, however, about more than balanced budgets and trimming trade deficits. The United States must take the necessary steps to stay competitive in the global economy to sustain our economic power, something we haven't devoted enough attention and resources to of late.

We can remain on top if we are prepared to make the adjustments we all know we need to make. I have yet to find a Hoosier comfortable with our fiscal profligacy.

The world, in many ways, respects our leadership and is coming our way. We are well ahead in higher education and advanced technology, the two most important fields in the 21st century.

In addition, we should support free trade and work with other countries to conclude the stalled Doha round successfully, make sure our country invests more in basic science and technology, remains open to the skilled and unskilled workers our labor market demands, and spread globalization's economic benefits to all Americans.

Making such adjustments will enable us to continue to have an economy that is the envy of the world and sustain a robust foreign policy.

(Lee Hamilton is Director of the Center on Congress at Indiana University and Director of the Woodrow Wilson International Center for Scholars in Washington, D.C. He was a member of the U.S. House of Representatives for 34 years.)