Essay: A Grand Bargain For America Too?

Up at Harvard, economists from East and West have been concocting a so- called Grand Bargain between the Western nations, led by the U.S., and the Soviet Union. The details are still secret, but the basic idea is simple: Western aid to the prostrate Soviet economy in exchange for a commitment to radical political and economic change. The numbers being bandied about are $20 billion or $30 billion a year, three or four billion of that from the U.S., for five years. “The strategy,” write Graham Allison and Robert Blackwill of Harvard’s John F. Kennedy School of Government in the current Foreign Affairs, is to “create incentives for leaders . . . to choose a future consistent with our mutual best interest by promising real assistance for real reform.”

Critics of aid to the Soviet Union ask, If reform is in the Soviets’ best interest, as it surely is, why should they have to be bribed to do it? For an answer, the critics might look to the U.S. Listen to the New York Times < lecturing Soviet leaders: “First, Moscow would have to balance its budget . . .” Wait a minute, this is beginning to sound familiar.

Every outsider looking at the U.S. economy writes the same prescription: cut the government deficit, increase the savings rate, end wasteful subsidies of coddled industries like agriculture, increase investment in infrastructure and education. Just last month the Bank for International Settlements — the central bank of the world’s central banks — weighed in with precisely this advice. BIS noted that the U.S. net savings rate was 4% of GNP in the 1980s, compared with 20.9% in Japan. American public investment on roads, bridges, airports and so on is down to 0.25% of GNP, compared with 5.7% in Japan. And by no coincidence, our standard of living — as the popular culture is suddenly starting to realize — has been stagnating, by some measures, for two decades now.

America’s economic problems are obviously far less extreme than the Soviet Union’s. So are the steps needed to correct them. Yet America seems equally paralyzed. More so, in a way: the Soviet crisis is partly one of transition from a half-abandoned old system. The U.S. has no such excuse.

The problem, in both cases, is the same. Economic reform, though beneficial in the long run, requires sacrifice in the short run. Although the Soviet Union is not yet a democracy, its leaders must nevertheless fear the consequences of popular wrath. One school of thought holds that for this reason the best route to reform is based on the dictatorship model of Chile and Singapore: bring capitalism, and hope democracy will follow. But most skeptics about aid to the Soviet Union want democracy simultaneously or even as a precondition. The pious hope that democracy can ease and legitimate sacrifice for the national good is not exactly vindicated by current American experience.

Maybe the U.S., like the Soviet Union, needs a little push to do the right thing. But who will offer America a Grand Bargain? The candidate is obvious: Japan. As a matter of fact, the Japanese are already subsidizing the American economy to the tune of many billions of dollars a year. One measure is the U.S. current-account deficit with Japan: $32.3 billion in 1990. That means, in essence, that the Japanese sold $32 billion more of goods and services to Americans than Americans sold to the Japanese. The excess represents a loan to the American economy, which takes various concrete forms. For example, an estimated 20% to 40% of new U.S. Government bonds are now purchased by Japanese interests. (Opponents of U.S. aid to the Soviet Union complain that it would amount to passing money from Tokyo through Washington and Moscow on its way to Havana.)

Allison and Blackwill say Grand Bargain money sent to the Soviet Union should go for “general balance of payments support, project support for key items of infrastructure . . . and the maintenance of an adequate safety net.” That’s more or less what the Japanese money invested in U.S. Government bonds is already going for. It would not require instructions from the Kennedy School of Government at Harvard for the Japanese to say, “Look, if you want us to keep financing your economy, you’ve got to do x, y and z.”

As it happens, Japan is already asking the U.S. to cut its government deficit, spend more on education and so on, in a trade negotiation known as the Structural Impediments Initiative. Leslie Gelb of the New York Times points out that these are “the very steps any American with half a brain knows we ought to be taking in our own self-interest.” Trouble is, the Structural Impediments negotiations are halfhearted on both sides (America is asking that the Japanese do things like stop working on Saturdays). In a notorious 1989 book titled The Japan That Can Say No, a popular Japanese legislator named Shintaro Ishihara declared, “No other nation will pay attention to Japan if Japan cannot say ‘no’ to the United States.” Well, here is Japan’s chance. Just say no, for America’s own good.

At present the Japanese subsidy of the U.S. economy creates no incentive at all for sensible reform. Quite the opposite: it permits America to luxuriate in its decadent ways and put off the necessary changes. Here, too, there is an echo of the debate over aid to the Soviet Union. Aid supporters say Western money is necessary to grease the wheels of change and ease the pain of transition. Skeptics argue that any financial support from the West would have the effect of shoring up the crumbling old system rather than helping build a new one. Pouring money into an unreformed economic system without demanding radical changes as a condition is what you would do if you actually wanted to see that economy slip farther and farther into the morass.

Hmmmm . . .