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Thinking Aloud

Originally published September 7, 1981

Thinking Aloud

WHY
SPECULATION
WILL UNDO
REAGANOMICS

IF YOU’VE GOT some money and want to use it to get more, there are three quite different things you can do: You can gamble, you can speculate, or you can invest. Since all three are ways of getting rich – or of going broke – your choice may not make much difference to you. But it will make an enormous difference to the economy, especially in a period of inflation. Perhaps because the choice is immaterial to the person with money, the effect on the economy is not generally noticed, with devastating consequences.

Speculation – what we’re mostly going to be concerned about here – has long had a bad name with the man in the street. Speculators, whether in Continental scrip or Civil War greenbacks, in city lots or rolling farm land, in domestic silver or imported coffee, have traditionally excited the envy or the hatred of their fellow citizens. In everyday speech speculation falls somewhere between gambling and investing; its connotations are disapproving. Although not quite so reprehensible as gambling, it is still suggestive of something secured for nothing, generally at an undue or unsafe or unsound or even unsocial risk. Brokers warn against speculative stocks, and the courts consider it imprudent to risk widows’ and orphans’ pittances on such issues. A successful speculator is a standing reproach to anyone who works for a living.

Most academics, however, disapprove of disapproving holding it to be unscientific, and possibly for this reason you can read many standard introductions to economics without ever encountering the word “speculation.” Hard-headed bankers and publicists ‘and – more to the point – hard-headed lawmakers tend to follow ‘the textbooks’ lead and ignore the activity. This neglect has helped to skew the economy and, in the present state of the world to frustrate many well intentioned measures to control inflation. For speculation is real enough, and there is reason to believe it is as much a cause as a result of inflation. To see why, we must distinguish among the three roads to riches. Our distinctions are not idle; they are of the utmost importance for the understanding and management of the economy-and, I am sorry to say, they are original.

Gambling is risking wealth in a zero-sum game. In any gamble-betting on cards or horses or football games- if some players win, some other players must lose the same amount. The winnings and the losings (after properly allocating taxes and the house’s cut) add up to zero. Nothing has been accomplished.

Speculation differs significantly from gambling in that it is not a zero-sum game. Speculation is risking wealth in an activity where all the players can win, or all can lose, or some can win and some can lose. It involves the buying and selling of stocks and other claims to wealth, the attempt to profit from or hedge against the vagaries of the market, the merging and spinning off of businesses, occasionally the churning of exchanges, the hoarding and dumping of almost anything imaginable. It creates no wealth but rearranges – sometimes to the very great profit of the re-arranger – wealth that already exists. It has been argued that, in the aggregate and over time, what goes up must come down and therefore speculation is a zero-sum game, too. But the speculative run is parallel, if not identical, with the inflationary run. If speculation were an irrelevant zero-sum game, inflation would likewise be nothing to fuss about: the two would rise and fall (assuming they do) together.

Investing is akin to speculation in that it is not a zero-sum game. In a healthy economy it is possible for all reasonably astute producers to profit, at least to-a degree, and contrary to current thinking this is true whether or not resources are limited. Investing differs from speculating in that it uses wealth to create new wealth. Its aim is the production and distribution of goods and services. These may be new kinds of goods and services, or they may be more of the same; they may be produced in new ways or in the good old ways; they may be provided by new businesses or by expansions of existing businesses; they may be what your heart desires or what you scorn as shoddy. The point is, economically they are goods.

Gambling, speculating and investing are frequently distinguished, notably by laymen and lawyers, on the basis of risk. Yet all three are risky. (To paraphrase President Kennedy, life is risky.) Nor is there any correlation between risk and economic effect. In gambling, the odds are often known with mathematical precision; that is ‘what makes casino owners rich. In speculating, one can command the services of brokers and advisers who spin out their lives poring over charts and tables. Investing, On the other hand, can be very risky indeed; despite meticulous market research, a highly promising new product may turn out to be an Edsel.

Economists, being locked into their equilibrium models; generally confuse the issues in another way. Gambling, it is obvious to them, has no impact on the economy, except to the problematic extent that it distracts people from more productive endeavors. What one wins, another loses, and the GNP remains as before. I n a world enjoying relative equilibrium, speculation seems no different. Commenting on John Maynard Keynes‘ ultimate disapproval of speculation (after he had made a small fortune buying and selling foreign currencies), Roy Harrod gives us the classical view: “As regards the gains of the successful speculator, in the case of foreign exchanges, this was solely at the expense of the unsuccessful, who, since he has voluntarily incurred the risk, had no legitimate hardship if the risk went wrong. In the case of commodities, the same argument largely applied: what speculator A gained, speculator B lost….”

That is a fair enough description of what happens-provided the-economy is in equilibrium. But suppose the economy is not in equilibrium, or even close to it. Suppose, indeed, that inflation is, as they say, raging: 4 per cent a year, 5, 8, double-digit, 12 per cent-with no end in sight. What does speculation look like now? Most important for our purposes, it no longer looks even vaguely like a zero-sum game. With a little bit of luck almost any of the speculators can win. There need be no losers among those who play the game. Some may, to be sure, gain more than others. I may sell my pot of gold just before it makes a great leap forward, but even the more sluggish hog-belly futures that I then buy are also on their way up.

IN SUCH a situation only the timid or foolish (or impoverished) will forgo the fun. The brash and clever and rich will, moreover, recognize that in inflationary times the thing to do is speculate: in common stocks of companies that (like Conoco) have substantial holdings of natural resources, in commodities, condominiums, works of art, objets d’art, collectibles. Almost anything can be a collectible. One of G. Gordon Liddy’s regrets was that he felt obliged to shred his match-folder collection lest it reveal to the Watergate investigators the many motels he had stayed at as he careened down the sub rosa way.

Keynes devoted 10 pages of The General Theory of Employment, Interest and Money to an attempt at differentiating between short-term speculation (which he saw as the pervading vice of Wall Street) and long-term “investment” by a “professional” who makes a point of understanding the businesses whose securities he buys and “who most promotes the public interest.” Yet except as one has a pseudo-esthetic preference for steadiness over flashiness, it is hard to see the differentiation. Even Keynes acknowledges that the lucky or clever speculator may make larger sums than his more careful cousin. And it does not matter to the companies whose securities are traded. After the first sale to the public, the buying and selling of their shares does them no good, and ordinarily no harm, either. Surely they don’t care how intelligent or stupid the buyers and sellers may be.

Corporation executives do of course take an intense interest in the vicissitudes of their companies’ stocks. Partly this is because they may own some, or have options that are worth more as the stock goes up; partly it is because their present salaries, and prospective salaries elsewhere, are dependent upon their success in making money for the speculative investors who play the market. In certain instances their companies may want to attract additional funds for some purpose or other-even including the expansion of production, although this is not very likely in inflationary times.

One of today’s common misapprehensions is that the securities and commodities exchanges are engaged in supplying capital to those who produce goods and offer services. No doubt the exchanges once did actually encourage the investment of funds that might otherwise have lain hidden in mattresses because of their owners’ liquidity preference. But that day is long past. The value of all new stock issues (many – if not most- of which had only speculative ends in view) on all exchanges in all of last year, was about the same as one week’s trading on the New York Stock Exchange alone.

 It is safe to say that considerably less than 1 per cent of the transactions on the financial and commodities exchanges have anything whatever to do with productive investments. The rest are speculations. No producer gains the use of capital from them. Though the traders-may become rich, no new wealth is created by their frenzied activity. Yet because it became public policy (Icing before supply-side economics was thought of) to encourage investment, so-called long-term capital gains are taxed at a very favorable rate-just cut to

20 per cent. Given the tiny fraction of exchange transactions actually supporting production, it is plain that the favorable treatment almost exclusively stimulates speculation.

And speculation sucks money into itself like a firestorm. It always can use more. Vast sums are needed merely to keep transactions afloat for the few days it takes the brokers’ back rooms to complete them. These sums swell with speculation. In the first six months of this year, the New York Stock Exchange set a new record of 6.1 billion shares traded, thus requiring upwards of 10 times as much money to conduct its business as it did only a few years ago. Meanwhile, everything from a collection of beer cans to an example of Picasso’s blue period has been soaring in price as much as 100 percent a year, and the amount of money this ties up obviously has been increasing correspondingly

No productive enterprise can make money that fast. The after-tax earnings on equity of the Fortune 500 business runs around 10-15 percent, even in good years. Now that the interest rates they have to pay (or earn internally are well into the double-digit range, their record is poorer. (That’s why this inflation hasn’t sent the stock market through the roof, as everyone expected.) Smaller businesses – the kinds that arouse the same sentiments as mom’s apple pie – are on the whole having a much harder time. A man is a fool to work to produce something in the hope of earning 10-15 per cent when he can make many times that simply collecting Dresden china (should his fancy rake that turn).

The speculator, on the other hand, is perfectly happy borrowing every dollar he can lay his hands on at 15-20 per cent or more if he can thereby turn a profit of 20-30 percent. Aside from his apparent gain, he gets an enormous bonus from the income tax laws. The interest he pays on the money he borrows is deductible at the same rate as ordinary income, while his profits are taxed at the very much lower capital gains rate. Leverage like that can be very attractive.

Similar considerations underlie the activities of conglomerating corporations. In fact, they levy a greater toll on the money supply than all the individual speculators combined. DuPont is borrowing $4 billion to consummate its CONOCO deal (a speculation in coal more than in oil, but certainly not in enterprise). Bankers argue that Conoco’s happy stockholders will recirculate their windfall by making new” investments.” Yet whether they take out their profits in riotous living or use them to bid up other speculations, the economic effect will be inflationary.

Twelve other giant corporations – mostly oil companies with conglomeration in mind – have secured lines of credit totaling $42 billion. This may be the iceberg. or only its tip, for scores of smaller (but still large) corporations have un totaled lines of credit to finance takeovers, Whatever they add up to, they represent money withdrawn from the economy at least until taken down, and in any case not available for productive investment. There is seldom the slightest pretense that conglomeration will increase production; the goal is the fast buck, and many billions of dollars are being devoted to pursuing it.

The situation has been aggravated by the policy of the Federal Reserve Board under former chairman Arthur F. Burns and his successor, Paul Volcker, The Fed’s attempt to hold down inflation by controlling the money supply has further encouraged speculation at the expense of productive investment. With speculators and conglomerators snapping up the limited funds available irrespective of interest rates, producers cannot afford the financing they would invest in new products or services, or new ways of providing old ones. This is how the recently discovered productivity gap came about, and the easing of the capital gains tax will widen it for having enhanced the appeal of speculation.

Productive enterprise has been so systematically starved during the Burns- Volcker years that-especially with the addition of millions of women and blacks to the labor force-a great influx of money probably will be required to get the economy working again. This is, indeed, an insight that supply-siders share with fiscalists. But so long as nothing is done to curb speculation, the new money, whether from the Fed or from lower taxes, will flow into speculation or consumption and leave production as hungry as before.

THE THING about speculation, of course, is that sooner or later the kissing stops; and almost everyone gets caught with a long position in tulip bulb futures. The South Sea Bubble bursts; Wall Street lays an egg. When the bubble bursts, speculation feeds on itself going down, as it had fed on itself going up. Going up, everyone can win; going down, everyone can lose. Successful bears are very few, and their contribution to the common wealth is to make the disaster worse faster.

Is a disastrous outcome inevitable? In the light of the nostrums the Reagan Administration has had enacted into law, some sort of disaster can be predicted with confidence (if that is the right word). Because of the FDIC (horrors! – Federal regulation), there will be no run on the banks this time, and that will be a blessed distinction from the Great Depression. Because of the SEC (another regulative agency!), Wall Street pools are a thing of the past, and it’s harder to make a killing there (so fewer will be killed).

But the expectations of the innocent supply-siders will surely be dashed on the rock of speculation: The proceeds of the tax cuts will not go into productive investment; the money· supply will continue to resist management; interest rates will not fall; the surge of inflation wiII not abate this side of recession. If there are cynical supply-siders, and I rather think there may be some, they will be pleased with what they see:· The rich will be richer (at least comparatively), the big will be bigger, and the nation’s markets will be more firmly controlled by the kind of leaders who have made such recent successes of the automotive and steel industries. Amid all this, cruel unemployment will steadily spread.

The disease was first named by the British, who called it “stagflation.” A moderately reflective person might have expected that the experience of Great Britain (which doesn’t have the excuse of OPEC) would give pause to the noisy enthusiasts for low capital gains taxes and high interest rates. The British have been playing the game longer than we have-and their stagflation is worse than ours. But it seems (hat we are doomed to repeat their game plan.

It is a crying shame. The grief that will be caused is incalculable. And speculation could be easily inhibited. The Federal Reserve Board could forbid the granting of loans for purposes of trading on any securities or commodities exchange, or for purposes of merging or acquiring businesses, The Fed already sets limits to brokers’ margin accounts; at various times in the past it has forbidden them altogether; it could do so again tomorrow morning. Congress could readily tax capital gains as. ordinary income (owner-occupied dwellings might be treated differently, although I can imagine strong arguments against this). At the minimum Congress could, without being reproached for irrationality, define a long-term” capital gain as one on property held for IO years instead of one. Even five years (recognized by the money markets as the definition of “long-term” financing) would be a great step forward, particularly if coupled with modifications of the charitable deduction and elimination of other inflationary tax shelters.

The Fed and the Congress don’t do these things because they think the sole difference between speculation and productive investment is that the former involves more risk than the latter. But the true difference is, to repeat, that speculation has only financial gain in view, while productive investment uses wealth to produce more wealth. Though the risks may be great, investment can stimulate the production of goods and services. Regardless of risk, speculation can only stimulate inflation. Production improves the common wealth and the standard of living of the citizens; speculation simply redistributes what is otherwise created, and deflation destroys it.

It should be remarked that my proposals to deter speculation do not take sides – and do not need to take sides – in the fiscalist vs. monetarist controversy. There is very likely much truth on both sides, but there is assuredly no help possible from either side if speculation is not discouraged. While I am not a gambling man myself, I do not think there will be no more cakes and ale. It is not proposed to outlaw gambling or speculation. It is merely proposed that our government stop encouraging speculation. The Fed’s doctrinaire (false doctrine) refusal to consider the uses to which our money is put encourages speculation. The Congress’ espousal of a low capital gains tax encourages speculation. The new gift and inheritance tax encourages speculation. It would be easy enough for us to cease and desist from these encouragements.

As matters stand, one may read the Wall Street Journal or the financial pages of tile New York Times or any other metropolitan newspaper day after day and find very little news on some days none at all – concerning people producing something to sell to other people to satisfy their needs or wants. The shocking fact is that a great number of the best and best educated brains in the country are caught up in speculation of one kind or another, in devising new speculative schemes and new tax shelters. Our laws foster a sad misuse of this potential national resource. Getting and spending we lay waste our powers. President Coolidge was wrong: The business of America in the 1920’s was not business; it was speculation. It is speculation again today,

Finally, it may be objected that the proposed discouragement of speculation will not, of itself, control inflation. Certainly not. But unless speculation is deterred, inflation cannot possibly be controlled. Unless one is ready to run the printing presses flat out, the only way to get money into productive hands is to see that little or none of it falls into speculative hands. The first step toward achieving this is understanding what speculation is. Speculation is not risky productive investment. Nor-emphatically-is it economically neutral, like gambling. Far from it: Speculation is coterminous with inflation-and, as we are in grave danger of soon rediscovering, coterminous with deflation, too.

The New Leader

Originally published January 12, 1979

BEFORE HIS old broom sweeps it all away, Ronald Reagan should give careful thought to the possibility that some of Jimmy Carter’s foreign policy-in particular the human rights program and the downgrading of CIA activities-may have a better practical base than even its sponsors imagined. What probably was conceived as born-again do-goodism may actually be the epitome of hardheaded down-to-earth practicality in the world we face today. For unlike our parents and their parents, we now live in a bipolar world. This is something new under the sun.

We have had good experience with an analogous situation in domestic politics, where it is clearly recognized that a two party system is radically different from any other. We believe this  system gives our government a stability denied to those of, say, France and Italy. To the extent that our belief is well founded, and that we understand the nature of the foundation, we may hope for stability in international affairs. If we misunderstand the  situation, we are likely in for trouble.

From the point of view of the voter, the salient fact of two-party politics is that one is generally voting against, rather than for. To put it in its harshest light, as many recently did, one must choose the lesser of two evils. Only rarely is it possible to enter the polling booth with unbounded enthusiasm.

The resulting political atmosphere is often bland, which is another way of saying non revolutionary. The two parties crowd toward the center of the political spectrum and tend to become similar in their programs. That makes possible such sudden voter shifts as we experienced last November, when those who could have been expected to vote against Reagan voted against Carter because of his perceived ineffectuality.

Occasionally, true believers find ways of establishing something approaching an ideological difference between the parties, of giving voters “a real choice.” Handfuls of the faithful are made ecstatic, but the usual consequence is electoral disaster. Barry Goldwater and George McGovern are roundly defeated. Few can have loved Lyndon Johnson or Richard Nixon, even at the height of their powers, yet vast majorities had reasons to vote against their opponents.

On reflection, the vote-against syndrome is not surprising. Quite apart from the great variety of opinion called forth by any question, all tragic or comic views of life recognize that no one is perfect, and moreover, that perfectionists never get anything done. Perfection is not to be looked for; and when the choice is narrowed to two, the less imperfect is the best available. Whether this is good or bad is not to the present point; it is in any case generally acknowledged that this is the way things are in a two-party system.

Where in the end the choice is the lesser of two evils, the winning campaign strategy is not so much to build up one’s own candidacy as to tear down one’s opponent. There is, of course, the danger of a backlash, so it is advisable to mask or moderate the strategy, In recent American politics a tactic has been for the candidate himself to take the high road and let supporters do the mudslinging. Thus Dwight Eisenhower uttered healing platitudes as Nixon and Joe McCarthy screamed about the mess in Washington and 20 years of treason. When the new Nixon ran with Henry Cabot Lodge in 1960, both tried to be statesmanlike and it did not work. Eight years later the new new Nixon was the picture of highmindedness, while Agnew went after effete Easterners and the like in strings of alliterative vituperation. Harry Truman effected a subtle combination of both roles in himself: He gave the do-nothing 80th Congress hell, but left his opponent alone and gasping. John Kennedy and Carter tried variants of this tactic, and it is noticeable how futile Carter became once he had to shift to promoting his own virtue instead of castigating Washington’s sinfulness.

The essential meretriciousness of most of the campaigns mentioned should not mislead us into thinking that bipolar politics is always largely a media event. The classic refutation is provided by the Lincoln-Douglas debates, where Lincoln forced Douglas to destroy his own credibility, especially in the South, by admitting that his doctrine of squatter sovereignty would allow the people of a territory to vote slavery down as well as up. The admission won Douglas the debates, in that he was re-elected to the Senate. But Lincoln achieved his aim of splitting the Democratic Party, and two years later he was elected President. Douglas became the candidate to vote against, whether you were a Southerner in favor of slavery or a Northerner opposed to it.

IT IS ONLY in the last quarter century that the international system has polarized. The balance of power was destroyed by the world wars and consensus was destroyed by Korea. The two superpowers now confront each other. Each has as its minimum goal the maintenance of its independence. Each has as its maximum goal the elimination or metamorphosis of the other. Neither one intends-or wishes -to use the bomb to gain its ends; they must wage their war by other means.

The obvious means suggested by conventional diplomacy is a system of alliances; hence we have NATO on one side and the Warsaw Pact on the other. Yet not a day passes without some event reminding us that our allies do not exactly love us. Even when they seem to agree with us they find ways, often irritating ways, of asserting their independence. They also do not love the Soviets, however; should they have to make a vital choice they will rally, albeit reluctantly, to our side. It is much the same with the Russian satellites. Today the Poles are giving the Russians fits, but no one expects them to break away from their lord and master. In the end, the lesser of the evils will be grudgingly accepted.

The Third World offers a still closer parallel to that of the voter in a two-party system. The very claim of nonalignment testifies to an unwillingness to make an unequivocal commitment to either great power. It may frequently seem that nonalignment is a sham, and it is surely a nuisance. The Third World countries, however, no doubt all wish that they could simply follow the lead of one big power or the other with enthusiasm; their lot would be vastly easier if one of the two competing big powers were worthy of their undying affection. As it is, on issue after issue they must support what appears to them the less reprehensible side; they must decide against, rather than for.

Assuming the foregoing analysis is approximately correct, it would seem that U.S. foreign policy today should be directed more toward making the USSR mistrusted than toward making ourselves beloved or feared. In other words, it is more important for our opponent to lose friends than for us to gain them: the greater the world’s skepticism of the Soviet Union, the safer place it is for us, even if France thinks us tasteless and India is shocked by our materialism.

We have seen this principle at work. The Helsinki Final Act and the Carter human rights program have weakened the Soviet Union. Euro communism, only recently thought likely to engulf the Continent, is no longer heard of. Spain and Portugal, countries Henry Kissinger was ready to write off, have survived outside the Russian orbit. In America, the revisionists’ theory of the origin of the Cold War has become clouded with doubt. These substantial developments are at least partly due to the Soviets being forced to show their hand in their treatment of the dissidents. When Andrei Sakharov is not safe, after 60 years of total and unchallenged Bolshevik rule, it is difficult for anyone to believe in Moscow’s claims of having created an ideal society.

But since Sakharov is not safe, it can be argued as well that the value of the human rights program is open to question. Indeed, many of the dissidents themselves have made known their concern that the Soviet leaders have too weak a hold on power to tolerate being pushed very hard. Like the former American President who claims to understand them, they may, if forced to decide between admitting their guilt and acting it out, do the latter. To really help the dissidents, it is said, we should revert to quiet diplomacy.

There is no denying that our position here becomes ambivalent. Our national interest may be served by pursuing policies that could result in disaster for those we profess to assist. The unpleasant fact is, again, that it is more important for our enemies to have enemies than for us to have friends. This is equally true whether our potential friends are individuals or nations. It may therefore seem that we are using the dissidents to fight our battles, just as Britain was accused in 1940 of fighting to the last Frenchman. But of course the dissidents are using us, too. Humanitarians are, in the end, as tough-minded as self-advertised practical men.

In all this, though, there is an important difference between propaganda and policy. Young Abraham Lincoln’s plan for arguing a weak case was “Skin the defendant.” That is propaganda, and as Lincoln also said, “You can’t fool all of the people all of the time.” In the debate with Douglas, in contrast, he forced Douglas to skin himself. Naturally, Douglas could not have been forced to skin himself if squatter sovereignty had been a defensible idea-but then there would have been no need for a debate.

It is (or can be) the same in international affairs. Talk about Russians using gas in Afghanistan or Americans using germs in Korea or Germans slicing off virgin breasts in Belgium is propaganda. Such horrors are incidental to the main issue and almost  unprovable. Human rights is quite different. To a large extent it proves itself. If there is a free press, where are the opposition papers? If anyone can migrate, why all the barbed wire at the borders? If everyone can speak his mind, why prosecute those who do so? To a large extent, too, it confronts the defendant nation with impossible alternatives: If the Soviet Union cracks down on the dissidents or on the Poles, it loses credibility in the rest of the world. If it does not do so, it risks the gradual-perhaps rapid-erosion of its totalitarian system. To the Soviet leaders, these must be bitter options; we, meanwhile, might feel safer if their society opened up, yet even the first alternative would strengthen our position.

UNDER THE direction of five Presidents, the CIA has been operated on the opposite theory, namely that what we need in the world is friends. Given the results of its efforts, this may seem a perverse reading of events. But it is the sole sensible  explanation for our contributing to the overthrow of Jacobo Arbenz Guzman in Guatemala, Mohammed Mossadegh in Iran, Salvador Allende Gossens in Chile, and similar attempts elsewhere. The CIA has tried to get us friends, by purchase or by pelf, and it has managed to corral a few, several of whom survive. These friends are reasonably sure votes in the United Nations. They are generally enthusiastic suppressors of anything that looks even remotely like a Communist or populist movement. And they have given us a bad name in the world.

Some of this bad name is no doubt unjustified. Whenever anything goes wrong anywhere it is readily blamed on the CIA, whose initials have become a universal cussword. The charges are sadly credible because the CIA’s own propaganda claims credit for many dirty tricks and boasts of the Agency’s ability to do more if only unleashed. Even granting its view of international relations, this boasting is stupid. From any rational view, it undermines the national interest.

In yesterday’s multipolar world (where active friendships could be vital to us) subversive activities made it very difficult for potential friends to ally themselves with us. In today’s actual bipolar world, with its quite different requirements, a policy of buying friends and destroying apparent enemies makes it hard for opponents of the Soviets to declare themselves or to remain steady in their opposition.

It does not much matter to us whether the next blood-and guts corporal or law-and-order colonel announces he is Marxist or anti-Marxist. Either way he will be as suppressive of his fellow countrymen as he feels necessary and as eager for foreign handouts as the game will allow. Either way he will encourage foreign investors on Barnum’s principle about suckers. Either way he will vote against us in the UN as long as CIA posturing validates the theory that we are neocolonialists-and probably a while longer for good measure. But he can’t do us much harm, and more important, he can’t do the Russians much good. We can afford to be scrupulous in our dealings with him; and if our only pressure on him is in regard to human rights, we will, at the least, win the respect of his neighbors and, possibly, the gratitude of the internal opposition that may moderate his excesses or eventually supplant him.

Now that Angola is no longer in the news, for example, one wonders what all the flap was about. Gulf Oil still has its relatively minor business there, because the Angolans need it (or merely want it) regardless of ideology. And looking back, it is hard to see how anyone could have imagined that Angola was of more than marginal strategic importance. In the first place, Arabian harbors and Arabian oil fields would be handier targets for Russian missiles than tankers of whatever registry in the South Atlantic; in the second place, the German experience in World War I demonstrated the uselessness of isolated African outposts. Yet our UN ambassador made a tremendous fuss about Angola’s presumed threat to world peace, and the CIA semi-clandestinely wasted American lives (they were mercenaries but still human beings) and supplies there. Worse than that, the CIA encouraged the entry of the South Africans into the fray, thereby reinforcing in every black and every colored from Capetown to Cairo a conviction of our perfidy. Finally, the CIA’s actions made it impossible for us to gain a diplomatic triumph by exposing the Cubans, and this in turn made it easier for the Cubans to interfere in the horn of Africa.

The CIA (under orders, it would appear, from Secretary of State Henry Kissinger and so, presumably, from President Gerald Ford) could scarcely have done more damage to American national interests if the script had been written by the Russians themselves. It cannot be over emphasized that the ineffectiveness of the CIA is not the point. Most of the damage to the United States would have occurred even if the intervention had succeeded, and all we would have gained would have been another expensive client whose nonexistent Olympic team would have boycotted Moscow. In a bipolar world friends like that are of no use to us, and generally are actually harmful.

The dirty tricks operations of the CIA might have made sense in the last half of the 19th century; In the last quarter of the 20th century they are irrational in the extreme and flatly destructive of the national interest. It is admittedly exasperating that a curious double standard seems to let the KGB be 10 times dirtier and trickier than the CIA ever was. But that is no reason for a grand unleashing. Our interests will not be advanced by presenting ourselves as no better than the Russians, simply somewhat clumsier.

At first glance it might appear that the Soviet takeover of Afghanistan exposed the futility of the policies advocated here. After all, the human rights program and some restraining of the CIA have been in effect for upwards of three years, yet the Russians invaded with impunity. But the most obvious and regrettably soonest forgotten fact of American foreign policy is that its aim should be to protect and advance U.S. interests. Although an independent regime in Kabul might marginally contribute to that aim, it is not identical with it. Afghanistan fits Chamberlain’s mistaken description of Czechoslovakia-a far country of which we know little. It is by no means a second Czechoslovakia, nor is Southern Asia a second Western Europe.

Let us say, for the purposes of argument, that the Russians in Afghanistan are a threat to Pakistan. If they should try to take over that troubled land, it would serve them both right. The USSR would, to be sure, then have access, via Baluchistan, to the warm sea, thus satisfying a long-since-meaningless ambition of the Tsars. It might also, if it were not careful, wind up conquering and ruling India and Bangladesh.

The dominoes of Southern Asia line up from west to east, just as a quarter century ago we feared they were from Vietnam westward. But no matter what direction they topple, they offer nothing except trouble to the toppler. We are not dealing with a situation reminiscent of World War II when Hitler’s dominoes gained for him (and denied to his enemies) productive industry, productive agriculture, skilled manpower-plus a protected eastern flank that facilitated his conquest of Western Europe and opened the route for his eventual attack on the Soviet Union. This last may suggest a geopolitical question: Could the Russians use a conquered subcontinent as a springboard for an attack on China? No one who has heard of the Himalayas is likely to think so. Or could they have in mind an attack on Iran? But they already have a more congenial route open via Azerbaijan.

There remains the question of collective security, in which we have a serious interest. But it is quite different in our bipolar world from what it was hoped to be in the days of the League of Nations, or the early days of the united Nations. The conquest of Cambodia has dealt us a cultural deprivation in the inaccessibility of Angkor Wat; our strategic loss has been insignificant. In the same way we could have afforded to contemplate the takeover of Afghanistan with something less than absolute horror. .

It was really an issue for the Third World, and they rose to the occasion. The UN censure was a major Soviet defeat. But instead of letting this defeat stand as a permanent reproach and inhibition, we trivialized it by connecting it with, of all things, the Olympic Games. That might not have been so bad had we contented ourselves with our own boycott, which would have been noticed whether anyone joined us or not. We made the boycott the subject of a major diplomatic effort, however, and then trivialized that with such ham handed moves as sending Muhammad Ali to Nigeria. Even our handling of the grain embargo showed us more fervent believers in economic determination than the Russians.

As a result, we distracted attention from the Soviet defeat on a major issue to our own defeat on a trivial one. We had an opportunity for productive diplomacy and we threw it away, because we did not understand the bipolar world.

A POLICY IN the present world that involved tarnishing the Soviet’s image would not necessarily hurt their national interest, and this fact should be held steadily before their eyes and ours. Politics is not a zero-sum game. The election of Richard Nixon and Spiro Agnew amounted to a loss not only for the Democrats but for the Republicans as well. The election of Franklin Delano Roosevelt was a universal victory. It is the same in international affairs. The winners of a war suffer grave damage, too; the losers in a trade negotiation may still be better off than they were before. John Paton Davies, John Service and the rest may have lost Chiang Kai-shek’s China, but Mao’s China has proved a greater curb to Russian aggrandizement.

It is often remarked that American foreign policy is now an unstable amalgam of moralizing and Realpolitik. The instability is a consequence of the failure of either element to base itself on the historical situation of the world today. Fine talk and tough talk are equally inappropriate. Both hawks and doves are obsolete. We do not need either to join the Soviet Union or to bury it; we need merely to prevent it from getting into a position where it can bury us.

It is possible that in the long run the constraints of a bipolar international system, like those of a two-party national system, will narrow the differences between the contenders. It should not be expected that such narrowing will automatically decrease hostility. In 1914 Germany and Great Britain were more nearly alike than the most fanciful scenario can project for the Soviet Union and the United States. Nor should it be expected that people-to-people contacts (desirable though they may be in themselves) will invariably have positive nation-to-nation results. In 1940 young Germans, who as children had been cared for in Norway during the starving times of 1918-21, returned to their foster homes as Gauleitern.

In any event, whatever narrowing of ideological differences occurs will come about as a byproduct, not as the consequence of deliberation. Our deliberate policy should be to keep the Soviet Union on the ideological defensive. If this requires improvements in American treatment of black people and black nations, and in Russian treatment of dissidents: well and good. In the unlikely case that the policy requires the opposite: too bad. The objective of American foreign policy remains what it has always been: to maintain the independence of the United States of America. But the means of achieving that objective must suit the times. Our bipolar world is different from everything that has gone before, and policies like the human rights program are precisely what is needed, while unleashing the CIA will damage us severely.

GEORGE P. BROCKWAY, a previous NL contributor, is the
chairman of the board of dir
ectors of W. W. Norton & Co.

Originally published June 19, 1978

THERE ARE four questions concerning the normalization of relations between the United States and the People’s Republic of China (PRC) that have received astonishingly little attention: (1) By what right does the People’s Republic assert sovereignty over Taiwan? (2) Why is it important for the U.S. to normalize relations with the PRC? (3)Why is it important for the PRC to normalize relations with the U.S.? (4) If we should adopt the so-called Japanese formula-that is, withdraw recognition from the National Republic of China, denounce our defense treaty with it, but continue trade-would the PRC be as content with our action as it has been with Japan’s?

The persistent cacaphony issuing from both Chinese governments-not to mention our own China Lobby-has distracted our attention from the fact the PRC controls the territory it does by the right of revolution, supplemented in the case of Tibet by the right of conquest. No other show of legitimacy can be put on its accession to power. This does not mean that what it seized de facto does not now belong to it de jure; it merely means that Peking’s authority rests on a violent base. This, in turn, is not to say that the base is necessarily unworthy or corrupt; it is, however, to say that it has certain limitations.

The essential thing about territory won by revolution or by conquest is that it has to be won. As Mao said, “A revolution is not a tea’ party.” That is so obvious that no one mentions it, and in the present instance no one even thinks of it. Consider Tibet: If the invading Chinese had been thrown back at the border, would they have been given the country anyhow, for trying? Or if Chiang Kai-shek had been able to’ stop the Communists at the line of the Yangtze, and if a stalemate had developed there, would either side, for whatever reason, have been declared the winner and awarded control over the other? Right to the point, were Canada, Newfoundland and the British West Indies handed over to the fledgling United States at the Treaty of Paris?

The Taiwan stalemate has developed in Formosa Strait. There is no reason for this particular stalemate to have special consequences. True, both Chinese governments insist there is but one China and that Taiwan is part of it. Rather gingerly and informally and possibly hypocritically, we. have endorsed this extraordinary notion; and were it put to a vote in the UN General Assembly tomorrow morning, the proposition undoubtedly would pass by a greater margin than the last election for mayor of Peking.

But the fact remains that the PRC’s claim to Taiwan rests solely and nakedly on might and Peking doesn’t have the navy or the airforce or the modern equipment to make good a landing. It couldn’t even take Quemoy and Matsu (still being shelled on alternate days for no real purpose) without risking astronomical casualties. It might, to be sure, manage to destroy Taiwan with atomic bombs; but even if the Communist Chinese (like us) are not too rational to destroy something in order to save it, they of all people don’t want the idea to get around-that atomic-warfare is a Good Thing.

Thus, if the PRC is going to take over Taiwan, it will have to do so with diplomacy. That diplomacy will have to be directed at the United States, and our handling of it will be improved to the degree that we understand how tenuous the PRC claim to Taiwan actually is.

ALTHOUGH the People’s Republic has no right to Taiwan, it might be to our interest to help it prevail there. Chamberlain thought it was to the British interest to help Hitler get the Sudetenland, and we evidently think it to our interest to put pressures on Israel and Egypt and on Rhodesia and South Africa.

In the case of Taiwan, it is urged that we are specially responsible for its present status. The return of Formosa to China was rather offhandedly promised by Roosevelt at Cairo. The Nationalist forces, or some of them, escaped to the island with, and probably by means of, materiel we had given them. Misreading the import of the Korean War, we interposed our Seventh Fleet to protect them from a PRC invasion. Later, we removed the fleet and “unleashed” Chiang Kai-shek, not that it made any difference either way. We made loud diplomatic noises about Quemoy and Matsu. We fought as long as we could to keep the Nationalists in the United Nations. We equipped and trained and advised their military forces. We advised and pressured their civilian authorities into a no doubt grudging implementation of their own ostensibly liberal policies. Our giant corporations and many of our fly-by-night operators have invested heavily there. So if one has the right to destroy whatever one creates (a dubious notion, but let it pass), it can be said that the United States of America has the right to destroy the National Republic of China.

Even if the right is granted, it of course does not follow that it should be exercised, and no one suggests that it should be exercised for no reason at all. But there have been suggestions that it is not too high a price to pay for the normalization of our relations with the People’s Republic of China. Yet why is this important?

That we live in one world, and that great nations simply should have relations with each other, does not get us very far. If the proposition means anything, it means that such relations should be entered into with no strings attached. Nations have diplomatic relations in order not to have to conduct state policy by other means[1]. It is a truism that setting prior conditions to diplomacy is a sure way of avoiding it; indeed, the conditions are just what the diplomacy should be about. In the present instance everyone, including the PRC agrees[2] that Peking is setting the prior conditions.

Recently it has been strongly argued that, for a variety of reasons, we have briefly open to us a “window” (the allusion is to space probes) offering us the chance to make the PRC our ally, and if we don’t quickly take advantage of it the window will slam shut, never to open again in the forseeable future: Assuming the possible accuracy of this reading of the situation (though the window has remained open for a long time now), why should we care? The answer confronts us with a threat and a promise.

The threat is that, disillusioned by our unwillingness to take the next step toward handing over Taiwan, and convinced thereby of our perfidy and our animosity, the PRC will be forced back into the arms of the Soviet Union. We will then have recreated the Communist monolith, and the Russians will become even more intransigent than they have been of late. We need not consider the implausibility of this outcome; we need only wonder whether diplomatic recognition would in any way alter it.

The first Communist monolith (if there actually was one) came into being without our say-so and fell apart without our say-so, without any of our doing or any of our knowing. CIA and all, we read about it in the papers some 15 years after it happened. It is idle to imagine that we would have any more control over the second monolith. Geography and imperial ambitions made the PRC and the USSR enemies. If they could compromise their imperialisms – Who gets Outer Mongolia? Who gets Sinkiang? Who gets Vladivostok?-geography could make them friends again, just as we became friends with Canada after we decided not to fight for 54-40. An American ambassador in Peking wouldn’t have a clue not now available to our representative, Leonard Woodcock.

The promise is increased trade. But despite a century and a half of enthusiastic propaganda, the fact remains that the United States and China are not now, never have been and never will be significant trading partners. In 1898 we held onto the Philippines, and later shamefully fought Anguinaldo to retain our hold, partly to protect our trade with China-which was then all of $10 million annually and represented one-tenth of 1 per cent of our Gross National Product. Americans now boosting normalization hold out the prospect (not, so far as is known, based on anything but the number’s satisfying roundness) of a billion dollars in trade-or roughly one-twentieth of 1 per cent of our present GNP. In other words, if we do what the PRC wants, we can hope to see trade rise to about half of the slight importance it had for us when we first became enmeshed in Asia.

Basically, the two countries are too similar in resources. Beyond that, we have no use for their tractors, and they are determined not to use ours except as models. They are afraid of our books and movies, and we are bored by theirs. They can use our wheat, when they can’t get Australian or Canadian, and we can use their carved jade and ivory and ginseng root. Their new “practical” leaders will graciously buy our guns on credit, normalization or not.

That is how things are and how they’re likely to remain -with one significant difference. The $2 billion of trade we now do with Taiwan would, if the PRC got what it wants, go to the mainland. The factories might produce somewhat different goods and the workers might get somewhat different wages, but that is where the trade would go. The PRC would continue to have very little trade with us, and our total world trade would be $2 billion less.

Looking at the question from the other side, why is it important for the PRC to normalize relations with us? Does it have a big stake in the matter? If not, the whole endeavor will come to nothing. It is axiomatic that no treaty will be long respected that doesn’t have in it something the high contracting parties want to maintain.

Taiwan, of course, is the mainland stake here. Peking makes no bones about that. And until Taiwan is de jure and de facto the PRC’s, relations between Peking and the U.S. will not be truly normal. But what would truly normal relations amount to?

There is for the People’s Republic, exactly as there is for the U.S., the ideal that great nations should have diplomatic relations. The past behavior of both sides has left something to be desired. We rebuffed their overtures in the mid-1940s. In 1950 each of us misread the other’s intentions, and we came to blows in Korea. Thereafter there was no thought of diplomatic relations until a conversation between Mao Tse-tung and Edgar Snow, coincident with some skirmishing with the Soviets on the Usseri, led to the Nixon visit. Now Peking could have diplomatic relations if it wanted them, but it seems to put more store by its prior conditions.

As we do, the Communist Chinese also have reason to fear the Soviet Union; and as we fear the recreation of the Communist monolith, they fear that a U.S.-USSR détente will enable the Russians to cause them more trouble in Sinkiang and possibly elsewhere. All Over China elaborate systems of air-raid shelters have been built. All over China schoolchildren are trained in close-order drill and rifle marksmanship-often shooting at silhouettes said to represent imperialist Russian soldiers. The American Rifle Association would be simultaneously envious and shocked. One of the reasons for the overthrow of the Gang of Four was the Army’s concern that Chiang Ch’ing and her comrades were too committed to the Thought of Mao that a primitively armed but politically indoctrinated mass is inevitably victorious. The fear of Russia is real enough.

Once normal relations are entered into, the normal desire for normality and the need for neocontainment of the USSR should tend to keep the relationship alive. But these reasons are operative today, and the PRC evidently does not consider them good and sufficient. Perhaps there is no cause here for surprise. The experience of 4,000 years is not lightly discarded. The Middle Kingdom got along for millennia without noticing the outside world, and the People’s Republic itself got along for a quarter of a century sometimes isolated from everyone except Albania. It is, moreover, certainly not to the advantage of a totalitarian state to have its people in free contact with citizens of other lands. There is, in short, little reason to expect that normalized relations with the People’s Republic would be close or even lasting.

THE SO-CALLED Japanese formula has been well publicized. Its underlying (though unstated) theory is that Orientals are chiefly stimulated by face, and that the Chinese, being a very old race, are very patient in the pursuit of it. It would thus be an intolerable loss of face for the People’s Republic to renounce its claim to Taiwan after having been so vociferous about it for 30 years. On the other hand, all the PRC really cares about is having its claim recognized; there is no hurry about enforcing it; it will enforce itself in a hundred years anyhow, if not sooner. Chou En-lai said as much. There is, moreover, the example of their restraint regarding Hong Kong and Macao, particularly the latter, for even the hapless Indians made bold to take Goa back from the Portuguese.

According to the scenario, then, all we have to do to achieve peace in our time in Asia is endorse the PRC’s understanding of the Shanghai Declaration, denounce our defense treaty with the Nationalists, withdraw the 800-900 troops we still have on the island, close the diplomatic missions, and win kingly open “unofficial” trade missions. After us, things will work themselves out in some way, surely short of a deluge, and in the meantime everything will go on pretty much as before. This is what a psychiatrist or games theoretician would call the Best Outcome.

There is also a Worse Outcome, however, that is worth a moment’s thought. For once we recognize Taiwan as de jure a province of the People’s Republic of China, we will have to recognize the PRC’s laws there. And a sovereign power has the undisputed right to decide where and under what conditions it will trade with other powers, as well as the right to enforce those conditions through inspections and fees. In these circumstances, it is not hard to imagine the Worse Outcome scenario.

The PRC agrees to go along with our use of Taipei as a port of entry; it merely asks that for appearances sake any company coming in get a permit at the nearest Chinese consulate. Pan Am and the others shrug and pick up their permits.

No trouble at all, really. After a discreet interval little regulations are added that are irritating and productive of much diplomatic correspondence (that’s what normalization is all about), but not worth making a real fuss over. Eventually, the PRC notices that we acquiesce in humiliating Arab boycotts. So when (let us imagine) ITT signs a contract to build the Soviets an electrical plant in Vladivostok, the PRC announces that no entry permit and no exit permit will be issued to any ship or plane carrying goods, mail, or people having anything to do with ITT. The first ship denied a permit will no doubt be of Liberian registry, and a Chinese gunboat will intercept it. ITT, having (let us again imagine) heavy investments in Taiwan, screams for Uncle Sam.

There is no doubt that we could bull it through. An aircraft carrier or two and a half dozen destroyers could see to it that our trade was not interfered with, even if we didn’t want to reconstitute the Seventh Fleet, and the admirals would be delighted to get the exercise. But normalization would be gone, and so would the last shreds of our reputation for respecting the rule of law.

It may be objected that the PRC has not acted in this way with Japan or France or Canada or the rest of the world. It is nowhere written, though, that the Chinese must be consistent. Beyond that, a modicum of prudence would suggest to the PRC that any untoward behavior, before we are in the bag, would scare us off forever. Neither the Japanese nor the French nor the Canadians can keep the PRC from Taiwan. Only the United States of America can do that, unless we become fatally entangled in the net of normalization.

It may be further objected that there is a simple way to guard against the Worse Outcome. Since the People’s Republic does not scruple to impose conditions for normalization, we could do the same. We could honorably declare our willingness to agree that Taiwan is a province of the People’s Republic if the People’s Republic would publicly agree never to take any step, direct or indirect, to enforce its abstract right. No doubt Peking would continue to reject any such formula. It is unwilling to do more than smile or scowl inscrutably and allow us to hope it will not cause trouble.

THIRTY-ODD years ago we participated with the British in turning more than 2 million refugees (that is, people fleeing for their lives, then known antiseptically as Displaced Persons) back to Russia in furtherance of our desire to prove our good will to the dictator of that land, who made the legalistic claim that these people were his subjects. There is no evidence that our action contributed to the peace of mankind or even to the dictator’s favorable opinion of us. But there is heartbreaking evidence that almost all those 2 million human beings-men and women like ourselves-were subsequently done to death in misery describable only by a Solzhenitsyn.

We as individual Americans may not have been aware of this horror, and our leaders may not have had ground to anticipate it, but it was done, and done in our name, and we must, if we are human, feel pity and terror and shame. By the same token we may be proud of our refusal to force the repatriation of some 48,000 of the Chinese and North Korean prisoners we took in the Korean War. And now we should at least be sure beyond a reasonable doubt that a truly noble purpose would actually be served by putting Taiwan at risk. We don’t have to conjure up a horrible fate prepared by the PRC for the people on Taiwan (though the Communists do boast that politics comes out of the mouth of a gun). We certainly do not have to pretend that China would have been better off if the Nationalists had won. We merely have to have respect for the self-determination of peoples.

We Americans have sins to match our virtues: Two that beset us are knowing what is best for others and imagining that there is someone deed which, though inconvenient (we casually admit) for some people, will enable everyone else to live happily ever after. The temptation exerted by these sins is powerful. But we cannot allow ourselves to be unaware of the evil our arrogant glibness can compound. It may have been a mistake to help create the present situation on Taiwan; it would be an outrage to help destroy it.

GEORGE P. BROCKWAY a new contributor to these pages, is chairman of the board of directors of W. W. Norton & Co.

[1] The original text reads “devices” but GPB hand note reads “means”

[2] The original text reads “denies” but GPB hand note reads “agrees”

Note: Although most of the articles George Brockway published in The New Leader were in a series titled “The Dismal Science” this first article, before he had a regular column, is published as part of the “Thinking Aloud” series.

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