Always Fighting The Last War

Over at Washington Monthly, Nancy Letourneau highlights the fact that the battle against the destruction of US manufacturing created by globalization currently being waged by both Donald Trump and, to some extent, Bernie Sanders is essentially about fighting a war that's already over. That battle was never really fought and lost when it was needed in the late 1990s and early 2000s. Today, the level of global trade and cross-border capital flows have largely leveled off. And, in fact, the emergence of a vibrant middle class in some of those emerging economies is actually and finally creating a market for American products.

As Neil Irwin points out, "In short, the anti-globalization drive that is spreading across the Western world may be coming at exactly the wrong time — too late to do much to save the working-class jobs that were lost, but early enough to risk damaging the ability of rich nations to sell advanced goods and services to the rapidly expanding global middle class." Moreover, the upcoming trade battles are largely going to be in the area of information, artificial intelligence, renewable energies and other advanced technologies, and intellectual property, not in core manufacturing industries.

Of course, America specializes in fighting the last war. For the past forty years, our central bankers have been fighting the stagflation wars of the 1970s, obsessively focusing on the inflation bogeyman at the expense of the Federal Reserve's full employment mandate. Even as we headed into the depths of the financial crisis, certain members of the Fed and the club of right wing economists, many of whom are now working in the Trump administration, kept harping on the imminent onset of runaway inflation. That mistake was repeated once again last week with the Federal Reserve's announcement of another quarter point rate hike, putting the federal funds target rate between 1.50% and 1.75%. This decision was made in the wake of actual declining wage growth and with inflation running at or below target.

When it comes to military intervention, it also seems like we keep fighting the same war again and again. Despite the 20 year hiatus in the aftermath of the Vietnam war, we have essentially spent the last two decades fighting similar counter-insurgency, nation-building wars in the Mideast and, especially, Afghanistan. Now, however, we realize that nation-building is largely futile and only make token efforts at actually accomplishing it, but, unwilling to accept defeat or stalemate, we just keep on fighting the war itself, pretending that victory will come at some point in the not-to-distant future.

As expected and as the French found out at the start of World War II, continually fighting the last war means that you are totally unprepared for the next real one. In trade and economics, it means understanding the tremendous dislocation that will be caused by robotics and artificial intelligence and how important control of that technology will be. In military terms, it means being able to detect and defend the country from sophisticated cyber attacks by our enemies. Based on our leaders' focus over the last couple of years, it appears we will be unprepared, just as they were largely unprepared and uninterested in the enormous dislocation that globalization created twenty years ago.