The Global Economic Crisis

THE GLOBAL ECONOMIC ECONOMIC THE GLOBAL THE GLOBAL ECONOMIC CRISIS AND POTENTIAL IMPLICATIONS FOR FOREIGN POLICY AND NATIONAL SECURITY THE GLOBAL ECONOMIC CRISIS Aspen Policy Books is a series devoted to developing new thinking on U.S. national security policy. This book, a collec- AND POTENTIAL IMPLICATIONS FOR tion of papers prepared for the 2009 summer ASG conference, CRISIS addresses the critical intersection of the global financial reces- FOREIGN POLICY AND NATIONAL SECURITY sion and its potential impact on America’s foreign policy and AND POTENTIAL IMPLICATIONS FOR FOREIGN POLICY AND NATIONAL SECURITY AND NATIONAL POLICY FOREIGN FOR IMPLICATIONS AND POTENTIAL national security. Authors explore the possible shift in global power, the changing relationship between the U.S. and China, Foreword By Joseph S. Nye & Brent Scowcroft the impact on America’s development policy, and assess the capacity of domestic and international institutions to respond to the crisis. Contributors include: Richard Cooper (Harvard University), Kemal Derviş (The Brookings Institution), Martin Feldstein (Harvard University), Michael Green (The Center for Strategic and International Studies), David Leonhardt (The New York Times), Sylvia Mathews Burwell (The Bill & Melinda Gates Foundation), David McCormick (Carnegie Mellon’s Heinz College), Laura Tyson (University of California, Berkeley), and Bruce Stokes (National Journal). aspen strategy group The Aspen Institute, Washington, DC www.aspeninstitute.org/asg Edited By R. Nicholas Burns & Jonathon Price THE GLOBAL ECONOMIC CRISIS AND POTENTIAL IMPLICATIONS FOR FOREIGN POLICY AND NATIONAL SECURITY FOREWORD BY JOSEPH S. NYE & BRENT SCOWCROFT EDITED BY NIcholas BurNs & JoNaThoN PrIcE Copyright © 2009 by The Aspen Institute The Aspen Institute One Dupont Circle, N.W. Suite 700 Washington, DC 20036 Published in the United States of America in 2009 by The Aspen Institute All rights reserved Printed in the United States of America ISBN: 0-89843-515-3 Wye Publication Number: 09/019 Design by: Steve Johnson aspen strategy group CO-CHAIRMEN Stephen E. Biegun Vice President Joseph S. Nye, Jr. Ford Motor company university Distinguished service Professor John F. Kennedy school of Government Robert D. Blackwill harvard university senior Fellow The raND corporation Brent Scowcroft President Susan Collins The scowcroft Group, Inc. senator united states senate DIRECTOR Richard Danzig chairman Nicholas Burns center for a New american security Professor of the Practice of Diplomacy and International Politics John M. Deutch John F. Kennedy school of Government Institute Professor of chemistry harvard university Massachusetts Institute of Technology Richard A. Falkenrath ASSOCIATE DIRECTOR Deputy commissioner of counterterrorism New York city Police Department Jonathon Price associate Director Peter Feaver aspen strategy Group Professor of Political science and Public Policy Duke university MEMBERS Dianne Feinstein Madeleine K. Albright senator Principal united states senate The albright Group, llc Stephen Friedman Richard L. Armitage chairman President stone Point capital armitage International Michael J. Green Zoë Baird senior adviser and Japan chair President center for strategic and International Markle Foundation studies Richard N. Haass William J. Perry President Professor council on Foreign relations stanford university Chuck Hagel Jack Reed Distinguished Professor in the senator Practice of National Governance united states senate Walsh school of Foreign service Georgetown university Mitchell B. Reiss Diplomat-in-residence Jane Harman college of William and Mary congresswoman united states house of representatives Carla Anne Robbins Deputy Editorial Page Editor Arnold Kanter The New York Times Principal The scowcroft Group David Sanger chief Washington correspondent Nicholas D. Kristof The New York Times columnist The New York Times Wendy R. Sherman Vice chair Richard G. Lugar albright stonebridge Group senator united states senate Marin Strmecki senior Vice President, Director of Programs Leo S. Mackay, Jr. smith richardson Foundation Vice President corporate Domestic Business Development Strobe Talbott lockheed Martin corporation President The Brookings Institution Sylvia Mathews Burwell President, Global Development Program Fareed Zakaria Bill & Melinda Gates Foundation Editor Newsweek International Sam Nunn co-chairman and cEo Philip D. Zelikow Nuclear Threat Initiative The White Burkett Miller Professor of history Thomas O’Gara university of Virginia chairman o’Gara Group Robert B. Zoellick President The World Bank Acknowledgements Nicholas Burns Jonathon Price Director, aspen strategy Group associate Director, aspen strategy Group n early August 2009, the Aspen Strategy Group convened for a week in Aspen, IColorado to measure the effects of the global economic crisis and examine its implications on U.S. foreign policy and national security. This book is a collection of the essays that were commissioned for the summer workshop; it includes the nine papers used to guide our discussions, flanked by a scene setter and a set of concluding observations. As always, the Aspen Strategy Group is grateful for the support and dedication of many groups and individuals. Without their support, the summer workshop— and the book you are now reading—would not have been possible. We would like to thank the Margot & Thomas Pritzker Family Foundation, the Feldman Family Foundation, the Markle Foundation, the Bill & Melinda Gates Foundation, the Resnick Family Foundation, Booz Allen Hamilton, and Exxon Mobil for their support. We would also like to thank Howard E. Cox, Simon S. Pinniger, Thomas O’Gara, Terry Turkat, Leah Zell Wanger, and William E. Mayer for their generosity and dedication to the Strategy Group. As the Obama administration nears the end of its first year in office, we would like to congratulate several of our former ASG members who are now serving at senior levels in the administration. First and foremost, we would like to congratulate former ASG director Kurt M. Campbell on his appointment as assistant secretary of state for East Asian and Pacific affairs. We know Kurt will bring the same understanding and deep knowledge of foreign policy and national security to the Department of State that served the ASG so well. As former public servants, we understand the challenges Kurt and our friends and colleagues face, and wish them luck as they navigate through this increasingly turbulent chapter of American and global history. Additionally, we would like to thank our General Brent Scowcroft Award fellows, Alicen Bartle, Marshall Lilly, and Sarah Golkar for their inexhaustible work ethic and ubiquitous optimism in pursuit of this endeavor—a promising indication of bright futures to come. Rebecca Weissburg provided her excellent proofreading and editing skills throughout, for which we are deeply grateful. Finally, our deepest gratitude and highest regards go to our co-chairmen, Joseph Nye and Brent Scowcroft; it is under their guidance that ASG thrives and sustains these vital dialogues, ensuring a meaningful debate on the implications of this Great Recession. Their leadership facilitates ASG’s legacy as a forum for bipartisan inquiry, dialogue, and ideas. Contents Foreword by ASG Co-Chairmen . .9 Joseph s. Nye, Jr. & Brent scowcroft Preface by ASG Director . .11 Nicholas Burns Part 1 hIsTorIcal PErsPEcTIVEs aND currENT coNDITIoNs chaPTEr 1 Economic Conditions and U.S. National Security in the 1930s and Today . .19 Martin Feldstein chaPTEr 2 Pulling Back from the Crisis: A Roadmap for the Future of the American Economy . .35 David leonhardt Part 2 PrEDIcTIoNs oN ThE coursE aND ExTENT oF ThE GloBal EcoNoMIc crIsIs aND ITs larGEr IMPlIcaTIoNs chaPTEr 3 Global Recession and National Security . .49 richard N. cooper chaPTEr 4 Rebalancing Economic Engagement: The Foreign Policy Consequences . .59 Bruce stokes chaPTEr 5 Sustaining the Recovery and Containing the Deficit: A Balancing Act for Policy . .77 laura D. Tyson Part 3 arE INsTITuTIoNs rEaDY For ThE challENGE? chaPTEr 6 Interdependence, Global Issues Management, and Global Economic Governance . .93 Kemal Derviş chaPTEr 7 Picking up the Pieces: The Global Crisis and Implications for U.S. Economic Policymaking . .105 David Mccormick Part 4 coNsEquENcEs For DEVEloPMENT aND DEMocracY chaPTEr 8 Priorities for Progress: Security and Development at a Time of Global Economic Turmoil . .123 sylvia Mathews Burwell chaPTEr 9 The Impact of the Global Financial Crisis on Democracy . .139 Michael J. Green Part 5 coNcluDING oBsErVaTIoNs chaPTEr 10 Summary of the Aspen Strategy Group Deliberations . .157 Nicholas Burns Foreword 9 Foreword by asG co-chairmen Joseph S. Nye, Jr. Brent Scowcroft asG co-chairman asG co-chairman s a group that primarily considers the national security issues confronting the Acountry, the topic of the global economic crisis posed a unique challenge for the ASG. When the group was forged over twenty-five years ago, familiar challenges included arms control, a menacing Soviet Union, and the threat of nuclear war. Rarely—if ever—did the group worry about issues such as budget deficits, trade imbalances, and corporate bankruptcies. However, as the extent of the economic crisis crystallized in the fall of 2008, policy problems began to appear that fell in both the realm of economics and national security. For example, following the collapse of Iceland’s currency and stock market, Icelanders took to the streets to demand—and eventually receive—the government’s

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