Washington remains hobbled by Iraq

By Clive Crook

So far, reaction in the US to Russia’s invasion of Georgia has been all Vladimir Putin could have wished. Exhausted in every way by its experience in Iraq (a failure not much mitigated by recent progress there), its authority and sense of purpose quite depleted, the US looked slower and less decisive than Europe in its initial response, and that is saying something.

It took repeated prodding from presidential contender John McCain to draw President George W. Bush’s attention from the Beijing Olympics to the fact that Russian forces were overrunning the territory of a US ally. Then, as the White House slowly geared up its rhetoric, dispatched the secretary of state to Tbilisi and began talking vaguely of repercussions, both the administration and the goading Mr McCain were accused of war-mongering hysteria by liberal commentators and even by some conservatives.

It is easy to account for this lassitude and lack of self-confidence. The US feels anything but strong these days. Iraq has strained its armed forces to such a point that it cannot commit adequate resources even to its struggle to stabilise Afghanistan, which would otherwise be an immediate and high priority. Aside from the human cost of the Iraq mission, Americans are also preoccupied with its enormous fiscal burden. Just last week, Barack Obama’s campaign again underlined how much it is counting on savings from a withdrawal from Iraq to pay for expanded domestic spending. The country has a new set of priorities.

Even more telling, though, is the erosion of its moral assurance and sense of purpose in the world. The instant reaction of many of the administration’s critics was to say: “We invaded Iraq without justification. We have no standing to object if Russia does the same to Georgia.” Andrew Sullivan, a prominent conservative blogger and a one-time supporter of the Iraq war, wrote: “Maybe we should start complaining when as many Georgians have perished as Iraqis – and when Putin throws thousands of innocent Georgians into torture chambers.”

Differences between the two cases – Georgia is a democracy not a totalitarian tyranny, and is a state in good standing with the world not a proven aggressor and serial violator of United Nations resolutions – received little attention. The fact that Georgia is also a US ally was also overlooked. It was all the same thing. In fact, when you thought about it, Russia’s case for acting as it did was stronger than the US rationale for attacking Iraq: Mikheil Saakashvili, Georgia’s leader, is erratic and sort of asked for it, and his country is right on Russia’s doorstep, inside its legitimate sphere of influence.

Certainly, if the US is to recover its ability to make moral distinctions and rational calculations of self-interest, it will need to shed this administration. That is part of what it will take to get over Iraq – but will it be enough? It was disappointing, though unsurprising, that the McCain and Obama campaigns both saw Georgia through the prism of electoral politics, rather than seeking to unite on the issue. Mr McCain was agitated and militant – alarmingly so, it must be said. Mr Obama was circumspect, called for restraint on both sides and consultation with allies, and in effect said nothing. Mr McCain’s campaign underlined his toughness and experience; Mr Obama’s emphasised their candidate’s calmness and refusal to shoot from the hip.

An approach that combines these stereotypical attitudes is needed. If it is in Mr Putin’s mind to use force and intimidation to reconstitute the Soviet Union in the form of a new Russian empire – as it might be – then the US and its friends must overcome post-Iraq equivocation and recognise this as both morally outrageous and as a serious challenge to their interests. Mr Putin would need to be firmly resisted, not with empty overheated threats, but with measured concrete steps.

Since coming to power, Mr Putin has sought and in large measure been granted partnership with the west. Europe and the US have worked on the assumption that Russia wanted to become a normal country. That was questionable even before Georgia. At the moment it looks absurd. Russia wants it both ways. It wants the benefits of international partnership – in the World Trade Organisation, the Group of Eight and other forums – while being free to reassert itself over the former Soviet Union. Mr Putin needs to be told that he cannot have it both ways. If Russia keeps forces in Georgia proper, at a minimum that should veto WTO membership and future invitations to G7 conclaves. The message to Mr Putin should be that he is sincerely wanted as a partner because the benefits assuredly flow in both directions, but not at any price.

Aside from underlining the extent to which Iraq has weakened the US, spiritually and materially, the invasion of Georgia drove home something else as well: the fact that there is still no substitute for American leadership. Europe’s diplomatic mission was commendably prompt, but completely ineffective. The European Union is deeply divided over Russia. Its newer members from the former Soviet empire are intent on resisting any renewed Russian ambitions to intimidate them. Germany and others are fearful of offending Mr Putin – for instance, by speeding the accession of Ukraine and other ex-Soviet states into Nato and the EU. The US has to set the course in dealing with Russia. Europe ought to, but cannot and will not.

Exercising such leadership means getting over Iraq. Sadly for citizens of the former Soviet republics and their neighbours in central Europe, that is going to take a while.

We'll All Pay
For the Fed's
Loose Money Follies

By BENN STEIL

In the dozen or so years until 2007, it had become as close to a global orthodoxy in economic policy making as we ever see: Central banks should target a low and stable rate of inflation.

This replaced earlier orthodoxies -- such as that central banks should maintain a fixed exchange rate with an ounce of gold, which was abandoned in 1971. Though inflation targeting left far more latitude for government officials to expand the money supply, it too ultimately proved too great a shackle on the exercise of central bank wisdom.

The U.S. Federal Reserve, the European Central Bank, the Bank of England and other rich-country central banks have generally made 2% inflation, give or take a smidge, the touchstone of good performance. Fed officials have for 20 years paid public obeisance to their statutory "dual mandate," to maximize employment as well as stabilize prices. But in practice, until recently, they treated it much like a mildly embarrassing biblical injunction that could be safely ignored, if not repudiated.

Yet one of the great attractions of inflation targeting was that it only appeared to constrain central bankers' discretion. Other objectives which today's central bankers actually think are far more important -- in particular, keeping growth of that great aggregate of aggregates, "gross domestic product," above 0% -- can be safely pursued in place of price stability.

This is because the inflation target is what's called a "medium-term objective." The Fed is actually free to slash its key interest rate from 5.25% to 2%, stuffing the world with dollars, even as inflation soars past 5.6% (a 17-year high), because the public's inflation expectations will supposedly remain "well anchored." That is, we will eventually stop charging and paying each other ever higher prices for stuff, in spite of the flood of Fed money, because we know that once the Fed prints enough of it to fix our problems it will get really mad over the inflation we produced and target it with a vengeance.

Unless, of course, it hurts the GDP number, in which case the "medium term" will just be a bit longer. You get the picture.

The irony of the collapse of inflation targeting's intellectual edifice is that it has long been championed by Fed Chairman Ben Bernanke, not to mention departing Fed Governor Frederick Mishkin, who recently made a call for "establishing a transparent and credible commitment to a specific numerical [inflation] objective." This after siding with the doves on every rate vote, even as inflation soared to triple his preferred target.

The logic behind central bank discretion is that the economy is like a giant factory churning out 100 widgets a year, all of which are happily bought by consumers without prices rising. A sudden "exogenous shock" cuts demand to 98 widgets. But the central bank can then print money to induce consumers to buy up the two excess widgets, thereby stopping the factory from cutting production capacity and causing a "recession." It claws back the excess money when "equilibrium" is restored.

But what if this analogy is deeply flawed? What if the economy is much more like two factories than one? One factory produces, say, real-estate widgets, and the other produces everything else. If consumers decide they want fewer real-estate widgets and more of some other widgets, it will take time and resources for capacity to shift from the first factory to the second. "GDP" growth will decline during that time. But the process is normal and desirable. By printing more money, the central bank only makes it longer and more painful, not least by producing significant and prolonged inflation.

This is the serious mistake the Fed has made. And in so doing, it has probably killed the last great hope for a sound, durable global fiat money system -- inflation targeting.

Mr. Steil is director of international economics at the Council on Foreign Relations, and a co-author of "Money, Markets and Sovereignty" (Yale University Press, forthcoming).

NATO's Hour

By RONALD D. ASMUS
FROM TODAY'S WALL STREET JOURNAL EUROPE

BRUSSELS

Russia's invasion of Georgia is a game changer. This war is part of a Russian strategy of roll-back and regime change on its borders. The more evidence that comes in, the clearer it is becoming that this is a conflict Moscow planned, prepared for and provoked -- a trap Tbilisi unfortunately walked into. A core Western assumption since 1991 -- that Moscow would never again invade its neighbors -- has been shattered. As Moscow basks in its moment of nationalistic triumphalism, the West needs to take steps to prevent further Russian moves from spreading instability to others parts of Europe.

If they want to contain this crisis, NATO foreign ministers meeting here tomorrow need to focus on two strategic imperatives. The Alliance must take steps to reassure those members fearing Russian pressure that NATO's mutual-defense commitments are credible and real. And ministers must consider speeding up enlargement plans to lock in stability in the Balkans and bring in Ukraine and the southern Caucasus.

The Alliance can start with a very simple but clear statement declaring that Moscow's operation was an act of aggression incompatible with international law and the United Nations Charter, fundamental principles of security and cooperation in Europe as reflected in the Charter of Paris, and even the founding principles of the NATO-Russia Founding Act in 1997.

But strong words are only a first step. So the Alliance should also reassure current members who feel threatened by Russia's move and, above all, Moscow's rationale for action. Since the Alliance began enlarging a decade ago, it has not conducted any defense planning against a possible Russian military threat to new members in Central and Eastern Europe or the Baltic states. We have unilaterally refrained from such steps partly as a confidence-building step toward Russia. New members have complained bitterly about this. It is why the Alliance is seen by many in the region as hollow. It is time to take this step as a prudent part of Alliance defense planning.

Furthermore, we need to back up such planning by making our security guarantees to existing NATO members more credible. In the NATO-Russia Founding Act, the Alliance undertook a political pledge to carry out commitments under Article 5 -- which stipulates that an attack on one NATO ally is an attack on them all -- by relying on building military infrastructure in the new member states and sending reinforcements to defend that country in a crisis, as opposed to the permanent forward deployment of large numbers of combat troops. We did this, again, to reassure Russia and because our military commanders believed we could afford this given Western military superiority. This commitment was political, not legal, and was contingent upon the maintenance of a benign security environment -- diplo-speak for a peaceful Russia. NATO, however, unilaterally decided not to seriously develop that infrastructure or reinforcement capability. It is time to put into place the infrastructure, reinforcement capabilities and symbolic deployments we are fully entitled to as a stabilizing and confidence-building measure for new allies.

NATO also needs to reassure those partners likely to be the next targets of Russian pressure and possible aggression, first and foremost Ukraine. This means rethinking NATO's enlargement strategy. In the mid-1990s, NATO adopted an enlargement strategy based on integration and not as a strategic response to Russia. We consciously raised the bar and requirements for new members. Our focus was less on protection than on democratic reforms to help anchor these countries to the West. But we also consciously left ourselves the option of lowering the bar in the future if the security environment took a turn for the worse. It now has done just that, and we need to shift our criteria again.

Strategic reassurance should now come first. This means more robust NATO outreach and a fast-track approach to enlargement in the Balkans, Ukraine as well as the southern Caucasus. Ukraine is likely to be Moscow's next target along with Azerbaijan, which holds the key to the viability of Europe's trans-Caspian energy corridor. While many of these countries might not qualify under the criteria of the 1990s, they are strategically important for the West and at risk. We need to embrace them quickly in spite of their imperfections. That means granting them so-called Membership Action Plans and moving toward fast-track enlargement. We should not give up our goal of pushing for democratic reform in these countries. But let's first help make them safe.

Leaders in these partner countries also have big decisions to make. In Ukraine, the NATO issue is part of the domestic battle for power. But it is time to put politics aside and be serious. European Union association agreements currently under debate are good for the country but will not shield Ukraine from Russian pressure and aggression. Opposition leaders publicly oppose NATO to score points, but in private many say they want it. They must now decide if they want to be part of the West. If parts of the opposition join a bipartisan consensus, the Alliance should move quickly to embrace Ukraine. In Azerbaijan, presidential elections are approaching. Azerbaijan is not a democracy and has its own "frozen conflict" with Armenia in Nagorno-Karabakh. If Baku conducts free and fair elections and moves toward a democratic opening, and makes credible moves to make peace with Armenia, we should also be prepared to embrace Azerbaijan.

That of course leaves Georgia. Following this war, it will be years before Georgia again reaches NATO's current criteria for new members. Here, too, we need to change our approach and embrace a country whose survival is at stake, too. These new commitments, if undertaken, must be backed up by credible military planning and defense arrangements that deter Russia.

Last but not least, we should freeze the NATO-Russia dialogue in Brussels for the foreseeable future. If we are honest, this relationship has never become what we wanted: a channel for consultation and real cooperation. Moscow has walked away from many of its commitments in the Founding Act. It treats the NATO-Russia Council as yet another platform for its anti-Western strategy. Russian NATO Ambassador Dimitry Rogozin behaves like an old-style propagandist seeking to sow dissension in the ranks of allies. We have lots of channels to talk to Moscow. Let's shut this one down until Moscow gets serious about doing business and not spreading anti-NATO propaganda.

The stakes are high. It is time for the kind of leadership and trans-Atlantic unity that will preserve our values, interests and security in a more dangerous world.

Mr. Asmus is executive director of the Brussels-based Transatlantic Center and in charge of strategic planning at the German Marshall Fund of the United States. These views are his own.

A Better Way to Free Trade

Hong Kong

Gordon Crovitz

This tiny outpost of radical thinking is an excellent vantage point for the recent collapse of the multilateral trade negotiations. Hong Kong is essentially irrelevant to trade talks because it practices unilateral free trade, with virtually no tariffs or other barriers. People here understand that imports, exports and the rigors of comparative advantage create individual opportunity and wealth. Enough, in Hong Kong's case, for it to have evolved under almost pure free trade from a rocky harbor into one of the wealthiest places on earth.

But don't some industries in Hong Kong seek government protection? Don't some bureaucrats seek to expand their powers? What about antitrade activists?

"Unilateral free trade is never an issue," reports Yeung Wai Hong, publisher of the popular Chinese-language weekly Next Magazine. Unilateral free trade remains policy here under Chinese rule, as it was under Britain. Mr. Yeung noted that one of the few tariffs that did exist, on wine, was recently abolished, and in typically speedy fashion Hong Kong is already hosting some of the world's biggest wine exhibitions and auctions.

Few places practice unilateral free trade, but one reason the failure of the recent trade negotiations hasn't been bigger news is the less well-understood point that some of the most important industries in the world live in their own version of a free-trading Hong Kong.

The global information and technology industries in particular have thrived in nearly Hong Kong-like conditions. Trade barriers are rare issues, certainly compared with industries such as autos, steel and farming.

For many newer, knowledge-based industries, the U.S. has not relied on multiparty or bilateral agreements. Instead, Information Age industries have usually not sought trade protections and have thrived by being left alone. "Such ultramodern industries as telecommunications and financial services gained their momentum largely from unilateral openness and deregulation in the U.S.," economist Jagdish Bhagwati has explained. "A Brussels bureaucrat can argue with a Washington bureaucrat, but he cannot argue with the markets."

The idea of unilateral free trade is often dismissed as politically impossible outside trading centers like Hong Kong and Singapore. The impossibility of unilateralism is only partly true.

The hound that doesn't bark is the selective unilateral free trade that occurs when countries choose not to impose barriers in preferred industries. While global trade has grown rapidly since World War II -- partly because of the success of earlier multilateral trade agreements -- not enough attention has been paid to the role played by tariffs and other barriers that were never put in place for industries that have led growth in world trade. Unilateral free trade by the U.S. has especially helped software, hardware, the Web and other technologies.

Why should only selected, preferred industries benefit from unilateral free trade? Open trade is a good in itself; the wealth it produces can fund retraining for those displaced when a country loses competitiveness in particular segments. Trade is also the ultimate source of economic information, which means that the more free the trade in an industry, the more efficient the industry will become as comparative strengths move around the world.

If standard software can be developed most efficiently in India, that's where it will move. If sugar production needs to be subsidized in the U.S. or cows subsidized in France, these industries will lose out on innovation as competition is suppressed.

The experience of a trading center like Hong Kong, or of an open-trading industry such as technology, suggests that unilateralism would be a timely alternative to multilateral trade efforts. The "Doha Round" that began in 2001 and broke up in July was the first to fail since the founding of the General Agreement on Tariffs and Trade, now the World Trade Organization. The finger-pointing centers on India and China, which demanded new protections against agricultural imports from the U.S. and Europe. But these talks became so complex and involved so many interest groups from so many countries that it wasn't surprising they collapsed.

Even if the Doha Round is resuscitated, the language of trade as a negotiation among countries is now part of the problem. Support even for bilateral agreements has waned, with Congress holding up agreements with countries such as South Korea and Colombia. Rather than trade as something that governments regulate or agree to stop regulating, trade should be what people do when left to their own decisions in free global markets.

As Mr. Bhagwati puts it, "If we refuse to reduce our trade barriers just because others do not reduce theirs, we lose from our trading partners' barriers and then lose again from our own." So a proper response to the failure of multilateral trade talks would be to extend the benefits granted to lucky industries such as technology -- by granting all industries the same unilateral free trade.