Feature

Avoid the Double Dip

How Obama can save the fragile economy from going back into a tailspin.

Roughly three years since the onset of the financial crisis, the U.S. economy increasingly looks vulnerable to falling back into recession. The United States is flirting with "stall speed," an anemic rate of growth that, if it persists, can lead to collapses in spending, consumer confidence, credit, and other crucial engines of growth. Call it a "double dip" or the Great Recession, Round II: Whatever the term, we're talking about a negative feedback loop that would be devilishly hard to break.

If Barack Obama wants a realistic shot at a second term, he'll need to act quickly and decisively to prevent this scenario.

Near double-digit unemployment is the root of the problem. Without job creation there's a lack of consumer spending, which represents 40 percent of domestic GDP. To date, the U.S. government has responded creatively and massively to the near collapse of the financial system, using a litany of measures, from the bank bailout to stimulus spending to low interest rates. Together, these policies prevented a reprise of the Great Depression. But they also created fiscal and political dilemmas that limit the usefulness of traditional monetary and fiscal tools that policymakers can turn to in a pinch.

With interest rates near zero percent already, the Federal Reserve has few bullets left in its holster to boost growth or fend off another slump. This lack of available good options was patently on display in August when Fed Chairman Ben Bernanke spoke with a tinge of resignation about new "quantitative easing" interventions in the mortgage and bond markets -- a highly technical suggestion that, until the recent crisis, amounted to heresy among Fed policymakers. It certainly hasn't helped that the U.S. federal deficit has reached heights that make additional stimulus spending, of the kind that helped kindle the mini-recovery of early 2010, politically impossible.

Yet all is not lost. Obama will face an increasingly partisan and divided Washington over the next two years, but he can take steps to reduce the odds that this dark double-dip scenario comes to pass. This will, of course, require deft politics. To that end, the administration should focus on policies that create a revenue-neutral fiscal stimulus -- one that targets both labor demand and consumption.

Start with the one thing that everyone loves to hate: taxes. Forget the political hot potato over the size and shape of the cuts -- there's an easy way to do this. For the next two years, Obama should reduce payroll taxes for both employers and employees. The reduction for employers will lower labor costs and allow the hiring of more workers; for employees, increased take-home pay will get people spending again. It's not just about increasing foot traffic in the mall; households need to pay down the burden of credit cards, second mortgages, and other legacies of the years of easy credit.

But this tax cut can't bust the budget. How can it be funded? By allowing George W. Bush's tax cuts for people making more than $250,000 to expire while keeping in place those for middle- and low-income earners -- the vast majority of Americans. And whatever trickle-down Republicans in Congress say, Obama will have to remain firm on this.

After two years, when U.S. growth is hopefully more robust and the pace of private-sector hiring has picked up steam, Obama can afford to phase out the payroll tax cuts. But the income-tax increases for the rich? They'll need to stick around. To woo key middle-of-the-road Democrats and moderate Republicans and to maximize the incentives for private-sector hiring, the president should make sharper reductions to payroll taxes paid by employers than to those paid by employees. This makes mincemeat of the argument that high-income individuals invariably resort to -- that higher income taxes will hurt small businesses and curtail hiring. By incentivizing both consumer spending and hiring, this plan goes far beyond the modest tax credits for business investment proposed in September.

As for the employee payroll tax cuts, because low-income workers generally consume more of their salaries when given extra money, the payroll tax cut should be designed to provide a larger percentage break to those on the low end of the income scale. This has another ancillary benefit: "Progressive" Democrats will find this tax cut an easier sell.

But the mixture of employer and employee payroll tax cuts, the latter benefiting the majority of Americans, represents only the beginning of what might be done with a more creative approach to tax policy. After all, everyone agrees that something needs to be done: The president's fiercest political rivals go on the record daily declaring an economic state of emergency.

It's high time to hold U.S. financial institutions to account. The very companies that benefited from the billions of dollars of taxpayer stimulus are currently building up huge cash reserves -- in effect, overinvesting in capital at the expense of jobs. Taxing this capital would reduce the relative cost of labor and get companies hiring again.

Both for policy and political reasons, Obama should emphasize that these changes would be temporary. Absent a new stimulus package -- which appears highly unlikely at this point -- these cuts are the best way to avert another economic disaster. They direct billions of dollars back to the American households that are most likely to spend them and those businesses most likely to hire new employees.

Only a tiny percentage of Americans will end up paying more: the highest-income earners, who have already benefited greatly from the service the government (read: taxpayers) rendered to their brokerage firms and investment banks in 2008. Republicans may rail against increasing taxes on any American, but the complaints of the wealthy, in today's economic climate, will have little credibility among middle-class voters. In exchange for this increase, Obama can fashion a large tax break for employers and employees that jump-starts consumption, encourages hiring, and reduces the risk of a double dip -- all without busting the budget.

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Feature

The Tyranny of Metaphor

Three historical myths have been leading American presidents into folly for nearly a century. Is Obama wise enough to avoid the same fate?

In 1952, British historian Denis William Brogan published a brilliantly perceptive article on "The Illusion of American Omnipotence." In the midst of the Korean War, Brogan was not only commenting on Americans' frustration with their inability to prevail decisively against supposedly inferior Chinese and North Korean forces, but also cautioning against other misadventures in which the United States falsely assumed its superpower status assured a military victory in any conflict it chose to fight. Brogan could just as easily have titled his essay "The Omnipotence of American Illusion" in an echo of Friedrich Nietzsche's critique of true believers. "Convictions," the great German philosopher wrote, "are more dangerous enemies of truth than lies."

Brogan and Nietzsche might well have been talking about the last 100 years of American thinking about foreign policy and the convictions -- or call them illusions -- that have shaped it along the way, across administrations led by men as diverse in outlook and background as Woodrow Wilson, Dwight Eisenhower, and George W. Bush.

There is certainly much about America's world dealings in the 20th century that deserves praise: victory in World War II, the Truman Doctrine, the Marshall Plan, JFK's diplomacy during the Cuban missile crisis, the Camp David peace accords, the Panama Canal treaty, Richard Nixon's opening to China, and détente with the Soviet Union, to mention the most obvious. But a more rounded view would have to include its many stumbles. Three enduring illusions -- a misguided faith in universalism, or America's power to transform the world from a community of hostile, lawless nations into enlightened states devoted to peaceful cooperation; a need to shun appeasement of all adversaries or to condemn suggestions of conciliatory talks with them as misguided weakness; and a belief in the surefire effectiveness of military strength in containing opponents, whatever their ability to threaten the United States -- have made it nearly impossible for Americans to think afresh about more productive ways to address their foreign problems. Call it the tyranny of metaphor: For all their pretensions to shaping history, U.S. presidents are more often its prisoners.

Even Barack Obama, who rode his opposition to the Iraq war into the White House and has kept his campaign promise to withdraw U.S. combat troops, is not immune from history's illusions. How could he be? Domestic politics are as much a part of foreign policy as assessments of conditions abroad. But Obama might yet succeed in fending off such pressures. The president is keenly interested in making the wisest possible use of history, as was evident to me from two dinners 10 other historians and I had with him at the White House over the past two years. For despite the many countercurrents confronting him, Obama was eager to learn from us how previous presidents transcended their circumstances to achieve transformational administrations.

Such lessons must weigh heavily as Obama faces his next momentous decision on what to do in Afghanistan while praying that Gen. David Petraeus, the hero of the Iraq surge, can duplicate the feat before the public's patience runs out. So far, the president has avoided either fully embracing the Afghan war or calling for outright withdrawal. His commitment of 30,000 additional troops was meant to reassure America's national security hawks that he is as determined as they are to defend the country's safety from future attacks. At the same time, his promise to begin withdrawing U.S. forces in July 2011 suggests his understanding that Afghanistan could be another Vietnam -- a costly, unwinnable conflict that could tie the United States down in Asia for the indefinite future. It might also be, of course, that Obama has serious doubts about the value of sending American soldiers to die in a far-off, impoverished land of little strategic value, but understands that simply to walk away from the conflict carries unacceptable political risks, undermining his ability to enact a bold domestic agenda that is central to his administration and his chances for a second term.

Just as President Harry Truman could not ignore the political pressure from the China Lobby to back Chiang Kai-shek's failing regime against Mao Zedong's Communists in the middle of the last century, so Obama is mindful of the political risks of appearing irresolute. Already, his predecessor's U.N. ambassador, John Bolton, has blamed Obama's Afghan withdrawal timeline for sending "a signal of weakness that our adversaries interpret to our detriment." Former Vice President Dick Cheney has referred to the president as someone who "travels around the world apologizing." Bush himself previewed a similar line of attack in a 2008 speech in Israel, in which he criticized Obama and others then calling for engagement with Iran. "We have heard this foolish delusion before," Bush said. "As Nazi tanks crossed into Poland in 1939, an American senator declared: ‘Lord, if I could only have talked to Hitler, all of this might have been avoided.' We have an obligation to call this what it is -- the false comfort of appeasement, which has been repeatedly discredited by history."

Can Obama escape this trap? To do so, he'll need to study his predecessors' mistakes and learn from those few U.S. presidents who managed to avoid being tyrannized by metaphor. And he'll need to understand how we got here.

AMERICA'S LOVE AFFAIR WITH universalism, the first of the three illusions, began in January 1918 with President Woodrow Wilson's peace program, his Fourteen Points: the seductive rationalizations for U.S. participation in a "war to end all wars" and make the Western world "safe for democracy." Such high-minded ends appealed to Americans as validations of the superiority of their institutions. They were enough to convince an isolationist America to sacrifice more than 50,000 lives in the last 19 months of Europe's Great War. The 20 postwar years, which saw the rise of communism, fascism, Nazism, and Japanese militarism leading to World War II, gave the lie to Wilson's dreams of universal peace and self-governance, driving Americans back into their isolationist shell until the attack on Pearl Harbor demonstrated that the "free security" provided by vast oceans and weak neighbors no longer guaranteed their country's safety.

Yet Wilson's idealistic hopes for a better world did not disappear on the beaches of Normandy or in the caves of Iwo Jima. If anything, World War II reinforced Americans' unrealistic expectations that they could reduce -- if not end -- human conflict. Wilsonianism found continuing life in the birth of the United Nations and the triumph of democracy in Germany, Japan, Spain, South Korea, Taiwan, and parts of Latin America. But Wilson's vision was again elevated to a sacred doctrine that repeatedly played America false. Eager to believe that World War II would largely cure countries of their affinity for bloodshed, Americans persisted in seeing the Allies -- Britain, China, the Soviet Union, and the United States -- as permanent friends acting in concert to keep the postwar peace.

The onset of the Cold War brought an abrupt end to these dreams. But convictions about the irresistible attraction of U.S. institutions encouraged the hope that inside every foreigner was an American waiting to emerge, an outlook that shaped American thinking not only during the years of anti-communist struggle, but all the way up to Bush's rationale for fighting in Iraq. Today, Bush's prediction that the destruction of Saddam Hussein's military dictatorship would transform the Middle East into a flourishing center of traditional American freedoms is proving to be as elusive as Wilson's original grandiose vision. The imperfect U.S.-sponsored regimes in Baghdad -- and Kabul too, for that matter -- are a far cry from the robust democracies Bush hoped would become the envy of the region. "The survival of liberty in our land increasingly depends on the success of liberty in other lands. The best hope for peace in our world is the expansion of freedom in all the world," Bush said in his very Wilsonian second inaugural address, though U.S. military chiefs in Iraq and Afghanistan have since managed to move the goal posts, promising to establish reasonably pro-American governments that can handle their own security.

Most of the evidence, however, points to an unpredictable future for both countries, where political instability, anti-Americanism, and military coups seem unlikely to disappear. It may be that 10 or 20 or 30 years of U.S. stewardship will bring freedom and prosperity to Iraq and Afghanistan, but Americans have limited patience with nation-building that costs them unacceptable amounts of blood and treasure -- and often have a better collective sense of what American power can realistically achieve than the government's best and brightest. They have not forgotten the Vietnam War, even if, at times, their leaders seem to have.

Indeed, Vietnam is always there as a trap for the American leader, a trap set by the deadly and persistent second illusion -- that a failure to combat every act of international aggression is tantamount to appeasement, a return to the failed passivity of the 1930s. This illusion has time and again led the United States into unwise and costly military adventures. While Winston Churchill was marvelously right in saying that Britain had a choice between war and dishonor at Munich in 1938 and that Neville Chamberlain's appeasement of Adolf Hitler would produce both, Munich was never the perfect analogy for dealing with subsequent conflicts, as Churchill himself acknowledged. As he put it in 1950, "The word 'appeasement' is not popular, but appeasement has its place in all policy. Make sure you put it in the right place. Appease the weak. Defy the strong." But for hawks, it is always Munich 1938 -- no matter whether the aggressor is Saddam Hussein, Slobodan Milosevic, or "Baby Doc" Duvalier -- and presidents from Truman to Bush have been led by the appeasement metaphor into misjudgments that have harmed the United States and undermined their presidencies.

Truman, for example, justified his decision to enter the Korean War in 1950 as a way to deter the Soviet Union, which he saw as the architect of the conflict, from future acts of aggression that could touch off a World War III. Truman had reason enough to combat Pyongyang's aggression: South Korea's collapse would have undermined confidence in America's determination to defend Japan and Western European allies. Comparisons between Stalin and Hitler and predictions that Korea was the start of a worldwide communist offensive like the Nazi reach for global control, however, were decidedly overdrawn. But the power of the anti-appeasement proposition was so great in 1950 that one can search in vain for dissenting voices.

Had Truman aimed simply to restore South Korea's independence, his decision to enter the Korean fighting would look much different today. Instead, he chose to follow Gen. Douglas MacArthur's advice to destroy North Korea's communist regime by crossing the 38th parallel. It was a blunder based on two false assumptions: that the Chinese would not enter the conflict and that if they did, they would be roundly defeated, with the likely collapse of their communist regime. Instead, China's direct entry into the war produced a military and political stalemate, delayed a possible rapprochement with Beijing for years, and destroyed Truman's presidency. With his approval rating falling to 24 percent, he could neither enact his Fair Deal nor maintain public backing for the war.

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President Lyndon B. Johnson, of course, was another casualty of the Munich analogy. Recalling the political consequences for his party from the 1949 "loss" of China that right-wing Republicans like Joseph McCarthy used to label Democrats as appeasers of Chamberlain scale, he committed the United States to a war in Southeast Asia even more politically destructive to his administration and the country than any act of passivity might have produced. Johnson came to lament Vietnam's cost to him and his administration, complaining about the "bitch" of a war that distracted him from his true love -- building the Great Society.

The failure in Vietnam produced a new metaphor: Fighting a Third World country on hostile terrain was to be avoided at all costs. When George H.W. Bush convinced Congress and the country to oust Iraq from Kuwait in 1991, it was an uphill struggle to persuade Americans that he was not involving them in another Vietnam. Yet he succeeded by invoking that appeasement metaphor yet again: "If history teaches us anything, it is that we must resist aggression or it will destroy our freedoms," Bush explained in making his case for the war. "Appeasement does not work. As was the case in the 1930s, we see in Saddam Hussein an aggressive dictator threatening his neighbors." Such overblown warnings were enough to sell the Persian Gulf offensive, but postwar arguments that America had now kicked the Vietnam syndrome were premature -- and may have sown the seeds of his son's disastrous 2003 invasion of Iraq.

The third illusion U.S. presidents often hold is that militarized containment -- the belief that containing or preventing enemy aggression depends on a military threat to their survival -- is the right way to avoid the traps set by the first two. The core conviction here has been that America won the Cold War because it understood that the Soviet Union was intent on world domination and that the best way to counter its ambitions short of all-out war was to contain its reach for control by a combination of economic, political, and military initiatives that would discourage Moscow from aggression and strain its limited resources to the breaking point, forcing communism's collapse.

From the start, however, containment was a contested doctrine. In his famous "Long Telegram" of February 1946 and "X" article in Foreign Affairs the next year, George F. Kennan, who headed the State Department's new policy planning staff, counseled the White House to contain Soviet Russia's "expansionist," "messianic" drive for world control. Kennan later regretted having stated his views in such evangelistic language; it encouraged anti-communists to take his advice as a call for military as well as political and diplomatic action.

In fact, Kennan never believed that Moscow intended a military offensive against Western Europe. In his judgment, Soviet acts of aggression would take the form of political subversion, calculated steps to bring pro-Soviet governments to power wherever possible as Moscow drove to win what it saw as the inevitable competition between communism and capitalism. Kennan's formula for victory was economic aid fostering political stability in countries potentially vulnerable to communism's siren song. He wisely described Soviet communism as a system of state management and controls that would eventually collapse when its inability to meet consumer demands for the sort of material well-being and freedoms enjoyed in the West became evident. Accordingly, he vigorously opposed hawkish Cold War initiatives such as the establishment of the North Atlantic Treaty Organization, armed intervention in Vietnam, and the development of the hydrogen bomb as needless escalations that would only ensure a harsh Soviet response.

Kennan was a prophet without a following -- at least within the U.S. government. Secretary of State Dean Acheson told him to take his Quaker views to a more hospitable setting than he could possibly find in Washington. Kennan found a home in Princeton, N.J., at the Institute for Advanced Study, but vindication would not become fully evident until the close of the Cold War. As his life ended in 2005 at the age of 101, he was convinced more than ever that the tyranny of military containment had done little, if anything, to assure America's victory in that struggle. He saw the invasion of Iraq as another example of misplaced faith in a military solution to a political problem. In a September 2002 interview, a 98-year-old Kennan described Bush's talk of a pre-emptive war against Iraq as "a great mistake."

No postwar U.S. presidents were more mindful of the need to rely on diplomatic and political initiatives in fighting the Cold War than Dwight D. Eisenhower and John F. Kennedy. They understood that Truman's greatest foreign-policy successes were the Truman Doctrine, which committed U.S. financial aid to shoring up Greece and Turkey against communist subversion, and the Marshall Plan, which consisted of multibillion-dollar grants to support European economies as a bar to communist political gains in Britain, France, the Netherlands, Belgium, Italy, and Scandinavia.

True, Eisenhower and Kennedy were not averse to using subversion to undermine unfriendly regimes in the Middle East and Latin America, as the historical record demonstrates in U.S. dealings with Iran, Nicaragua, and Cuba during the 1950s and 1960s. Nor were they consistently wise in sanctioning clandestine operations that did not necessarily serve long-term U.S. interests. Both presidents, however, saw the reliance on direct military action to defeat the communists as a step too far. For all the rhetoric in the 1952 campaign about rollback and liberation (Adlai Stevenson has "a Ph.D. from Dean Acheson's cowardly college of communist containment," Richard Nixon taunted), Ike would not unleash America's military power to oust Kim Il Sung's communist regime from Pyongyang, as South Korea's Syngman Rhee and conservative Republicans in the United States urged. Nor would he support Hungary's attempt to throw off Soviet control in 1956 with armed intervention or rely on more than rhetorical threats to deter the Chinese from attacking Quemoy and Matsu, the islands between the Chinese mainland and Taiwan. And he resisted French pressure to intervene with air power to prevent defeat at Dien Bien Phu and the loss of Vietnam, which struck Eisenhower as an effort to involve the United States in a war Paris had already lost and America would not assuredly win.

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Kennedy was as cautious as Eisenhower about relying on armed intervention to serve the national interest. Despite intense pressure from U.S. military chiefs in 1961 to rescue the Cuban insurgents at the Bay of Pigs by using American air power against Fidel Castro's forces, Kennedy rejected a direct U.S. part in the fighting. True, the invaders were U.S. surrogates armed and financed by the CIA, but Kennedy wisely concluded that the price of open U.S. intervention would be greater -- a barrage of anti-American propaganda in the Third World -- than the embarrassment from a defeat. During the 1962 Cuban missile crisis, the demands on Kennedy from his generals to bomb Soviet missile installations and invade the island to topple Castro were intense. But Kennedy insisted on a "quarantine" and diplomatic solution that, as we know now, saved the world from a devastating nuclear war.

Kennedy was also a reluctant supporter of expanded U.S. military action in Vietnam. At the same time he increased the number of U.S. military advisors in Saigon from roughly 700 to more than 16,000, he saw a commitment of U.S. ground troops to South Vietnam's defense as a potential trap that could shift the burden of the war to the United States and turn the conflict into another Korea. In the months before he was assassinated in November 1963, he directed Defense Secretary Robert McNamara to lay plans for the withdrawal of the advisors. (He also signed on to a coup by South Vietnamese generals against Ngo Dinh Diem's government, aiming to create a more stable political rule that would reduce the need for U.S. military intervention.) We will never know exactly what Kennedy would have done about Vietnam in a second term, but it seems unlikely that he would have followed Johnson's path. As Kennedy told New York Times columnist Arthur Krock, "United States troops should not be involved on the Asian mainland." He warned Arthur Schlesinger, the historian and presidential advisor, that sending combat troops to Vietnam would place far greater demands on U.S. commitments than the public would tolerate and would not allow him to sustain public backing for other initiatives his administration might hope to take. The history of LBJ's presidency fully vindicates Kennedy's doubts.

Eisenhower and Kennedy have much to teach Obama and anyone else who becomes president; American leaders invariably confront such demands to use military force. The two men could resist that pressure because they were military heroes who could convince the public that they understood the use of armed strength better than domestic hawks urging action. Presidents without military records -- like Obama -- are at a disadvantage that they need to counter through vigorous rhetoric, a technique deployed with great success by the likes of leaders as varied as Franklin D. Roosevelt and Ronald Reagan.

Counter it they must, for the metaphors that have dominated American thinking about foreign affairs over the last hundred years are not simply objects of historical curiosity. As Obama understands, they remain powerful engines of influence on decision-making about vital questions of war and peace. In trying to forge sensible responses to the challenges posed by Afghanistan, Iran, North Korea, and the persistent Israeli-Palestinian conflict, Obama knows that the shadows of past failures hang over him, whether the misguided belief in turning authoritarian adversaries into Jeffersonian democrats or the false choice of favoring militant containment over anything that even remotely resembles appeasement. His room to maneuver is therefore limited -- at least if he hopes to act with the sort of public support required to put across his domestic agenda while also moving boldly to tame international dangers.

Obama seems keenly aware of the main lesson of Vietnam: Don't let the appeasement metaphor, cliché, conviction, call it what you will, lock you into an unwinnable war that destroys your presidency. He appreciates that a grand design or strategy in foreign affairs does not readily translate from one crisis to another. Appeasement was a terrible idea in dealing with Hitler, but avoiding it was never the right argument for crossing the 38th parallel in Korea or embroiling the United States in Vietnam. (After all, a stalemate in the first war and a defeat in the second did not deter the United States from winning the larger Cold War.) Nor is Obama persuaded by grand Wilsonian visions of bringing democracy to Iraq and Afghanistan; he has made clear that he does not see military solutions to the problems America faces in those two countries. He has openly described the invasion of Iraq as a "mistake" and seems determined to de-escalate U.S. involvement in Afghanistan as soon as possible.

But no matter how conscious Obama is of the perils of history's traps, he faces no small challenge in convincing political opponents to relinquish the outworn foreign-policy clichés that have been of such questionable service to America's well-being. As Germany's Otto von Bismarck is said to have observed more than 100 years ago, great statesmen have the ability to hear, before anyone else, the distant hoofbeats of the horse of history. More often than not, however, it is the accepted wisdoms -- or the wrong lessons of history altogether -- that govern the thinking of publics and the behavior of their leaders.

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Photos, left to right: Hulton Archive/Getty Images, Yuri Cortez/AFP/Getty Images