Argument

What Would Ike Do?

Why President Obama doesn't understand Eisenhower's lessons of war, pushback, and how to deal with thuggish regimes.

In the past several weeks, following tidal waves of criticism directed at the Obama administration's handling of the Ukraine crisis, supporters have risen up to defend the president, including pieces by James Traub in Foreign Policy and Fareed Zakaria in the Washington Post. There is a good deal to be said for their point of view; Putin's cold power politics is driving him, not Obama's past errors, and the administration has taken steps not unlike those of the Bush administration in the 2008 Georgia crisis. But both Traub and Zakaria go further, comparing the president's overall approach approvingly to that of President Dwight Eisenhower. There are similarities, but the differences are significant. Nonetheless, Traub and Zakaria do a service by sketching a direction this administration could take in "Ike's footsteps," as the administration must react further to Putin's running over the objections of the United States, Europe, and almost the entire U.N. Security Council in his goal to annex Crimea.

What links the two administrations, almost 60 years apart, is a reluctance to get bogged down in significant ground wars for uncertain ends. Eisenhower refused to get involved in any of our European allies' colonialist adventures, be it Indochina, Suez, or Algeria. Wisely, given the correlation of forces, despite much criticism he did not aid the Hungarians in 1956 or the East Berliners in 1953. Likewise, we can see in this President Obama's reluctance to continue indefinitely armed nation-building in Iraq or Afghanistan, or to put boots on the ground in Syria. But Zakaria and Traub misconstrue Eisenhower's extraordinary power politics activism, albeit without deployment of large-scale American ground troops to new hotspots in Eurasia or Latin America. Eisenhower ended the Korean War while ensuring South Korea remained independent, both by committing that U.S. forces would remain on the peninsula and by sticking to a line of tough rhetoric -- including references to possible use of nuclear weapons. His policy of threatening nuclear strikes, naval deployments, and the delivery of advanced weapons to the Nationalist Chinese between 1954 and 1958 led to the military defeat of Beijing in the Quemoy and Matsu islands. Eisenhower put combat troops ashore in Beirut in 1958, sent advisors to South Vietnam, and used the CIA and surrogates against unfriendly regimes in Iran, Guatemala, and Cuba. While "ending wars" (not starting new ones) was important to Eisenhower, he did not give the impression, as we have seen at times with the current administration, that this was his only goal.

Understanding the rationale for Eisenhower's actions requires a glance back at Cold War strategy. The original formulation by State Department official George Kennan was focused on containment and deterrence. But the formal U.S. government plan for the Cold War, NSC-68, was more ambiguous, adopting Kennan's strategy but also citing the possibility of offensive military action and rollback. The latter was applied with disastrous consequences when the United States marched into North Korea in the fall of 1950 after liberating South Korea, provoking Chinese intervention, a U.S. retreat from the North, and 31 more months of war. Nevertheless, rollback reemerged as the foreign policy doctrine of the 1952 Eisenhower campaign, particularly associated with Secretary of State John Foster Dulles.

But it wasn't the case with his boss, President Eisenhower, who became the greatest of Kennan's pupils. Eisenhower did not seek to challenge territory in Soviet hands, including Berlin or Hungary, but was relentless in pushing back Communist forays or even the rise of pro-Communist forces on the U.S. side of the line. While not completely eschewing "boots on the ground" (e.g., Lebanon) Eisenhower generally worked with "economy of force" action through surrogates and allies, backed by CIA covert ops, arms deliveries, advisory teams, and nuclear threats. While some of his push-backs ultimately failed in Cuba and Vietnam, and others in Iran and Guatemala were morally questionable, the overall effect of his policy was a worldwide alliance system whose member states -- and their foes -- knew that Washington had their back.

In the Obama administration, while some specific foreign-policy decisions can be justified as ending or avoiding quagmires, the overall effect has been to place that alliance system in question.

This is thus a lesson the Obama administration still is learning. Some of its assessments on the Ukraine crisis seem based on a "those on the wrong side of history will lose in the end" attitude. Traub attributes the same thought to Eisenhower: As he writes, "[President Eisenhower] felt confident that, in the end, the Soviets would not dance on the grave of the West." Perhaps, but Ike didn't just sit back and await this happy state. Eisenhower knew a Soviet Union that was gaining ground internationally would undermine the West's alliance system. Likewise today, our system cannot simply be assumed to eventually triumph on automatic pilot -- regardless of the challenges. But that raises the big question: What actually is the system which the administration seeks to defend? Clearly, it is not just territories and allies. Indeed, since the 1990s, it is some notion of universal ideals that all the countries of the world (even Russia, China, Iran, and other Middle Eastern states) more or less accept: rule of law, collective security, peaceful settlement of disputes, and protection of civilian populations.

But it is exactly those ideals that Russia is flaunting in Ukraine and in Syria (along with its ally, Iran).

Those evincing an understanding for Putin argue that he is acting out of realpolitik self-interest. But the question is: What to do about it? Eisenhower's answer, judging from his record, would have been to counter every sortie, perhaps not with a major military campaign, but to do so decisively. The Obama administration doesn't have a clear answer -- not in past conflicts, and not in Ukraine. And thus we have a problem with the Eisenhower analogy.

If we assume Putin is acting out of realpolitik, then Washington must deal with him in that realm, not simply hope that history will eventually punish 19th-century behavior with visa restrictions, some sanctions, international meeting boycotts, and trade talk cancellations. We cannot thus be comforted by Traub's assessment that "the West can afford to be steady and patient, secure in the knowledge that the future lies with the liberal democracies."

Rather, we need to give Putin a choice. If he does not deescalate, the Obama administration should respond not with more demerits on his 21st-century club membership, but with the same understanding of 19th-century hard power. Washington should forego the institutional trappings -- from NATO partnership to missile defense talks -- that assume Russia is a collective security partner. It must start liberating Europe from the teat of Russia's gas oligarchy, deploy limited U.S. "tripwire" ground troop detachments of a few thousand personnel -- as in Berlin in the Cold War and later in Kuwait -- on NATO's eastern borders, and provide sufficient weapons deliveries, advisory efforts, and proxy support to tie Putin and his friends down in Syria until they agree to a compromise that is not a game-changing victory in a region critical to U.S. interests. Now that is a foreign policy Eisenhower could understand.

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Argument

Out of the Red and into the Black

Is China's debt problem really under control?

Now that China has wrapped up the annual session of its pro-forma parliament, the National People's Congress (NPC), it is clear that a gulf has opened up between economic policymakers in Beijing and outside analysts. Many outsiders say China must quickly cut back on debtor face a financial crisis. Beijing, by contrast, seems happy to let debt keep piling up while it tackles some tough structural reforms. This strategy is less risky than it sounds.

According to a common outside view, China's biggest problem is a huge debt increase. The combined debt of households, corporations and government soared from 138 percent of gross domestic product (GDP) in 2008 to 205 percent in 2013. Unless this spiraling leverage is brought under control, the argument goes, China risks a financial crisis similar to the one the United States suffered after its debt-fuelled housing bubble. Ideally, according to this analysis, China should act swiftly to first stabilize, and then reduce, the ratio of debt to GDP, commonly known as the leverage ratio. To do so, Beijing must sharply reduce the growth in credit, from its current rate of around 17 percent annually to roughly 10 percent. But inevitably, a credit squeeze of that magnitude will cut into economic growth. So the conclusion is that if Beijing is serious about controlling leverage, it must accept significantly lower economic growth for at least a few years. If, on the other hand, the leaders insist on keeping economic growth at its current pace, this means they cannot be serious about controlling leverage -- increasing the likelihood of a financial train wreck.

It is evident from the work reports at the NPC -- and from the earlier reform program announced at the Third Plenum, a major Communist Party meeting last November -- that China's leaders disagree with this outside opinion. They aim to stabilize real GDP growth at around its current rate of 7.5 percent a year, and will let credit keep flowing to support that growth. Meanwhile, they will focus on structural reforms: making the bloated state-owned enterprise sector more efficient, and fixing the dysfunctional finances of local governments. It is almost certain that under this policy mix, leverage will continue to rise.

But China's leaders are not driving the nation off a financial cliff. Their strategy is sensible, though not risk-free, and demonstrates that China's President Xi Jinping and his colleagues have a good grasp of the real challenges in China's economy. It also shows they have absorbed valuable lessons from the way the United States, Europe, and Japan have handled -- or mishandled -- financial crises over the past two decades.

The essence of Beijing's approach is the recognition that a credit tightening would punish good and bad borrowers alike. It will also be self-defeating if it does not address the underlying causes of the debt buildup. In short, China's leaders see the leverage ratio as merely a symptom. They are betting that if they attack the disease, the symptoms will eventually take care of themselves.

This explains the choice of reform targets. The two biggest sources of excessive borrowing in the past five years are state-owned enterprises (SOEs) and local governments, which together account for more than half of all the country's debt. By reducing the incentives for SOEs and local governments to borrow, and ensuring that the money they do borrow is used productively, Beijing should be able to control the debt problem.

Both SOEs and local governments started piling up debt at a hectic pace in 2009, essentially because they were ordered to do so. In response to the global financial crisis, Beijing launched a massive economic stimulus that consisted mainly of heavily-leveraged investments in infrastructure. The main agents for this investment were the SOEs and special-purpose infrastructure companies controlled by local governments.

But SOE and local government borrowing have deeper causes as well. From 1998 until 2008, the SOEs were subject to a reform drive that forced them to shed non-core and non-productive assets, exit competitive sectors in favor of nimbler private firms, and focus on "strategic" activities such as aviation, telecoms, power and petrochemicals. During that decade, the number of state firms fell from 260,000 to 110,000, the private sector's share of national fixed investment rose from less than a quarter to 58 percent, the profitability of state firms rose dramatically (nearly matching the returns in the private sector), and the proportion of SOE assets in "strategic" sectors rose to an all-time high of 62 percent.

Since the 2009 stimulus program, which relied heavily on investment by state firms, most of these gains have stalled or been reversed. Crucially, the return on assets in SOEs plummeted to less than half the private-sector average, and state firms began to re-colonize sectors from which they had previously retreated: by 2011, 50 percent of SOE assets were in these non-strategic sectors.

For local governments, the deep-seated problems are chronic deficits and unfunded mandates. Localities collect only about 45 percent of all government revenue, but their share of total expenditures has risen from 65 percent to 85 percent of the national total in the past decade. Most of this increased burden resulted from demands from Beijing to provide ever more social goods and services: low-cost housing, healthcare, education and environmental protection. These new mandates did not come with any new funding sources.

In theory, transfers from the central government bridge this budget gap, but in practice the transfers often do not match up well with localities' actual needs -- either because the money arrives late, is insufficient, or is earmarked for the wrong purposes. Not surprisingly, localities respond to this structural deficit by resorting to a variety of off-budget funding schemes, the most popular of which is to grab land from farmers at below-market prices and then use the land as collateral for bank loans.

The reforms sketched at last November's Party Plenum and fleshed out at the just-concluded NPC are comprehensive. State firms will be compelled to improve their abysmal return on capital, rather than simply expanding their assets as they have done for the past several years. Direct private investment in SOEs and in state-led investment projects will be encouraged, and previously restricted sectors like banking, aviation, and telecoms services will be opened to private firms. And most likely -- although government officials have been deliberately coy on this point -- a swathe of underperforming locally-controlled SOEs in non-strategic sectors will be privatized or forced into bankruptcy.

Several concrete measures show that the SOE reform agenda is not just talk. In late February the government of Guangdong, one of China's richest provinces, has targeted converting 80 percent of provincial SOEs to a "mixed-ownership structure," with no predetermined minimum state shareholding -- code for privatization. Since then, 19 other provinces have followed suit with similar plans. Petrochemicals giant Sinopec has announced it will seek private investment for a share of up to 30 percent in its gasoline and diesel distribution operations. And Beijing has invited Internet behemoths Alibaba and Tencent to apply for banking licenses, which if issued would be a first for truly private companies. All these moves would have been inconceivable a year ago.

On the fiscal front, Finance Minister Lou Jiwei (who helped design the present tax system as a junior official in the early 1990s) used his NPC work report to lay out a remarkably detailed set of proposals for cleaning up local government finance. The centerpiece is reducing unfunded mandates by moving more expenditure responsibility back to the central government. Lou also plans a more flexible transfer system giving localities more leeway in how they use monies from the central government, a host of new taxes including a property tax and an environmental protection tax, and new financing channels including municipal bonds. The latter should provide a safer way to fund needed infrastructure projects than the current jury-rigged system of special-purpose companies financed by land grabs.

The reform agenda is a strong one: its diagnosis of China's economic ills is compelling, and the proposed cures seem sensible. Moreover, it shows a keen appreciation of the lessons from other financial crises. From the two "lost decades" following the burst of Japan's real estate bubble in 1990, Chinese leaders have learned that they must deal swiftly with the root causes of excessive debt and enforce productivity-enhancing reforms. Failure to do so could consign the nation to an extended period of economic stagnation.

From the contrasting experiences of the United States and Europe since 2008, China has learned that a single-minded focus on debt-reduction can be counterproductive, and that growth-supporting policies can also help reduce debt. In the years after the crisis, the United States ran huge fiscal deficits and an extraordinarily easy monetary policy in order to sustain growth; the Eurozone economies pushed its weaker members into fiscal austerity programs, in an effort to force debt levels down. It now appears that the U.S. approach worked better: the U.S. economy has continued to grow by around 2 percent a year every year since 2010, and consumer debts -- whose explosion triggered the financial meltdown -- have returned to their pre-crisis level. Europe, by contrast, suffered a painful "double-dip" recession from which it is only now recovering, and debt levels in many countries still remain very high.

The government's course is a bold wager: let debt keep rising to support growth, while pursuing structural reforms that will bring down the debt level in perhaps five years. The risk is obvious. Self-interested SOE or local government bosses could block reforms, in which case China will find itself in an even worse debt trap in a few years. On the whole, though, Xi's government has started to deliver convincingly on its reform promises. More likely than not, Beijing's bet will pay off.

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