Marshall Plan

The Marshall Plan and China’s “belt and road”

Posted on by j.giglio

In 1945, Europe lay in ruins. Its cities were devastated, its industries destroyed, and millions of its people homeless. The key to the recovery of Western Europe lay with the Marshall Plan, a decisive tool for the United States to rebuild Europe after World War II.

Seventy years later, history may be repeating itself. Only this time it is China that is the strategic benefactor with the United States playing the role of the post-war Soviet Union, on the outside looking in as China strategically uses its largesse to develop lucrative new markets.

In June 1947, Secretary of State George C. Marshall, gave a speech at Harvard’s commencement announcing a plan to provide economic assistance to all European nations, including the Soviet Union. Although Russia and its Eastern satellites predictably rejected the plan, 16 Western European nations eagerly participated.

The Marshall Plan, the largest peacetime foreign aid program in U.S. history, channeled over $13 billion of American aid (some $150 billion in 2017 dollars) into 16 Western European countries between 1948 and 1952, to help them rebuild their economies and normalize their societies. The Congressional Research Service estimates the plan’s 1949 appropriation accounted for 12 percent of the entire federal budget.

But the Marshall Plan was more than economic and financial aid; it was a way for the United States to promote its anti-communist agenda, rebuild the economies of the recipient countries and make them prosperous enough to buy large quantities of American goods. By the end of 1950, European industrial production had risen 64 percent, communist strength was declining in Western Europe and opportunities for American trade had revived.

The Marshall Plan boosted American exports, manufacturing, and employment, and led to the economies of the participating countries surpassing pre-war levels. In the two decades that followed, Western Europe achieved unprecedented growth and prosperity.

American goods flooded eastward and political and economic ties with Western Europe grew even stronger. One unintended consequence is that it later made it possible for Western European companies to compete against American business in the automobile and other industries.

Some observers have compared China’s ambitious new endeavor, the so-called Belt and Road Initiative unveiled in 2013, to the Marshall Plan as a game-changing effort to revolutionize trade and recast many long- standing relationships. The multi-trillion-dollar proposal is China’s largest economic and foreign policy undertaking since the founding of the People’s Republic. The infrastructure plan that spans more than 60 countries, about 65 percent of the world’s population and about one-third of the global economy, would spread Chinese investment and influence across Asia, Europe, and Africa.

The “belt” refers to a land route from western China through Central Asia to Europe; the “road” links to Europe by sea, connecting the country with Southeast Asia, the Middle East, and North Africa. The initiative has gained momentum thanks to the decline of American influence in East Asia in the wake of withdrawing first from the Trans-Pacific Partnership and then the Paris climate agreement.

After World War II, the United States needed to export excess capacity. Today, China’s economic growth is slowing and it too is looking for new markets. And just as the Marshall Plan was a blueprint for undermining the influence of the Soviet Union, so can the Belt and Road Initiative marginalize U.S. influence by improving relations with traditional American allies.

As German Chancellor Angela Merkel, Europe’s most influential leader, said after three days of trans-Atlantic meetings, “The times in which we can fully count on others are somewhat over.” She was referring to America’s positions on NATO, Russia, climate change, trade and its apparent relinquishing of a leadership role in world affairs contributing to a post-hegemonic era in which no country has a dominate role.

If she’s right, it could mark the end of 70 years of American world leadership.

originally published: June 24, 2017

US must confront the new realities

Posted on by j.giglio

The 21st century has witnessed the death of the old world economic order and the birth of a new one. America remains the world’s military superpower but Brazil, Russia, India, China and others are challenging our economic pre-eminence.

The parade of 2016 presidential candidates will offer short-form solutions unconstrained by resource limitations. They will blame others and predict impending doom if they are not elected. And the political rhetoric will surely be accompanied by nostalgia for the golden economic age of the decades that followed World War II.

But America’s dominance in the decades following World War II was a function of unique circumstances. Europe lay in ruins in 1945. In the rest of the world, cities were shattered, economies devastated and people were starving. In the two years after the war, the vulnerability of countries to Soviet expansionism heightened the sense of crisis.

The postwar economy was quite successful by any standard. The American middle class enjoyed higher wages from the end of World War II until the mid-1970s. Real wages, after inflation, continually rose until 1973. But that was when the United States accounted for a disproportionate share of the global economy, nearly two-thirds of the world’s gold reserves, and the dollar was the world’s reserve currency.

Prosperity was the governing theme of the postwar era. During those years, gross domestic product grew 140 percent and real (inflation-adjusted) per capita income doubled. Living standards improved to the point where the large majority of Americans could describe themselves as middle class.

The United States made the economic recovery of Western Europe and Japan a national security priority. Two basic motives guided policy.

Primo, the United States was increasingly concerned about the ambitions of the Soviet Union that had imposed communist governments on Eastern Europe and their threat to Western democracies.

Secondo, the United States believed stable, prosperous, democratic governments would serve as ramparts against Soviet expansion and bind these countries to us.

To restore Europe’s economic infrastructure, President Harry S. Truman signed what became known as the Marshall Plan in April 1948. Over the next four years the plan delivered $13 billion to modernize industry in 16 European countries. This funding, which translates into $103 billion in today’s dollars, enabled Europe to rejuvenate its domestic markets as well as export its way to economic recovery. By contrast, Afghanistan still can’t stand on its own after receiving about $110 billion in assistance.

The Marshall Plan along with cutting American tariffs by 35 percent to accommodate and promote foreign imports, which provided Americans with cheap foreign goods, supported the development of stable democratic governments in Western Europe. It also provided markets for American goods and services, a grand example of vendor financing.

The United States also developed and helped finance a comprehensive economy recovery program for Japan. The war had devastated the country and terminated almost all of its foreign trade.

It should not be overlooked that it was with America’s help that the world became a more prosperous and competitive place, which has indeed put downward pressure on wages as footloose companies take advantage of the information technology revolution to disperse supply chains contributing to the erosion of middle-class wages in the face of low-cost competition.

If America wants to maintain its status as the world’s economic superpower, it is time to jettison the addiction to past achievements and focus on new realities: The world is experiencing dramatic technological change and we face economic competition from millions of people around the world who are happy to work for a fraction of Americans’ wages.

We must get serious about issues that are the very foundation of American exceptionalism such as combating economic inequality and declining living standards for the shrinking middle class. If we don’t, Americans will have to drastically adjust their expectations about growth and opportunity and step back from our special place in the world.

originally published: July 4, 2015

America’s so-called Golden Age

Posted on by j.giglio

Visit any bookstore and your eyes are assaulted by scores of books explaining the meltdown that plunged America into a major economic crisis, and prescribing what must be done to return to the glory days from the end of World War II through the early-1970s, when the United States enjoyed the greatest boom in modem history.

The economy grew at an annual rate of over 3 percent, and the median family income almost doubled. But the circumstances that produced that growth were an historical aberration.

World War II destroyed the industrial capacity of the main belligerents. It was not fought on American soil, however. Here, the war ended the Depression and put everyone back to work.

It also produced wartime savings that helped fuel the boom when those savings turned into post-war consumer spending. For example, the automobile industry exploded after years of producing military hardware, and new industries such as aviation and electronics grew by leaps and bounds. At the same time, the post-war “baby boom” increased the number of consumers, and more Americans joined the middle class.

A number of programs were enacted that also contributed to the economic boom and enabled American business to exploit the lack of global competition. These would include:

The GI Bill: This gave millions of veterans the opportunity to enjoy middle-class living standards thanks to things like free college educations, the ability to buy their own homes with low-cost mortgages, and capital to start businesses. This expanding American middle class created an ever-growing market for consumer products and provided businesses with trained managers and professionals.

The Marshall Plan: Over five years during the late 1940s, the federal government invested nearly $13 billion to rebuild the devastated economies of Europe and Asia. This was a deliberate Cold War strategy aimed at strengthening the economies of the non-communist world and binding them to the U.S. It is a form of vendor financing that the Chinese have successfully copied.

The Federal Government/Fortune 500 Compact: During the late 1940s and 1950s, the federal government effectively subsidized corporate America with tax benefits, lucrative defense contracts, and various kinds of market protection. In return, Fortune 500 companies diverted some profits from shareholders to employees by giving them steadily rising purchasing power, free medical coverage, generous pensions, and other welfare benefits that Europe depended on government to provide. In the immediate post-war era, the view was that corporations had responsibilities to employees and the local and national community as well as to shareholders.

Things began to change when the oil crises of the 1970s hit.

By the late 1960s, our allies’ economies had recovered from World War II. Initially, those countries’ exports only penetrated low-end industries, giving us foreign goods on the cheap while leaving our high­ value industrial sectors unharmed. But intensifying global competition brought excess capacity and reduced profit margins. Steadily rising real wages gave way to a business model focused on  “maximizing shareholder value ,”under which firms were run solely to serve their owners’ interests.

A confluence of circumstances allowed the United States economy to emerge from World War II with no real global competition. Those circumstances, which resulted in decades of prosperity, were not sustainable. As they fell away, so did assurances that each generation of Americans would enjoy a better standard of living than the one that preceded it.

originally published: July 20, 2013