Dr. Henry Nau joins to help us explore the lessons learned during the 20th century and apply them to today. In America, we’re struggling for the soul of the country — a battle between those who want to keep America as it was founded — an America where capitalism and the American Dream reign supreme — and those who are pushing America to follow in the footsteps of communism and socialism. We explore this trend and what the ultimate cost will be to Americans if the 21st century turns a blind eye to history.
Dr. Henry R. Nau is Professor Emeritus of Political Science and International Affairs at George Washington University. Previously he served on President Reagan’s National Security Council as the senior staff member responsible for international economic affairs. Among other duties, he was the White House sherpa for several Annual G-7 Economic Summits and also served in the Department of State from 1975-1977 as Special Assistant to the Under Secretary for Economic Affairs. In 1977, he received the State Department’s Superior Honor Award. He is the author of numerous books, including his latest, Conservative Internationalism: Armed Diplomacy Under Jefferson, Polk, Truman, and Reagan, and has published numerous articles in scholarly and policy journals.
And welcome to She Thinks, a podcast where you’re allowed to think for yourself. I’m your host, Beverly Hallberg. And on today’s episode, we explore the lessons of the 20th century and apply them to today. In America, we have a struggle for the soul of the country, a battle between those who want to keep America as it was founded, and America where capitalism and the American dream are supreme. And those who are pushing for America to look differently, to follow in the footsteps of communism and socialism. Well we’re going to explore this trend and what the ultimate cost will be to Americans if the 21st century turns a blind eye to history. And we have the perfect person to break it down for us.
It’s our honor to have on Dr. Henry Nau, a professor emeritus of political science and international affairs at George Washington University. He served on President Reagan’s national security council as a senior staff member responsible for international economic affairs, among other duties. He was the white house sherpa for several annual G7 economic summits, and also served in the department of state from 1975 to 1977, as special assistant to the undersecretary for economic affairs. In 1977, he received the state department’s superior honor award. He is the author of numerous books, including his latest “Conservative Internationalism: Armed Diplomacy Under Jefferson, Polk, Truman and Reagan,” and has published numerous articles in scholarly and policy journals. Dr. Nau, it is an honor to have you on She Thinks. Thank you so much for joining us.
Dr. Henry Nau:
Well thank you. It’s nice to hear.
And that is quite the bio. I actually just wanted to start with a personal question. I’d love to hear how you decided to get into this line of work. Was it your childhood dream to study political science and international affairs?
Dr. Henry Nau:
You know, I think it was probably more a case of the apple falling close to the tree. My father was a professor and of the three children, I think I was the one who sort of followed him more directly. So from early on, I kind of knew I liked the contemplative life, and it wasn’t perfectly clear, but over a period of 10 years or so, it became very clear that that’s what I wanted to do. I wanted to get the PhD and I wanted to teach and I wanted to do research and frankly, it was a very good move on my part. I realized that the other options would have taken me on a very different course.
One would’ve been the military and the other, oddly enough, would’ve been the ministry. So I went, I think, into the line of work that I was made for, which is public life, public policy, international affairs, trying to understand them and then teach them as one can to the younger generation. A lot of history by the way, which as your opening remark indicated is very, very important. And unfortunately we lack a lot of historic context in the debates that we have today.
Well we thank you for your service to this country and being here to help us make sense of what’s going on in this country. And I want to start with that history. Going back to decades prior, of course we were fighting against communism and socialism in the 20th century. And here we find ourselves today where socialism is a popular term among young people. And so I guess the big broad question is, is how did we get here? Where were we and what has been the change to where we are today?
Dr. Henry Nau:
Well, I think one of the big turning points in the post war, World War II period was in fact, the 1970s, when we had roaring inflation in this country. We had very little growth. We were very eager to try to deal with environmental issues, population, pollution. So we had a lot of regulations. We had a lot of trade restrictions in the 1970s. And so the country was in the kind of difficulty that in many ways we find ourselves today or we find ourselves moving into that period. Now from my experience, obviously I think the two terms of Ronald Reagan’s administration did an awful lot to turn this whole situation around and basically to give us, for the last four decades, very high growth compared to other periods in history, very low inflation. We don’t really know what inflation is because we haven’t had it for 40 years.
We expanded enormously the world economy by adding new countries to the global marketplace. And we generally created a much more efficient, both national and international economy. And that permitted this growth with low inflation. And by the way, to contrast that with what was happening in the communist world during that period, I began to travel regularly to Eastern Europe and particularly to East Germany, where I had relatives, starting in the 1960s. And if you wanted to see a contrast between the capitalist world of the west and the communist world of the east, that was the time to see it. I would visit my cousin, actually my father’s cousin, in Germany and would go shopping with her. And in their little shops, there would be one kind of milk, one kind of cheese, one kind of bread. And if you wanted anything that was special, like chicken or fish or meat, you had to go to a counter where you were rationed a certain amount that was allowed for each family.
You couldn’t get any good coffee, you couldn’t get any good fruits. It was a terrible system. And that contrast always stayed with me. And I always wished that I had a small iPhone with me at that time to take pictures of all this to show to students what the difference is between an economy that is based on competition, on price competition, on competition in innovation and growth and an economy that is focused on distribution and control, political control. So we are in a situation now that is a little hard to think about because we haven’t experienced inflation, and inflation, I think for me, is the big concern as we look ahead to the next 5 to 10 years.
And we had the consumer price index come out this week and say that inflation is the worst we have seen it in roughly 40 years. I know a hashtag trending and social media was “bare shelves Biden” in the past couple weeks still is going strong today. People tweeting out pictures of empty shelves in the grocery stores. I did the same, couldn’t find potatoes the other day. Couldn’t find onions at the store among many other things, including toilet paper. And it seems strange to us as Americans to see this. And it makes me say to myself, and I’m sure many others, that this isn’t how America is supposed to be. So we have had our president, president Biden, decry capitalism, and saying that it is not a fair system. Why first of all, is this happening? The inflation that we’ve seen, because I think COVID makes things complex and convoluted that we’ve gone through this pandemic. What is COVID related that we couldn’t really get out of, what is related to bad policies and what does it all mean?
Dr. Henry Nau:
Yeah, well, we are now practicing, I think, bad policies. Let’s think for a moment without the complication of COVID. We have had a shift in policies, rather significant shift in policies over the last two, three, maybe years, maybe over the last five years. And they have moved us a direction now that I think is going to recreate some of the conditions that we had in the 1970s. That is, we have expanded demand dramatically through both monetary and fiscal stimulus, pushing a lot of money out into the system, which inevitably increases demand. While at the same time, we have imposed more and more regulations, trade restrictions, other kinds of constraints on the supply side of the economy, making it more difficult for goods to be produced. Now COVID has complicated that because it has created a panic from time to time in the economy where people will buy a lot of goods because they think that this panic, this COVID is going to create a longstanding situation.
So they buy up all the toilet paper or all the, what do you call it, the rolling paper that we use. And that increases obviously prices and pushes prices up. And so we’ve had now 7% inflation just in the last year. Now that compares to something like 15% that we reached 1970s. I think we’re heading in that direction and that’s going to be very difficult to deal with.
Inflation takes a long time to work its way in and a long time to work its way out. In the 1970s it took us 10 years, basically, maybe 15 years before we really pulled out of that bog that we were in in 1975. And if we go much more like we are going now, if we go another year or two with this kind of stimulus and this kind of supply side constraint, then I think we’re going to have explosive inflation again in a very few years.
By the way, the fact that we have now a more global economy, which is a product of the good things that have happened in the last four decades, but that fact means that we’re much more dependent upon supplies from other countries. And so that has caused a lot of the empty shelves in our grocery markets and so on recently because those goods have not been able to get into the United States. They come from abroad and they have been now interrupted by the supply chain problems we’ve had. And that has increased the pressure on prices because when goods are stalled out in the Pacific someplace, lumber, for example, and other products that recently have shot up dramatically in price, lots of furniture items, for example, that is a factor that you can’t get the supply to where it belongs, where it can be bought, where it can be consumed. And so that drives prices up.
So I wish there were a way… Unfortunately, we haven’t taught this history and therefore young people have this idea that somehow or other capitalism is all about growth and not about poverty, but in fact, capitalism is done more to alleviate poverty than any other single by far, than any other single event that we can think of. For example, I mean, developing countries have been growing for the last three decades faster than the developed countries, than the advanced countries. That means we’ve been actually narrowing the difference between poor countries and advanced countries. That’s unprecedented. We’ve never had three or four decades like that. So capitalism with all of its problems, and it has problems, it has nevertheless produced more goods and those goods eventually do reach lower and lower. We create a middle class. Look what China has done in the last two decades. They’ve created a middle class. Now they think, I think erroneously, that somehow or other they’re going to grow as fast with less dependence on the world market. They probably aren’t because their domestic market is controlled. It’s very much like the communist markets in Europe during the cold war. And so they’re going to have some problems now as a result of these restrictions that they’re imposing, but we will too.
And somehow or other, we’re going to have to work our way through this. We’re going to have to realize that we have a very big world market with lots of goods flowing back and forth. We may want to slow that growth of that market down a bit. And we may want to shift some of our supply manufacturing operations, maybe out of China and into Vietnam or into India where they may be more reliable, their supply may be more reliable. So we’ll have to make some adjustments, but in general, that capitalist economy has worked miracles, you could say, in the last four decades.
One of the things that I think is fascinating about the claim that capitalism is such an evil and it is only there to help the rich and just impoverishes as the poor is that we still have so many people trying to come into our country, both legally and also crossing the border right now. If this was such a bad system, so many people wouldn’t want to come to this country. So I always think that there’s an interesting juxtaposition of what reality is on that. But I want to focus on the trade issue, which you have mentioned. There is a big push in this country to have more items that are made in America. A few years back that was because we just wanted to try to hold onto manufacturing and didn’t want that to go away. And that was a debate we were having. But as somebody myself who does support free trade and thinks that that does spread democracy across the world, we do find ourselves in an interesting situation where trading with a country like China, where they have horrific human rights violations, presents a different issue.
It’s, should we prop them up economically, based on how they treat people within their country, but also based on their disdain for the American way of life as it is. And so how do you view free trade through the lens of trading with countries that are bad actors? Should we never do that? Should we pull out of trade of China altogether or is free trade still a way that one might argue as a way to try to defeat that communist style of running a country?
Dr. Henry Nau:
Yeah, I think you have to do both. And I know Ronald Reagan did both. That is he focused on trade issues and he helped in those years to open up trade markets, especially to new countries like China. And you have to take into account the political policies of the countries that you trade with. In part, China’s advantage in goods that are made, that are low-tech goods that are made by manual ways, that is, made by the labor force, they are benefiting from essentially slave labor in their Western provinces, where they have clamped down on the population and on the Muslim population in that part of China and have forced them in effect to produce a lot of these goods at very low prices.
So we need to make them aware of the fact that that’s not what capitalism is all about. Capitalism is not about producing products at low prices. It’s about eventually growing the economy and spreading that wealth also to the poor people in provinces like Xinjiang. Now, we may need some adjustments at the current time in our trade relationships. We have expanded dramatically in the last 20 years, brought lots of new countries in including China. We may need a pause in our trade relationships, just as I think we probably need a pause in our immigration program. We need to get control of our immigration system certainly. And we also need, I think, to make some adjustments in our trade relations. Like I say, perhaps depend less on China for many of these goods that we import, many of the parts that we import from China, spread that out as you would do for example, if you were dependent upon China for a certain commodity, like we’re dependent upon the Middle East for oil. You want to make sure that you can get oil from alternative sources.
Well, in our case, in today’s case, seems to me, you want to make sure you can get your parts for your economy for building automobiles and so on, and your semiconductor chips and so on. You want to make sure you can get those from alternative sources and that you don’t focus and concentrate entirely on one country.
So we may have to back off a bit from the interdependence with China. By the way, China’s doing that on its own. It’s making decisions that are forcing its companies to engage less with the international economy. So some of those adjustments might be good, but here’s the thing we need to remember. And I used to try to make this point to my students by telling them to look at the labels on their blouses or on their shirts when we started to talk about trade. Because the prices of those items are very low today because of the fact that we can import low cost products from countries that benefit from labor that is cheaper than ours, like China, and that’s a benefit to China, but it’s also a great benefit to us.
So if we wanted to produce everything in America, if we wanted to make everything in America. We would face the situation very quickly in which the prices of those products would go up very, very rapidly. And we wouldn’t all be able to afford all of the shirts we have, or indeed even maybe the iPhone that we have, which is expensive to be sure still, but it would be much more expensive if we could not import from other countries.
So we need to be balanced. But I think we are in a position where we can pull back a bit from the focus on trade interdependence and then make it clear to countries that are oppressing their people and are obtaining an advantage in trade through essentially oppressed labor at home. I think we have to make it clear to them that this isn’t what the world economy is about. This is what capitalism does. And if they don’t understand that, they’re not going to be able to participate in the benefits of that economy.
Final question for you, with the limited time that we have left, is to make some policy suggestions based on looking at the ’70s, what happened under Carter and then under Reagan, as we apply those lessons to today, what does President Biden need to do? If we have a changeover in Congress and midterms, what do they need to do? I assume part of that is, don’t continue to put more stimulus money into the economy, this taxpayer money going back to people. But what is the other lesson that we can take, that we need to implement from a policy perspective?
Dr. Henry Nau:
Well, you mentioned one of the two big things that we need to do, and this was one of the real attributes of Ronald Reagan. He focused on the big things. He focused on the cold war with the Soviet Union. In connection with the economy he focused on two things, really. He said, we’ve got to get control of the money supply because we’ve been pouring money out there into the marketplace, creating this excess demand. And we have to cut back on federal spending. Now in order not to create an economy that simply contracts, he also emphasized tax cuts, which give people more money from their paycheck and allowed them then to spend that money the way they decide to spend it, rather than the way that the Congress decides to spend it or some agency in the US government. So he worked on those three problems you could say, the cold war, trying to get tax cuts implemented, and then trying also to bring spending down and then to try to get control of the money supply.
He focused on those big things, and by the way, it took about four or five years before we saw any results of that. Those were tough years, ’82 and ’83, when there was no apparent effect of these policies, but eventually they began to have their impact. And by the time Reagan left office, we were on our way to three decades of further growth and wealth, not just for the rich, but also for the poor.
Let me just make this one last comment about the economy and about the rich; it’s true that we liberalized financial markets in the course of the 1980s and the 1990s and the 2000s. And there was a group of people, financiers in effect, who were able to exploit that and make significant returns all right. More so than could the average person. That’s what gave us the 1%, that is, at the top of the income ladder. But if you look at the rest of the country and by the way, we should do something about that 1%, we can tax those people more. That’s a possibility. This carry-interest benefit that they enjoy is something that we ought to examine, maybe take away.
But when you look at the general population, household incomes have gone up, they’ve gone up dramatically in the last three decades, maybe in part because, or to some extent in part, because there’s second, those women and all of those minorities and all of those men who didn’t have jobs back in the 1970s. So the situation, with respect to the level of income and the level of wealth in our country, is much better than you can see if you just focus on the top 1% and worry about the gap between the 1% and the rest. The rest have risen. And that’s what we want to continue to do. And we want to preserve at the same time that we remove some of the special benefits that the financiers were able to exploit.
Well, I think as we take a look at anything today, because I believe there is nothing new under the sun, it’s important to take a look back at history. That’s why we appreciate people like you coming on She Thinks, to give us a history lesson. Dr. Nau, with George Washington University and also author of his latest book, “Conservative Internationalism: Armed Diplomacy Under Jefferson, Polk, Truman and Reagan.” Doctor, we so appreciate you coming on the program today.
Dr. Henry Nau:
Thank you very much. I enjoyed it.
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