Addled Foreign Policy Nurtures Domestic Ills : Economics: Some of the obstacles to solving major national problems are the result of misguided and problematic diplomatic maneuvers.

Despite some recent pronouncements by Bill Clinton, the 1992 presidential candidates are downplaying the sort of foreign-policy issues that typi cally grab headlines. For the most part, this has been a wise decision. Nothing that happens in the former Soviet Union, the Middle East, or anywhere else will affect America’s future as profoundly as continued social and economic decay at home.

But some broader foreign-policy issues have become central to our national destiny--by creating formidable obstacles to solving domestic problems. Without confronting these obstacles, Democrats will find it difficult to win the White House. Without overcoming them, any new President will find it difficult to govern effectively.

U.S. foreign policy is blocking domestic renewal in four principal ways:

-- By weakening the political foundations of our tax system. President Bush’s projected defense cuts seem deep enough to end all disputes about the affordability of our foreign policy. We spent 8%-10% of gross national product on defense and 2%-3% on foreign aid in the 1950s and 1960s, stand-patters observe, surely 3.5% of GNP and a thimbleful of aid is reasonable for the 1990s. Blame our budget problems on out-of-control middle-class entitlements, they argue, which will consume a projected 60% of the budget by 1996, or on the public’s unwillingness to pay for services it demands.

From the taxpayer’s perspective, it looks different. Yes, military spending is falling. But it will consume roughly one of every five budget dollars through 1997. Yes, entitlements are skyrocketing. But our public services remain dwarfed by those offered in other industrialized countries. Yes, U.S. tax rates are relatively low. But U.S. private consumption figures include expenditures for health care and higher education provided by government in Europe and in Japan.

In any democracy, a successful taxation system rests on a covenant: The public agrees to pay if government spends on what taxpayers want. In the United States, where taxpayers foot their own medical and college bills, where infrastructure has decayed and where military spending defends countries long capable of defending themselves, this covenant has broken down in the public’s mind.

Resolving our budget crisis will require some combination of domestic spending cuts and tax increases. But how can these measures fly politically without defense cuts dramatic enough to persuade Americans that their welfare comes first in Washington? And these defense cuts would, in turn, require substituting a narrower set of foreign-policy objectives.

--By warping our macroeconomic policy. Everyone agrees that, sometime during the 1960s, U.S. leaders abandoned the fundamentals of national economic success. Peacetime budget deficits proliferated even in boom years, monetary policy lost all discipline, incentives to consume were expanded, incentives to save shriveled. Even Republican Richard M. Nixon fueled the fire by linking middle-class entitlement spending to rising prices. Soon, productivity growth rates slumped, international economic competitiveness weakened and the growth of U.S. living standards slowed. After 12 years of Reaganomics, our national engines of economic progress seem out of gas.

One reason for this could be the pressures exerted on elected leaders by years of high foreign-policy budgets. Look at it as the post-Vietnam presidents must have. How could they persuade voters to support costly global containment policies in far-off or prosperous regions even as they shortchanged them on social programs? Without compensating the public for its sacrifices, these presidents all faced early retirement.

Lyndon B. Johnson, Nixon, Gerald R. Ford and Jimmy Carter chose to compensate Americans by printing money and thereby propping up consumption. By the time Ronald Reagan entered office, our European and Japanese allies tired of importing our inflation and nixed this strategy. Rather than print money, Reagan borrowed it.

Without policies that encourage savings, investment and production, we will not be able to consume in the long run. Yet until foreign-policy spending nose-dives, Americans will never tighten their belts even temporarily. And as demonstrated both by both the Republicans and Democrats, politicians will continue to buy votes with economic gimmicks.

--By slighting the costs of international economic weakness. No economy will excel if its leaders don’t value excellence. But such indifference is what postwar U.S. foreign policy and its purist faith in market forces has encouraged.

America’s best bet for prosperity, our internationalist leaders assumed, is not actively trying to improve the U.S. position in the free world economy, but maximizing global efficiency by enabling each country to focus on what it makes best. As the 1992 report of the President’s Council of Economic Advisers argues. “The case for an open trading system is even stronger today than in 1817,” when English economist David Ricardo developed the theory of comparative advantage. Any attempt to interfere with market forces “is likely to do more harm than good” for every country.

As long as world output grows, the argument continues, America’s share is unimportant. Moreover, since the goal is the most efficient worldwide division of labor, U.S. strength in particular industries doesn’t matter--except where military production is concerned. Entrepreneurial people like Americans will always find profitable new industries. And since the industry-by-industry mix of the U.S. economy is meaningless, it was easy to offer trade breaks that helped destroy U.S. industries.

Yet because this is not 1817, these Panglossian assumptions no longer hold. The stakes of global economic competition are just as high as those of military competition--national freedom of action and independence, and rising living standards. And in the key realm of high-tech industries, a nation’s relative performance is critical. Countries that forge ahead can acquire the resources and know-how needed to stay ahead. Countries that fall behind tend to stay behind.

The aim is not to resist interdependence, but to achieve it on favorable terms. How can we build our competitiveness if our foreign-policy approach defines this challenge out of existence?

--By offering foreign policy cure-alls to domestic ills. Lastly, U.S. foreign policy sandbagged domestic revitalization by encouraging us to solve domestic problems with diplomatic gimmicks, rather than with domestic initiatives that are more promising but ideologically taboo, politically messy or simply less glamorous.

Energy is a prime example. The United States is now more dependent on Persian Gulf oil than in 1973, just before the first OPEC oil-price shock. Why? Less because we are too stingy to pay a little more for gas that keeps getting cheaper in real terms than because our leaders view Gulf oil as our cheapest and therefore best energy choice. Never mind that this oil is located halfway around the world, in a region full of deeply anti-Western cultures; that America spent nearly $50 billion annually in peacetime throughout the 1980s to protect that oil against aggression and that the next Gulf War could go nuclear. The internationalist view of international economics ridicules any attempt at greater economic self-sufficiency in this age of interdependence.

In trade, the Uruguay Round of the General Agreement on Tarriffs and Trade was conceived by the Reagan Administration largely to avoid structural economic reform at home. In the early 1980s, as trade deficits soared and key U.S. industries were pushed to the brink, cries mounted for protectionism and for ready versions of industrial policy. Rather than explore public sector-private sector economic cooperation--and risk disproving the Reaganite dogma that government can do no right--and rather than correcting the economy’s balance between consumption and production incentives, Washington promised to solve America’s woes by opening foreign markets. After nearly four years of sluggish growth and stalemated trade talks, Bush is more confident than ever that America can convert the world to economic liberalism and export its way back to prosperity.

Perhaps the most flagrant resort to foreign-policy gimmicks is on the drug front. For 20 years, drug-abuse policy has emphasized fighting Third World narcoterrorists abroad and inducing peasant farmers to grow vegetables rather than far more lucrative drug crops. It’s easy to see why our drug-war generals view shootouts and social engineering in unfamiliar lands as more exciting than tackling the domestic problems behind drug abuse. But why are these tasks seen as more manageable?

The next national leader who grasps these connections between foreign and domestic policy may not necessarily be our next President. But he’ll surely be our next successful President.