This morning there was an op-ed in the Times regarding the changing role of economic “statecraft.” It was written by Mohamed El-Arian, a Wharton Economics professor and consultant to Allianz Insurance. He says that his essay echoes the themes that he teaches to his business students, although the op-ed is a reaction largely to remarks by Scott Bessent, the current Secretary of the Treasury. These remarks were delivered in a speech at the Economic Club of NY, of which Bessent is a member. The club, founded in 1907, is apparently a way for wealthy and influential people to have an expensive dinner with each other while they talk about the way of the world. I assume they finish with cigars and port in the drawing room.

Here are links to the text of Bessent’s speech  and the El-Arian op-ed.

Let’s start with the El-Arian op-ed. I will paraphrase: The world is changing, and corporate policies and actions can no longer be based purely on considerations of profit by the heads of those companies. Milton Friedman and ‘shareholder value’ as an overriding concern is a thing of the past. This new “economic regime change” [his words, not mine] is because we can no longer assume that economic security and national security are separate. Economic partnership with other countries now comes with non-negotiable expectations. We are in a state of perpetual war with all of our trading partners.

The result? (I am still paraphrasing.) Consumer prices will go up across the board due to the more muscular economic policies; other nations will discover that [no-strings] access to our markets is a thing of the past; American companies will need to create redundant supply chains to hedge against other countries withdrawing support or reacting to our policies, pushing up prices; investors will need to shift where assets are invested to accommodate the increased government control over economic activity (e.g., defense spending up).

End of my paraphrase of El-Arian. The nice way to say this is that we are entering an economic phase comparable to the US in WWII, where the Government placed controls on corporations in all areas of their operation, including wages, profits, what products they could make, and what markets they were allowed to enter. All manufacturing was focused on the war effort. El-Arian is claiming that we are in such a situation now, and the only way we are going to survive as a country is to implement the same types of controls now that were in place then. The not-so-nice way to say this is that our Government is implementing centralized production and market controls that sound analogous to what happened in the Communist Soviet Union or Communist China. Ultimately, this worked ok for China (at least in the aggregate unless you count freedom of the citizenry), but not well at all for the Russians.

Much of this approach is contrary to what our President has actually been saying and doing – for example, last weekend he gave a speech where he criticized Communism as wholly evil, and as something that only the Democrats want. And he has been letting the wealthy owners of large companies do whatever they want regardless of regulations, which is very un-Communist.

Now onto Bessent’s speech. Again, my paraphrase: In the many years since WWII, we have assumed that closer economic integration with other countries would lead to a convergence of interests among us. These and other related assumptions (e.g., about fairness in trade) have failed to hold up. [I don’t think it is that simple.] Our economic policy has become unmoored from our national strategy. We need to insist – finally! – that trade with others be fair and in our best strategic interest. Bessent makes these points:

1. Economic security begins with national capacity. If our economic production is based on the whim of other governments, we have lost our security. We need to have the capacity to be better than every other country in the technologies that we are all talking about. Like AI and cryptocurrency. This suggests that the Government should assert control over American companies to make sure that they are independent of other countries. It would have to be pretty muscular.
2. Our markets cannot be open if those of our trading partners are not. We need to use regulation, and many other tools available to our Government, to insure that our companies do not trade with other countries unless those other Governments agree to our terms. Again, this argues to heavily regulate American businesses.
3. America will write the world’s economic rules. [I can’t paraphrase this one, as it seems to fly in the face of the definition of trading with other sovereign nations. If we insist that everyone always play by our rules, we will be the only ones on the playground.]
4. Financial Leadership is the Central Instrument of Statecraft. [this is another one that defies a short summary. Certainly using tariffs as weapons can have some impact, although not much based on recent events. Criminals that steal money or extort countries are bad. OK, so?]
5. Economic Statecraft Must Serve the American People. The purpose here is to connect economic statecraft with household prosperity. And, oh yes, to restore confidence in the institutions that make us great. We are a great country! The fortunes of a nation are shaped by the energies of its people. We need fair trade with others. We need an economy not measured by what it produces, but by who it lifts. And so on.

End of paraphrase of Bessent speech. OK, this sounds like a call to ramp up State control of commerce and industry. All done in the name of security and fairness. 

And I agree with him that after WWII our policy was to help our allies (and our enemies!!! Which he does not mention, but which was crucial) so that a rising tide lifts all boats. Which it did. I am not so clear about what our national strategy is, and therefore why our approach to open markets caused us to diverge.

I think his first point is the only one that really makes sense; if we are preparing for war with most of the other countries in the world, then we’d better make sure that we have the capacity to equip ourselves to win. Which means telling American companies how to conduct their businesses, the way FDR did in WWII. I’m sure Bessent is thinking about the rare earth business with China, where we would be crippled if we went to a war with them this week.

Are we really preparing for war with most of the other countries in the world? Shouldn’t he have led with that?

The “fair trade” part is the next item in clarity on my list; perhaps there would be a way to define what is “fair” and what isn’t. Right now, is it fair to soybean farmers to yank their biggest customers out from under them, pushing many into bankruptcy? This has been the effect of Trump’s tariffs on China. But fairness is a good aspiration in any event.

The fourth point seems to be missing the role of Congress and the State Department. I know Bessent is the Treasury Secretary, but “statecraft” is the job of the State Department. It was established by Congress, so not by the President. This may be a technicality, but it could explain why Bessent’s argument here seems so awkward to me.

The central instrument of Statecraft is diplomacy, not the Treasury. Unfortunately, Bessent’s boss got rid of the State Department (except for its Secretary). If the only tool you have is a hammer, then everything is a nail.

The fifth point in the speech, about all this State control of production and commerce, does not make any sense to me. Why would any of that be in the interest of an individual household? I am hearing Soviet talking points about how manufacturing to meet the goals of the State is going to free us from our chains. What am I missing?

Conclusion: It’s not just Donald Trump. His staff are advocating Soviet-style control of businesses, while Trump himself is giving speeches out of nowhere saying how bad communism is. Can’t we just have a middle ground, where there is some regulation tempered by a thoughtful process, while business is allowed to pursue its own needs? And where our leaders have talked about this and are in agreement?

I understand that we have a strategic readiness problem in the face of needing to go to war with a major country. Do we need to be ready to go to war with China? With Russia? I hope not.

There are a couple of things left out. For our Government to implement protectionist policies that significantly harm American pocketbooks, there would need to be popular support. At the start of WWII this was the case. It is not the case now. The level of popular unrest could easily rise from where it is now to that of France in 1789.

Also, the yawning chasm between the very wealthy and the rest of us is an important reason why we are where we are. These people – the very wealthy – are in positions of influence and authority everywhere. Bessent is one of them. In WWII, FDR essentially drained their bank accounts to pay for the war, and they did not like it. Will Bessent and the supporters of this approach be willing to drain their own bank accounts? It will be a tough thing to do. Recall that Reagan ran on a platform of reducing taxes on the wealthy, to make them even wealthier, and he is a Republican hero. This level of control would result in a big increase on the burden placed on the wealthy.

There also seems to be a willingness to overlook why our manufacturing was outshored in the first place. It is because Asian workers are paid so much less than ours that companies are willing to pay for the remote management and transportation and still come out way ahead. How is this gap going to be bridged? Cut the pay of Americans to make our manufacturing competitive?

There is a real problem here, as outlined by Bessent, and I agree with him. Americans are going to be at a disadvantage if we have to run our economy while not trading with countries that we don’t like. It is not an easy problem to solve. I don’t have a quick or ready answer either, other than to be a little more careful about how you go about changing things, and somehow to assemble a Congress and administration that all agree on both the problem and the solution. Which we had in WWII, but don’t have now.