Shadow Government

Obama and his generals

President Obama's awkward relations with his senior military commanders have just taken a turn for the worse - much worse.  A new article for the Rolling Stone, released in advance to reporters, dishes all sorts of gossipy dirt on what General McChrystal - or more precisely, what McChrystal's staff - really thinks about the key principals on Obama's National Security Council team.  Alas, McChrystal and his staff do not think very highly of them, and they were foolishly willing to share their low opinions with an obliging reporter.

The put-downs are remarkably sophomoric -- "Biden? Did you say: Bite me?" -- and the entire affair reads like a bad high school feud (cue the writers of Glee looking for material for next season). Like a petty high school feud, this new flare-up is just the latest round in a back-and-forth that has gone on for a long time; it is following a script that was predictable long ago.  I do not know whether the reporting timelines support this inference, but it sure seems to me like the Rolling Stone story was McChrystal's staff retaliating for the equally disturbing attacks on McChrystal and Petraeus by White House political advisors in Jonathan Alter's semi-authorized account of the Afghan Strategy Review.

McChrystal has already apologized and his apology seems sincere. But it may not be enough to save his head from this famously thin-skinned White House. The last time a senior military commander spoke this unwisely to a reporter, he quickly resigned, and rightly so because his bad behavior thoroughly squandered whatever confidence his chain of command had in him by that point. McChrystal has a stronger battlefield record and so may have started with a bit more confidence to squander.  Moreover, President Obama may not want the painful confirmation hearings for McChrystal's successor that a hasty departure would generate. And the McChrystal interview accurately notes that other members of the Obama AfPak team are already on beltway insiders' short-lists to leave, opening up the possibility of widespread chaos at the top during the most critical year of the war so far. Obama might be wiser to bring McChrystal in for a tongue lashing and send him back into the fight as quickly as possible.

If Obama takes that course, he should also tongue-lash the other participants in this feud, namely his closest circle of White House advisors and his country team in Kabul. The Americans seem to be preoccupied with Washington enemies when they should be directing their fire at the real enemy -- the one that is firing bullets, not insults, at them.  Indeed, the dissension and back-biting that has characterized the Obama administration is precisely the sort of divide-and-conquer confusion we are trying to foster among the Taliban and Al Qaeda foes we are confronting in the AfPak theater. It is a tragic irony that we have proven more capable of sowing it among our own ranks than among the ranks of the enemy.

Good civil-military relations and the unity of command and effort they engender may not be sufficient to win. But in a war this complex, they may be a necessary condition for success. President Obama has not yet achieved good civil-military relations in the conduct of his wars and he does not have much time to get it right.  Let us hope that he finally heeds the wake-up call, however discordant and unfortunate it is.


Shadow Government

To gloat or not to gloat?

Did the Obama administration just score a big foreign policy victory on Chinese currency practices? Over the weekend, China announced that it would let its currency begin to move for the first time in years. As trading for the week opened, the Chinese renminbi (RMB) broke free from its long-held 6.83 rate to the dollar, and rose above 6.80.

This certainly seems like the successful culmination of a strategy the administration pursued at some political risk. In the spring, pressure was mounting on the Treasury to name China a "currency manipulator." The administration resisted the pressure and ignored the Congressionally-mandated April 15 deadline for a determination. Top administration officials persuaded Congress to await the outcome of multilateral efforts to persuade the Chinese to move. Key Congressional figures, like House Ways and Means Chairman Sander Levin (D-MI) set out a new deadline: get results by the G-20 meetings at the end of June, or Congress would act.

Now, the Chinese seem to have responded in the nick of time. Not only did China seem to relent, but it did so on the eve of the G-20 summit in Toronto. The Obama administration had previously trumpeted the elevation of the G-20 as the world's premier multilateral forum as a principal foreign policy success of its first year.

So what's not to celebrate?

China has long said it would change its policy; it had just not said when. In its weekend announcement, Chinese authorities were exceedingly vague about the specifics of the new policy. The only real clarity is that the change will not be a dramatic one-off appreciation of the sort that some U.S. critics of China have been calling for.

The most likely outcome is that the RMB will bounce around as it gradually appreciates, perhaps at a rate of 6 percent per year. This is the most likely outcome only because it is the policy China pursued in the only other instance in which significant appreciation was allowed, from 2005 to 2008. Nouriel Roubini has even noted that the RMB could depreciate, should the euro continue its sharp decline.

The change could be sufficiently minor that the real puzzle is why China did not do this months ago. The move relieves a great deal of international pressure on the Chinese and they incur minimal costs in terms of new competition for their exporters. Now the Chinese are free to spend their summit time criticizing Western budget deficits.

The U.S. domestic politics of China's currency move get complicated. The only position that really united the bulk of Western critics was that Chinese stasis on currency was unacceptable. Some prominent critics pointed to Chinese revaluation as a cure for U.S. job market ills.  Fred Bergsten, Director of the Peterson Institute for International Economics, wrote that Chinese revaluation would be "by far the most cost-effective possible step to reduce the unemployment rate and help speed economic recovery" in the United States. A Washington Post story Sunday cited Bergsten to note:

"A jump of 20 percent (in the RMB) could cut as much as $150 billion off the U.S. trade deficit with China and create as many as 1 million U.S. jobs by making American exports more competitive..."

This weekend's move will not come close to meeting those expectations. The analysis promising job gains is problematic at several levels. For example, in our sole previous experience with Chinese appreciation, the 20 percent rise from 2005 to 2008, the U.S. bilateral trade deficit with China actually expanded.

A more fundamental issue is that the link between trade deficits and jobs is tenuous. The United States has experienced full employment at times of large trade deficits, and we've experienced painful rates of unemployment at times when deficits were declining. Normally, we think trade deficits have little to do with the overall rate of unemployment. The relatively sophisticated argument being put forward by Paul Krugman is that we are suffering from a ‘liquidity trap,' placing us in an exceptional time in which the standard rules do not apply. That view is controversial, but let's accept it for the moment. There is little indication that the liquidity trap, if we are in one, will go on indefinitely. [A key feature of liquidity traps is that interest rates are near zero, and right now longer term interest rates are not]. Thus, if Chinese currency appreciation were to cure U.S. unemployment, it would have to be big and quick. The Chinese announcement just made clear it would be neither.

That's likely to leave critics unsatisfied. Estimates of Chinese currency undervaluation among the most strident critics ranged from 25 to 40 percent. A move from 25.0 percent undervaluation to 24.5 percent undervaluation is unlikely to appease them. Bloomberg quoted Senator Charles Schumer (D-NY) yesterday as rejecting the Chinese move as insufficient and saying:

"It is only strong legislation that will get the Chinese to change and will stop jobs and wealth from flowing out of America as a result of unfair trade policies...We intend to move forward as quickly as possible with legislation."

This leaves the Obama administration with some difficult choices. A foreign policy victory would be most welcome and the administration's use of multilateral diplomacy to help dislodge China from its currency peg could qualify. But claiming this as victory would suggest satisfaction with the result. It would seem to require a firm stance against new legislation from Congress - who needs a fix if you've already fixed the problem? So far, the administration has shown little stomach for taking on Congress, particularly if the objectionable measure is attached to important legislation.

The administration has handled the situation with China well and achieved the best result they could realistically have hoped for. The question is whether the politics of China trade will allow them to claim the victory.