Jacob Lew Believes U.S. Abusing Its Economic Power

Jacob Lew

Former Treasury secretary Jacob Lew has a bone to pick with the Trump administration, believing that they are overusing, abusing and undermining U.S. economic power.

In the world of politics, it’s all too easy to be a critic, as just being disgruntled is more than enough, whether or not your criticisms have any actual merit. In the political arena itself, merit isn’t even much of a criterion, as partisanship alone is sufficient as participants on both sides are content to just bash each other’s ideas merely based upon party affiliation.

Regardless of the motivation that has driven former Treasury secretary Jacob Lew to soundly criticize what he feels are abuses of economic power by the current administration, his remarks need to be held to a higher standard than just someone on the street grumbling, especially since he is supposed to have at least a decent understanding of the issues at hand given his former role.

In an article called “Trump’s Policies Overuse America’s Economic Weapons. U.S. Economic Power is at Risk,” he shares with us his misgivings about how the Trump administration is undermining U.S. economic power. The idea that we are overusing these “weapons” is provocative enough to deserve a closer look, where we’ll need him to show us that there are at least good grounds to believe him, and if so, what the repercussions are.

The issue under discussion is the use of economic sanctions, and we don’t even want to define a single objective here, as Lew does, because there can be several, depending on the intent. Lew seems to think that they are limited to enhancing diplomatic efforts, as strange as that should sound, when he remarks that the “Trump administration has put aggressive economic statecraft at the center of its foreign policy, but often without clear diplomatic objectives.”

He mentions sanctions against “Iran and China and elsewhere” as the target of this criticism, and grouping Iran and China in the same category is very interesting since the objectives of these sanctions are so different.

Political sanctions against countries such as Iran are deemed necessary when diplomacy has failed, even though diplomacy is the preferred way to settle these things. This is like when words don’t do it, we are forced to turn to other actions, an attack of sorts involving the use of economic or military options.

We might want to say that using these powers may enhance diplomacy, by seeking to compel the other side to give into our demands by use of force, but that’s certainly not achieving anything by way of diplomacy, even though the use of coercion may serve to soften up the positions of the other side and promote more discussion under different terms.

The way Lew frames this suggests that the diplomatic objectives are the objectives itself, even though this is clearly not the objective at all, it is to get the other side to be more willing to accept our demands. It doesn’t matter if their willingness to talk is reduced, and they are cursing under their breath as they finally give in, it is the giving in that we’re after here.

To say that economic sanctions ever need to have a diplomatic objective at all is like saying going to war with a country needs to have clear diplomatic objectives, and Lew not realizing this demonstrates that he has truly gone off the rails with his argument before it has even begun. This is a ridiculous measuring stick that takes its eye completely off the ball and whether or not the way we pursue these ends is in accordance with his vision becomes meaningless.

The fact that he includes China here is particularly strange, since this situation has nothing to do with diplomacy per se. Whether these sanctions against China have been a good idea or not, we should all be able to agree that the intent has not been just to seek to improve diplomatic relations with China, and whether or not it is aligned with clear diplomatic objectives is particularly immaterial.

It’s hard to even imagine how something that is at best a means to an end could somehow be the prime objective and the end goal of these processes. It is one thing to prefer diplomatic solutions, and quite another to think that this remains the goal past the point where these discussions have failed and we need to pursue another path to promote desired outcomes.

Undaunted, Lew claims that “unless economic statecraft is utilized as part of a coherent diplomatic approach, measures may succeed at imposing economic pain, but fail to produce desired policy outcomes.” That’s even further off the rails, as it’s not hard to imagine our achieving our objectives by force alone, such as starving a country to death for instance where they either have to give in or die, diplomacy be damned.

Economic sanctions in themselves are never this effective, as a blockade might be, but these things speak for themselves and are in fact the antithesis of diplomacy, much like a punch is during an argument. After you land one, the other side may indeed may be more willing to see it our way, but we can’t say that this was reached by way of diplomacy.

Often times, we do not achieve desired outcomes by inflicting economic pain, but they still may be influential. Iran may never give up the idea of building nuclear weapons for instance, but we may be able to slow them down with sanctions, and that’s actually been the idea here.

There is nothing wrong with continuing to pursue diplomatic solutions, and it would be foolish to turn our backs on this option should there be a reasonable basis for it helping, and economic sanctions can sometimes provide valuable leverage for negotiations. Trump himself is quite adept with this has he has shown with China, where he has imposed additional sanctions and then offered to remove them to gain concessions.

This move is therefore already in Trump’s arsenal, and we’ve even used this to get a leg up with Iran, at least until Trump pulled that from the U.S. side of the table. Whether or not that was a good idea or not is another matter, but the measuring stick always needs to be whether a move furthers our achieving our goals or not, not just whether it promotes more or less diplomatic discussion.

The situation with Iran is more complicated, and there are some deep-seated issues that serve as a natural barrier to diplomacy, in particular the strong U.S. support for Israel, Iran’s sworn enemy. Perhaps we could benefit from a more balanced approach to this problem to achieve a more amicable position with Iran and other countries who are bothered by this, but this is all a separate issue when this is not achievable through discussion, when you need to do something else and something that we presumably see as furthering our objectives to some degree.

We can presume that the parties have tried to settle these issues amicably through diplomacy and not succeeded by the time the economic sanctions are imposed, but even if this is not the case, our focus then needs to be on improving diplomacy. If lessening or removing the sanctions can be used as a tool to enhance diplomatic efforts, all the better, but this can only happen if the sanctions are actually put into force.

Promoting Diplomacy Somehow Has Become the Goal of Sanctions for Lew

Lew feels that if we don’t make diplomacy in itself the goal, what he deems to be “highly principled standards”, “there is a risk of undermining the source of power behind economic statecraft—the singular global centrality of the U.S. economy derived from confidence in the U.S. financial system, the strength of the dollar, and the attractiveness of U.S. markets.”

The strength of the U.S. financial system, the dollar, and U.S. markets have little to do with U.S. foreign policy, save for countries placing sanctions upon us. We’ve invoked a little of that from the tit for tat tradeoffs with China, and while that may be somewhat regrettable from an economic standpoint, we’d need far more of this to do any real damage to the economy.

We’re also not sure how taking a more “principled” approach to this situation, whatever that may be in this case, could help, given that the two countries could not come to a more “principled” agreement and further action was warranted to move forward. The principle he speaks of here is to improve diplomatic relations, but that’s not the primary goal with sanctions, and may not even be a goal at all.

Lew believes that economic sanctions are powerful weapons that need to be used carefully to not erode their power in the future. They often are actually not so powerful, and often fail to accomplish very much, and we only need to look to Iran or North Korea to see this. These nations are fanatical enough to retain the priority of their military aspirations, and when their resources are reduced by way of economic sanctions, the welfare of their people is what takes the brunt of this.

Since they are so committed to their goals, we therefore don’t make as much progress with these sanctions as we would like, but they still can be somewhat effective and perhaps effective enough to be justified. However, the idea that placing sanctions against countries like Iran and North Korea will erode the future power of these sanctions does not even make sense, as their effects are not diminished in any way by past actions against other countries and these matters are completely independent.

The only way that this could happen is if we lacked resolve with the sanctions, where there may be a loss of confidence in the future, but that’s not happening, and far from it. No one will ever blame Trump of a half-hearted effort here, and his extra resolve, if anything, adds to their power instead of diminishing it.

Lew tells us that, as Treasury secretary, he followed three basic principles when considering sanctions, and the principles in themselves appear reasonable enough. He believes that we should seek maximum international support to enhance their effectiveness, we must have a reasonable belief that the sanctions will further our goals, and that we need “rigorous and highly principled execution.”

He claims that the Trump administration has “reversed these key principles.” He feels that their willingness to act unilaterally in some situations violates the first one, but if you have an objective that does not garner international support, the way to maximally pursue it then becomes to act alone, as if you do not act at all, you achieve nothing, which isn’t exactly maximal.

He believes that “we must reserve the right to act alone but should do so only when absolutely necessary for our national security.” We’re left to wonder why he feels this way, other than his pointing out the obvious, that more co-operation is better, but why the threshold for acting alone is any higher is left unexplained.

If there is a job that needs to be done, and you can’t get help, then you are by default the only one that can be expected to do it. Having this situation cause you to be much more reluctant to do it just does not make any sense.

He does point out that visiting a country like Iran with “economic pain” may not resolve things, and he is right about this of course, but that does not mean that we should not try if we still feel that it may help. Iran getting a nuclear weapon later rather than sooner or ultimately having a smaller arsenal does seem preferable enough.

Lew Forgets What Presidents Are Even Supposed to be Doing

Lew also complains about Trump’s use of economic power to gain more favorable trade outcomes, and whether or not he has gone too far with this, that’s not an unreasonable objective. A country may be friendly but we should still seek to advance the interests of our own country by seeking more favorable trade relations if possible. We cannot forget that the responsibility of our President is toward his own people, and if people in other countries are made a little worse off while Americans are made better off, he is doing his job, and nothing else should ever be acceptable in fact.

He speaks of the “overuse of economic tools divorced from strategy” that Trump is presumably guilty of, and if that were actually true, if Trump was just acting capriciously here with no clear objective or advantage, that would be one thing, but there is a strategy and objective to all of this, whether we agree with it or not. Being divorced from Lew’s strategy, whatever that may be, just doesn’t matter and is not a valid objection at all.

Lew confuses economic and political objectives when he criticizes Trump for acting “purely out of immediate commercial interest, or without a diplomatic approach to bring allies along.” Acting out of commercial interest, even purely so, is a legitimate goal, whether or not allies are brought along in the crusade. While having allies on board can help, we cannot forget, as Lew does, that pursuing these commercial interests in this case is what we are trying to accomplish.

It would be nice, for instance, to be able to team up with allies with our sanctions against China, but not having them does not remove or even address the need for remediation that is felt, rightly or wrongly.

He does bring up the fact that economic sanctions can have an effect upon domestic business, where there may be reluctance to expand for instance, and this can even contract our economy in a meaningful way. While we all hope that this is accounted for properly, if the goal is to ultimately improve things, this may be a price that needs to be paid, taking a step back in order to take two steps forward later.

If the sanctions end up being excessive or not well thought out, and produce long-term pain instead of gain, that’s a different matter, but this is all supposed to be worked out and carefully considered. There’s no reason to think that the sanctions against China won’t work out in our favor in the end though, and the smaller price that we pay for not trading with Iran or North Korea is not one that we expect an economic benefit with anyway.

Perhaps we could do a better job of thinking these things through and executing them, but the issues at hand do require more than Lew’s vision of our looking to join hands with other countries and use that as the basis for our actions, where we set aside our own needs in favor of foreign interests presumably.

While we can and should consider such things, the U.S. has to be the ultimate benefactor in accordance with political will. Making other countries happier can be a worthy goal, but only if we are also made happier, which is in the end all that counts, and all that even makes sense to count.

Lew wraps up his piece by telling us that “if we continue down the current path, the United States risks weakening its global leadership and the source of our economic power.” Both our leadership and our economic power reside in our strong commitment to pursue goals important to the United States though, and anything that takes away from this will only serve to weaken both.

The United States derives its economic leadership by way of its prosperity ultimately, where we make a lot of things that people in other countries wish to buy, and also have the money to buy many things other countries offer for sale. There is no reason to even think that this has been diminished under Trump’s leadership, and he may have even taken this power to a higher level if anything.

What stands out the most with Donald Trump’s leadership is his firm commitment to vigorously pursue the interests of Americans even if this involves stepping on some toes. He’s obviously has stepped on Lew’s toes, who believes that we should place the interests of Americans secondary to his opinion of how a global leader should act. Once we realize that this is not about how we may best serve the world, these views simply wilt, and all we are left with is the grumbling.

We need to get a little clearer on what countries the President actually leads and who he has actually sworn to benefit before we raise our fists like this. We may have the ability to further our goals through diplomacy as well as by way of other means, but unless we understand what is even sought, which is more than just promoting diplomacy, we’ll just end up with the sort of nonsense that Lew has felt compelled to share with us.

John Miller

Editor, MarketReview.com

John’s sensible advice on all matters related to personal finance will have you examining your own life and tweaking it to achieve your financial goals better.