Neither leading nor ceding

AFTER THE HORRORS of the second world war most Americans just wanted to go to the movies and drink Coke, observed Averell Harriman, who later became secretary of commerce. Instead their government built a world order centred around America. Its economic achievements were exemplified by the Marshall Plan to help rebuild war-ravaged Europethe most unsordid act in history, according to Winston Churchill. It revived the world economy and made America richer, too. By 1950 Coca-Cola was selling 50m bottles a day in Europe.

This was a golden era of American foreign-policymaking. What did it take to make the country act in such enlightened self-interest? According to The Wise Men, a history by Walter Isaacson and Evan Thomas published in 1986, the magic ingredients included a rarefied East Coast foreign-policy elite who could easily glide between Wall Street and high office; responsible media; a thoughtful Congress capable of bipartisanship; a public that could be united against a common ideological enemy with which America had few economic links; and a president, Harry Truman, who was a war hero.

None of those conditions applies today. Viewed from outside, Americas economic diplomacy since the financial crisis of 2007-08 has become cranky. Earlier this year America tried to discourage its allies from supporting Chinas new development bank, the Asian Infrastructure Investment Bank (AIIB), only to find that many of them joined the institution anyway. It was a diplomatic fiasco. Old-timers complain that links with Chinese policymakers, once carefully cultivated, have atrophied. A row with China over cyber-security is brewing.

Domestic constraints on economic policymaking have got worse. Political confrontations over the budget have pushed the country close to default, irritating the foreigners who own 60% of the Treasury market. Since 2010 Congress has refused to recapitalise or pass reforms of the IMF, keeping the world waiting.

Foreign banks have been subjected to fines and litigation costs totalling about $100 billion, some richly deserved, some little more than shakedowns by local officials looking for headlines and cash. Some banks from the emerging world and a few countries have been all but excluded from the dollar payments system by money-laundering rules whose cost, imprecision and extraterritorial reach are pushing the global banking system away from America. The Federal Reserves extension of liquidity to foreign banks is under attack from the left and from the Tea Party, and at least a third of Congress wants to review or limit the Feds powers. In July Congress stopped Exim Bank, a government body that finances exports, from writing new loans.

The grandest foreign-policy initiative has been the Trans-Pacific Partnership (TPP), a proposed trade deal between Asia-Pacific and America. (Another deal with Europe is coming up behind.) In June Congress agreed to hold a simple yes or no vote on any TPP deal that Mr Obama strikes. But TPP is a far cry from the trade pacts of the past. It excludes China and India. The hope is that both countries will eventually ask to join, but they could equally go into a huff and push their own trade pacts. TPP negotiations have dragged on and Congress may now be voting on it during next year, in the midst of a presidential election. Hillary Clinton, the Democratic front-runner, has declined to endorse the pact, even though she had supported it in broad outline in the past. Half the field of Republican candidates are hostile to TPP.

The campaign will also see tensions with China flare. Marco Rubio, a Republican contender, has called on America to stop appeasing China. Donald Trump, another Republican hopeful, said ahead of a visit to America by Xi Jinping, Chinas leader, that instead of a state banquet he would offer him a Big Mac.

One view is that all this is just a temporary blip. America has always harboured a strain of populism that dislikes elites and foreign engagements, sometimes called the Jacksonian tradition after Andrew Jackson, who served as president from 1829 to 1837. America declined to participate in the Genoa conference in 1922 that aimed to restore Europes economy. In 1948-49 Congress vetoed American membership of a planned global trade body, the precursor of the World Trade Organisation (WTO). In 1953 Joseph McCarthy, a prominent anti-communist Republican senator, said the career of John McCloy as the second American head of the World Bank and a diplomat in Germany was an unbelievable, inconceivable, unexplainable record of the deliberate, secret betrayal of the nation to its mortal enemy, the communist conspiracy. In the 1980s relations with Japan were prickly. In the 1990s Chinas rise and its currency peg to the dollar were the subject of bitter political debates.

Do the right thing

Optimists point out that America usually manages to overcome its Jacksonian impulses. At the Bretton Woods conference in 1944 it designed and pushed through the IMF and the World Bank, along with a system of fixed exchange rates that lasted until the 1970s. During the 2007-08 crisis American politicians agreed to bail out global banks headquartered in America. They did not stop the Fed from extending up to $500 billion of loans to foreign financial firms and at least the same again in dollar swap lines to foreign central banks.

Congress has always been tricky to handle. It delegates the power to negotiate treaties to the president but can investigate decisions, try to block funding for foreign-policy initiatives and pass laws that influence foreign policy. It also holds authority over the Fed. Even the policymakers of the post-war golden era found it troublesome. Robert Lovett, who as secretary of defence helped Harry Truman build up NATO, said dealing with Congress was like getting a shave and having your appendix taken out at the same time. Paul Nitze, who helped draft the Marshall Plan, had to appear before Congress 43 times to defend it, losing 15lb (about 7kg) during the ordeal.

In the 1990s America was again ascendant abroad. Its economic ideas became a global, free-market orthodoxy known as the Washington Consensus. America led the response to the emerging-markets crises of 1995-99, prompting Time magazine to label a triumvirate of officials, Alan Greenspan, Robert Rubin and Larry Summers, as the committee to save the world. America passed the NAFTA trade deal, joined the WTO and shepherded China into it, too. But all this was bitterly contested at home. To bail out Mexico in 1995, Mr Rubin, then Treasury secretary, had to use a kitty of money reserved for currency interventions that did not require congressional approval.

All this suggests that Congress and the American public have always been ambivalent about economic diplomacy, and that the current White House has not been good at managing that tension. But the pursuit of Americas enlightened self-interest is also genuinely getting harder, for three reasons.

First, partisan politics have intensified, a fact attributed variously to gerrymandering, to a natural self-induced sorting of like-minded people into the same areas, and to the decline of the moderate wings of both parties. Congress has become gridlocked, a problem exacerbated by the 24-hour news cycle, lobbying and the huge sums spent on campaigning.

There is hostility to economic diplomacy on both sides of the political divide. The left wing of the Democratic Party, symbolised by Senator Elizabeth Warren, opposes free trade, perhaps more strongly that it did in the 1990s. The right wing of the Republican Party, the Tea Party, has an expeditionary wing that is willing to use force abroad and an isolationist one that wants to keep the world away from America. Both dislike anything that smacks of world government. Parts of the machinery of economic diplomacy are subject to an operating licence that must be renewed by Congress frequently, for example the presidents right to pursue trade deals and try to get them through Congress with a simple yes or no vote, known as Trade Promotion Authority (TPA). These votes are now recurring triggers for ideological battles.

Second, popular discontent with globalisation and worries about stagnant middle-class incomes and shrinking blue-collar jobs have become more prominent. In the abstract, a majority of Americans still support free trade and globalisation. But there are plenty of warning signs. Less than a fifth of them believe that trade creates jobs, and the poorer they are, the less they think it is a good thing. Americans are also suspicious of China, Americas most important economic partner. In polls, a majority of them agree that their country should mind its own business internationally and let other countries get along the best they can on their own (see chart), and that Americas influence is declining.

The third problem is the fallout from the financial crisis, which has exacerbated mistrust of globalisation. It has also made it harder for Wall Street types to work for the government, a staple of American economic diplomacy, thus reducing the quality of manpower available for such jobs. Of the 24 Treasury secretaries since 1945, 14 have worked on Wall Street at some point. Americas economic relations with China after it opened up in the early 1990s were built up by an elite that moved just as seamlessly between the government, Goldman Sachs and Citigroup as their Chinese counterparts did between state-owned enterprises, party appointments and government posts.

The financial crisis has also led to a populist creep in which bits of the apparatus previously subject to technocratic control have become politicised. One example is the global dollar payments system, which used to be the responsibility of the Fed and the Treasury. Now lots of different official bodies are competing for authority over it and for the power to levy fines on global activity, which at their worst come with a storm of publicity and gagging orders and without judicial process.

Another example is the Federal Reserve itself, whose popularity with the public has fallen over the past decade. Several Republican bills currently passing through Congress are seeking to subject the Fed to more supervision by Congress and the Government Accountability Office. Elizabeth Warren has introduced legislation that would limit the Feds emergency lending powers to American and foreign banks. These initiatives may not become law, but fear of confrontation with Congress will dull the Feds appetite to take risks of the kind it did in 2007-08 when it was the worlds lender of last resort.

The consequence of American ambivalence is that the three pillars of the worlds economic architecture, the IMF, the World Bank and the WTO, are all in bad repair, though for different reasons.

Take the IMF first. It is meant to monitor the world economy and lend money to countries with balance-of-payments problems. Given the size of global imbalances and capital flows, it should have become more important. In practice it is hobbled. This is partly a question of legitimacy. Asian countries faced stringent conditions which the bank (guided by America) imposed on loans during the Asian crisis of 1997-98. Many emerging economies vowed that they would never borrow from it again. That is one reason why they have built up the huge foreign-currency reserves that have distorted American capital markets. The IMF has tried to make amends by allowing countries that it judges to be very strong performers to pre-qualify for loans, but so far only Mexico, Colombia and Poland have signed up.

Fund in a funk

In 2009-10 the Obama administration proposed a package of reforms to put the IMFs finances on a sounder footing and increase its legitimacy with emerging economies. European countries would cede votes and seats on the board to emerging economies, although America would retain a sufficient share of the IMFs capital and votes to have a veto. These proposals probably did not go far enough. Emerging economies would still have under half the votes and the capital, and in time the rest of the world might object to Americas veto. Even if the reforms were implemented the IMFs permanent kitty would still be only about $1 trillion, nowhere near the $6 trillion of reserves that emerging economies consider necessary as an insurance policy.

All the same, Congress has failed to approve the reforms on four occasions since 2010. Part of its complaint is a nit-picking objection to the technicalities of the IMFs funding; the reform will replace a temporary arrangement with a permanent one. Another grumble is that the IMF has been disproportionately generous to the euro zone. Relative to the size of its GDP and its capital contribution, Greece has received at least five times more money from the IMF than the typical Asian country did in the crises of the 1990s. Congress has a point here, but its objections are perverse because the reform package would dilute Europes influence within the IMF by cutting its votes and the number of people it can put onto the IMFs executive board. If the obstruction continues for another year or two, other countries may try to bypass America, for example by setting up a parallel fund. That might prompt America to exercise its veto, leading to a bigger spat.

If the IMF is partly beached, the World Bank and the WTO are drifting. The governance of the World Bank, where America has a veto and whose boss it traditionally appoints, has become cumbersome. Emerging economies complain that it is too bureaucratic and obsessed with fashionable campaigns. Its outstanding loans have shrunk from 3% of emerging-market output in 1994 to 1%, although it is now trying to increase them and to reorganise itself. The WTO is still good at enforcing existing trade agreements, but has not managed to bring in a comprehensive new deal for two decades. The so-called Doha round of talks, which began in 2001, has more or less fizzled out. Emerging economies refuse to agree to new trade deals, and America is no longer knocking heads together.

Should anyone care if the IMF, the World Bank and the WTO do not work well? There is no magic about these particular institutions, but a widely agreed international economic framework is worth having. The post-war system hinged on one country looking beyond its narrow self-interest to support a global set of rules. It is now less willing to do that. At the same time the world is becoming more volatile and complex. The best illustration of that is the global monetary and financial system.

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