Foreign Relations of the United States, 1981–1988, Volume I, Foundations of Foreign Policy

140. Memorandum From Norman Bailey of the National Security Council Staff to the President’s Assistant for National Security Affairs (Clark)¹

Washington, January 27, 1983

SUBJECT

• National Security Policy Planning Over the Next Decade

Executive Summary

— Cyclical analysis indicates that 1985/86 will be a period of maximum danger to the economic system and structure of the Western world. However, the current international debt crisis could trigger systemic collapse this year.

— If the traditional patterns of history are repeated, such an economic crisis will lead to social instability, subregional and regional conflict and eventually intercontinental war.

— All this while the Soviet Union has the most intelligent, sophisticated and realistic leadership since Lenin, and the new military technologies are reestablishing the primacy of the offensive.

— History need not mindlessly repeat itself, however. Transition to the next boom based on the fantastic new technologies can be managed but only by an act of will to overcome powerful vested interests. Furthermore, it must be done in this Administration.

— Meanwhile, the center of economic gravity of the world is shifting to the Pacific Basin, and Japan is the only major economic power which has managed its affairs well and thus has the capital base to fuel deployment of the new technologies.

— Thus, our foreign policy and strategies should be directed to the strengthening and consolidation of the Pacific connection while making sure of our security in this Hemisphere and managing the international debt crisis.

Analysis

Introduction

The foreign, security and defense policies of the United States have traditionally suffered from a narrow and short-term point of view, responding in an ad hoc and improvised fashion to the concerns and crises of the moment. This was never a good thing, but we could get away with it while the country was relatively isolated from the rest of the world, and later when our power and wealth were overwhelming. Since the disaster of the Vietnam war (which, let us remember, MacArthur and Eisenhower warned against, Kennedy and Johnson got us into and Nixon got us out of), this is no longer true. As a result, the ad hoc approach is now not only inadvisable but extremely dangerous. We are already in a period of maximum peril which will last for many years. Consequently, the direction the country is moving in must be set, to the extent possible, in the remaining years of this Administration. Since no one knows whether that will be two or six years, and since 1984 will be an election year subject to even more severe political pressures than in 1982, the conclusion must be that 1983 is crucial.

The Primacy of Economic Factors, 1983-c. 1988/90

The short, medium and long economic cycles all tended downwards in the period 1979–1982 leading to a liquidity crisis on top of the solvency crisis caused by years of profligacy and inflation. The short cycle is now tending upwards and will be until 1985/86. Ordinarily, the short cycle is dominant over the longer cycles and thus a recovery could be expected until approximately 1985 when all three cycles will again coincide downward. The recovery will be very weak, however, due to a serious capital shortage and the very low base of solvency and liquidity from which the recovery will start. In other words, even a high percentage figure (say 6% annual real growth in GNP in 1983, which no one expects) would not really mean that much, since corporations will be rebuilding their shattered capital bases, rather than investing in new plants, equipment and technology.

Thus, the next simultaneous cyclical downturn will take place before there has been any substantial recovery and will probably lead to a systemic collapse. This, incidentally, would be perfectly normal. During a long cyclical up-cycle, capital gradually becomes frozen in obsolescent industries and the fruits of the technological innovations that triggered the economic boom are frittered away in excessive consumption and speculation rather than devoted to savings and capital formation. The crash that follows wipes out the old capital structure and the new technologies trigger a new up-cycle. Kondratieff told us how this happens and Schumpeter explained why.² The fact that it has happened over and over again in world economic history approximately every two generations does not mean that it is inevitable, however. It is caused by the inflexibility of vested interests in frozen capital and thus can, at least in theory, be broken by an act of will.

The incredible technologies now under development—genetic engineering, bio-chips, micro-chips, robotization, fifth generation computers, cloning, fusion power and many others will totally transform the world and lead to the greatest economic boom in history (unless the world destroys itself first). Barring universal destruction, the question really is not whether it will happen but how, when and under whose auspices.

If history repeats itself mindlessly, the economic collapse of 1985/86 will in turn lead to a wave of social unrest, violence and civil conflict in the 1985–1990 timeframe. Again, this would be a repeat of the “normal” historical experience. It should be pointed out here that the time sequences mentioned in this memo might be telescoped as a result of the international debt situation proving unmanageable in the short-term, which would result in a systemic collapse this year, followed by the social and political consequences mentioned. Should that happen, the strategy outlined here will have been overtaken by events and ad hockery will reign supreme. This is a real possibility, but my best estimate is still that the point of maximum danger will occur about 1985/86.

Subregional and regional armed conflicts will increase as governments in desperation try to turn their subjects’ attention away from domestic problems. In the 1988–1993 period, these conflicts may well spread and eventually turn into generalized intercontinental warfare, at precisely the time when the science fiction advances in military technology are again, as in World War II, establishing the primacy of the offensive in warfare.

The Andropov Factor

All of this is taking place at a time when the Soviet Union, which has always operated in strategic terms in contrast to our tactical, reactive tendencies, has the most intelligent and subtle leadership since Lenin. In the very short time since he has taken power, Andropov has already demonstrated a sophisticated understanding of the mentality of the Western world and a lively realization of the limitations of Soviet resources as well as the necessity for economic liberalization while maintaining a political iron grip. Out of economic constraint concessions will be made on peripheral issues and in peripheral places and then trumpeted to the world as major gestures demanding a Western response. Detente will blossom again (it already has), lightening Soviet burdens and constraints and enabling continued concentration on the modernization of the Soviet capability to wage limited and general war and to take advantge of widespread social entropy in the West and the developing world.

Geostrategic Shifts

In the last five thousand years, there have been only three major shifts in the geostrategic epicenter of the world. The most recent occurred in the 18th and early 19th centuries when the Mediterranean rim finally lost the position it had occupied since 200 B.C., and the focus of economic, military and political power became centered in the northern Hemisphere between the Urals and the Mississippi. The center of political and military power is still there, but the center of worldwide economic gravity is shifting to the Pacific Basin with great rapidity. This is taking place in an area that for accidental historical reasons is something of a military vacuum, which may give us a hint of where the intercontinental conflict mentioned earlier is likely to be centered. This vacuum will eventually be filled, and there are only four candidates—China, which for various reasons is unlikely to do so by the end of the century; the Soviet Union, which will try to do so but which has serious logistical problems; Japan or the U.S. Clearly it is in our interests to see to it that the vacuum is filled by the U.S. and Japan jointly in close cooperation. The flow of history can be quixotically opposed with predictable negative results or it can be used and worked with. Obsolete policy and strategic baggage must be gradually lightened and eventually replaced, if we are not to be in the position of being prepared for yesterday’s challenges but faced with today’s.

Implications

If the above analysis is correct, various conclusions must be drawn from it.

— Rebuilding the capital base of the economy of the Western world and simultaneously shifting resources to the new technologies in an organized fashion, and not through the chaos of a systemic collapse, is essential to prevent or minimize the social and political consequences of the period of transition.

— It is clear that while this Administration’s economic policies were directed towards achieving exactly that result, the political will does not exist in the American people and Congress to carry the process through thoroughly and rapidly.

— The necessary political will exists to an even lesser extent in Europe.

— The defense buildup, and especially development and deployment of the new technologies, must be maintained. Nevertheless, it is highly likely that the Andropov strategy will succeed in seriously weakening this resolve, again more in Europe than here, but also here. Therefore, the necessity to maintain and widen the technological lead in defense, as opposed to sheer mass.

— The necessary capital as well as a remarkable ability and willingness to apply this capital to new technologies and not leave it frozen in obsolescent industries is found only in Japan, which is simultaneously the economic engine of the Pacific Basin phenomenon and which will rearm by the end of the century as the generation of World War II dies off, with us or without us.

— As a result, the Pacific Basin and, particularly, Japan must be the centerpiece of our foreign policy for the rest of the century. This again will require an act of political will to overcome frozen intellectual and political capital now centered in Europe and the Middle East. Doing so will provide a powerful pole of attraction for China and India and freeze the Soviet Union, out of the new geostrategic world complex.

— Momentum in this direction must be firmly in place by the end of this Administration or it will not happen.

— In the meantime, the current international financial crisis must be overcome or all of the above will be overtaken by events.

— We must also maintain control over our own Hemisphere. Latin American policy and strategy must be formulated and firmly carried out in an area where this Administration is weak and where public, media and academic support is even weaker than in the area of defense policy.

Conclusions

I propose, therefore, as Director of Planning, with responsibility for political and economic matters, to concentrate my energies and attention during 1983 to:

— Promoting and consolidating the Japanese relationship in particular and the Pacific Basin relationship in general.

— Doing what I can to help manage the international debt crisis so that a systemic collapse does not occur this year.

— Supporting the effort to resist the deterioration of our position in the Hemisphere.

The second and third items are obviously interrelated and are necessary to provide the conditions for success of the first.

All of this will be attempted in the face of powerful vested interests both inside and outside of the government, as well as incompetence, confusion, ignorance and in some areas very thin staffing. The resources and big guns are on the other side. If you agree, however, the attempt will be made.

1. Source: Reagan Library, Executive Secretariat, NSC Agency File, National Security Council (01/12/1983–12/08/1983). No classification marking. Sent for information. Wheeler initialed the top right-hand corner of the memorandum. A stamped notation on the memorandum reads: “WPC HAS SEEN.”
2. References are to Soviet economist Nikolai Kondratieff and Harvard Professor Joseph Schumpeter. Schumpeter characterized Kondratieff’s identification of long-term 40-to-60 year cycles of economic growth and decline as “Kondratieff Waves.”