The American Enterprise Institute is generally considered part of the “conservative” network of think tanks working to influence policy in Washington D.C. Founded in 1938 by executives of major corporations in opposition to the New Deal, what it mainly wanted to “conserve” is free-enterprise capitalism. I grew up as a right-wing activist in an environment where conservatism was too often identified as capitalism, with wider national concerns like morality at home and defense overseas as lesser concerns, easily jettisoned if they got in the way of doing business. However, the radical turn of many capitalists has cooled this fervor among conservatives who remember Karl Marx was funded by the industrialist Friedrich Engels.

AEI has worked closely with Republican administrations and has attracted a great many influential thinkers to its ranks. During the Cold War AEI took a hard line and remains in the vigilant camp supporting Ukraine and Taiwan. A Senior Fellow with a long record working with national security organizations is Mackenzie Eaglen. She recently called to expand the U.S. military to cover “three campaigns” at once as the country continues to face threats in the Middle East while larger threats have reappeared in Europe and Asia. “The cost to strengthen our military should be considered an investment in deterrence. The cheapest war is the one we don’t fight,” she writes. Unfortunately, President Joe Biden threw away America’s legacy of Cold War victory during his first “cut and run” year in office, so wars have already broken out. Restoring deterrence will require both material and mental rebuilding to be credible.

Yet, there seems to be a divide at AEI, with a “capitalism over nationalism” cadre still active. Recently, former GOP senator Phil Gramm and Donald Boudreaux of George Mason University wrote an op-ed in the Wall Street Journal which AEI distributed as Gramm is a Senior Fellow there. The title was “We all pay the price of protectionism.” The timing was interesting as Vice-President Kamala Harris has criticized once and future President Donald Trump for his tariffs on Chinese goods for rising prices for consumers. This is part of her anti-inflation campaign which ignores the actual meaning of inflation and the Biden-Harris record of generating it with trillions in reckless deficit spending on failed programs. On trade, Biden has kept Trump’s tariffs on Beijing and even added one against the import of Chinese electric cars. Trump’s tariffs, like his tax cuts (which continue to undergird the economy as they do not expire until next year), were within an economy whose inflation rate averaged less than 2% a year.

As chair of the Senate Banking Committee, Gramm pushed deregulations in 1999-2000 widely viewed as opening the door to the blunders and abuses that brought on the 2007-2009 global mortgage and banking crisis, the worst financial upheaval since the Great Depression. Recovery took years and destroyed the economic lives of millions. Gramm did not run for re-election in 2002. His legislative efforts were rewarded as he became a vice president at USB, the world’s largest private international investment bank, headquartered in Switzerland. When the financial crisis hit, USB nearly collapsed and needed a government bailout by the Swiss National Bank. The old saying “hoist by his own petard” seems appropriate.

But ideologues never learn from their mistakes. Gramm and Boudreaux argue from the principle that decisions made by business leaders are inherently better than those made by government officials. “Protectionism and industrial policy misallocate resources and reduce economic efficiency” they claim. As a general rule, capitalism is both the natural and superior economic system compared to state socialism. But there are exceptions to every rule and national security is a government domain situated not just outside but above that of  private business. Gramm and Boudreaux never mention this, nor does China come up. They falsely claim, “the political appeal of trade protectionism has centered on its ability to benefit a privileged few special interests while spreading costs across society.”

Yet the impetus for “decoupling” from China in strategic industries (ties private corporations formed without giving any thought to the wider consequences of building up the techno-production base of a geopolitical rival) is national security, a fundamental general interest of the American people. And when they complain that core industries like computer chips and steel are getting “protection” they are discrediting their own argument that “free trade” would give a better result by allocating resources to China.

While the China threat reflects Beijing’s ambitions to become the world’s dominant power, its ability to act was largely created by “transnational” corporations which transferred massive amounts of capital, technology, and management skills to China and then supported their development by importing the output of their factories while closing American factories. The Beijing regime encouraged these shifts in economic strength with their own industrial policies (substituting state capitalism for state socialism) which offered profits (often more fanciful than real) to lure capitalists into selling out their own homelands. Yet, anyone with any knowledge of the Beijing regime should have known it would never allow foreign firms to dominate its markets. American leaders allowed this to happen because they listened to the fatal arguments of people like Gramm and Boudreaux who actually do represent special interests who do not want their “freedom” to trade with the enemy restricted.

The Chamber of Commerce has complained “listing China, Cuba, Iran, North Korea, Russia, and the Maduro regime as foreign adversaries provides false comfort to businesses” because “it does not take into account the realities and complexities of modern manufacturing processes and supply chains.” Beijing agrees. The CCP’s media outlet Global Times has argued “the US obsession with protectionism measures underscores the hollowing out of US manufacturing. The services sector dominates the US economy, which no longer has the base to develop large-scale manufacturing.”

Decades of deindustrialization has gutted the mobilization base for military production which depends on the same supply chains as private industry. Though Congress is appropriating money for a naval buildup to meet the Chinese threat, shipyards cannot find enough trained industrial workers to build the ships. And while the U.S. economy is ten times larger than the Russian economy, Vladimir Putin is getting more guns and ammunition for his aggression in Ukraine than the “arsenal of democracy” can produce due to decades of our misallocation of resources. A recent report from the Pentagon addressed much of what must be done to boost areas like electric batteries, microelectronics, critical materials, the role of small business, a skilled workforce, and a culture of innovation. The fundamental principle is that supply chains must adjust to Great Power competition.

As historian Paul Kennedy notes in The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000, “The triumph of any one Great Power… has usually been the consequence of lengthy fighting…  but also been the consequence of the more or less efficient utilization of the state’s productive economic resources in wartime, and… of the way in which that state’s economy had been rising or falling relative to the other leading nations in the decades proceeding the actual conflict.” This book should be required reading, an antidote to the shallow thinking of Gramm and Bourdeaux who seem oblivious to wider factors that determine who runs the world, and whether nations thrive or even survive.

They cite Adam Smith, but not about what he said about strategic trade in The Wealth of Nations. Smith embraced the Navigation Acts that protected British shipbuilding, and other restrictions on trade writing “It may be advantageous to lay some burden upon foreign imports for the encouragement of domestic industry when some particular industry is necessary for the defense of the country… It is of importance that the kingdom depends as little as possible upon its neighbors for the manufactures necessary for its defense.” Amen to that!

William R. Hawkins is a former economics professor who has worked for conservative think tanks and on the Republican staff of the U.S. House Foreign Affairs Committee. He has written widely on international economics and national security issues for both professional and popular publications including for the Army War College, the U.S. Naval Institute, and the National Defense University, among others. 

Image: AT via Magic Studio