Russ Roberts

George Shultz on Economics, Human Rights and the Fall of the Soviet Union

EconTalk Episode with George Schultz
Hosted by Russ Roberts
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George Shultz, the Thomas W. and Susan B. Ford Distinguished Fellow at Stanford's Hoover Institution and Secretary of State under Ronald Reagan, talks with EconTalk host Russ Roberts about the role of economics in his career, the tension between morality and pragmatism in foreign policy, and the role of personalities and economics in diplomacy, particularly in US/Soviet relations in the 1980s.

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0:36Intro. Russ: Role of leadership in history: Do people change history or do various forces lead to particular leaders being almost inevitable in their actions and views? Which was it for fall of Soviet Union? David Brooks quote about Bush:
He's convinced leaders have the power to change societies, even in a place as chaotic as Iraq—good leadership makes all the difference.... He's confident in his ability to read other leaders—who has courage? who has a chip on his shoulder? And he's confident that in reading the individual character of leaders, he is reading the tablet that really matters. History is driven by the club of those in power. When far-sighted leaders change laws and institutions, they have the power to transform people.
Brooks gives Tolstoy's view, Hayekian:
Tolstoy had a very different theory of history. Tolstoy believed great leaders are puffed up poppinjays. They think their public decisions shape history, but really it is the everyday experiences of millions of people which organically and chaotically shape the destiny of nations from the bottom up. According to this view, societies are infinitely complex. They can't be understood by the White House or the Green Zone. Societies move and breathe on their own, through the jostling of mentalities and habits. Politics is a thin crust on the surface of culture. Political leaders can only play a tiny role in transforming a people, especially when the integral fabric of society has dissolved.
Both views have truth to them, but how much is real and how much is inevitable? Was the relationship between Reagan and Gorbachev the key, or is that just an ex post explanation?
4:36MIT and Chicago Business School faculty member. Did your background in economics come in handy as Secretary of State? Economic questions. Economics is a strategic science, things happen with lag, may not pay off immediately. Politicians get impatient. Coined phrase: "An economist's lag is a politician's nightmare." At MIT in 1950s and in business school there; Paul Samuelson, Bob Solow. At U. of Chicago, Milton Friedman and George Stigler. Russ: Friedman immersed himself in world of public policy, Stigler more likely to stand in sidelines. Schultz: George had a big interest in public policy, history of economic thought, price theory, industrial organization, monopoly. Friedman, policy and also non-policy questions. Played golf and tennis together. "Milton was tough as a tennis player because, while he didn't hit the ball hard, but he always got everything back. And it's just the way he argued. Everything always comes back; he never gives up." Schultz interested in the use of economics. Served on the Council of Economics Advisers under Eisenhower.
10:46Statistics in the U.S. are obsolete. GNP accounts originally put together in 1920s-'30s at National Bureau of Economic Research, but no change in categories since then. Constantly fitting new things into old categories: new things often called services so it looks like we increasingly have a service economy. Minimum wage statistics. What role does international trade play in diplomacy, and what role does diplomacy play in international trade? Do you favor restrictions on trade to achieve diplomatic ends, e.g., embargoes? Use of trade sanctions have limited use, maybe short term effect. They break down. Look what happened in Iraq. Greatest impact comes more from financial restrictions rather than trade sanctions. South African businessmen found they couldn't get loans and weren't welcome in clubs and their currency started to deteriorate, it hit home. Big opening of markets since WWII. Embargo looks like it doesn't cost but it does cost you. If you get too fast and loose people lose confidence in the U.S.--maybe it is not a reliable supplier. Carter administration, light switch diplomacy, can't turn it on and off. China, growth from openness in the economy. Foreign aid: does it entrench thugs and stunt growth because of corruption? Have to distinguish if you are talking about military assistance to friends and allies, it can be very effective. For economic aid, if it's done right it can be helpful, but often not done right. Unless governance is right you are not going to help very much with aid. China has not had the expansion it's had because of foreign aid but because it's changed its economic environment allowing trade to flourish. Recent IMF table, World Economic Outlook, no minus signs, now is a golden moment. Is foreign aid done to serve another end or is it idealistic? Is it a strategic weapon? It's not a good thing for the U.S. to have countries that are impoverished. Sometimes just giving money is not a help, can even set it back. Funds to help people reform themselves or providing educational process or infrastructure at critical moments can be useful. A lot of cases where food is given, it prices the local farmers out of the market, because they can't provide something at no cost. Harmful.
20:39Human Rights, 1980s, Reagan and Schultz put it at the forefront. Why? Both believed human beings should be treated decently, wherever. To improve relations between U.S. and Soviet Union had to improve human rights. President Reagan believed change was possible. Original conception of the strategy was called containment: we should contain them, and if we could contain them long enough it would cause them to look inward and they wouldn't like what they saw and would change. Worked into theory of d├ętente: We're here, they're there, that's life, the name of the game is peaceful coexistence. "Ronald Reagan never accepted that. Neither did I." If you think things can change, that means you think the pattern of governance can change. The way people are treated is an essential ingredient in that pattern of governance. First deal we made was a human rights deal; nature was such that hardly anybody knows about it. We got people who had rushed into our embassy way back during the Carter administration had asked to get out, to emigrate. The Soviet Union said "We'll let them out if you don't crow." They got out and Ronald Reagan said nothing. Convinced Soviets that Reagan was a man of his word, can take it to the bank. Big issue of the time was you weren't allowed to leave; Jewish population specifically was punished if they wanted to leave by losing their jobs and being treated badly. It created tension in the U.S./Soviet relationship. Looks costly to focus on that. Agenda was arms control, bilateral issues, regional issues (e.g., Afghanistan), and human rights. They resisted the human rights matters, but they had signed the Helsinki Accords, so we had a right to know. Gromyko left; Scheverdnadze, Gorbachev more receptive. Reykjavik. Schevardnadze said to Schultz: "George we might do something about some of these things you are talking about, but not to please you. Only if they make sense from our point of view." Schultz discussed that with Reagan a lot, developed an approach, carefully written out and read out slowly taken by note-takers: we are in and moving rapidly into the information age. New thing hitting the world. In this age you will be handicapping yourself very badly if you run a closed compartmentalized economy. it's to your advantage to have people able to move around and communicate more freely. Meetings with dissidents, well-publicized Seder at embassy in Moscow, Scheverdnadze criticized Schultz for meeting with the Jews, so offered to take them off the Soviets' hands, "We've got a big airplane on the tarmac." Changed the subject. But eventually came around. Information age: even copy machines were dangerous for Soviet government at the time. At Reykjavik couldn't get something copied, but no fax machine or modern copier; Soviets offered to use their old mimeographic machine.
29:50Reykjavik meeting formative: Turmoil and Triumph. Star Wars media fallout at the time. Dramatic concessions offered by Soviet Union but rejected by President Reagan. Since vindicated. But a huge amount of important stuff was put on the table at Reykjavik and eventually came to pass. Seminal meeting. Scheverdnadze later visited Schultz, private discussion in backyard of home at Stanford. Shultz: "When you and I entered office the Cold War was about as cold as it could get; and when we left office it was basically over. So what do you think was the turning point?" Scheverdnadze: "Reykjavik." At Reykjavik it was the first time leaders had talked to each other, sat down with each other. There, it's possible to make changes, but staff people bargaining never could have broken through. Did Reagan anticipate the end? Yes, read speech he gave at Westminster, London, 1982: "Communism would be on the ash heap of history." Change was inevitable. Are you optimistic about the future? Difficult time diplomatically, though rosy picture economically. Golden moment; we need a full-court press in diplomacy to keep it going. Have to watch out about energy supplies, protectionism, nuclear device acquisition by agents of terror, climate change--require major diplomatic effort. We need a larger State Department, will make more capable people and more attractive for first-class political appointees to come in. Colin Powell reversed what was a downward trend in terms of infrastructure of the State Department.

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COMMENTS (2 to date)
lisa harris writes:

Russell, Enjoyed the pod cast with Dr/Secretary of State George. He was great and so were you. lisa

Jayesh writes:

Hello Mr Roberts. I may seem like an unlike;ly candidate for an econtalk listner. I am a surgeon from India & have had no training in economics, except Atlas Shrugged. I have been fascinated by the economic system since i read Ms Rand, & you are the most incredible presenter i have seen of the suject.

When USSR collapsed, i was a teenager who knew nothing except what was told to me by the socialist indian media (& parents). The collapse was perceived as an unmitigated disaster in our part of the world with imminent subjugation of all the the big mighty evil Uncle Sam. Of course we know what hapened later, & it was really nice to hear a first person account of the event. I didn't know Mr Schultz was an economist, but i should have guessed. Thanks a lot for this podcast, & all others. (Wish i could be your Student). Jayesh

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