Debt, defense, and diplomacy: foreign policy dilemmas before the president-elect.

• Author: Freeman, Chas W., Jr.

Editor's Note: A distinguished retired diplomat analyzes the implications of the current economic crisis for U.S. foreign policy. The country can no longer afford a militarily-oriented, interventionist stance and must rely increasingly on diplomacy, he maintains; but its diplomatic capacity has been seriously weakened in recent years, and the power of other countries is rising in relation to America's. The new Administration faces both enormous challenges and severe constraints.

Ambassador Freemans's comments were delivered in a November 13 speech to the California State Association of County Retirement Systems. --Ed.

Last week Americans voted in record numbers for a new president. However you felt about the outcome, you must have been moved, as I was, by how the two candidates reacted to the election results. In defeat, Senator McCain was gracious, sincere, and--as always--put our country ahead of himself. His patriotic call for all of us to "help our new president lead us through the many challenges we face" reminded us why he deserves our respect both as a man and as a public figure.

President-elect Obama's remarks at his victory celebration in Chicago were eloquent and inspiring. Two-and-a third centuries ago, our founders pledged that we would be a nation in which "all men are created equal." We have finally made that proposition an unrefutable reality.

November 4, 2008, was a night to be proud--more proud than ever--to be American.

Now it is the morning after. We must turn our attention to the grim realities of our current situation. Those realities didn't change because we elected Barack Obama as our president. Given the magnitude of the problems we face, it wouldn't surprise me at all if, once the sting of defeat wears off, Senator McCain feels grateful that someone else has been saddled with these problems. As Joe McCain, John McCain's fiercely partisan younger brother, said the day after the election, "there is no time for looking back, not with what history will inevitably throw at us. ... Times are going to get more challenging, possibly even very dark ... Problems will be thrown at us we cannot even imagine .... I am going ... to try to help our President-to-be to bring the land to a safer, better place," he said. " ... For if Barack Obama fails, we all fail. Together."

Difficult Choices

In that spirit, I want to speak with you about some of the choices President-elect Obama and the American people now confront. A few of these choices are unavoidable; many entail painful consequences for us and for our foreign relations; most are difficult. The list of our problems is long, but I want to leave time for discussion, so I will try to be brief. That means I will be superficial--but that has never bothered me at all. Years ago, a wise man from the East told me that if something is worth doing, it is worth doing superficially. (He was from the East Coast of the United States. I can't remember whether he was in Washington then or still on Wall Street.)

I don't have to tell this audience that our current economic outlook is dire. We are entering a deep recession. It was born in America but now affects every country in the world. Our debt-ridden financial system and economic model have been discredited. In many ways, the Obama Administration faces a more difficult set of economic and related foreign policy challenges than the Hoover and Roosevelt Administrations did at the outset of the Great Depression.

In 1930, the U.S. national debt was less than 18 percent of our GDP. Almost all of it was held by American rather than foreign investors. Our government had no unfunded obligations. We therefore had plenty of borrowing capacity on which to draw for Keynesian counter-cyclical deficit spending.

Today, our acknowledged national debt comes to about three-fourths of our GDP, and bailouts and stimulus packages are rapidly driving it toward 100 percent. About two-fifths of this debt has been borrowed from entitlement programs, like Social Security, government employee pension plans, set-asides for veterans programs, and the like, many of which are themselves technically insolvent. The other three-fifths are held by investors, about half of whom are foreign, many of them instrumentalities of foreign governments like Japan, China, and major oil exporting countries.

Unfunded Obligations

It is politically incorrect to do so, but honesty obliges me to add that, if the federal government applied the accounting principles used by corporations and state and local governments to itself, its unfunded obligations would be recorded as debt. The official explanation for this accounting exception is that we can always decline to pay Social Security, Medicare, Medicaid, veterans' benefits, and so forth, so they aren't really debt. I don't know about you, but I am not reassured by this explanation. These unfunded obligations now total more than $60 trillion. Including them would bring our national debt to something well over $70 trillion, or more than five times our...