Foreign Policy Starts in the Neighborhood

A Conversation with George Shultz by William McKenzie and Matthew Rooney

Over the past four decades, George Shultz has had a unique perch from which to watch the North American continent grow in prosperity. But while North America stands as a global powerhouse, the former secretary of state reminds us that we still have room to grow.

Secretary of State George Shultz and President Ronald Reagan on December 4, 1986 Secretary of State George Shultz and President Ronald Reagan on December 4, 1986. (White House Staff / Ronald Reagan Presidential Library, National Archives and Records Administration)

George Shultz’s resume is as authoritative as any in American politics. Secretary of Labor. Director of the Office of Management and Budget. Secretary of the Treasury. Secretary of State. The Republican leader has seen America’s challenges and strengths from all angles. An economist who has taught at Stanford, MIT and the University of Chicago, Shultz also has written widely about North America’s economic potential.

Now a respected scholar at the Hoover Institution, Secretary Shultz recently visited the Bush Center to talk about that potential, as well as America’s role in the world.

Two years ago you wrote in The Wall Street Journal that North America stands to be a global powerhouse. Are we there yet?

Yes, we’re there. We’re there from the size of our continental economy. We’re there because we have a region of the world that has a certain stability and cohesion.

Foreign policy starts in your neighborhood. If you have a good neighborhood, you have a basis for moving elsewhere. If you have a neighborhood in chaos, there’s not much you can do constructively. North America is important to us as an economy, important to us as a sense of stability, and important to us as people.

I was always surprised to learn that there are a million Canadians living in California. You don’t even know it. And there are lots of Mexicans.

People don’t realize that fertility in Mexico has dropped way down. It’s at replacement level. When all of those kids showed up at our border about a year ago, they weren’t Mexicans. They were Central Americans. If you really want to do something about illegal immigration, you better pay attention to Mexico’s southern border and the conditions in Guatemala and in El Salvador.

The debate we’re hearing now in the U.S. suggests that the North American relationship, especially the Mexican relationship, is hard for us.

We need to have people examine reality. Look at our trade picture.

In the Reagan administration, we negotiated a free trade agreement with Canada. And George H.W. Bush drafted the North American Free Trade Agreement and the treaty got ratified in the Clinton administration. There’s a bi-partisan element to the whole thing. Now, Canada is our biggest trading partner by far. Mexico is our third largest trading partner. Our imports from Mexico contain 40 percent of U.S. content. There is no trading relationship like that anywhere in the world. Our imports from Canada contain 25 percent U.S. content. By contrast, our imports from China contain four percent U.S. content.

If you have a neighborhood in chaos, there's not much you can do constructively.

This is not just a trading relationship. It is an integrated process of making things that people in both countries want.

How do you see North America playing into our foreign policy over the next four years?

As the President of the United States goes around and does things, he or she does it from a base that’s reasonably stable. Compare us with the Middle East. Compare us with Europe. We have a much better situation. If you’re living in a nice neighborhood, a good neighborhood, you can go somewhere and do something. If you live in a bad neighborhood, you’re afraid to leave home. It makes all the difference.

You have been in education for a long time. How do you feel about our ability to educate the workforce that North America needs?

Canada is doing a good job, we’re doing a lousy job, and Mexico is doing a terrible job. This is something we need to work on hard. That includes the way our education system works with Latino students. We’re not doing anything like the job we should be doing.

The Bush Institute has a working group of experts on North America. Business leaders in that group, especially Mexican business leaders, consistently say that it is difficult to find the personnel they need. There is a disconnection between the private sector and educational sector.

There’s nothing wrong with the kids. They are perfectly capable. You’ve got to give them a chance by putting them in good schools and presenting stimulating environments. Their parents are not holding them back. Their parents want them to thrive.

We need to emphasize school choice. Your kid should be able to go to the school he or she wants to attend. Schools then would have to compete by offering a good education. If schools have lousy teachers, they would get rid of them.

Are you encouraged with the education reforms that Mexican President Enrique Piña Nieto has tried, such as improving teacher standards?

Yes. The Mexican president has initiated some very important reforms in education, energy and industrial practices. They still have to take hold, but at least they have some things started.

What needs to happen to ensure energy transformations in Mexico and elsewhere help make North America more energy secure?

We have the good fortune in our country to have a good research base and an entrepreneurial culture. It was a Texan who took all the background knowledge about horizontal drilling and figured out how to get oil and gas out of these shale deposits. All of sudden, we have a gusher.

This can happen in Mexico and it’s starting to happen. They’re starting to have leases, for example.

Between Canada, Mexico and the U.S., we should be able to become not only energy independent, but an energy exporter. And I say get real about the Keystone pipeline. This is secure energy.

Between Canada, Mexico and the U.S., we should be able to become not only energy independent, but an energy exporter.

In the energy picture, you always have to keep in mind security, economics, and the environment. And don’t neglect the environment.

The fracking revolution has cooled down some…

The prices have gone down, but still the expertise is there. It can always come back. There is continued work going on to make the cost further down, so that’s not going away.

So, you see this shift as a more of a short-term phenomenon than a long-term one?

Our fracking capability is long-term. People know how to do it. They’re working to get the costs down even further. And with natural gas prices being low, you don’t have to yell about coal production. Coal is not economical compared to natural gas.

We hear a lot about China as an investor, especially in different parts of Latin America. And we hear about jobs being re-shored back from China to Mexico. Should we be welcoming China into North America or should we be concerned about China making investments?

China is a big country with a big economy. There’s no problem with people out to make investments as long as we are careful about national security. We have to be especially concerned about the cyber activity in China. They have been stealing intellectual property right and left. I am not enough of an expert in the field, but we better figure out how to deal with it.

What do you see the North American labor market looking like over the next four-to-five years?

First, we need to kick-start our own economy. It’s easy to do. Get the George W. Bush and Ronald Reagan policies back into effect and our economy will take off. We’re imposing too much regulation.

The 1986 Tax Reform Act is there as a template to reenact on a personal tax basis. The corporate income tax system makes no sense. Why do you want a corporate tax system? It causes companies to operate abroad and keep their money there. That’s ridiculous. We can change it easy.

Then we need regulation that works. We don’t need the kind of regulation that holds people up and creates uncertainty. That is particularly hard on small businesses. They can’t afford a big staff of people who worry about compliance with everything.

We need regulation that works. We don’t need the kind of regulation that holds people up and creates uncertainty.

How would you explain to skeptics the importance of the flow of people, goods and capital across North America? As you know, we’re having a debate in this country about tariffs, immigration flows and walls along the border.

We have to realize that we do have problems on the border. Some sections are basically lawless and dominated by drug lords. People don’t cross the drug lords.

Our war on drugs is a failure. I think drugs are bad for people and for society. We want the most effective way to do something about that. But the way we’ve done it is not working. We have the idea that if we keep drugs out of this country then people won’t take them. The system hasn’t worked. Drugs are here.

I remember way back in 1970, when I was director of the budget in the Nixon administration. I was riding up to Camp David with Pat Moynihan, who was counselor at the White House. He was kind of a self-appointed drug czar. I had a presentation to make so I’m studying my notes. Pat’s in a state of euphoria and says to me, “Shultz, do you realize we just had the biggest drug bust in history?” And I said “Congratulations,” and went back to my notes. He said “You don’t get it, this was 50 trillion tons of cocaine.” I said “Wonderful.” He said, “But this was in Marseilles. We’ve broken the French connection.” I said “Congratulations.” There was sort of dead silence. He said, “Shultz, I suppose you think as long as long as there is a big profitable demand for drugs in the United States, there will be a supply.” I said “Moynihan, there’s hope for you.’”

George Shultz discusses North America George Shultz discusses North America at the George W. Bush Presidential Center.  (Andrew Kaufmann / George W. Bush Presidential Center)

So, the supply comes. We have a high drug use in this country, if you look at other countries in the Organization for Economic Co-operation and Development. We need an effective way to deal with it. We had a campaign to get people to curb smoking and it worked. Some people still smoke, but you don’t think they’re smart. We could have a campaign pointing out to people these drugs are bad for you. I’m not happy about these states that are legalizing marijuana as though it’s a great thing.

There is an interesting experiment in Portugal, which we should learn more about. Drugs are still illegal there, but they have decriminalized their use and emphasize treatment centers. If you’re caught taking drugs in Portugal, you can go to a treatment center. You don’t go to jail. You get help.

We should be working on things that get people to realize that taking drugs is a bad thing.

If we deal with issues like the border and drugs, will that lay the foundation for eventually getting immigration reform?

Everybody knows that we need to reform our immigration system. President Bush 43, John McCain and others put together a pretty good program that didn’t jell, but it’s right there. We need to have a guest worker program. We need to do more about the best and the brightest. When people graduate from SMU or somewhere, we should put a green card on their diploma.

We need to do more about the best and the brightest. When people graduate from SMU or somewhere, we should put a green card on their diploma.

We have a demographic problem ourselves, which people don’t realize. Our age groups under 65 aren’t growing. The fastest-growing age cohort is 65-plus. Participation by younger groups in the labor force is at a low point.

We should reform Social Security so once you reach your ability to draw full benefits, there are no more deductions from your payroll. Workers would have much bigger take home pay. That would be an incentive to keep working.

Doing things like that would keep people in the labor force. Then, we need to get the best and the brightest from around the world to come here and keep them here.

What is your take on the resurgence of nativism we’re seeing in the polls? Do you take it terribly seriously?

I see it but I don’t like it, so I am arguing against it. I don’t think it’s in our best interest.

As you look over the next four years, what are the most persuasive arguments about why American should be engaged in the world and leading the world? We also are seeing a resurgence of isolationism.

At the end of World War II, which I fought in, some gifted people like (Presidents) Truman and Eisenhower looked back. What did they see? They saw two world wars. They saw the first one settled on rather vindictive terms that helped lead to the second. They saw that millions of people were killed in the Second World War. They saw the Holocaust. And they saw the Great Depression.

They said to themselves, “What a crummy world but we’re part of it, whether we like it or not.” So they thought to take leadership in building a better world.

You think we can sit here as Middle East terrorism rises and think it is not going to affect us? You’re wrong. We need to be ready to take leadership.

You think we can sit here as Middle East terrorism rises and think it is not going to affect us? You’re wrong. We need to be ready to take leadership.

What that means exactly varies from place to place, but here is the playbook on how to do it:

One, when the U.S. sets out to do something, we do it. When we say we’re going to do something, we mean it. Establish that you can achieve what you set out to achieve.

Two, be realistic, don’t kid yourself. No rose-covered glasses. At the same time when you see an opportunity, don’t be afraid to recognize it.

Three, be strong, obviously militarily but you can’t be militarily strong unless you are strong economically. Then, have that spear that says, “America, we’re the good guys, we’re proud of ourselves.” Then, we need to figure out what our agenda is and negotiate on the basis of that agenda.

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