Even when the European-Iranian agreement to halt Iran's uranium-enrichment program looked solid, the United States was blunt in its disapproval. The ink was barely dry on the accord when the Bush administration, it appears, began trying to derail it.

First, rather than endorse the accord, Secretary of State Colin Powell essentially accused the Iranians of lying when they said their nuclear program was for peaceful purposes. He announced that new intelligence showed Iran is developing a nuclear warhead to arm its Shahab-3 ballistic missiles. Then, at a Nov. 20 meeting of heads of state in Santiago, Chile, President Bush stated unequivocally that Iran is trying to build a nuclear weapon.

Why would the administration take such a combative stance? Because hard-liners within the administration thought Tehran would use the settlement to buy time for building nuclear weapons, and that the United States would be better off bombing Iran's suspected weapons sites.

Proponents of using military force against Iran have not yet won the argument within the Bush administration. But the past two weeks of strong pronouncements about the threat Iran poses suggest that the military option may be gaining ground. And Iran's last-minute attempts to maintain some enrichment capabilities -- which by press time Friday were threatening to kill the European agreement -- no doubt strengthened the hard-liners' hand.

Before the United States even considers such a drastic step as airstrikes against suspected nuclear weapons sites -- or even trying to compel the United Nations to endorse new economic sanctions against Iran -- it is essential that our leaders be clear about what they are trying to accomplish in Iran and whether such actions will help or hurt.

If the ultimate goal is to create a democracy -- one that would not fear the United States and therefore have less use for the bomb -- then dual-track diplomacy with Iran's government and with its people is more likely to work than military action.

Probably the most important question the administration's leaders should ask themselves is whether Iran, even a nuclear-armed Iran, poses a direct threat to the United States and its allies.

The answer, we believe, is no.

The mullahs who rule Tehran long ago gave up their ideological quest to "export'' revolution. Like the last generation of octogenarians who ruled the Soviet Union, Iran's leaders today want nuclear weapons as a means to help them preserve their power, not to help them spread their model of theocratic rule to other countries.

Deterrence works

In other words, even if Iran's rulers succeeded in building nuclear bombs, they would be very unlikely to take on the United States and its vast nuclear arsenal or to attack Israel. (The mullahs in Tehran understand that any nuclear attack against Israel would trigger full retaliation from the United States.) In dealing with Iran, deterrence works.

Tehran would also be unlikely to pass a bomb to Islamist terrorists, despite its support of Arab terrorist organizations that continue to attack Israel. One reason, again, is deterrence. Iran's rulers know that the United States would probably be able to trace the weapon back to them and retaliate.

The threat of a nuclear Iran comes, instead, from the reaction it is almost sure to spark in the region and the world, possibly sending Egypt and Saudi Arabia on their own quests for nuclear weapons.

Such an arms race would undermine the longstanding Treaty on the Non-Proliferation of Nuclear Weapons, an agreement signed by nearly 190 countries, that has proved indispensable in preventing the spread of nuclear weapons.

Bush administration hard-liners want to save that arms-control treaty by using arms. In advocating a "surgical'' military strike against Iran's most important nuclear facilities, including the once hidden enrichment plant in Natanz, they cite Israel's airstrike against Iraq's nuclear complex at Osirak in 1981 as a model of success. They argue that an American (or Israeli) strike would not end Iran's nuclear aspirations, but would dramatically slow its program and make the mullahs reconsider the costs of trying to restart it.

Attack would backfire

But a pre-emptive military strike would instead do just what the hard-liners in Tehran hope for: It would unite their people behind them.

Even a precise bombing campaign would kill hundreds if not thousands of innocent Iranians; destroy ancient buildings of historical and religious importance; trigger an Iranian counterstrike, however feeble, against American targets and friends in the region, and spur the mullahs to increase their direct support for American enemies in the Shiite part of Iraq.

Even more important, an attack would only encourage Tehran to redouble its efforts to build a bomb, just as Saddam Hussein sped up his efforts after the 1981 strike. It would also hurt the democratic opposition movement inside Iran, which is already in retreat and cannot afford another setback. After an attack, Iranians, not unlike Americans, are sure to rally around the flag and their government.

If the administration decides, in the end, that American military options are limited and counterproductive, the only serious way to impede the development of Iranian nuclear weapons is through negotiation. Iran's recent accord with France, Britain and Germany is only temporary, and negotiations are expected to continue.

If the United States were to jump in now, it could try to ensure that our European allies accept nothing less than a permanent and verifiable dismantling of Iran's enrichment capabilities, as well as banning any plutonium production.

Allowing the Iranians to enrich even some uranium, which they say will be used merely to feed their nuclear power plant, makes it too easy to cheat. To make the deal work, the United States would need to join with Europe, Russia and China in pledging to guarantee Iran a permanent and continuous supply of enriched uranium. To make the deal even more attractive, the fuel could be offered at reduced prices.

Even under the strictest inspection regime, Iran's leaders will cheat, as they have often done in the past, and they will eventually divert enriched uranium from peaceful to military purposes. But the harder and more transparent the allies can make it, the longer it will take Iran to begin building bombs.

In the long run, the world's only serious hope for stopping Iran from developing nuclear weapons is the development of a democratic government in Tehran. A democratic Iran will become an ally of the Western world no longer in need of a deterrent threat against the United States.

Democracy in Iran therefore obviously serves U.S. national interests. Yet Bush administration officials (as well as their predecessors in the Clinton, Bush and Reagan administrations) have not succeeded in developing a strategy for advancing the cause of Iranian democracy.

New strategy

What is needed is a radical new approach that would nurture change from within the country, in alliance with Iran's democratic movement, rather than impose change from without.

A first step would be to establish an American presence in Tehran, as many in Iran's democratic opposition have proposed. Now decades old, the U.S. policy of isolating Iran has not weakened but instead strengthened its autocratic government.

Of course, we are not suggesting that the United States open an embassy in Tehran and turn a blind eye to human rights abuses; that would only contribute to the further consolidation of the mullahs' hold on power. But we are suggesting a new strategy that would allow American government officials, as well as civic leaders, academics and business people, to engage directly with Iranian society.

This engagement cannot occur on a widespread scale without some level of diplomatic relations and some revision of the American sanctions against Iran. Then, more Western foundations would be able to make grants to pro-democracy Iranian organizations, while business people -- and especially the Iranian-American business community in the United States -- would be able to leverage their capital and know-how to influence economic and political change inside Iran. A U.S. presence in Iran would, not incidentally, also enhance the West's ability to monitor Iran's nuclear program.

Critics of engagement argue that diplomatic relations with Iran will reward this "axis of evil'' member for years of supporting terrorism and pursuing nuclear weapons. In fact, an American presence in Iran is the mullahs' worst nightmare.

Iran's government has long used its ongoing tensions with the United States, as well as the embargo, as an excuse for the economic difficulties that are, in fact, the direct results of the regime's incompetence and corruption. Tehran's leaders have conveniently labeled nearly all of their opponents as "agents of America.''

Most important, part of the regime's self-declared legitimacy lies in its claim to be the only Muslim country fighting what it sees as U.S. imperialism. If the United States could prove it's not an enemy of the Iranian people, the legitimacy of Iran's leaders would diminish.

Reagan's course

In the first years of his presidency, Ronald Reagan labeled the Soviet Union the "evil empire'' and went out of his way to avoid contact with such a regime.

Over time, however, Reagan charted a new course of dual-track diplomacy. He engaged Kremlin leaders (well before Gorbachev) in arms control, while also fostering contacts and information flow between the West and the Soviet people in the hope of opening them up to the possibilities of democracy.

In the long run, it was not arms control with the Soviets, but democratization within the Soviet Union, that made the United States safer.

If George W. Bush desires a foreign-policy legacy as grand as Reagan's, now is the time to think big and change course as dramatically as Reagan did.

Earlier this month, the so-called EU Three--Britain, France and Germany-- achieved an important victory for global security, convincing Iran to suspend its uranium enrichment and plutonium reprocessing activities pending further negotiation on its nuclear question. Though Iran claims that it does not desire a nuclear bomb, the West has long been skeptical of the oil-rich state's contention that it seeks a nuclear fuel cycle for energy purposes alone. Europe and the United States (and of course Israel) will sleep better knowing that Tehran is not pursuing enrichment activities, whatever their alleged purpose.

But the EU3 agreement, which fails to discuss consequences for Iran if it breaks the deal, is vulnerable to being undermined not only by Iran but also by the United States; both have already raised eyebrows in the wake of the accord. Iran raced to produce uranium hexafluoride, a gas that can be enriched into bomb fuel, before it began to observe the temporary suspension on Monday. And both President George W. Bush and outgoing Secretary of State Colin Powell have publicly aired their suspicions that Iran will continue its drive for nuclear weapons under cover of the deal.

At the moment, administration hawks are pressing to confront the mullahs at the United Nations Security Council, where economic sanctions could be considered; calls for using force and for regime change are likely to follow.

Military action is inadvisable at this point, because of a dearth of solid intelligence and the secretive, geographically diffuse nature of Iran's nuclear sites. If the issue reaches the Security Council with the United States and Europe continuing along divergent paths, the inevitable deadlock will deal a severe and lasting blow to international security. Therefore, the agreement must be fortified to keep the Iranians honest, the Europeans effectively engaged and the U.S. hawks bridled.

This can be achieved through a U.S.-European accord laying out trigger mechanisms for specified consequences if Iran violates certain benchmarks. For example, if Iran fails to allow inspectors the access accorded by the Nuclear Nonproliferation Treaty's additional protocol--which Iran is provisionally observing pending ratification--or resumes enrichment and centrifuge-building activities, it could face severe economic sanctions, censure by the Security Council (necessitating cooperation from Russia and China), or in the event of hostility, a forceful response.

We don't know yet whether Tehran will play by the rules. The regime has mastered the art of behaving badly and then seeking rewards for getting back into line. To date, the Europeans have played into its hands, offering carrots for compliance without wielding sticks to punish violations.

Therefore, the Bush administration's apparent comfort with a military option can serve as an important deterrent against Iranian cheating, arming the EU3 agreement with teeth that it would not otherwise have. Iran desires economic incentives but does not yet desperately need them; without a credible threat of U.S.-backed sanctions imposed by the international community, the mullahs can simply decide one day that the restrictions have ceased to be worth their while, and break any deal as though it were merely a business contract.

For the United States, accepting the EU3's carrot-based approach (provided the benchmarks are added) will show the world that it still supports negotiated diplomacy and multilateralism, even in cases where military threats loom. Participating in this framework will also send a message to Iran that the United States is not ruling out renewed relations. This would resonate with the largely pro-American Iranian populace, who despise their regime and are seeking inroads to break free of it.

But if the United States instead presents itself as a unilateralist maverick, it will hinder its own interests; the only thing Iranians disdain more than the mullahs is outside meddling with their deeply nationalistic desire for self-determination. The more overtly hostile the United States acts toward Iran, the more the mullahs are able to spin America's posture to alienate Iranians against the "Great Satan."

The way to keep the Iranian regime in check while speeding its demise is to insure the nuclear agreement through benchmarks and triggers, and then give the mullahs exactly what they ask for in terms of increased access to international institutions like the World Trade Organization.

Such carrots can also be Trojan Horses, allowing the forces of democratic reform within Iran to blossom by enabling pro-democracy elements to make global connections. The U.S. and Europe should saddle up those horses together.

Are federal fiscal deficits accelerating deindustrialisation in the United States? For four decades, employment in U.S. manufacturing as a share of the labour force has fallen further and faster than in other industrial countries. In the mid-1960s, manufacturing output was 27 per cent of gross national product and manufacturing's share of employment was 24 percent. By 2003, these numbers had fallen to about 13.8 percent and 10.5 percent respectively. Employment in manufacturing remains weak, with an absolute decline of 18,000 jobs in September shown in the Labor Department's payroll survey.

At the same time, the orgy of tax-cutting, with big revenue losses, continues unabated. On October 6, House and Senate negotiators approved an expansive tax bill that showers businesses and farmers with about $145bn in rate cuts and new loopholes -- on top of what were already unprecedented fiscal deficits. These are principally financed by foreign central banks, which hold more than half the outstanding stock of US Treasury bonds. Moreover, meagre saving by American households is forcing US companies also to borrow heavily abroad.

The upshot is a current account deficit of more than $600 billion a year. America's cumulative net foreign indebtedness is about 30 percent of gross domestic product and rising fast. How will this affect manufacturing? The transfer of foreign savings to the US is embodied more in goods than in services. Outsourcing to India aside, most services are not so easily traded internationally. Thus when U.S. spending rises above output (income), the net absorption of foreign goods -- largely raw materials and manufactures -- increases. True, in this year and last the high price of oil has also boosted the current account deficit. However, since the early 1980s, the trade deficit in manufactures alone has been about as big as the current account deficit -- that is, as big as America's saving shortfall (for more detail, see http://siepr.stanford.edu).

If U.S. households' and companies' spending on manufactures is more or less independent of whether the goods are produced at home or abroad, domestic production shrinks by the amount of the trade deficit in manufactures. The consequent job loss depends on labor productivity in manufacturing, which rises strongly through time. If the trade deficit in manufactures is added back to domestic production to get "adjusted manufactured output", and labor productivity (output per person) in manufacturing stays constant, we get projected manufacturing employment. In 2003, actual manufacturing employment was just 10.5 percent of the US labor force, but it would have been 13.9 percent without a trade deficit in manufactures: the difference is 4.7m lost jobs.

In the 1980s, employment in manufacturing began to shrink substantially because of the then large current account deficit attributed to the then large fiscal deficit: Ronald Reagan's infamous twin deficits. With fiscal consolidation under Bill Clinton, the savings gap narrowed but was not closed because personal saving weakened. Now under George W. Bush, the fiscal deficit has exploded while private saving is still weak. The result is heavy borrowing from foreigners and all-time highs in the current account deficit. The main component remains the trade deficit in manufactures, intensifying the shrinkage in manufacturing jobs.

Is there cause for concern? Note that I do not suggest that the trend in overall employment has decreased, but only that its composition has tilted away from tradable goods -- largely manufactures. In the long run, growth in service employment will largely offset the decline in manufacturing. However, the rate of technical change in manufacturing is higher than in other sectors. It is hard to imagine the US sustaining its technological leadership with no manufacturing sector at all.

More uncomfortably, more Congressmen, pundits and voters feel justified in claiming that foreigners use unfair trade practices to steal U.S. jobs, particularly in manufacturing, and hence in urging protectionism. The irony is that, if imports were somehow greatly reduced, this would prevent the transfer of foreign saving to the United States and lead to a credit crunch, with a possibly even greater loss of US jobs.

The answer is not tariffs, exchange rate changes or subsidies to manufacturing that further increase the fiscal deficit. The proper way of reducing protectionist pressure and relieving anxiety about U.S. manufacturing is for the government to consolidate its finances and move deliberately towards running surpluses -- in short, to eliminate the U.S. economy's saving deficiency.