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Five Big Ideas

1. We should privatize Social Security and direct Americans to invest their retirement nest eggs in the market.

As things stand now, of course, Social Security funds are invested in those low-yielding U.S. government securities. How dull! How collective! How safe!

2. The greatest threat to the U.S. economy is inflation, so the Federal Reserve should keep interest rates high, maybe even raise them to cool down the economy.

This idea was getting harder and harder to sustain even before the current crash - uh, correction. Manufacturers in depressed Asian economies were already cutting the prices of their exports, making it impossible for U.S.-based manufacturers to raise prices here. Commodities, from food to oil, were already tanking. Inflation has been running at about 1 percent per year. Nonetheless, since the late '70s the Fed has lived only to fight inflation; even now, it has set real interest rates of around 4 percent and expressed concern that wage increases for low-income workers might re-ignite a wage-price spiral. (These were, by the way, the first wage increases for low-income workers in decades.)

Now that the specter of global deflation is quite real, and that of domestic recession at least imaginable, the Fed is being implored to cut its rate just a bit, encourage more consumer spending (since we can't export our way to prosperity like we used to, we'll just have to buy more here) and make our rates a little less attractive for those global speculators yanking their capital out of every other country (which does us no favor, since we can't sell exports if everyone else is flat on their backs). This is still a tough call for the Fed, since it may mean continued wage increases for those low-income workers. Damn!

3. With communism gone, there is no longer a systemic threat to Western democracies, much less a Russian threat to capitalism.

This is a variant of Francis Fukuyama's "End of History" thesis - that the world is moving irrevocably toward capitalism and democracy, and ain't nobody, certainly not post-communist Russia, gonna stop it. Accordingly, what we commended to and imposed on "emerging market" nations like Russia was a laissez-faire form of capitalism. The sooner they passed muster with Milton Friedman - cutting back the regulations and the welfare state; getting out of the way of all private enterprise - the sooner we'd all be one big happy global village.

(A footnote is in order here: Just before Thanksgiving 1991, I had my one and only one-on-one sit-down interview with then-Arkansas Governor Bill Clinton, at which I asked him whether the U.S. should be commending a Keynesian mixed economy or a more laissez-faire model to the nations of Eastern Europe and the soon-to-be-former Soviet Union. More laissez-faire, he answered, and that's exactly what we've commended, and imposed.)

In one sense, Russia actually overshot the anti-statist Friedman bias. A cowboy capitalism arose in which a small group of businessmen came to dominate what passed for an economy, treating banks as their playthings, making the wackiest loans and then, in the past couple weeks, converting their rubles to dollars rather than using them to repay creditors or back up their depositers' accounts. For its part, the Russian state never quite figured out how to collect taxes - a theoretical paradise for an Ayn Rand apostle, but a living hell for Russians who, oddly enough, expected the government to help them out.

Meanwhile, the value of the entire Russian economy (its gross domestic product) has declined at least by half in the years since the Soviet Union gasped its last, a barter economy has largely replaced the circulation of currency, and the lifespan of the average Russian male has declined by seven years during these seven years. Now Russia has effectively repudiated its debt, creating the possibility that other beleaguered nations may do the same - a dagger pointed at the heart of the global economy.

Somewhere along the line, we forgot that capitalism periodically destabilizes itself. Whether that qualifies as a systemic threat is, I suppose, a theological question.

4. The role of public transnational financial institutions, such as the International Monetary Fund (IMF), should be to impose austerity on nations that accept its bailouts, so that financial order can be restored and foreign lenders reassured.

Thus the IMF imposed budgetary cutbacks on South Korea, whose fiscal house had been in order for years, and on a range of Asian nations. Thus it gave all their banks the green-eyeshade treatment, slowing their loans to a trickle. And there's the rub: If foreign money has stopped coming in (which is usually the case when the IMF intervenes) and the government has stopped spending and the banks have stopped loaning, who, exactly, is putting money into circulation? In East Asia today, the answer is a resounding "Nobody."

The consequences for East Asians have been devastating, on a scale that is difficult to imagine. In Indonesia, for instance, the annual per capita income when the recently ousted President Suharto took power in 1965 was $260. By last year, it had risen to $1,000, nearly a four-fold increase. This year, it declined all the way back to where it started: $260. Indonesia, by the way, is the fourth-largest nation in the world, with a population of 210 million, probably no more than 200 million of whom hate our guts.

The conventional wisdom on IMF bailouts always ran counter to the lessons of our own Depression, in which the Herbert Hoover-Andrew Mellon policies of austerity just deepened the general woe. It required the increased public spending of the New Deal and the build-up to World War II - the very opposite of the IMF's prescriptions - to bring about a recovery. Yet the West's leading financial institutions have steadily discounted the lessons of our own economic history, which recommend a more equitable capitalism than they were willing to entertain. As such, they have today pushed the world to the brink of a global recession.

5. Forget Monica. The economy will save Clinton.

Poor Clinton.


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