Early Thoughts on the Wall Jude Wanniski November 15, 1989

We've been resisting commentary on the dramatic developments in Berlin for the same reason the Bush Administration has seemed passive to many observers. I think of what is occurring as a political avalanche, a cascade, which we knew had to happen, the only question being what particular snowflake would cause the slide. The snow storm itself is the crisis of the Soviet economy, and in September, when Fed Governor Wayne Angell and I were in Moscow, we advised our hosts that they had not years to make an adjustment to market socialism, but months. The avalanche itself is an interesting spectacle, but of greater interest to a political economist are questions of the equilibrium at its end. What will the mountain look like then?

In a profound way, the Berlin Wall came down as the curtain to one grand opera, the overture to the next. Historic forces arranged to have it precede the Bush-Gorbachev meeting in the Mediterranean. The outburst in our backyard, the desperate rebel offensive in El Salvador, Daniel Ortega's saber-rattling in Nicaragua, are also part of the shifting historic furniture on this grand stage. At the Wall, the most important question answered for these two leaders is that once everyone in East Germany had the opportunity to get out, not many did.

This dress rehearsal is a comfort to Mr. Gorbachev, who will soon have to do the same. It's also an important negotiating point for Mr. Bush, whose main objective at the meeting will be to persuade Gorbachev that such bold steps will have advantageous, not embarrassing, results, and that it is in Western interests that they be advantageous to him. The President must offer to hold his hand in some way as Gorbachev takes Moscow toward its leap of faith, and because the snow storm is economic, that's where our help must come. A major farewell to arms is not yet at the top of the agenda. If Mr. Gorbachev is going to gamble on the economy, he must have us cover some of his bet. And if the gamble pays off in a way that ends Politburo fears of an exodus, an unraveling of the union itself, arms talks can move higher on the agenda. I'd expect the insurgency in El Salvador to end, elections in Managua to proceed, but Fidel Castro to be held in reserve for the time being.

German unification will take a long time, perhaps the rest of the century. The integration jbf Europe has been unfolding for decades and will be only partly completed in 1992, even if there qlre no hitches. Even if the language and culture and will are no problem to unity, knitting together two complex political economies is no mean feat. Incredibly complex questions exist in multiple dimensions, involving public debt, pension systems, health and welfare commitments. These can't possibly be solved without first creating a political umbrella that enables these difficulties to be approached, let alone solved, in a fashion that seems equitable to the combined electorates. Commercial intercourse can expand at a much more rapid rate between the Germanies, but capital flows from West to East will still be clouded by political issues involving U.S.-Soviet, NATO-Warsaw Pact relationships that can only be resolved at a separate level and pace of discourse.

It should come as no surprise to our clients that we believe this political bull market in large part stems from the renaissance of classical growth theory and the Reagan Revolution. As in the financial bull market we've enjoyed since April 1978, when the Steiger Amendment on capital gains took root, there will be plenty of political wiggles, bumps, even crashes ahead. Euphoria is okay for a moment, but I'm happy to see President Bush and his team keeping their seat belts buckled.