State of the World Jude Wanniski July 7, 1993

In December 1980, in the early days of the Reagan Revolution, I wrote a Polyconomics paper entitled "A Supply-Side Foreign Policy." The essay contended that it was insufficient for the incoming administration to fix the U.S. economy with supply-side tax and monetary reforms, for if the rest of the world persisted in going in perverse directions, the distress would feed back to the U.S. economy. "This is why it is so critical that the new President, at the very outset of his administration, shape a foreign policy that has as a key ingredient the transmission of classical economic reforms to the rest of the world." At the time, I also suggested that "In the ridiculous extreme, if the United States were the only country following perfect economic policies, and the rest of the world were following perfectly awful economic policies, everyone in the world would want to live in the United States, and they would find a way to get here, leaving the rest of the world empty." 

The Reagan Administration did not heed the advice in that paper, which essentially argued that it had to wrest control of the International Monetary Fund and World Bank away from the forces of austerity, the money-center international banks. Then as now, the banks were driven by the desire to have their Third World debts repaid. The banks would lend money to, say, Haiti or Jamaica or Zaire, on the condition that the countries use the funds to pay their bankers and on the further condition that the countries follow demand-side strategies that invariably meant raising taxes and easy money, via currency devaluation -- exactly the opposite of the Reagan prescriptions for the U.S. It wasn't Reagan's choice. He simply was no match for the Eastern Establishment, which permits its banking members to call the shots on such matters. 

Reagan never knew what hit him. On October 31, 1980, only days before Reagan's landslide victory, President Carter nominated A.W. Clausen of the Bank of America to be the new president of the World Bank. This was done even though Robert McNamara's tenure at the World Bank would not end until the following March. The bankers, fearful that Reagan would name someone out of their control, trumped up a "crisis" around the preposterous idea that unless McNamara's successor were named immediately, the Europeans would insist on naming his successor the following March. George Shultz, an Establishmentarian in good standing, was deputized by the banks to broker the deal with Carter's man at the White House, Lloyd Cutler. In 1973, when Shultz was President Nixon's Treasury Secretary, he had also responded to the wishes of the New York bankers in floating the dollar, which is what ultimately produced all that bad Third World debt to begin with. In 1980, Shultz was CEO of Bechtel, the international construction company that had fed off the bank loans to the Third World dictators, and had been introduced to Reagan only a month before by Caspar Weinberger, a vice president at Bechtel and an oldline Reaganaut. Reagan, who had just put in a full day of campaigning in Indiana, was tracked down in his hotel room and more or less informed by Shultz that he should sign off on the Clausen appointment for the good of the country! Yep, yep from the sleepy Gipper and the shabby deal was done. In similar fashion, the key international slots in the Reagan Treasury department, which controls the IMF, also fell into the hands of the banks, where they remained throughout the Bush Administration. 

The background is recounted here in the summer of '93, as we observe a Clinton Administration thoroughly dominated by the banks and their Ivy League economists, who are now proposing to apply to the United States the same prescriptions that have worked so well in Haiti, Jamaica and Zaire. The world economy, net, is standing still. The unemployment rate in the United States is still a mere 7%, but political leaders in Canada and Europe are confronting double-digit rates as a matter of routine. Japan has its first recession in 40 years after four years of being hammered by U.S. Treasury conditions, and President Clinton seems amazed that the Japanese he is now encountering in Tokyo seem so resistant to our latest nostrums. Africa is a plague-ridden wasteland after suffering forty years of financial imperialism at the hands of the international financial institutions. There is not a country in Latin America that we can recommend for investment at the moment, save Mexico, and Mexico only because the Ivy League economists who run the government, President Carlos Salinas de Gortari and his finance minister, Pedro Aspe, have thrown away their textbooks. The Russian and Eastern European economies have been smashed by the IMF/World Bank. Only China grows, in large part because it is taking the advice of Chinese capitalists in Hong Kong and Singapore.

Two of the hot topics in Washington at the moment are the North American Free Trade Agreement, NAFTA, and the immigration issue, both of which, of course, relate to the state of the world I addressed in 1980. The Eastern Establishment is eager to see the success of NAFTA, not to enhance free trade, but primarily to secure American investments south of the border. In this stagnant economy, which threatens to stagnate further if the Clinton tax plan is somehow enacted, there's not much chance NAFTA can pass. Generalized free-trade agreements rarely occur in a stagnant world economy, as the net benefits are spread unevenly. NAFTA will happen when the U.S. and Mexican economies are already expanding. The same is true of the Uruguay Round. The problem in the world economy is not due to tariff or non-tariff barriers to trade, but to the excessive tax and regulatory barriers to entrepreneurial capitalism within each country of the industrial world.

Illegal immigration, the other hot topic, would actually recede as a problem if the Clinton tax plan were to be enacted next month. In the extreme, if enough damage is done to the U.S. economy, Americans will be building wooden boats in Florida for escape to Haiti! Now, the problem runs in the other direction. Several hundred thousand illegals a year are funneling into the U.S., and it doesn't seem likely that any barriers will stop them. It is still more promising here than almost anywhere else. Yet there is no supply-side domestic policy in place, except insofar as Alan Greenspan and the Federal Reserve work to preserve the purchasing power of the dollar. People will always leave countries with bad money in search of countries with good money. In this sense, we might say Greenspan is a source of the illegal immigration.

With illegals from Asia and Latin America showing up on street corners all over the country, the debate has resumed on whether immigration is good or bad for the United States. Hardly anyone is making the argument that immigration is bad for the country the immigrants are leaving. It's true the most entrepreneurial and adventurous young men and women are always those who leave a stagnating country for a new land of opportunity. Wouldn't it be better for all concerned if instead of importing these folks we exported our Statue of Liberty, in the form of a supply-side foreign policy? 

Yes, but the Establishment is very stubborn, and will not admit there is this better way. We can be No. 1 in the world by generously sharing ideas of growth with the rest of the world. Or, we can try to remain the No. 1 superpower even while stagnating, by somehow persuading the rest of the world to go into decline. We're at this crossroad now. When President Clinton gets back from Asia with his empty bag, and he confronts a hostile Congress with an empty plan, it will be about time for him to throw away his textbook and start from scratch.