Cuban Pressure Cooker Jude Wanniski August 22, 1994

President Clinton's decision to tighten the U.S. embargo on Cuba pushes confrontation with Fidel Castro to a point that may explode within the next two months. It will influence all other considerations in Washington, including the debate over health care as well as the November elections. The anti-Castro forces in Havana and in the Cuban-American community are using this political window of opportunity to take their most serious shot at Castro since the Bay of Pigs invasion. One cynical view in circulation, which we do not dismiss, suggests a concerted attempt to push the confrontation to a point of no return: A Cuban crisis -- with sustained riots and civil unrest throughout the island in September and October -- would offer the Clinton Administration welcome political distraction from its problems in Haiti and its setbacks on health care on Capitol Hill. 

Earlier this month the Castro regime had unwittingly obliged by announcing its latest plans to reverse the sickening decline of the Cuban economy by raising taxes in order to halt the domestic inflation and collapse of the peso. In my late May visit to Havana at the invitation of the Castro government, I advised every official I saw that the course they were on was doomed to failure; it is essentially the plan the International Monetary Fund had developed for Mikhail Gorbachev's perestroika, which led to the unraveling of the Soviet Union and Gorbachev's departure. The Cuban economy was already in desperate shape in May, the people uncertain from day to day how they would be fed. Only the lifeline between the island population and friends and relatives in the Cuban American community -- the flow of hard currency and shipments of vitamins and medicine -- kept the political cauldron below the boiling point. The failure of the economic reforms and the stubbornness of the Castro regime to stick with its "slow motion shock therapy," as I called it, has extinguished any hope that Castro will somehow find a way back to prosperity. In late July, Rep. Charles Rangel [D-NY], who had asked me last year to offer economic advice to Cuba for humanitarian reasons, called to tell me that my trip to Havana had been fruitless.

The pressure cooker is thus heating up in earnest, as the President has severed the lifeline of dollar remittances and suspended the charter flights permitting donations of medicine. At the same time, he has shut off the safety valves that have always served Castro's interest, ones that enabled the most disgruntled Cubans to flee by boat. We now have the bizarre situation of the Havana government tightening the screws on the Cuban people via shock therapy while the United States cuts the relief lines that provide a bit of oxygen. We also use Radio Marti to urge the people of Cuba to stay where they are, as we will interdict them if they try to escape, and return them to the seething cauldron. 

It is not a pretty picture and one that cannot go on for more than several weeks. It is not like Haiti, which can indefinitely survive U.S. attempts to strangle its economy via embargo because most of the population lives off the land, it has a market economy, and it has private capital that it can draw upon to finance the lifeline with the Dominican Republic. Cuba had been transformed into a largely urban, educated populace during the Castro years, with the smaller fragment of the population in the countryside producing sugar for export. The people have no capital, no savings, no collateral, and depend on the state to provide them with calories and clothing. Cuba at least has diplomatic relations with the rest of the world, and Cuban Americans are now surely trying to set up new lifelines via Canada and Mexico. But with the Clinton Administration now threatening a unilateral blockade of the island, other governments must be reckoning that ours has decided to play for keeps. 

If Castro has any more cards to play, I can't think of them. In the past, other Latin American governments and the government of Spain have sided with Castro publicly, but I'm told by a reliable source that this support has been disintegrating during the last year and in recent weeks has turned against Castro, with the clear signs that the Cuban people have turned against him. The leaders of the Cuban American community in Miami have been predicting for years that the people will become so desperate that they will rise up and overthrow Fidel. They are betting along with President Clinton that Castro appears to be back on his heels and one good push will topple him. The riots in Havana two weeks ago suggest they are right. If this further tightening of the noose forces Castro to spill blood on the streets of Havana, we could see either military defections leading to civil war or a coup by the palace guard. If Castro has more cards to play to keep the population below the boiling point, I would expect the Miami Cubans to push Clinton again toward a knockout punch of some kind. This can't drag on too long, or the suffering of the Havana Cubans would lead to a turn in public opinion among their families in Miami. As the temperature rises in the pressure cooker, it looks like Castro may be going out with a bang.

ISRAEL: Could you believe your eyes upon reading that the Israeli government not only has instituted a capital gains tax on shares traded in its stock market, but also closed the stock exchange in advance of the news, knowing stocks would sell off sharply? This is an absolutely disgraceful, palpably destructive act by the government. Do not hold your breath, though, expecting anyone in the U.S. political world -- Democrat or Republican -- to say a word about it, except that we must not let it interfere with our foreign aid to the Israeli government. My suspicion is that the Israeli establishment has decided that this is the easiest way to shut off the flow of capital to the upstart Russian emigres, who are proving to be too aggressive as entrepreneurial capitalists. The official reason is provided by Jacob Frenkel, the governor of Israel's central bank: "The main reason for taxing capital gains was to introduce reason and order into the economy and to cut other taxes that have a much more destructive effect on the public." Frenkel, by the way, earned his Ph.D. at the University of Chicago. Prior to his appointment as governor of the Israeli central bank, he was director of research at the International Monetary Fund in Washington, D.C. Those of us who believe there will never be real peace in the Middle East until Israel becomes a truly fluid capitalist state, which can inspire the region in that direction, can only wonder in amazement at this perversity.

AUTO STAGFLATION: The New York Times wonders this morning: "Will Rising Prices of Cars Imperil Detroit's Recovery?" Chrysler's new compact sedan, the Cirrus, rolls out at an "eye-popping" base price of $17,970. This is what we saw on a larger scale 20 years ago, when auto sales were robust through the spring and summer of 1974. Shrewd consumers bought up auto inventories before the "sticker shock" of the '75 models hit, reflecting the inflation that had been bottled up by Nixon's wage and price controls. If the economy were as dandy as auto sales have been showing, Wall Street would be happier with the prices of the domestic auto companies. At 47, Chrysler is well off its 12-month high of 63. At 49, GM is off its high of 65. Ford, at about 30, is below its high of 35. The auto economy and all it supports should in fact be softer than conventional forecasts. If the past is any guide, unemployment rates will begin tending up, and jump in January. We will then begin hearing from the incoming Republican congressional class about the need to cut tax rates.