Matters of Some Importance Jude Wanniski February 2, 1999

KEYNESIAN SQUABBLE: I’ve been waiting 20 years for the Keynesians to face the fact that their international model is a primary source of misery to mankind. Now, a fistfight has broken out in their ranks over the proper means of defending a currency. On one side we have Joseph Stiglitz, chief economist of the World Bank, along with Jeffrey (“shock therapy”) Sachs, who argue that defending a currency with high interest rates is self-defeating, because it causes recessions. On the other side, we have Deputy Secretary of Treasury Larry Summers, who insists that the recessions would have been worse if the high interest rates hadn’t had desirable effects in keeping a currency stronger than it would otherwise be. He is joined by MIT’s Stanley Fischer, the deputy chairman of the IMF, whom we have designated one of the most dangerous men in the world precisely because he not only believes in his model but has the power to destroy economies with it. We learned of this squabble breaking out into the open in a Sunday NYTimes dispatch from Davos, Switzerland, where all these learned gents have been attending the annual meeting of the World Economic Council. Times economic columnist Louis Uchitelle, who covers this conference of Ptolemaic Astronomers, doesn’t know who is right. Floyd Norris, who writes the economic editorials for the Times, weighed into the debate in a signed piece on Brazil, deciding Sao Paulo was correct in devaluing its currency but did it too much. There we go again, with the Times cutting the baby in half.

Nowhere in the raging Keynesian debates do we see anyone suggesting the Mundellian solution for defending a currency: Have the central bank sell government bonds into the national banking system, withdrawing liquidity. We had for many months been warning our global clients away from Brazil on the grounds that its top officials didn’t know what they were doing -- defending the real/dollar peg with 50% interest rates. It simply should have advised the market that it would sell bonds to the banks and destroy the currency collected, thus making it scarce relative to the dollar. This is the course I urged Federal Reserve Chairman Alan Greenspan to recommend to Mexico, when I met with him on the day of the infamous peso devaluation in December 1994. Instead, Greenspan joined the ranks with the IMF’s Stan Fischer and Treasury’s Summers, allowing his own international economist Ted Truman to keep him in line. Mexico still has not recovered, its economy in tatters, almost half its population in poverty, the crime rate rampant, emigres streaming into the southwest United States. And Treasury’s Bob Rubin and Larry Summers still<I>congratulate</I> themselves for “saving Mexico.” Ted Truman’s reward was to be named Assistant Treasury Secretary for international affairs; he is now in Brazil, no doubt helping the IMF’s Fischer drive a stake through its heart.

The Fed of course is delighted with the news that the 4th Quarter GNP growth came in at a whopping 5.6%. Everyone and his brother congratulates Greenspan for producing this robust expansion, although we know it was the 1997 tax bill, the lower capital gains tax, and the powerhouse Roth IRA. The GNP number is big, but it masks the fact that the bottom of the economy is in recession, the middle of the economy is growing, and the top is booming. The GNP news is so good that it is of course terrible, which is why Wall Street is in a swoon today. The problem we face is directly related to the squabbling among the Keynesians on how to defend a currency. As long as Greenspan refuses to recognize the damage the Fed has done to the commodity sector by using an interest-rate target instead of a commodity target, we will remain in this never-never land. And as they say in never-never land: With such a strong economy anyway, why cut tax rates? Let’s pay down the national debt!

SENATE TRIAL: In a C-SPAN television appearance a few weeks ago, Andrew Ferguson of The Weekly Standard had one of the great insights of the season. He marveled at how few people had predicted the impeachment of the President would get this far and upon reflection realized the Founders had craftily designed a binary mechanism into the impeachment process. That is, only “Yes” and “No” decisions are allowed at every step of the way. There are no opportunities for compromise at a fundamental level, which means there are no opportunities for splitting the difference. The NYTimes has for several months argued that even though the President perjured himself and obstructed justice, the baby should somehow be cut in half a la King Solomon. This morning, in its lead editorial, it makes this incredible statement: “Virtually everyone in the capital except Mr. Starr seems to know that censure-plus-admission, speedily arrived at, would be a far better outcome for the country than a trial for either a sitting or former President.” Hello? If this were a three-party system, the binary mechanism wouldn’t work, but this is the strength of the U.S. system, built around the winner-take-all electoral college that militates toward constant argument until a final decision is made. In this case, the Daddy Party (Republican) is arguing for a standard for the presidency that does not permit occupancy by a criminal. The Mommy Party (Democratic) says we should give the kid a break, even though we suspect the kid will break out the cigars and bongo drums if merely given “censure-plus-admission.” The final decision can’t be both, which is why I’ve been rather sure there will be conviction.

Just as the Democratic ploy to skirt conviction with censure failed because the binary process does not permit it, so the Republican ploy suggested by Sen. Susan Collins of Maine can get nowhere. She would have a vote on the facts, which would seem to be what the Times wants. This presumably would convict Mr. Clinton without removing him. The idea has been laughed out of court, left and right. Left, by Anthony Lewis, the judicious sage of the Times. Right, by Robert Bork, the expert called upon by the WSJournal. As these doors are being shut, the 100 Senators are beginning to see they will have no choice but to vote. One Democratic Senator grumped on tv the other day that “the constitution is forcing us to extremes.” That is, final resolution instead of an indecisive standard that lets the kid play Mommy off against Daddy.

How odd it is to have Robert Bennett, the lawyer, acting in the President’s defense, while his brother Bill, of Empower America, serves as Moral Arbiter for the Daddy Party. Bill B. hit pay dirt last night on "Larry King Live"when he challenged Sen. Patty Murray, Democrat of Washington, on a point of fact. He made the point that was the last straw for me, as a defender of the President for almost all of last year -- that it was not nice for the President to have his “delight” with Monica and then tell Sidney Blumenthal that she threatened him unless he had sex with her. That is, Ms. Lewinsky sexually harassed him and when he refused, good boy that he is, she made up her fantasies on tapes supplied by Linda Tripp. This was evil, I contend, something that requires the cleansing of the Oval Office. Senator Murray, who had been telling the panel how carefully she had listened to the presentations and how thoroughly she had read the transcripts, intervened to tell Bennett that he had it all wrong: “The President expressed concern that Monica was worried she would be viewed as the stalker!” Hello? Senator Murray, who clearly has slept through the Senate trial thus far, is actually a metaphor for the country, which did not pay attention to the proceedings in the House or on the Senate floor, but will be in for a rude awakening when the trial begins and they tune in. Daddy will prevail this time.