Reuven Brenner, Cover Boy! Jude Wanniski July 29, 1998

Memo To: Larry Minard, Editor, Forbes Global
From: Jude Wanniski
Re: Reuven on the Cover

My website guests have been hearing me rave about Reuven Brenner for the last two years, when I first invited him as a guest lecturer at Supply-Side University. I told them I thought he was the best economist in the world! Now you have gone and put him on the cover of your August 10 edition, with entrepreneurial "Leapfrogging" the topic. He is finally getting the attention he deserves and as a result, so should your global spinoff of Forbes. I've decided to excerpt enough of the piece to give our clients, browsers and website fans an even better idea of the fertility of his mind.

LEAPFROGGING THEORY

By Lawrence Minard
Interview with Prof Reuven Brenner
Excerpts/Forbes Global /08-10-98

Minard:

How to explain the risk-takers...who move the world forward, as well as the behavior of the giants they slay? Reuven Brenner, a professor of economics at Montreal's McGill University, has spent his career developing an answer to those questions. His answer, in a word, is what he calls "leapfrogging." By that he means people take chances when they perceive there isn't much to lose if they fail—when the upside, in Wall Streetspeak, greatly exceeds the downside....Often the catalyst is an unpleasant shock....The world darkens. The only way forward is by taking a risk, trying something new. From entrepreneurial struggle, the world's wealth grows....

As in business, the key to building the wealth of a nation lies in trying to commercialize new ideas. Brenner puts it this way: "If one does not experiment, whereas someone else does, then one falls behind. This is true about people as well as a society. "It's not enough just to have new ideas," says Brenner. "You must be able to commercialize the ideas. Think of the Chinese. They made many of the technological breakthroughs that defined the Industrial Revolution—500 or 1,000 years ahead of the West. But they did not have a financial system that enabled them to commercialize their innovations...."

Brenner:

"Milken didn't invent junk bonds; they existed from the beginning of the century. What Milken did do was create a liquid market [for junk bonds]. He developed a new tool to help new companies thrive. People still talk about junk bonds—but if you look at what was financed by so-called junk bonds it's probably the defining companies of these times.....

"There is no way of knowing [beforehand] if an innovation has commercial appeal or not. If it does not, it's a cost, and it must be stopped before it becomes too expensive. That is why inventing institutions of checks and balances to prevent the persistence of mistakes is absolutely necessary if an economy is to prosper "....In politics, Brenner replies, the answer is simply democratic voting that allows voters to throw the bums out of office and change direction when things go badly.

M:

The global financial markets don't seem to have done a very »ood job of preventing mistakes in Southeast Asia.

B:

I would not call the Southeast Asian markets deep. I also think it vas unexpected fiscal changes, forced by the IMF on those countries, hat brought about many of their current problems....

I believe Mexico would have moved far more rapidly with its political and fiscal reforms if the U.S. had not bailed them out. For example, they would have sharply cut income-tax rates, which at 32% on incomes of] $4,000 prevent the striving poor from succeeding....In Russia the land is very rich. If it wasn't, communism could not have survived 70 years. This is one reason I think China will never go back, ever. I put greater chances on Russia going back to some type of dictatorial regime than China, because Russia is much richer in resources. China is not resource-rich but has a billion people to feed, so it must trade. To trade it must have liberal policies that favor trade....

[I]n Russia, I wrote repeatedly that the government must give a stake in the system to the people. Otherwise they will go back to looking for help from the government. But what happened? They were not given land, they were not given an apartment, there were no financial markets, their savings were wiped out by hyperinflation. So of course e people are not content [and are likely to] go back and ask the government to take care of them again. This is the biggest danger, because it has very long-term consequences. I think few people realize this danger...

M:

Could the Asian Crisis have been prevented?

B:

If all the Asian countries had said we won't devalue, we are putting in place a currency board like Hong Kong or Argentina, then much of the damage could have been avoided. I say much but not all, because [with currency boards] if Alan Greenspan makes a mistake, then you import it. And I think that Greenspan did make a mistake. And he continues to make it, in my view....

M:

Isn't the US economy too liquid, as Greenspan obviously fears?

B:

I don't think that there is excess liquidity in the U.S. Look at [depressed] commodity prices, including gold. Greenspan should add dollar liquidity. That's the signal that I read everywhere from around the world. There is a big demand for dollar liquidity.

M:

If the Fed doesn't cut rates, do you foresee a global recession?

B:

If China devalues, then definitely we will have a recession. Because apart from China and the U.S., nobody else is doing very much to bring about internal, entrepreneurial dynamism.....

M:

...What do you think of the euro's prospects?

B:

I think the euro will be a disaster. Because nobody knows yet how it will work. We don't know how the central bank will function....The institutions are just not there. There's no government behind the euro, and no monetary standard, no gold behind it....

M:

Do you think a return to a gold standard is a realistic possibility?

B: This would be a drastic political change, and drastic political changes happen only after a crisis. It would be a drastic political change because this monetary standard makes the government's fiscal errors instantly visible. I think maybe, maybe after the Asian crisis and Mexico in 1994, this may be the last straw to make that change and move now to [a gold standard]....

M:

With the dollar so hard these days, maybe we don't need gold.

B:

....Why do we think that Alan Greenspan or a bunch of economists can determine where a currency or interest rates should be? Interest rates are prices, so if we really believe the Russian system was a failure because Moscow didn't know how to price chicken and eggs, why should we think someone in Washington can set interest rates? This always struck me as absurd…

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