Memo To: Jack Kemp
From: Jude Wanniski
Re: Scoring The Wall Street Journal remedies for Asia
On the WSJ's editorial page yesterday, the editors "asked a number of distinguished analysts and business leaders to answer two questions: How will the current Asian economic turmoil affect the United States? And what should American leaders do in response?" We talked about the responses to Larry Hunter, your chief economist at Empower America, and thought it would be helpful to you for us to go down the list and score the results. Here is the report card we worked out at Polyconomics, with David Gitlitz joining in our assessment:
BARTON BIGGS of Morgan Stanley Asset Management. (B+) Failing to see the Asian deflation began with their currency ties to the deflating dollar, Biggs confuses the picture a bit by stating "Asia will export its deflation, its overcapacity and its lack of growth to the West, particularly to the U.S." But he has the general idea correct, and he does manage to offer the right advice to the Fed and Bundesbank, to "become less manic about inflation and worry more about deflation. The next move in official interest rates should be down, not up." And he offers some fair advice on how U.S. leaders could help the Asians.
JIM CANTALUPO, president and CEO of McDonald's International. (F) Cantalupo did not even try to answer the two questions posed, but simply announced that he will hunker down and wait for the business cycle to turn up.
RUDI DORNBUSCH, professor of economics at MIT. (C) Dornbusch acknowledges the U.S. will have its economy impacted adversely. He also correctly observes that it can defend itself now by cutting tax rates and interest rates. He does not offer any advice on what the Asians should do, which I think was implied in the question.
BARRY EICHENGREEN, U of Cal, Berkeley, economist and IMF advisor. (F) He does address the Asian economies, suggesting "reorganization and reflation," and runs off at the mouth in a total confusion about "liquidity." He identifies Japan's problem as "fiscal," when any fool should know it is monetary. His discussion about trade and capital flows is pitiful and says the U.S. should help Asia by importing their goods instead of not importing them.
STEVE FORBES, chairman of Americans for Hope, Growth and Opportunity. (B) Like Biggs, Forbes does not see the deflation originating at the Fed, but Biggs at least suggests Fed ease. Steve incorrectly blames Clinton for pushing the Asians toward devaluations. His prescriptions for Asia are mostly in the ballpark, though. He says the U.S. should 1) help the Asian nations repeg to/the dollar at higher rates, "perhaps" through a currency board system, 2) "pressure" the Bank of Japan to stop deflating, 3) lower trade barriers, cut taxes and regulations, 4) tell IMF officials to "take a hike." All broad brush.
YOICHI FUNABASHI, correspondent of Asahi Shimbun.. (F) Not much here that makes any sense, especially his suggestion that Japan revalue the yen to 115 to . 125 "so the trade imbalance caused by a cheaper yeiyuoes not balloon to a point where it upsets the U.S.'s vital role as importer of last resort." Is this the dark mercantilist model Japan's elite has embraced? Of several silly points he makes, the only one of value is U.S. encouragement to Beijing not to devalue the renminbi, although Beijing does not need encouragement.
JEFFREY E. GARTEN, dean of Yale School of Management. (D-) Extremely weak presentation. He sees a tidal wave of imports from Asia that will increase U.S. trade deficit by 50%, but with goods/at half price, we would need to import three times as much by volume. He also blames Japan's problem on fiscal policy and urges "big tax cuts." And "The Fed will have to be ready to lower interest rates if too many clouds form oyer the U.S. horizon." This is comic-book Keynesianism.
JAMES GRANT, editor of Grant's Interest Rate Observer. (F) "Booms cause busts." There is nothing you can do about it. Let the markets sort all this out. There should be no public effort to bail out private profligacy. Curiously, Grant identifies the South Korea problem as a shortage of corporate profits relative to interest expense, and blames the IMF for trying to limit economic growth there to 3%: "The U.S. Congress should investigate at once." (???)
M. R. GREENBERG, chairman and CEO of American International Group. (F) Greenberg says the U.S. should show "leadership." The IMF "should take the lead." He recommends "prompt action" to "prevent illiquid but otherwise sound companies from becoming insolvent." Except for these platitudes, he doesn't answer the questions.
ARTHUR B. LAFFER, chairman of Laffer Associates. (D) Very little analysis here, we are afraid. The stock market will be hurt by Asia, but not the underlying U.S. economy!!! (Are they not connected?) The U.S. shouldn't do anything dumb. "Greenspan & Co. are doing a great job." And "All in all, we in the U.S. are in pretty good shape. My advice: Don't just do something, stand there." It doesn't look like Art took the assignment very seriously.
DAVID MALPASS, chief international economist, Bear Stearns (B) There must be something missing in his entry, as he seems to say the mere announcement by the U.S. government that it wants strong currencies in Asia will cause that to happen. He doesn't offer a mechanism. He doesn't mention the role U.S. monetary policy played in fomenting the Asian crisis, but he clearly has an excellent and well-developed strategic prescription for Japan that could be undertaken immediately — printing yen! With a mechanism, this could be an A.
EDWARD YARDENI, chief economist, Deutsche Morgan Grenfell. (B) Excellent analysis from Yardeni on the first question, of how the turmoil will affect the U.S. economy, but he doesn't answer the second question on what he would advise U.S. leaders to do about it. It could be the WSJ editors had run out of space. If the second answer were as good as the first, he would get an A.
* * * * *
The correct analysis is that the Fed caused the deflation in Asia by starving the world economy of dollar liquidity in 1997, which brought the dollar/gold price down by $100, to the $285 range from $385. Many of Asia's problems would be eased by having the dollar/gold price rise back to $350, which would occur only if the Fed added dollar liquidity to the banking system. The Southeast Asian countries would then see their currencies rise relative to the dollar. Steve Forbes talks about a strengthening of the currencies with a currency board system, but currency boards are built around foreign exchange, which they ain't got in the first place. The central banks of the Asian currencies all have plenty of national debt, which they can sell in exchange for surplus currency, driving up the value of each currency and inviting foreign exchange. This may be what Malpass is talking about, as he proposed such a method during the Mexican peso crisis. Notice that Barton Biggs gets the highest grade. Do you know that almost 20 years ago I told Barton he should get himself ready to be Treasury Secretary in the Kemp administration? That's when I thought you would run in 1980, before you signed up with the Gipper instead. Barton may finally be ready.