Cookies for the Poor
Jude Wanniski
March 15, 1999


Memo To: Foreign Affairs editors
From: Jude Wanniski
Re: Martin Feldstein's "Self-Help Guide"

Recall that I lavished praise on you for your January/February number, in which you published analysis by three bright fellows who concluded that we could not topple Saddam Hussein without enormous loss of life and diminished prestige in the Islamic world. I agreed with that hard-nosed analysis, the first I had seen anywhere. Now, I think it only fair to warn you that I'm not nearly as happy with your March/April issue. Let me run down the articles, in the order I chose to read them. In a few weeks ahead, I will comment on each in random order. I do this out of great respect for your journal, which once was the most important periodical in the English language, I think. You folks have brought it back from its darkest days, when your timing and value was as accurate as a stopped clock. You still do not seem to realize the demand-side economic paradigm that grew out of the Great Depression now is hopelessly obsolete. It is for this reason that I am going to invest considerable time in dissecting this March/April number. So far, I've only read the first by Marty Feldstein, so I really do not know how my report card will look like at the end of the review. We start with an F for flunk.

First. On page 93, Marty writes "A Self-Help Guide for Emerging Markets." Yes, Feldstein was chairman of Ronald Reagan's Council of Economic Advisors for a relatively brief period (during which every one of his important forecasts was wrong). And he is President of the National Bureau of Economic Research and a professor of Economics at Harvard University. According to the papers, he is also on the economics team of Texas Governor George W. Bush, who, we are told, is about to waltz to the White House. I'm sorry to inform you that Feldstein is not a very good economist, even by the abysmal standards of the neo-Keynesians. These are the economists who win Nobel Prizes even though their models invariably fail to produce prosperity, but are marvelous at generating poverty, disease and death.

In his "self-help guide," Feldstein advises the poor countries of the world that if they wish to avoid frequent recessions and depressions and civil unrest, they should build up their international hard-currency reserves. This is so stupid an idea, it is hard to believe you let it get into print. It is like telling the poorest families of the United States, with husband and wife working two jobs each to make ends meet, that they should avoid hard times by filling the cookie jar with as many dollars as they can. When a rainy day comes, they will be ready, by George.

You editors should have asked Marty what good the cookie jar did for Mexico when the $45 BILLION it filled with cookies from 1989 to 1994 suddenly vanished when Feldstein's friends at the International Monetary Fund and the U.S. Treasury decided to push Mexico into a currency devaluation? The reserves dissolved in a matter of months. This "self help guide" is a modern variation of Marie Antoinette's let them eat cake. Let them eat cookies!

The idea of accumulating dollar reserves is pure economic imperialism. We should run around the world telling poor countries to buy our national debt, which pays tiny interest rates compared to the potential growth rates of the poor countries if they got supply-side advice? A mythical Freedonia, at the bottom of the barrel, would have to grow at a 10% annual rates for a hundred years before it caught up with us. Why should a nation invest in our country at 5% when it could be investing in itself so it could grow at 15%? Some self help. There is no reason for any country, poor or rich, to accumulate dollar reserves. When the United States was an emerging country, how much of its income was it using to accumulate reserves in British sterling?

P.S. All his ramblings about Thailand's baht are totally irrelevant. The problem with the Bangkok government is that it first took the advice of MIT's Paul Krugman, who stopped in Bangkok on his highly publicized 1995 Asian tour and successfully urged the Thai government to institute capital controls. Even Krugman has to admit this halted the flow of capital into Thailand and PREVENTED it from accumulating the reserves that Professor Feldstein says are so necessary for the baht cookie jar, even though they are not. Not only is the prescription wrong, so is the diagnosis. Do you know what I mean? If you don't, you need to sign up as students at Supply Side-University.