This spring, French voters dumped their Socialist government in parliamentary elections, while British voters in local elections handed the ruling Tories their worst drubbing in a century. Electorates are weary of economic stagnation, no matter which government is in power.
It has been 20 years since the postwar boom faltered in 1973. The quadrupling of the price of oil was the immediate cause, but that same year the Bretton Woods system of stable fixed exchange rates collapsed. The U.S. dollar was no longer the anchor of an orderly world financial and trading system.
Governments of various stripes have tried diverse remedies to restore growth to the 4% annual range of the postwar boom, which allowed near-full employment and social progress throughout the industrial West. In the U.S. and Britain, radical conservatives sought to slash taxes, reduce the welfare state, and reward entrepreneurship. But neither conservative program worked: Growth did not return to the levels of the postwar boom, and living standards continued to stagnate in both countries.
On the Continent, meanwhile, social democrats also broke their picks on the economy. In 1981, the French Socialists, under President Fran ois Mitterrand, attempted an ultra-Keynesian program of economic stimulus. This could not work, since stimulating demand in one trade-dependent country only pulls in imports and leads to financial imbalance. Mitterrand was compelled to rein in his program and link it to the sound-money strategy of his far more conservative German neighbors.
But Germany, like France, had sluggish growth in the 1980s and is now further constrained by the cost of financing the reconstruction of its eastern region. Western Europe as a whole has unemployment in excess of 10%. And because of its common market, no country can successfully go it alone.
Is this the best we can do? All Western governments--whether conservative, liberal, or social democratic--share a common interest in reelection. All need to restore growth, jobs, living standards, and hopes. In Europe as well as America, it's the economy, stupid!
The Clinton Administration wants to revive the Group of Seven (the finance ministers and central bankers of the U.S., Japan, Germany, France, Britain, Italy, and Canada) and turn it into a real mechanism for economic-policy coordination. But that's not enough. Policy must be coordinated on behalf of high growth, full employment, and the reregulation of laissez-faire global finance.
It is too easy to conclude from the common and seemingly intractable problems afflicting diverse governments that the dilemmas are now "postideological." In fact, one big ideological issue underlies all the particular policy choices: Should we keep moving further toward laissez-faire policies or recognize that a big dose of intervention is required?
Economic history suggests that markets, by themselves, do not yield high growth, full employment, or financial stability. Today, our deregulated financial markets trade more than $1 trillion of currencies daily, and the purely speculative movement of currencies overwhelms money used to finance actual commerce. Escalating financial speculation only diverts resources, deters investment, and breeds further speculation. So the issue is not just "coordination," but coordination on behalf of a sustainable, mixed economy.
The major industrial nations need:
-- A common commitment to high growth. This must be based on significant increases in public investment and a supportive policy of low interest rates by central banks. The Clinton Administration, like the Bush Administration before it, badgered Japan to stimulate its economy with public works. The Japanese responded with a $120 billion program. Germany has been stimulating the economy of its eastern region with massive capital transfers, yet it has undermined any net stimulative effect with high interest rates--which depresses growth in the rest of Europe. If all the nations raise investment levels and agree to keep interest rates low, all will benefit.
-- A New Bretton Woods. The era of high growth was one of stabilized and regulated global finance. We need stable currency values and tax and regulatory policies to take the profit out of purely speculative financial transactions, as well as the long-term low interest rates to promote development. This is particularly important for the recovery of the former communist world.
-- Completion of the GATT Uruguay Round. A completed General Agreement on Tariffs & Trade means trade based on common rules, not on utopian laissez-faire. If we can't get universal free trade, let's at least have relatively liberal trade within a family of nations that can agree on common ground rules. The rest of the world--notably Japan--can have conditional access to the markets of the nations that follow those common rules.
Only one nation can take the lead on behalf of this agenda, and that is the U.S. The next economic summit should seriously begin the task of restoring world growth. That would also be salutary for Bill Clinton's reelection--and for that of every other politician who must face the voters.